UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 000-23904
SLADE'S FERRY BANCORP
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3061936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 675-2121
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock of Slade's Ferry Bancorp,
held by nonaffiliates of the registrant as of December 31, 1998 was
approximately $41,718,715. On that date, there were 3,446,413.8 shares of
Slade's Ferry Bancorp Common Stock, $.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
ANNUAL REPORT to security holders for fiscal year ended December 31, 1998
incorporated by reference into Parts I and II. Proxy Statement for Annual
Meeting of Stockholders April 12, 1999 incorporated by reference into Part
III.
PART I
ITEM 1
BUSINESS
Description of Business
Business of Slade's Ferry Bancorp
- ---------------------------------
Slade's Ferry Bancorp ("the Company") is a business corporation that
was organized under the laws of the Commonwealth of Massachusetts on June
13, 1989 as Weetamoe Bancorp. The name Weetamoe Bancorp was changed to
Slade's Ferry Bancorp effective January 1, 1997. The office of Slade's Ferry
Bancorp is located at the office of the Bank at 100 Slade's Ferry Avenue,
Somerset, Massachusetts, 02726, and its telephone number is the same as the
Bank's: (508)675-2121.
The Company was organized for the purpose of becoming the holding
company of the Bank. The Company's acquisition of the Bank was completed on
April 1, 1990. The Bank (Slade's Ferry Trust Company) is a wholly-owned
subsidiary of Slade's Ferry Bancorp.
Competition
- -----------
The primary business of Slade's Ferry Bancorp is the ongoing business
of the Bank. The competitive conditions to be faced by Slade's Ferry Bancorp
will be the same as those faced by the Bank. It is likely that, as a holding
company, it may compete with other holding companies engaged in bank-related
activities. Thus, the Company will face competition in undertaking to
acquire other banks, financial institutions or companies engaged in bank-
related activities, and in operating subsequent to any such acquisitions.
While the Company investigates opportunities to acquire other banks or
bank facilities when they occur and may in the future acquire other banks,
financial institutions, or bank facilities, it is not currently engaged in
any such acquisition.
Employees
- ---------
At present there are four employees of the Bank and the Company whose
compensation is paid by the Company. Although the Company has no current
plans to do so, if the Company should acquire other financial institutions
or pursue other lines of business, it may at such time hire additional
employees.
Business of Slade's Ferry Trust Company
- ---------------------------------------
On September 30, 1959, the Slade's Ferry Trust Company opened for
business as a state chartered trust company incorporated under the laws of
the Commonwealth of Massachusetts and as a member of the Federal Deposit
Insurance Corporation (FDIC). The founders were a group of individuals from
Somerset, Swansea, Fall River and Seekonk, Massachusetts who recognized the
need for a local bank committed to personalized services.
During the past three years, assets of the Bank increased by $107
Million of which $49 Million is attributed to overall growth and $58 Million
attributed to the acquisition of the National Bank of Fairhaven, which
occurred in August 1996. The Bank currently has ten banking facilities
extending east from Seekonk, Massachusetts to Fairhaven, Massachusetts. The
Bank also provides limited banking services at the Somerset High School. The
Bank employs 136 full-time employees and 54 part-time employees.
The Bank currently services numerous communities in Southeastern
Massachusetts and contiguous areas of Rhode Island through its ten
facilities in Fall River, Somerset, Swansea, Seekonk, New Bedford and
Fairhaven.
The Bank's major customer base consists of almost 32,000 personal
savings, checking and money market accounts and 8,200 personal certificates
of deposit and individual retirement accounts. Its commercial base consists
of over 3,200 checking, money market, corporate, and certificate of deposit
accounts.
The Bank does not have any major target accounts, nor does it derive a
material portion of its deposits from any single depositor. It is a retail
bank that services the needs of the local communities, and its loans are not
concentrated within any single industry or group of related industries that
would have any possible adverse effect on the business of the Bank. The
Bank's business is not seasonal and its loan demand is well diversified. As
of December 31, 1998, commitments under standby letters of credit aggregate
approximately $2,307,880.
Services
- --------
The Bank engages actively in a broad range of banking activities,
including demand, savings, time deposits, related personal and commercial
checking account services, real estate mortgages, commercial and installment
lending, payroll services, money orders, travelers checks, Visa, Mastercard,
safe deposit rentals, automatic teller machines and cash management
services. The Bank offers a full range of commercial, installment, student,
and real estate loans. The service area of the Bank is approximately 300
square miles, including the southern geographic area of Bristol County,
Massachusetts and extends over to the towns of Tiverton, Warren, Bristol and
Barrington in the state of Rhode Island.
Competition
- -----------
The banking business in the market area served by the Bank is highly
competitive. The Bank actively competes with other banks, financial
institutions, and credit unions, including major banks and bank holding
companies which have numerous offices and affiliates operating over wide
geographic areas. The Bank competes for deposits, loans, and other business
with these institutions.
Many of the major commercial banks, or other affiliates in the service
areas of the Bank, offer services such as international banking, and
investment and trust services which are not offered directly by the Bank.
Supervision and Regulation
Holding Company Regulation
- --------------------------
Under the Federal Bank Holding Company Act ("BHCA"), the prior
approval of the Federal Reserve Board ("FRB") is required before a
corporation may acquire control of a bank. FRB approval must also be
obtained before a bank holding company acquires all or substantially all of
the assets of a bank, or merges or consolidates with another bank holding
company. In considering any applications for approval of an acquisition or
merger, the FRB is required to consider the financial and managerial
resources of the companies and banks concerned, and the convenience and
needs of the communities to be served.
As a registered bank holding company, the Company is required to file
with the FRB annual and periodic reports and such other additional
information as the Board may require. The Company and its subsidiaries are
also subject to continuing regulation, supervision and examinations by the
FRB.
A bank holding company, with certain exceptions, may not acquire more
than 5% of the voting shares of any company that is not a bank and may not
engage, directly or through subsidiaries, in any activity other than
banking, managing or controlling banks, or furnishing services to or
performing services for its subsidiaries, without prior approval of the FRB.
The FRB is authorized to approve the ownership by a bank holding company of
voting shares of any company whose activities the FRB determines to be so
closely related to banking or managing or controlling banks as to be a
proper incident thereof. Under the FRB's current regulations, and subject to
certain restrictions and limitations specified therein, bank holding
companies and their subsidiaries may be permitted by the FRB to engage in
such non-banking activities as: (1) making, acquiring, or servicing loans or
other extensions of credit such as would be made by a mortgage, finance,
credit card, or factoring company; (2) operating an industrial bank or
industrial loan company; (3) performing the functions of a trust company;
(4) acting as an investment or financial advisor; (5) leasing real or
personal property or acting as an agent or broker in leasing such property
or acting as an agent or broker in leasing property in certain situations;
(6) making investments to promote community welfare; (7) providing certain
data processing and transmission services; (8) acting as principal, agent,
or broker with respect to insurance directly related to extensions of credit
by the bank holding company or its subsidiaries, and engaging in certain
other insurance activities subject to specified conditions and limitations;
(9) providing courier services for checks and certain other instrument
exchanges among banks, and for audit and accounting media of a banking or
financial nature; (10) providing management consulting advice under
specified conditions to banks not affiliated with the bank holding company;
(11) issuing and selling retail money orders having a face value of not more
than $1,000 and travelers checks and selling U.S. Savings Bonds; (12)
performing appraisals of real and personal property; (13) arranging
commercial real estate equity financing under certain circumstances; (14)
providing securities brokerage services as agent for the accounts of
customers; (15) underwriting and dealing in certain government obligations
and money market instruments; (16) providing foreign exchange advisory and
transactional services; (17) acting as a futures commission merchant in
specified capacities or providing investment advice as a futures commission
merchant or commodity trading advisor with respect to certain financial
futures contracts and options; (18) providing consumer financial counseling
services; (19) providing tax planning and preparation services; (20)
providing check guaranty services to subscribing merchants; (21) operating a
collection agency; and (22) operating a credit bureau. In addition, a bank
holding company may file an application for FRB approval to engage, directly
or through subsidiaries, in other nonbank activities that the holding
company reasonably believes are so closely related to banking as to be a
proper incident thereto.
In addition, pursuant to the Bank Export Services Act of 1982, a bank
holding company may invest up to 5% of its consolidated capital and surplus
in shares of an export trading company unless such investment is disapproved
by the FRB after notice as provided in that Act.
As a bank holding company, the Company will be required to give the
FRB prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of
Bancorp's consolidated net worth. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would violate any law,
regulation, FRB order, directive, or any condition imposed by, or written
agreement with, the FRB.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
Under Massachusetts law, Board of Bank Incorporation approval is
required before any company may become a bank holding company by directly or
indirectly owning, controlling or holding the power to vote 25% or more of
the voting stock of two or more banks. Further, such approval is required
prior to a bank holding company's (i) acquiring voting stock of another bank
institution if, as a result of the acquisition, such acquirer would,
directly or indirectly, own or control more than 5% of the voting stock of
such institution, or (ii) engaging in certain other transactions. The
Company is not considered a bank holding company under Massachusetts law
since it does not control two or more banks. The activities of the Company,
however, will be limited under Massachusetts law to activities described
above which would be permissible for a bank holding company registered under
the BHCA. In addition, the acquisition by the Company of 25% or more of the
voting stock or the power to elect a majority of the directors of another
commercial bank, savings bank, cooperative bank, or savings and loan
association would subject the Company to regulation as a bank holding
company under applicable Massachusetts law and would require the approval of
the Massachusetts Board of Bank Incorporation.
Bank Regulation
- ---------------
As a Massachusetts-chartered, FDIC-insured trust company, the Bank is
subject to regulation and supervision by the Commissioner of Banks, the FDIC
and the FRB.
The Massachusetts statutes and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of surplus
and reserve accounts, distribution of earnings, and payment of dividends.
The Bank is also subject to state regulatory provisions covering such
matters as issuance of capital stock, branching, and mergers and
acquisitions.
Deposit accounts at the Bank are insured by the FDIC, generally up to
a maximum of $100,000 per insured depositor. As an insurer of deposits of
certain thrift institutions and commercial banks, the FDIC issues
regulations, conducts examinations, requires the filing of reports, and
generally supervises the operations of institutions to which it provides
deposit insurance. The approval of the FDIC is required prior to any merger
or consolidation with another financial institution, or the establishment or
relocation of an office facility. This supervision is intended primarily for
the protection of depositors.
As an FDIC-insured bank, the Bank is subject to certain FDIC
requirements designed to maintain the safety and soundness of individual
banks and the banking system. The FDIC periodically conducts examinations of
insured institutions and, based upon appraisals, may revalue assets of an
insured institution and require establishment of specific reserves in
amounts equal to the difference between such revaluation and the book value
of the assets. In addition, the FDIC has a regulation which defines and sets
minimum requirements for capital adequacy.
Bank regulators have implemented risk based capital guidelines that
require a bank to maintain certain minimum capital as a percent of such
bank's assets and certain off-balance sheet items adjusted for predefined
credit risk factors (risk adjusted assets). Under the requirements a minimum
level of capital will vary among banks on safety and soundness of operation.
At December 31, 1998 the minimum regulatory capital level of Risk Based
Capital was 4% for Tier 1 Capital, 8% for Total Capital and Leverage Capital
was 4%.
The Company, the Bank, the Slade's Ferry Realty Trust, and the Slade's
Ferry Securities Corporation are "affiliates" within the meaning of the
Federal Reserve Act. Certain provisions of the Federal Reserve Act, made
applicable to the Bank by Section 18(j) of the Federal Deposit Insurance Act
and administered with respect to the Bank by the FDIC, limit the amounts of
and establish collateral requirements with respect to the Bank's loans or
extensions of credit to and investments in affiliates. In addition, related
provisions of the Federal Reserve Act and FRB regulations also administered
with respect to the Bank by the FDIC limit the amounts of and establish
required procedures and credit standards with respect to loans and other
extensions of credit to officers, directors and principal stockholders of
the Bank, of the Company, and of any subsidiaries of the Company, and to
related interests of such persons.
Recent Regulatory Examinations
- ------------------------------
During the most recent regulatory examinations of the Company and the
Bank, encompassing year end 1997 and three months ending March 31, 1998, no
major or consequential violations were found.
Statistical Information
- -----------------------
The following supplementary information required under Guide 3
(Statistical Disclosure by Bank Holding Companies) should be read in
conjunction with the related financial statements and notes thereto, which
are a part of this report.
I. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY;
INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth the Company's average assets,
liabilities, and stockholders' equity, interest income earned and interest
paid, average rates earned and paid, and the net interest margin for the
periods ending December 31, 1998, December 31, 1997, and December 31, 1996.
Averages are daily averages.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. Average Interest(1) Avg. Int.
(Dollars in Thousands) Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning Assets (2)
Commercial Loans $ 42,244 $ 3,953 9.36% $ 36,195 $ 3,466 9.58% $ 23,440 $ 2,191 9.35%
Commercial Real Estate 118,939 11,630 9.78 110,093 10,740 9.76 90,576 9,035 9.98
Residential Real Estate 45,781 3,520 7.69 52,894 4,116 7.78 50,486 3,788 7.50
Consumer Loans 6,767 652 9.63 6,503 659 10.13 6,094 613 10.06
- -----------------------------------------------------------------------------------------------------------------------------
Total Loans 213,731 19,755 9.24 205,685 18,981 9.23 170,596 15,627 9.16
Federal Funds Sold 12,214 630 5.16 11,309 607 5.37 14,994 783 5.22
U.S. Treas/Govt Agencies 54,842 3,366 6.14 49,682 3,099 6.24 43,871 2,715 6.19
States & Political
Subdivisions 9,763 649 6.65 6,948 477 6.87 5,959 400 6.71
Mutual Funds 209 14 6.70 301 15 4.98 241 13 5.39
Marketable Equity Securities 2,761 105 3.80 2,518 120 4.77 1,946 75 3.85
Other Investments 6 0 0.00 126 8 6.35 197 15 7.61
- -----------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 293,526 $24,519 8.35% 276,569 $23,307 8.43% 237,804 $19,628 8.25%
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses (3,602) (3,474) (2,958)
Unearned Income (715) (665) (597)
Cash and Due From Banks 12,186 11,366 9,565
Other Assets 15,376 14,022 9,489
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $316,771 $297,818 $253,303
=============================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Savings $ 43,885 $ 1,075 2.45% $ 42,642 $ 1,067 2.50% $ 40,246 $ 1,006 2.50%
NOW's 38,764 1,196 3.09 37,739 1,202 3.19 28,788 858 2.98
Money Market Accounts 13,777 273 1.98 14,116 281 1.99 13,326 270 2.03
CD's > $100M 22,945 1,266 5.52 23,162 1,256 5.42 18,813 1,104 5.87
Other Time Deposits 119,118 6,700 5.62 109,278 6,460 5.91 97,957 5,754 5.87
Other Borrowings 2,933 201 6.85 2,114 146 6.91 1,374 86 6.26
- -----------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
Liabilities 241,422 $10,711 4.44% 229,051 $10,412 4.55% 200,504 $ 9,078 4.53%
- -----------------------------------------------------------------------------------------------------------------------------
Demand Deposits 46,217 43,724 33,572
Other Liabilities 1,063 1,847 493
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 288,702 274,622 234,569
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock 34 30 28
Paid-in Capital 21,448 16,899 14,393
Retained Earnings 6,395 6,308 4,486
Net Unrealized (Loss) Gain
on Available-for-Sale
Securities 192 (41) (173)
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 28,069 23,196 18,734
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities &
Stockholders' Equity $316,771 $297,818 $253,303
=============================================================================================================================
Net Interest Income $13,808 $12,895 $10,550
=============================================================================================================================
Net Interest Spread 3.91% 3.88% 3.72%
=============================================================================================================================
Net Yield on Earning Assets 4.70% 4.66% 4.44%
=============================================================================================================================
<FN>
<F1> On a fully taxable equivalent basis based on tax rate of 34%. Interest
income on investments and net interest income includes a fully taxable
equivalent adjustment of $212,000 in 1998, $157,000 in 1997 and
$133,000 in 1996.
<F2> Average balance includes non-accruing loans. The effect of including
such loans is to reduce the average rate earned on the Company's
loans.
</FN>
</TABLE>
NET INTEREST INCOME - CHANGES DUE TO VOLUME AND RATE (1)
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996
Increase Increase
(Decrease) (Decrease)
- ----------------------------------------------------------------------------------------------
Total Due to Due to Total Due to Due to
(Dollars in Thousands) Change(2) Volume Rate Change(2) Volume Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal Funds Sold $ 23 $ 48 $ (25) $ (176) $ (195) $ 19
US Treas/Govt Agencies 267 320 (53) 384 361 23
States & Political Subdivisions 172 190 (18) 77 67 10
Mutual Funds (1) (5) 4 2 3 (1)
Marketable Securities (15) 10 (25) 45 24 21
Other Investments (8) (4) (4) (7) (5) (2)
Commercial Loans 487 574 (87) 1,275 1,207 68
Commercial Real Estate 890 864 26 1,705 1,926 (221)
Residential Real Estate (596) (550) (46) 328 184 144
Consumer Loans (7) 26 (33) 46 41 5
- ----------------------------------------------------------------------------------------------
Total Interest Income 1,212 1,473 (261) 3,679 3,613 66
- ----------------------------------------------------------------------------------------------
Interest Expense:
Savings Accounts 8 31 (23) 61 61 -0-
NOW Accounts (6) 32 (38) 344 275 69
Money Market Accounts (8) (7) (1) 11 16 (5)
CD's > 100 M 10 (12) 22 152 246 (94)
Other Time Deposits 240 568 (328) 706 667 39
Other Borrowings 55 56 (1) 60 49 11
- ----------------------------------------------------------------------------------------------
Total Interest Expense 299 668 (369) 1,334 1,314 20
- ----------------------------------------------------------------------------------------------
Net Interest Income $ 913 $ 805 $ 108 $2,345 $2,299 $ 46
==============================================================================================
<FN>
<F1> Changes in interest income and interest expense attributable to
changes in both volume and rate have been allocated equally to changes
due to volume and changes due to rate.
<F2> The change in interest income on investments and net interest income
includes interest on a fully taxable equivalent basis based on a tax
rate of 34%.
</FN>
</TABLE>
Interest Rate Risk
- ------------------
The Company considers interest rate risk to be a significant market
risk as it could potentially have an effect on the Company's financial
condition and results of operation. The definition of interest rate risk is
the exposure of the Company's earnings to adverse movements in interest
rates. Volatility in interest rates requires the Company to manage interest
rate risk which arises from the differences in the timing of repricing of
assets and liabilities.
The Company's Asset-Liability Management Committee, comprised of the
Bank's Executive Management team, has the responsibility of managing
interest rate risk, and monitoring and evaluating the difference between
interest-sensitive assets and interest-sensitive liabilities within various
time periods.
The Company's objective is to reduce and control the volatility of its
net interest income by managing the relationship of interest-earning assets
and interest-bearing liabilities. In order to manage this relationship, the
Committee utilizes a monthly GAP report. This report for the period ending
December 31, 1998 is set forth below.
The GAP report provides a static analysis of repricing opportunities
of rate-sensitive assets and rate-sensitive liabilities. It is prepared by
categorizing these assets and liabilities into time periods based upon
either their contractual or anticipated maturity or repricing. The analysis
determines the net dollar amount of assets less liabilities that are
repricing in various time frames. This, in conjunction with certain
assumptions and other related factors, such as anticipated changes in
interest rates, projected cash flows from loans, investments and deposits,
provides a means of evaluating interest rate risk. Management also takes
into consideration that certain assets and liabilities react differently to
changes in interest rates.
The interest sensitivity gap is determined by subtracting the amount
of liabilities from the amount of assets that reprice in a particular time
period. When more liabilities than assets reprice or mature within a given
time frame, a liability sensitive position results (negative gap). A
negative gap position would tend to increase net interest income when
interest rates are falling, and decrease net interest income when rates are
rising. Conversely, an asset sensitive position (positive gap) results when
more assets than liabilities reprice within a given period. In this
scenario, net interest income would increase when interest rates rise and
decrease when rates fall.
At December 31, 1998, the GAP report shown below indicates the
Company's interest rate risk to have a reliance on short term liabilities.
This position would have an adverse effect on earnings in a rising rate
environment and a positive effect on earnings in a decreasing rate
environment.
Interest Sensitivity GAP Report
- -------------------------------
Repricing period at December 31, 1998
- -------------------------------------
<TABLE>
<CAPTION>
3 Months 4 Months 1 Year to 2 Year to 5 Years
(Dollars in Thousands) or Less to 1 Year 2 Years 5 Years & Over Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS(1)
Loans $ 65,650 $ 73,003 $ 28,328 $ 31,725 $ 16,193 $214,899
Investments 3,636 6,394 6,956 24,875 37,583 79,444
Federal Funds Sold 14,500 --- --- --- --- 14,500
- -----------------------------------------------------------------------------------------------------
Total Interest-Earning Assets $ 83,786 $ 79,397 $ 5,284 $ 56,600 $ 53,776 $308,843
- -----------------------------------------------------------------------------------------------------
Cumulative RSA $ 83,786 $163,183 $198,467 $255,067 $308,843
=====================================================================================================
INTEREST-BEARING LIABILITIES
Regular Savings $ 48,360 --- --- --- --- $ 48,360
NOW Accounts 39,882 --- --- --- --- 39,882
Money Market Accounts 12,437 --- --- --- --- 12,437
Time Deposits $100,000 & Over 9,822 12,440 2,168 1,576 --- 26,006
Other Time Deposits 39,278 60,801 16,668 12,073 --- 128,820
- -----------------------------------------------------------------------------------------------------
Total Deposits 149,779 73,241 18,836 13,649 --- 255,505
Federal Funds Purchased --- --- --- --- --- ---
Other Interest-Bearing
Liabilities 67 920 103 354 3,921 5,365
- -----------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities $149,846 $ 74,161 $ 18,939 $ 14,003 $ 3,921 $260,870
=====================================================================================================
Cumulative RSL $149,846 $224,007 $242,946 $256,949 $260,870
=====================================================================================================
Gap (66,060) 5,236 16,345 42,597 49,855 47,973
Cumulative Gap (66,060) (60,824) (44,479) (1,882) 47,973
RSA/RSL (.56)% 1.07 % 1.86 % 4.04 % 13.71%
Cumulative RSA/RSL (.56)% (.73)% (.82)% (.99)% 1.18%
<FN>
<F1> Nonaccrual loans amounting to $3.3 Million have been eliminated from
the loan balances.
</FN>
</TABLE>
In addition to the GAP report, the Company also uses an analysis to
measure the exposure of net interest income to changes in interest rates
over a relatively short time period (i.e. 12 months). This analysis involves
projecting future interest income and expenses from the Company's earning
assets and interest-bearing liabilities. Depending on the GAP position, the
Company's policy limit on interest rate risk specifies that if interest
rates were to change immediately up or down 200 basis points, the effect on
estimated net interest income for the next 12 months that would be tolerated
would be not more than a ten percent decrease. The following table reflects
the Company's estimated exposure as a percentage of estimated net interest
income for the next 12 months, assuming an immediate change in interest
rates:
<TABLE>
<CAPTION>
Rate Change Estimated Exposure as a
(Basis Points) Percentage of Net Interest Income
- -------------------------------------------------------------------
<C> <C>
+200 1.52%
-200 (4.83%)
</TABLE>
The model used to monitor earnings-at-risk provides management a
measurement tool to assess the effect of changes in interest rates on the
Company's current and future earnings. The Company's 10% limit establishes
an internal tolerance level to control the Company's interest rate risk
exposure and is monitored on a quarterly basis.
II. INVESTMENT PORTFOLIO
The following table shows the book value of the major categories of
investment securities Held-to-Maturity for the years indicated:
<TABLE>
<CAPTION>
At December 31,
- ----------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $ 8,810 $ 9,415 $13,193
Obligations of States and
Political Subdivisions 11,997 7,976 6,131
Mortgage-backed securities 114 209 257
Other Debt Securities -0- 1 6
- -----------------------------------------------------------------------
Total $20,921 $17,601 $19,587
=======================================================================
</TABLE>
In the following table, the carrying value of Held-to-Maturity
securities maturing within stated periods as of December 31, 1998, is shown
with the weighted average interest yield from securities falling within the
range of maturities:
<TABLE>
<CAPTION>
US Treasury Obligations
& Government of States & Mortgage Other
Corporations Political Backed Debt
(Dollars in Thousands) Agencies Subdivisions(1) Securities(2) Securities Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Due in 1 year or less:
Amount $5,365 $ 1,703 $ --- $ --- $ 7,068
Yield 5.27% 5.76% --- --- 5.39%
Due in 1 to 5 years:
Amount $3,195 $ 4,298 $ 114 $ --- $ 7,607
Yield 5.76% 6.74% 6.81% --- 6.33%
Due in 5 to 10 years:
Amount $ 250 $ 5,664 $ --- --- $ 5,914
Yield 7.00% 6.58% --- --- 6.60%
Due after 10 years:
Amount --- $ 332 --- --- $ 332
Yield --- 7.70% --- --- 7.70%
- --------------------------------------------------------------------------------------------------
Amount $8,810 $11,997 $ 114 $ 0 $20,921
==================================================================================================
Yield 5.50% 6.55% 6.81% --- 6.11%
==================================================================================================
<FN>
<F1> Rates of tax exempt securities are shown assuming a 34% tax rate.
<F2> Mortgage-backed securities stated using average life.
</FN>
</TABLE>
The following table shows the amortized cost basis of the major
categories of Available-for-Sale securities for the years indicated:
<TABLE>
<CAPTION>
At December 31,
- ------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $44,620 $30,402 $32,793
Mortgage-backed Securities 10,862 7,747 2,469
Asset-backed Securities 222 234 246
Marketable Equity Securities (net) 1,918 1,565 1,775
- -------------------------------------------------------------------------
Total $57,622 $39,948 $37,283
=========================================================================
</TABLE>
In the following table, the amortized cost basis of Available-for-Sale
securities (other than equity securities) maturing within stated periods as
of December 31, 1998, is shown with the weighted average interest yield from
securities falling within the range of maturities:
<TABLE>
<CAPTION>
US Treasury
& Government Mortgage Asset-
Corporations Backed Backed
(Dollars in Thousands) Agencies Securities(2) Securities Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in 1 year or less:
Amount $ 500 $ 2,037 $ --- $ 2,537
Yield 5.69% 6.18% --- 6.08%
Due in 1 to 5 years:
Amount 23,175 6,497 --- 29,672
Yield 5.79% 6.17% --- 5.87%
Due in 5 to 10 years:
Amount 20,945 2,052 222 23,219
Yield 6.09% 6.14% 6.64% 6.10%
Due after 10 years:
Amount 276 --- 276
Yield 6.00% --- 6.00%
- -------------------------------------------------------------------------------
Amount $44,620 $10,862 $ 222 $55,704
===============================================================================
Yield 5.93% 6.16% 6.64% 5.98%
===============================================================================
<FN>
<F1> Mortgage backed securities stated using average life.
</FN>
</TABLE>
The following table shows the amortized cost basis and fair value of
the major categories of Held-to-Maturity securities as of December 31, 1998:
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $ 8,810 $117 $ 0 $ 8,927
Debt securities issued by states of
the United States and political
subdivisions of the states 11,997 257 13 12,241
Mortgage-backed securities 114 1 0 115
- ------------------------------------------------------------------------------------------------
Total $20,921 $375 $ 13 $21,283
================================================================================================
</TABLE>
Investments in Available-for-Sale securities are carried at fair value
on the balance sheet and are summarized as follows as of December 31, 1998.
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $44,620 $211 $ 54 $44,777
Marketable Equity 1,918 551 161 2,308
Mortgage-backed securities 10,862 52 23 10,891
Asset-backed securities 222 1 0 223
- ------------------------------------------------------------------------------------------------
Total $57,622 $815 $238 $58,199
================================================================================================
</TABLE>
Increase in Stockholder's Equity:
(In Whole Dollars)
<TABLE>
<S> <C>
Net unrealized gain on Available-for-Sale Securities $577,119
Less tax effect 212,175
--------
$364,944
========
</TABLE>
III. LOAN PORTFOLIO
The following table shows the Company's amount of loans by category at
the end of each of the last five years.
<TABLE>
<CAPTION>
At December 31
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 43,777 $ 36,641 $ 31,244 $ 16,744 $ 17,123
Real estate - construction and land development 3,773 6,678 6,891 6,865 2,290
Real estate - residential 51,220 55,477 59,500 50,472 50,938
Real estate - commercial 112,913 108,008 94,545 70,749 59,625
Consumer 6,477 6,747 6,681 6,149 6,097
Obligations of states and political subdivisions 3 9 16 23 29
Other 67 176 109 85 89
- -----------------------------------------------------------------------------------------------------------
218,230 213,736 198,986 151,087 136,191
Allowance for Loan Losses (3,569) (3,694) (3,354) (2,498) (2,306)
Unamortized adjustment to fair value (32) (42) (54) 0 0
Unearned Income (691) (690) (643) (520) (403)
- -----------------------------------------------------------------------------------------------------------
Net Loans $213,938 $209,310 $194,935 $148,069 $133,482
===========================================================================================================
</TABLE>
The following table shows the maturity distributions and interest rate
sensitivity of selected loan categories at December 31, 1998.
<TABLE>
<CAPTION>
Within One One to Five After Five
(Dollars in Thousands) Year Years Years Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural $25,070 $12,713 $5,994 $43,777
Real Estate - construction 2 12 3,759 3,773
- ------------------------------------------------------------------------------------------------
Total $25,072 $12,725 $9,753 $47,550
================================================================================================
</TABLE>
The following table shows the amounts, included in the table above,
which are due after one year and which have fixed interest rates and
adjustable rates:
<TABLE>
<CAPTION>
Total Due After One Year
- ----------------------------------------------------------------------------------
(Dollars in Thousands) Fixed Rate Adjustable Rate Total
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Commercial, financial, and agricultural $5,455 $13,252 $18,707
Real Estate - construction 134 3,637 3,771
- -----------------------------------------------------------------------------------
Total $5,589 $16,889 $22,478
===================================================================================
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
<TABLE>
<CAPTION>
December 31
- -----------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,331 $4,597 $4,352 $2,695 $3,238
Loans 90 days or more past due
and still accruing 317 147 112 23 204
Real estate acquired by foreclosure
or substantively repossessed 1,026 159 308 633 888
- ------------------------------------------------------------------------------------
Total nonperforming assets $4,674 $4,903 $4,772 $3,351 $4,330
====================================================================================
Percentage of nonaccrual loans
to total loans 1.53% 2.15% 2.19% 1.78% 2.38%
Percentage of nonaccrual loans,
restructured loans and real estate
acquired by foreclosure
or substantively repossessed to
total assets 1.54% 2.00% 1.88% 1.62% 2.20%
Percentage of Allowance for Loan
Losses to Nonaccrual Loans 107.15% 80.36% 77.07% 92.69% 71.22%
</TABLE>
Nonaccrual loans include restructured loans of $0 at December 31,
1998; $263,000 at December 31, 1997; $398,000 at December 31, 1996; $425,000
at December 31, 1995; and $286,000 at December 31, 1994.
Information with respect to nonaccrual and restructured loans for the
past five years ending December 31 is as follows:
<TABLE>
<CAPTION>
December 31
- --------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,331 $4,597 $4,352 $2,695 $3,238
Interest income that would have been
recorded under original terms $ 318 $ 394 $ 361 $ 243 $ 242
Interest income recorded during the
period $ 37 $ 58 $ 62 $ 21 $ 19
</TABLE>
Nonperforming assets include nonaccrual loans, loans past due 90 days
or more and still accruing, restructured loans not performing in accordance
with amended terms, and other real estate acquired through foreclosure.
Nonperforming assets as a total decreased to $4.7 Million at year end 1998,
from $4.9 Million reported at year end 1997. Nonaccrual loans at December
31, 1998 were down by $1.3 Million to $3.3 Million from $4.6 Million
reported on December 31, 1997. Included in the $3.3 Million of nonaccrual
loans is a $1.3 Million commercial real estate loan that was classified as
nonaccrual in March 1997. The real estate collateralizing this loan was
appraised in December 1997 at $2.7 Million. Due to the excess collateral
value, the Bank does not anticipate any loss on this loan. Loans that became
nonaccrual during the current year, amounted to $1,797,493. Offsetting this
increase were receipts of loan payments of $629,032 and loans of $753,485
that were deemed uncollectible and charged off to the Allowance for Loan
Losses. There was a transfer to Other Real Estate Owned of $1,049,634,
property sold at auction of $156,000 and a transfer to accrual status of
loans totaling $474,457.
The Company places a loan on nonaccrual status when, in the opinion of
management, the collectibility of the principal and interest becomes
doubtful. Generally, when a commercial loan, commercial real estate loan or
a residential real estate loan becomes past due 90 days or more, the Company
discontinues the accrual of interest and reverses previously accrued
interest. The loan remains in the nonaccrual status until the loan is
current and six consecutive months of payments are made, then it is
reclassified as an accruing loan. When it is determined that the
collectibility of the loan no longer exists, it is charged off to the
Allowance for Loan Losses or, if applicable, any real estate that is
collateralizing the loan is acquired through foreclosure, at which time it
is categorized as Other Real Estate Owned. The nonaccrual category is
comprised of $1,035,145 of residential real estate loans, $1,966,307 of
commercial real estate loans, $292,080 of commercial loans and $37,885 of
other types of loans.
Real Estate acquired by foreclosure increased to $1,026,000 at
December 31, 1998 compared to $159,000 reported at year end 1997. This
amount consists of five separate parcels of property. Annual appraisals are
performed on these properties and if the appraised value is less than the
carrying value of the property, the carrying value is written down by a
charge to the Writedown on Other Real Estate Owned expense account. The Bank
currently has one purchase and sales agreement on hand for an early 1999
sale.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The table below illustrates the changes in the Allowance for Loan
Losses for the periods indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $3,694 $3,354 $2,498 $2,306 $1,954
- ----------------------------------------------------------------------------------
Charge-offs:
Commercial (0) (40) (144) (184) (22)
Real estate-construction (0) (0) (0) (0) (0)
Real estate-mortgage (716) (147) (136) (79) (246)
Installment/Consumer (76) (68) (159) (134) (93)
- ----------------------------------------------------------------------------------
(792) (255) (439) (397) (361)
- ----------------------------------------------------------------------------------
Recoveries:
Commercial 8 41 332 1 51
Real estate-construction 0 0 0 0 0
Real estate-mortgage 43 16 0 16 2
Installment/Consumer 16 38 107 22 15
- ----------------------------------------------------------------------------------
67 95 439 39 68
- ----------------------------------------------------------------------------------
Net Charge-offs (725) (160) 0 (358) (293)
- ----------------------------------------------------------------------------------
Additions charged to operations 600 500 400 550 645
Allowance attributable to
acquisition 0 0 456 0 0
- ----------------------------------------------------------------------------------
Balance at December 31: $3,569 $3,694 $3,354 $2,498 $2,306
==================================================================================
Allowance for Loan Losses as a
percent of year end loans 1.64% 1.73% 1.69% 1.65% 1.70%
Ratio of net charge-offs to
average loans outstanding 0.34% 0.08% 0.00% 0.25% 0.23%
</TABLE>
The Allowance for Loan Losses at year end December 31, 1998 was
$3,569,282; and $3,693,865, $3,354,311, $2,497,774 and $2,305,860, for years
ending 1997, 1996, 1995 and 1994 respectively. The Allowance for Loan Losses
as a percent of year end loans was 1.64% in 1998, 1.73% in 1997, 1.69% in
1996, 1.65% in 1995 and 1.70% in 1994.
The level of the Allowance for Loan Losses is evaluated by management
and encompasses several factors. These factors include but are not limited
to recent trends in the nonperforming loans, the adequacy of the assets
which collateralize the nonperforming loans, current economic conditions in
the market area and various other external and internal factors.
Management's assessment of the adequacy of the Allowance for Loan Losses is
reviewed by regulators and by the Company's independent accountants.
The Company's provision for loan losses, which is a deduction from
earnings, in 1998 was $600,000. Prior years' provisions were $500,000,
$400,000, $550,000 and $645,000 for years ending 1997, 1996, 1995 and 1994
respectively. In 1998, the Company realized recoveries of previously
charged-off loans of $67,000. Recoveries recorded in previous years were
$95,000, $439,000, $39,000 and $68,000 in 1997, 1996, 1995 and 1994
respectively.
The amount provided to the Allowance for Loan Losses was deemed
appropriate by management after full consideration of the value of the
assets securing the nonaccrual loans.
This table shows an allocation of the allowance for loan losses as of
the end of each of the last five years.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,249(1) 20.06% $ 984(1) 17.14% $ 789(1) 15.70% $ 597(1) 11.35% $ 588 12.82%
Real estate
Construction 27 1.73 44 3.12 41 3.46 40 4.55 14 1.68
Real estate
Mortgage 1,964(2) 75.21 2,311(2) 76.50 2,150(2) 77.42 1,581(2) 80.04 1,374 81.03
Consumer(3) 329(4) 3.00 355(4) 3.24 374(4) 3.42 280 4.06 330 4.47
- ----------------------------------------------------------------------------------------------------------------------------
$3,569 100.00% $3,694 100.00% $3,354 100.00% $2,498 100.00% $2,306 100.00%
============================================================================================================================
<FN>
<F1> Includes amounts specifically reserved for impaired loans of $128,207
as of December 31, 1998, of $42,937 as of December 31, 1997, $0.00 as
of December 31, 1996 and $214,542 as of December 31, 1995, as required
by Financial Accounting Standard No. 114, Accounting for Impairment of
Loans.
<F2> Includes amounts specifically reserved for impaired loans of $187,554
as of December 31, 1998, of $566,220 as of December 31, 1997, $838,290
as of December 31, 1996 and $240,500 as of December 31, 1995, as
required by Financial Accounting Standard No. 114, Accounting for
Impairment of Loans.
<F3> Includes consumer, obligations of states and political subdivisions
and other.
<F4> Includes amounts specifically reserved for impaired loans of $9,126 as
of December 31, 1998, of $14,413 as of December 31, 1997, $0.00 as of
December 31, 1996 and $0.00 as of December 31, 1995 as required by
Financial Accounting Standard No. 114, Accounting for Impairment of
Loans.
</FN>
</TABLE>
The loan portfolio's largest segment of loans is commercial real
estate loans, which represent 51.7% of gross loans. Residential real estate,
which is the second largest segment of the loan portfolio, represents 23.5%
of gross loans. The Company requires a loan to value ratio of 80% in both
commercial and residential mortgages. These mortgages are secured by real
properties which have a readily ascertainable value.
Generally, commercial real estate loans have a higher degree of credit
risk than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements of the borrower(s), the location of the real
estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, the Company reviews the
borrower(s) repayment history on past debts, and assesses the borrower(s)
ability to meet existing obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by
inventory, furniture and fixtures, and accounts receivable. In assessing the
collateral for this type of loan, management applies a 40% liquidation value
to inventories; 25% to furniture, fixtures and equipment; and 60% to
accounts receivable. Commercial loans represent 20.1% of the loan portfolio.
Consumer loans are generally unsecured borrowings and represent 3.0%
of the total loan portfolio. These loans have a higher degree of risk than
residential mortgage loans. The underlying collateral of a secured consumer
loan tends to depreciate in value. Consumer loans are typically made based
on the borrower's ability to repay the loan through continued financial
stability. The Company endeavors to minimize risk by reviewing the
borrower's repayment history on past debts, and assessing the borrower's
ability to meet existing obligations on the proposed loans.
Charge-offs in 1998 amounted to $792,000, up by $537,000 when compared
to losses incurred in 1997 of $255,000. The Company had charge-offs of
$439,000 in 1996, $397,000 in 1995 and $361,000 in 1994. The real estate-
mortgage category incurred losses of $716,000 in 1998 compared to $147,000
in 1997, $136,000 in 1996, $79,000 in 1995 and $246,000 in 1994.
V. DEPOSITS
Deposits are obtained from individuals and from small and medium sized
businesses in the local market area. The Bank also attracts deposits from
municipalities and other government agencies. The Bank does not solicit or
accept brokered deposits.
The following table sets forth the average amount and the average rate
paid on deposits for the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing Demand Deposits $ 46,217 0.00% $ 43,724 0.00% $ 33,572 0.00%
Interest-bearing Demand Deposits 38,764 3.09 37,739 3.19 28,788 2.98
Savings Deposits 43,885 2.45 42,642 2.50 40,246 2.50
Money Market Deposits 13,777 1.98 14,116 1.99 13,326 2.03
Time Deposits $100,000 or More 22,945 5.52 23,162 5.42 18,813 5.87
Other Time Deposits 119,118 5.62 109,278 5.91 97,957 5.87
- -------------------------------------------------------------------------------------------------
Totals $284,706 3.69% $270,661 3.79% $232,702 3.87%
=================================================================================================
</TABLE>
As of December 31, 1998, time certificates of deposit in amounts of
$100,000 or more had the following maturities:
<TABLE>
<CAPTION>
(Dollars in Thousands)
<S> <C>
Three months or less $ 9,822
Over three months through six months 6,614
Over six months through twelve months 5,826
Twelve months and over 3,745
-------
$26,007
=======
</TABLE>
VI. RETURNS ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of
the Company for each of the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997 1996
---------------------------
<S> <C> <C> <C>
Return on Assets 1.06% 0.96% 0.94%
Return on Equity 11.98% 12.27% 12.69%
Dividend Payout Ratio 28.54% 27.57% 27.95%
Equity to Assets Ratio 8.86% 7.79% 7.40%
</TABLE>
VII. SHORT TERM BORROWINGS
The following table shows the Company's short-term borrowings at the
end of each of the last three years along with the maximum amount of
borrowings and average amounts outstanding as well as weighted average
interest rates for the last three years.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31 $ 42 $1,200 $1,200
Maximum Amount Outstanding
at Any Month's End $1,365 $1,725 $2,141
Average Amount Outstanding
During the Year $ 813 $1,067 $ 987
Weighted Average Interest
Rate During the Year 5.65% 4.91% 5.71%
</TABLE>
The Bank has the ability to borrow funds from correspondent banks and
the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston,
by pledging various investment securities as collateral. The Company did not
borrow during 1998 and 1997. Tax payments made by our customers, which are
owed to the Federal Reserve Bank Treasury Tax and Loan account, are
classified as borrowed funds. The Company has notes payable of $847,990 due
to Fleet Bank with a final maturity in November 1999. This note was assumed
from Fairbank, Inc. at the time of the acquisition. Because of the term of
the note, including applicable prepayment fees, management determined it
advantageous for the Bank not to pay off the note. There is also $4,475,454
in borrowings from the Federal Home Loan Bank which represent the match
funding program that is available to qualified borrowers.
Accounting for Deferred Income Taxes
The net deferred tax asset at year end 1998 was $1,461,166. The amount
of taxable income required to be generated to fully realize such net
deferred tax asset will be approximately $3.7 Million. The taxable income
earned by the Company in 1998 was $5,579,202.
ITEM 2
PROPERTIES
The main office of the Bank is located at 100 Slade's Ferry Avenue,
Somerset, Massachusetts at the junctions of U.S. Routes 6, 138, and 103. The
Bank has nine additional branches located in Fairhaven, Fall River, New
Bedford, Seekonk, Somerset and Swansea, Massachusetts. As of December 31,
1998, the following Bank properties are owned either directly by the Bank or
through its subsidiary, the Slade's Ferry Realty Trust:
<TABLE>
<CAPTION>
Location Sq. Footage
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Main Office 100 Slade's Ferry Avenue Somerset, MA 37,000
North Somerset 2722 County Street Somerset, MA 3,025
Linden Street 244-253 Linden Street Fall River, MA 1,750
Brayton Avenue 855 Brayton Avenue Fall River, MA 3,325
North Swansea 2388 G.A.R. Highway Swansea, MA 2,960
Seekonk 1400 Fall River Avenue Seekonk, MA 2,300
Fairhaven 75 Huttleston Avenue Fairhaven, MA 13,000
South Main Street 1601 South Main Street Fall River, MA 6,604
Offices listed below are leased properties which indicate the applicable
lease expiration date.
Swansea Mall
(expires 2003) Rt 118 Swansea, MA 2,250
Brayton Avenue
Drive Up Complex
(expires 2000) 16 Stevens St. Fall River, MA 549
Walgreens Drug Store
(expires 2004) 838 Pleasant St. New Bedford, MA 835
</TABLE>
The main office building contains approximately 42,000 square feet of
usable space, of which the Bank occupies approximately 37,000 square feet
and the remainder is rented to local businesses as warehouse and office
space. The Bank also has a school banking facility located in the Somerset
High School, Grandview Avenue, Somerset, Massachusetts that consists of 200
square feet which provides basic banking services to students and school
staff. The Seekonk office is an 8,800 square foot building of which the Bank
is utilizing 2,300 square feet and leasing out the remainder.
ITEM 3
LEGAL PROCEEDINGS
The Bank is involved in a civil suit brought in Plymouth Superior
Court by a former employee of the National Bank of Fairhaven, which
primarily alleged a breach of contract. The original demand by the plaintiff
was $550,000 to settle the case which was lowered to $250,000 by the
plaintiff in 1998. Discovery has been completed, and the case is currently
scheduled for trial on April 22, 1999. The Company believes there are
meritorious defenses to the plaintiff's claim, and it intends to vigorously
defend the suit. The Company believes that the suit will not have a material
adverse effect on the Company's financial condition, results of operation or
liquidity, and no reserves have been accrued to cover the potential
liability.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matters were submitted to a vote of
stockholders of the Company.
PART II
ITEM 5
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Reference is hereby made to Company's Annual Report to Stockholders
for the year ended December 31, 1998, attached as an exhibit hereto. The
information set forth on page 9 of such Annual Report with respect to the
Market for the Registrant's Common Stock and Related Stockholder Matters is
incorporated herein by reference.
ITEM 6
SELECTED FINANCIAL DATA
Reference is hereby made to the Company's Annual Report to
Stockholders for the year ended December 31, 1998, attached as an exhibit
hereto. The information set forth on page 10 of such Annual Report under
this heading is incorporated herein by reference.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is hereby made to Company's Annual Report to Stockholders
for the year ended December 31, 1998, attached as an exhibit hereto. The
information entitled "Management's Discussion and Analysis" and set forth on
pages 11 through 20 of such Annual Report is incorporated herein by
reference.
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The most significant market risk factor affecting the financial
condition and operating results of Slade's Ferry Bancorp is interest rate
risk. Refer to this Form 10-K, page 9, under "Interest Rate Risk" for a
discussion of market risk.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to Company's Annual Report to Stockholders
for the year ended December 31, 1998, attached as an exhibit hereto. The
consolidated balance sheets at December 31, 1998 and 1997, and the
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998
and the related notes with the report of Shatswell, MacLeod and Company,
P.C., independent auditors, which appear on pages 21 through 43 of such
Annual Report to Stockholders, are incorporated herein by reference.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on
accounting and financial disclosure matters.
PART III
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 12, 1999. The information set
forth under the heading "Directors and Executive Officers" on pages 10
through 13 and under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance" on page 16 of such Proxy Statement is incorporated
herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 12, 1999. The information set
forth under this heading on pages 19 through 22 of such Proxy Statement is
incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 12, 1999. The information set
forth under this heading on pages 13 through 16 of such Proxy Statement is
incorporated herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 12, 1999. The information set
forth under this heading on page 25 of such Proxy Statement is incorporated
herein by reference.
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of the Company's Annual
Report to stockholders for the year ended December 31, 1998, attached as an
exhibit hereto.
(1) Consolidated Financial Statements
Page
Report of Independent Auditors 21
Consolidated Balance Sheets 22
Consolidated Statements of Income 23
Consolidated Statements of Changes in
Stockholders' Equity 24
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 27
(2) Financial Statement Schedules
All financial statement schedules required by Item 14(a)(2)
have been omitted because they are inapplicable or because
the required information has been included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits: see attached Exhibits Index
(b) Reports on Form 8-K: None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 31, 1999.
Slade's Ferry Bancorp
By /s/ Kenneth R. Rezendes
Kenneth R. Rezendes, President/
Chief Executive Officer and
Director
In accordance with the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <S> <C>
/s/ Thomas B. Almy 3/31/99 /s/ Ralph S. Borges 3/31/99
Thomas B. Almy Ralph S. Borges
Director Treasurer/Chief Financial Officer/
Chief Accounting Officer
/s/ James D. Carey 3/31/99 /s/ Peter G. Collias 3/31/99
James D. Carey Peter G. Collias
Executive Vice President Director
and Director
/s/ Donald T. Corrigan 3/31/99 /s/ Melvyn A. Holland 3/31/99
Donald T. Corrigan Melvyn A. Holland
Chairman of the Board Director
and Director
/s/ William Q. MacLean Jr. 3/31/99 /s/ Francis A. Macomber 3/31/99
William Q. MacLean Jr. Francis A. Macomber
Director Director
/s/ Majed Mouded, MD 3/31/99 /s/ Shaun O'Hearn Sr. 3/31/99
Majed Mouded, MD Shaun O'Hearn Sr.
Director Director
/s/ Lawrence J. Oliveira, DDS 3/31/99 /s/ Peter Paskowski 3/31/99
Lawrence J. Oliveira, DDS Peter Paskowski
Director Director
/s/ Kenneth R. Rezendes 3/31/99 /s/ William J. Sullivan 3/31/99
Kenneth R. Rezendes William J. Sullivan
President and Chief Executive Director
Officer
/s/ Charles Veloza 3/31/99 /s/ David F. Westgate 3/31/99
Charles Veloza David F. Westgate
Director Director
</TABLE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Page
- ------- ----------- ----
<C> <S> <C>
3.1 Articles of Incorporation of Slade's Ferry (1)
Bancorp as amended
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Agreement and Plan of Merger by and between (3)
Slade's Ferry (formerly Weetamoe) Bancorp and Fairbank, Inc.
10.2 Slade's Ferry (formerly Weetamoe) Bancorp (3)
1996 Stock Option Plan
10.3 Noncompetition Agreement between Slade's (4)
Ferry Trust Company and Edward S. Machado
(A substantially identical contract exists
with Peter Paskowski)
10.4 Supplemental Executive Retirement Agreement (5)
between Slade's Ferry (formerly Weetamoe)
Bancorp and Donald T. Corrigan
10.5 Supplemental Executive Retirement Agreement (2)
between Slade's Ferry (formerly Weetamoe) Bancorp
and James D. Carey
10.6 Supplemental Executive Retirement Agreement (2)
between Slade's Ferry (formerly Weetamoe) Bancorp
and Manuel J. Tavares
10.7 Swansea Mall Lease (4)
13 Annual report to security-holders for fiscal year ended
December 31, 1998
21 List of subsidiaries of Slade's Ferry Bancorp. (2)
23 Consent of Independent Public Accountants
27 Financial Data Schedule
<FN>
<F1> Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
<F2> Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996.
<F3> Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended March 31, 1996.
<F4> Incorporated by reference to the Registrant's Registration Statement
on Form S-4 File No. 33-32131.
<F5> Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1994.
</FN>
</TABLE>
ANNUAL REPORT
1998
Description of Business
- -----------------------
Slade's Ferry Bancorp, originally incorporated as Weetamoe Bancorp in June
of 1989 under the laws of the Commonwealth of Massachusetts, is a one bank
holding company which owns and controls 100% of the assets of Slade's Ferry
Trust Company and its subsidiaries.
The primary business of Bancorp is the ongoing business of Slade's Ferry
Trust Company, a state chartered trust company incorporated in
Massachusetts in 1959. The Trust Company is a member of the Federal
Deposit Insurance Corporation and serves as a retail bank.
Slade's Ferry provides multiple deposit products and a wide range of
financial services, including consumer installment loans, residential and
commercial mortgages; as well as other forms of commercial lending. It
serves a broad customer base derived from southeastern Massachusetts and
nearby Rhode Island, currently operating twelve strategically located
retail facilities and multiple ATM's in the towns of Fairhaven, Somerset,
Swansea and Seekonk, and the cities of Fall River and New Bedford, MA. An
Equal Opportunity/Affirmative Action Employer (M/F/D/V), Slade's Ferry
Trust Company employed a total of 136 full-time and 54 part-time employees
as of December 31, 1998. The Bank keeps convenient business hours,
including Saturdays.
The Bank actively competes with a variety of other financial institutions -
major banks, bank holding companies and credit unions - for deposits, loans
and additional forms of business by offering competitive rates. The Bank
adheres to an established philosophy of providing professional, highly
personal service throughout its marketplace.
Corporate offices are located at 100 Slade's Ferry Avenue, Somerset, MA.
SHAREHOLDERS LETTER
As we bring this century to a close and finalize our preparation for
the new millenium, the accomplishments of 1998 will serve as a springboard
for our future success in the new century.
Our assets grew from $302 Million at year-end 1997 to $340 Million or
12.6% by year-end 1998. Our growth in new business came primarily from two
marketplaces, the Rhode Island border towns and the Greater New Bedford
area. Our investment in the New Bedford market in 1996 is now paying the
dividends projected when we acquired the National Bank of Fairhaven.
Profits rose dramatically from $2,845,990 at year-end 1997 to
$3,363,042 or 18.2% by year-end 1998. The increased earnings were fueled by
two sources: the highest interest margin on investable funds we have
enjoyed in over twenty years, and the gains of $382,370 that we were able
to realize from our stock portfolio. During the fourth quarter of 1998, we
saw multiple reductions in interest rates, which have already greatly
reduced our margins and put pressure on our earning projections for 1999.
The return on average assets rose to 1.06% from .96% in 1997, while
the earnings per share on a fully diluted basis rose $.09 from $.89 to
$.98.
During 1998, our stock price rode the crest of the market, as did
most stocks, reaching a high of $19.13 per share and settling consistently
at year-end at approximately $14.00 per share. Early in the year, we issued
a 5% stock dividend, followed at mid year with an increase in cash
dividends to $.06 per share, as well as an extra cash dividend at year end.
During the summer, we purchased land on Ashley Boulevard in New
Bedford and commenced construction of a new branch facility to be
operational during the first quarter of 1999.
We also purchased the former BankBoston banking facility on South
Main Street in Fall River and completed extensive renovations by year-end.
The newly refurbished branch opened in January of 1999 and promises to be
one of the fastest growing and busiest branches in the years to come.
The addition of these two branches will fill in gaps in our market
service area, and makes Slade's Ferry Bank convenient to thousands more new
and existing customers.
In addition of these two branches will fill in gaps in our market
service area, and makes Slade's Ferry Bank convenient to thousands more new
and existing customers.
In addition, during the year, we committed substantial resources to
addressing all of the issues affecting us with the upcoming transition into
the Year 2000 (Y2K). We assessed all of our computer system concerns to
identify problems or replacement needs. We have systematically replaced,
upgraded, tested and continue to test all our systems to assure our
customers that the transition into the Year 2000 will be made without any
interruption to our servicing abilities. We are extremely confident that
your bank and the industry have sufficiently addressed the Y2K concerns to
enter the new millenium prepared to continue the levels of service you have
come to expect.
1999 will mark the fortieth anniversary of Slade's Ferry Bank, which
started from humble beginnings back in 1959.
Because of your faith in us and our focus on personalized customer
service, we have grown to be a well-respected, well-capitalized financial
organization with continued bright prospects for the future.
The addition of two new branches to our delivery system, our growth
in 1998 and our Y2K preparations will propel us into the new century with
solid financial footings, exciting growth potential, and increased ability
to provide value and reward for your investment in our bank.
We look to the new millenium with great excitement and anticipation.
Sincerely,
James D. Carey
Executive Vice President, Bancorp
President, Chief Executive Officer, Slade's Ferry Bank
January 29, 1999
SLADE'S FERRY BANCORP
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last five
years.
<TABLE>
<CAPTION>
Year Ended December 31
- --------------------------------------------------------------------------------------------------------
(Dollars in Thousands
Except per Share Data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Interest Income $ 24,306 $ 23,150 $ 19,495 $ 16,541 $ 13,546
Interest Expense 10,711 10,412 9,078 7,764 4,944
Net Interest Income 13,595 12,738 10,417 8,777 8,602
Provision for Loan Losses 600 500 400 550 645
Noninterest Income 1,568 1,562 1,305 1,056 1,099
Noninterest Expense 8,984 9,033 7,380 6,632 6,701
Income Before Income Taxes 5,579 4,767 3,942 2,651 2,355
Applicable Income Taxes 2,216 1,921 1,564 1,005 888
Net Income 3,363 2,846 2,378 1,646 1,467
PER SHARE DATA (1)
Net Income-Basic $ 0.99 $ 0.894 $ 0.819 $ 0.572 $ 0.540
Net Income-Diluted(2) $ 0.98 $ 0.892 $ -- $ -- $ --
Cash Dividends $ 0.28 $ 0.246 $ 0.229 $ 0.166 $ 0.151
Book Value (at end of period) $ 8.62 $ 8.168 $ 7.116 $ 6.811 9.023
Avg. Shs. Outstanding 3,402,218 3,184,857 2,903,131 2,875,162 2,717,207
Shares Outstanding Year End 3,446,413 3,236,713 2,789,142 2,617,181 1,645,492
BALANCE SHEET DATA
Assets $ 340,355 $ 301,571 $ 291,342 $ 233,422 $ 193,909
Loans 218,230 213,736 198,986 151,094 136,191
Unearned Discount 691 690 643 527 403
Allowance for Loan Losses 3,569 3,694 3,354 2,498 2,306
Loans, Net 213,938 209,310 194,935 148,069 133,482
Goodwill 2,854 3,081 3,307 -- --
Investments 80,020 58,668 57,732 58,757 43,537
Deposits 303,786 271,322 267,791 214,221 177,315
Stockholders' Equity 29,707 26,436 19,847 17,827 14,848
FINANCIAL RATIOS
Net Yield on Interest Earning
Assets (3) 4.70% 4.66% 4.44% 4.36% 4.78%
Net Interest Spread (3) 3.91 3.88 3.72 3.72 4.33
Net Income as a Percentage of
Average Assets 1.06 0.96 0.94 0.75 0.75
Average Equity 11.98 12.27 12.69 9.99 9.71
Dividend Payout Ratio 28.54 27.57 27.95 29.03 27.93
Average Equity to Average Assets 8.86 7.79 7.40 7.55 7.71
- --------------------
<F1> Earnings per share are computed based on the average number of shares
of common stock outstanding during the year. On January 19, 1994, the
Company declared a 5% stock dividend mailed to stockholders on February
1, 1994. On February 24, 1995, the Company declared a 5% stock dividend
mailed to stockholders on March 1, 1995 and on March 13, 1995, the
Company announced a 3 for 2 stock split mailed to stockholders on April
18, 1995. On January 8, 1996, the Company declared a 5% stock dividend
mailed to stockholders on January 31, 1996. On January 12, 1998, the
Company declared 5% stock dividend mailed to stockholders on February 11,
1998. Per share data has been restated to reflect the effect of the stock
splits and the stock dividends.
<F2> There were no stock options outstanding in years prior to 1997.
<F3> Calculated on a fully taxable equivalent basis.
</TABLE>
SLADE'S FERRY BANCORP
Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
- ------------------
On January 7, 1998, the Company's common stock became listed in the NASDAQ
Small Cap Market under the symbol SFBC. Prior thereto, the Company's
common stock was listed in the "pink sheets" of the over-the-counter
market. The following table sets forth the range of high and low bids as
reported for NASDAQ Small Cap Market by quarters for 1998, and high and low
bid quotations as reported in the "pink sheets" by quarters for 1997.
<TABLE>
<CAPTION>
1998 1997(1)
------------------------------------
High Low High Low
------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $17.00 $15.50 $ 9.75 $ 8.25
2nd Quarter 19.13 17.50 10.50 8.88
3rd Quarter 18.75 16.38 13.00 9.50
4th Quarter 15.88 13.00 16.63 13.13
<F1> These quotations reflect interdealer prices, without mark-up, mark-
down, or commission and may not necessarily represent actual
transactions.
</TABLE>
Dividends - History and Policy
- ------------------------------
The Company, since its inception in 1990 and prior thereto the Bank, has
consistently paid dividends to the stockholders since 1961. In January
1998, the Company issued a 5% stock dividend on the Company's common stock,
resulting in a distribution of 161,698 shares. The Company also paid two
quarterly cash dividends of $.05 per share and then increased its dividend
to $.06 per share for the third and fourth quarter in 1998. In addition,
an extra cash dividend of $.06 per share was paid in December 1998 for a
total of $.28 per share paid in 1998.
In 1997, the Company paid quarterly cash dividends of $.05 per share, plus
an extra cash dividend of $.05 per share, for a total of $.25 per share
before the effect of the 5% stock dividend issued in 1998.
The declaration of cash dividends is dependent on a number of factors,
including regulatory limitations, and the Bank's operating results and
financial condition. The stockholders of the Company will be entitled to
dividends only when, and if, declared by the Company's Board of Directors
out of funds legally available. Under the Massachusetts Business
Corporation Law, a dividend may not be declared if the corporation is
insolvent or if the declaration of the dividend would render the
corporation insolvent.
Furthermore, the directors may be liable for authorization of a dividend if
such dividend is in violation of the Articles of Organization, or if the
corporation is then or is thereby rendered insolvent. The Company will be
considered insolvent when it is unable to pay debts as they fall due in the
usual course of business, or when its liabilities are in excess of the
reasonable market value of assets held.
Chapter 172 Section 28 of the Massachusetts Statutes on Bank and Banking
provides that a bank's Board of Directors may, subject to the restriction
contained in the section, declare and pay dividends on capital stock out of
net profits from time to time and to such extent as they deem advisable.
However, under this provision, no cash dividend shall be paid unless,
following the payment of such dividend, the capital stock and retained
earnings account will be unimpaired.
Management's Discussion and Analysis
- ------------------------------------
The purpose of Management's Discussion and Analysis is to focus on certain
significant factors which have affected the Company's operating results and
financial condition, and to provide stockholders a more comprehensive
review of the figures contained in the financial data of this report.
Overview:
* In 1998, Slade's Ferry Bancorp recorded net income of $3,363,042 or
$0.98 per share on a diluted basis compared to $2,845,990 or $0.89
per share on a diluted basis in 1997. This represents an increase of
$517,052 or 18.2% in net income and $.09 or 10.11% per share on a
diluted basis between 1998 and 1997.
* Return on average assets increased to 1.06% in 1998 from .96% in 1997
and .94% in 1996. Return on average equity for 1998, 1997 and 1996
was 11.98%, 12.27%, and 12.69% respectively.
* Book value of the Company's common stock increased to $8.62 in 1998
from $8.17 reported in 1997, and $7.12 reported in 1996.
* The Company in February 1998 issued a 5% stock dividend to its
stockholders of common stock, and the cash dividend for the year
totaled $.28 per share, up from $.246 per share in 1997 and $.229 per
share in 1996.
* Assets at December 31, 1998 increased by $38.8 Million or 12.9% to
$340.4 Million when compared to $301.6 Million in assets at December
31, 1997. Net loans increased by 2.2% during 1998. Deposit levels
were up by 12.0% at December 31, 1998 when compared to 1997.
* Two new branch banking facilities are being added to the branch
network and are scheduled to open in early 1999.
Results of Operations
- ---------------------
Net interest income, which is the difference between interest and dividend
income earned on earning assets and interest expense paid on interest-
bearing liabilities, is the dominate contributor to net income. Increases
or decreases in interest rates affect the yields earned on loans and
investments and the rates paid on deposits and other borrowings. On a
fully taxable basis, net interest income was $13.8 Million in 1998, $12.9
Million in 1997, and $10.6 Million in 1996. The increase in net interest
income in 1998 when compared to 1997 is primarily a result of growth in
average earning assets of 6.13% from the prior year. Growth in earning
assets is due to general increases in business volumes. The average
earning assets produced a 8.35% yield, down slightly when compared to 8.43%
in 1997. In 1996 the yield on earning assets was 8.25%. The loan
portfolio, which generally produces higher yields than other earning assets
represents 67.5% of average assets in 1998 compared to 69% in 1997 and
67.3% in 1996.
Cost of funds decreased to 4.44% in 1998 primarily due to the lowering of
rates paid on Other Time Deposits which is the largest component of
interest-bearing liabilities. Cost of funds in 1997 was 4.55% and 4.53% in
1996. During 1998 the average balances in interest-bearing liabilities
increased to $241.4 Million compared to $229.1 Million in 1997 and $200.5
Million in 1996.
The net interest spread, which represents the difference between the
weighted average yield on interest-earning assets and the weighted average
cost of interest-bearing liabilities increased to 3.91% in 1998 from 3.88%
reported in 1997 and 3.72% in 1996.
Net yield on earning assets, which represents net interest income as a
percent of average earning assets, increased to 4.70% from 4.66% in 1997
and 4.44% in 1996.
The Provision to the Allowance for Loan Losses in 1998 was increased to
$600,000 compared to $500,000 in 1997 and $400,000 in 1996. This increase
to the provision was based upon management's desire to maintain an
appropriate ratio of the Allowance for Loan Losses to outstanding loans
while recognizing the growth in the loan portfolio and the amount of charge
offs that occurred in 1998 compared to prior years.
Total Other Income in 1998 increased slightly to $1,568,112 compared to
$1,562,257 reported in 1997. In 1996, Total Other Income was $1,305,497
which reflected only four months of merger-related income associated with
the acquisition of the National Bank of Fairhaven that took place in late
August 1996. Service charges on deposit accounts and overdrafts which are
the largest component of Other Income decreased slightly to $881,964 in
1998 compared to $902,079 and $849,425 reported in 1997 and 1996
respectively. As a result of favorable market conditions, various
marketable equity securities were sold throughout 1998 whereby gains were
realized totaling $382,370. The Company realized gains in the security
portfolio in 1997 totaling $313,844 and $112,631 in 1996.
Total Other Expense for 1998 decreased by $49,326 to $8,984,181 from
$9,033,507 reported in 1997. Salaries and Employees Benefits which is the
largest component of Other Expenses increased by $162,571 due to general
wage adjustments and increased costs associated with employees medical
insurance and retirement plan. In 1997 the Company incurred an increase of
$989,218 in Salaries and Employees Benefits when compared to 1996 which was
attributable to a full year associated with the retention of officers and
employees of the National Bank of Fairhaven acquired by Slade's Ferry Bank
in late August 1996. Personnel costs associated with these new employees
were expensed for twelve months in 1997 compared to four months in 1996.
The increase in Salaries and Employees Benefits in 1998 was offset by the
combination of a decrease in Occupancy Expense and Equipment Expense
totaling $31,237, and a decrease of $97,047 created by a Gain on Sale of
Other Real Estate Owned (OREO) totaling $54,590 in 1998 as opposed to a
loss of $42,457 realized in 1997. In 1996 the Bank incurred a loss of
$21,008 on sale of OREO properties. In 1998 the Bank did not incur any
expense associated with the writedown of values on Other Real Estate Owned,
while in 1997, writedowns totaled $67,480 and $30,000 in 1996.
Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums in
1998 were $32,353 compared to $71,880 in 1997 and $6,278 in 1996. In 1997,
under federal legislation enacted in 1996, FDIC Bank Insurance Fund
deposits were assessed to finance the annual interest costs on government
bonds issued to assist in recapitalizing certain thrift institutions in
prior years. The resulting increase is reflected in 1997 and 1998
premiums.
Stationery and Supplies expense in 1998 decreased to $229,344 from costs of
$311,546 in 1997 and $243,653 in 1996. In 1997 the Bank incurred
additional costs due to the need to stock the Fairhaven and New Bedford
Massachusetts branches which were acquired through the merger acquisition.
The following table sets forth the components of the line item Other
Expense, which reflects an increase of $105,596 to $2,042,253 in 1998
compared to $1,936,657 in 1997. In 1996 Other Expense was $1,678,873.
Expense items in 1996 reflect four months attributed to the acquisition of
the National Bank of Fairhaven compared to twelve full months in 1997 and
1998.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of Goodwill $ 226,800 $ 226,800 $ 98,000
Advertising and Public Relations 405,737 400,502 337,947
Communications 290,253 269,239 257,575
Professional Fees & Other Services 571,952 536,710 499,448
Other Various Expenses 547,511 503,406 485,903
- ----------------------------------------------------------------------------
Total Other Expense $2,042,253 $1,936,657 $1,678,873
============================================================================
</TABLE>
The increases noted above are attributed to normal business growth.
Income taxes in 1998 increased to $2,216,160 up by $295,419 when compared
to $1,920,741 in 1997, and up by $652,159 when compared to $1,564,001 in
1996.
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The following table sets forth the Company's average assets, liabilities,
and stockholders' equity, interest income earned and interest paid, average
rates earned and paid, and the net interest margin for the periods ending
December 31, 1998, December 31, 1997, and December 31, 1996. Averages are
daily averages.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. Average Interest(1) Avg. Int.
(Dollars in Thousands) Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Earning Assets (2)
Commercial Loans $ 42,244 $ 3,953 9.36% $ 36,195 $ 3,466 9.58% $ 23,440 $ 2,191 9.35%
Commercial Real
Estate 118,939 11,630 9.78 110,093 10,740 9.76 90,576 9,035 9.98
Residential Real
Estate 45,781 3,520 7.69 52,894 4,116 7.78 50,486 3,788 7.50
Consumer Loans 6,767 652 9.63 6,503 659 10.13 6,094 613 10.06
- --------------------------------------------------------------------------------------------------------------------------------
Total Loans 213,731 19,755 9.24 205,685 18,981 9.23 170,596 15,627 9.16
Federal Funds Sold 12,214 630 5.16 11,309 607 5.37 14,994 783 5.22
U.S. Treas/Govt
Agencies 54,842 3,366 6.14 49,682 3,099 6.24 43,871 2,715 6.19
States & Political
Subdivisions 9,763 649 6.65 6,948 477 6.87 5,959 400 6.71
Mutual Funds 209 14 6.70 301 15 4.98 241 13 5.39
Marketable Equity
Securities 2,761 105 3.80 2,518 120 4.77 1,946 75 3.85
Other Investments 6 0 0.00 126 8 6.35 197 15 7.61
- --------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 293,526 $24,519 8.35% 276,569 $23,307 8.43% 237,804 $19,628 8.25%
- --------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan
Losses (3,602) (3,474) (2,958)
Unearned Income (715) (665) (597)
Cash and Due From
Banks 12,186 11,366 9,565
Other Assets 15,376 14,022 9,489
- --------------------------------------------------------------------------------------------------------------------------------
Total Assets $316,771 $297,818 $253,303
================================================================================================================================
LIABILITIES &
STOCKHOLDERS' EQUITY:
Savings $ 43,885 $ 1,075 2.45% $ 42,642 $ 1,067 2.50% $ 40,246 $ 1,006 2.50%
NOW's 38,764 1,196 3.09 37,739 1,202 3.19 28,788 858 2.98
Money Market Accounts 13,777 273 1.98 14,116 281 1.99 13,326 270 2.03
CD's > $100M 22,945 1,266 5.52 23,162 1,256 5.42 18,813 1,104 5.87
Other Time Deposits 119,118 6,700 5.62 109,278 6,460 5.91 97,957 5,754 5.87
Other Borrowings 2,933 201 6.85 2,114 146 6.91 1,374 86 6.26
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
Liabilities 241,422 $10,711 4.44% 229,051 $10,412 4.55% 200,504 $ 9,078 4.53%
- --------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 46,217 43,724 33,572
Other Liabilities 1,063 1,847 493
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 288,702 274,622 234,569
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock 34 30 28
Paid-in Capital 21,448 16,899 14,393
Retained Earnings 6,395 6,308 4,486
Net Unrealized Gain
(Loss) on Available-
for-Sale Securities 192 (41) (173)
- --------------------------------------------------------------------------------------------------------------------------------
Total Stockholders'
Equity 28,069 23,196 18,734
- --------------------------------------------------------------------------------------------------------------------------------
Total Liabilities &
Stockholders' Equity $316,771 $297,818 $253,303
================================================================================================================================
Net Interest Income $13,808 $12,895 $10,550
================================================================================================================================
Net Interest Spread 3.91% 3.88% 3.72%
================================================================================================================================
Net Yield on Earning
Assets 4.70% 4.66% 4.44%
================================================================================================================================
- --------------------
<F1> On a fully taxable equivalent basis based on tax rate of 34%.
Interest income on investments and net interest income includes a
fully taxable equivalent adjustment of $212,000 in 1998, $157,000 in
1997 and $133,000 in 1996.
<F2> Average balance includes non-accruing loans. The effect of including
such loans is to reduce the average rate earned on the Company's
loans.
</TABLE>
FINANCIAL CONDITION
Loans
- -----
The loan portfolio increased by $4.5 Million to $218.2 Million at the end
of 1998 when compared to $213.7 Million reported at the end of 1997,
notwithstanding principal pay-downs averaging $2.5 Million per month.
Paydowns reflect the normal monthly amortization occurring under the
original terms of the loans. In addition, throughout 1998, a very
competitive rate environment existed among lending entities along with some
lowering of credit underwriting standards. The Bank, while offering
competitive rates, however, has not lessened any of its credit criteria and
strives to maintain the quality of the loan portfolio. The Bank manages
its credit granting programs for commercial loans through an internal
credit department that performs an independent analysis of the financial
condition of the borrower and the business entity. In turn, the borrowing
request is further evaluated by Executive Management and submitted to the
Executive Committee of the Board of Directors for final approval before the
loan is granted.
The largest segment of the loan portfolio is commercial real estate loans
which represent 52% of total loans. These loans are collateralized by
various types of commercial properties located within the Bank's market
area extending throughout southeastern Massachusetts and abutting cities
and towns in Rhode Island. There is no predominate type of property nor
concentration of credit in any one industry. The properties consist of
apartment complexes, medical centers, strip malls, factories with multiple
tenants, and retail office units. Commercial real estate loans generally
have a higher degree of credit risk than residential real estate loans
because they are predominately dependent on the success of the business.
Analysis of financial statements of the business is performed periodically
and if it is determined that there are any weaknesses developing in the
business or any negative trends occurring, contact with the borrower is
made to determine the cause and what remedial action is planned.
Residential real estate, another large component of loans which accounts
for 23% of the loan portfolio, is comprised of mortgages on one to four
family residential properties. Credit is granted based on income to debt
ratio, a satisfactory credit report and the appraised value of the
property. The Bank also provides a "minimum down-payment" program to
encourage home ownership for first time home buyers. This enables
prospective homeowners the opportunity to purchase a home without having to
save over an extended period of time, the normally required 20% down
payment.
Other types of loans total 25% of the portfolio and are comprised of
commercial loans, which are generally short term loans to finance business
inventory, consumer credit installment loans, automobile financing and
credit card loans.
Deposits
- --------
Deposit levels increased substantially in 1998 to $303.8 Million, up by
$32.5 Million when compared to $271.3 Million reported at the end of 1997.
The most significant increase occurred in the time deposit category. Time
deposits is the largest component of deposits. Growth in deposits occurred
through a practical customer service philosophy complimented by competitive
interest rates and fees. This approach contributed to the overall
expansion of the Bank's customer base. Deposits are the Bank's largest
source of funding.
The Bank is a member of the Federal Home Loan Bank, (FHLB) and borrows
funds secured by residential mortgage loans and other assets. This
borrowing mechanism enables the Bank to match-fund loans to commercial
borrowers that meet certain credit and deposit requirements. At December
31, 1998, the Bank had $4.5 Million of loans match-funded with FHLB.
Interest Rate Risk
- ------------------
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, monitors and evaluates the interest rate
sensitivity of the Company's assets and liabilities. The committee
utilizes a GAP report which indicates the differences or gap between
interest-earning assets and interest-bearing liabilities in various
maturity time periods. This, in conjunction with certain assumptions and
other related factors, such as anticipated changes in interest rates and
anticipated cash flows from loans, investments and deposits, provides a
means of evaluating interest rate risk. Management also considers that
certain assets and liabilities react differently to changes in interest
rates. Some assets may have rate caps or prepayment fees attached to the
instrument, and some liabilities have early withdrawal penalties.
A positive gap results when more assets than liabilities are expected to
reprice within a certain time frame and a negative gap reflects an excess
of liabilities repricing in that period. A positive gap would tend to
increase net interest income when rates are rising and decrease net
interest income when rates are falling. A negative gap position would tend
to produce the opposite effect. At December 31, 1998 the analysis of the
GAP report indicates that there is an excess of $0.7 Million in assets
subject to repricing in the 0 to 2 year category. This equates to a
percentage of total assets of 0.19%. Management believes that this is an
ideal situation recognizing that most of the liabilities will be repriced
in relatively the same time frame as assets, thereby having a minimal
impact on interest rate risk.
In addition to the gap analysis used to evaluate the Bank's interest rate
risk exposure, the Bank utilizes a model to monitor earnings-at-risk. This
model provides management a measurement tool to assess the effect of
changes in interest rates on the Bank's current and future earnings. A
specific risk limit with respect to the Bank's potential loss of net
interest income due to rising or declining interest rates has been
established. This limit provides management an internal tolerance level to
control interest rate risk exposure and is monitored on a quarterly basis.
INTEREST RATE - SENSITIVITY GAPS
Repricing Period at December 31, 1998
<TABLE>
<CAPTION>
Within 1-2 2-3 3-5 Over 5
(Dollars in Thousands) 1 Year Years Years Years Years Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets(1)
Federal Funds Sold $ 14,500 $ -- $ -- $ -- $ -- $ 14,500
Investment Securities 10,030 6,956 5,906 18,969 37,583 79,444
Residential Mortgages 19,985 9,698 7,226 1,612 11,664 50,185
Commercial Mortgages 74,560 15,023 12,376 5,072 3,916 110,947
Other Loans 44,108 3,607 2,706 2,733 613 53,767
----------------------------------------------------------------
Total Earning Assets $163,183 $35,284 $28,214 $28,386 $53,776 $308,843
----------------------------------------------------------------
Interest Bearing Liabilities:
NOW Checking and Savings Deposits $ 39,766 $10,388 $10,388 $27,700 $ -- $ 88,242
Money Market Deposits 3,730 1,865 1,865 4,977 -- 12,437
Term Deposits 122,341 18,836 13,649 -- -- 154,826
Borrowed Funds 848 -- -- -- 4,475 5,323
Other Interest-bearing Liabilities 42 -- -- -- -- 42
----------------------------------------------------------------
Total Interest-bearing Liabilities $166,727 $31,089 $25,902 $32,677 $ 4,475 $260,870
----------------------------------------------------------------
Net Interest Sensitivity Gap $ (3,544) $ 4,195 $ 2,312 $(4,291) $49,301 $ 47,973
Cumulative Gap $ (3,544) $ 651 $ 2,963 $(1,328) $47,973 $ --
Cumulative Gap as a Percent
of Total Assets 1.04% 0.19% 0.87% 0.39% 14.10% --
================================================================
- --------------------
<F1> Nonaccrual loans amounting to $3.3 Million have been eliminated from
the loan balances.
</TABLE>
Investments
- -----------
The investment portfolio represents the second largest component of the
Company's assets and consists of securities in the Available-for-Sale
category and securities in the Held-to-Maturity category. The designation
of which category the security is to be classified as is determined at the
time of the purchase of the investment instrument. Securities in the
Available-for-Sale category are securities that the Company intends to hold
for an indefinite period of time, but not necessarily to maturity. These
securities may be sold in response to interest rate changes, liquidity
needs or other factors. Any unrecognized gains or losses, net of taxes, is
reflected in Stockholders Equity as a separate component. Securities in
the Available-for-Sale category consist predominately of securities of U.S.
Treasury and other U.S. Government corporations and agencies, mortgage-
backed securities, and marketable equity securities. Securities of U.S.
Treasury and U.S. Government corporations and agencies have little or no
credit risk, other than being sensitive to changes in interest rates; and
if held to maturity, these securities will mature at par. The Company
amortizes premiums and accretes discounts over the life of the security
unless it is a callable bond, in which case the premium or discount is
amortized or accreted to the call date. Marketable equity securities,
however, have a greater risk as they are subject to rapid market
fluctuations. These securities are constantly monitored and evaluated to
determine their suitability for sale or retention in the portfolio.
Management minimizes its risk by limiting the total amount invested into
marketable equity securities to 5% of the total investment portfolio. At
December 31, 1998, the amount invested in marketable equity securities was
2.5% of the total investment portfolio distributed over various business
sectors.
The Held-to-Maturity category consists predominately of securities of U.S.
Treasury, U.S. Government corporations and agencies, and securities issued
by states of the United States and political subdivisions of states. The
Company has the positive intent and ability to hold these securities to
maturity. In managing the Held-to-Maturity portfolio the Company seeks to
maximize its return and maintain consistency to meet short and long term
liquidity forecasts by purchasing securities with maturities laddered
within a short term period of 1-3 years, a mid term period of 3-5 years and
some securities extending out to 10 years. The Company does not purchase
investments with off-balance sheet characteristics, such as swaps, options,
futures and other hedging activities that are called derivatives. The main
objective of the investment policy is to provide adequate liquidity to meet
reasonable declines in deposits and any anticipated increases in the loan
portfolio, to provide safety of principal and interest, to generate
earnings adequate to provide a stable income, and to fit within the overall
asset/liability management of the objectives of the Company.
Nonperforming Assets
- --------------------
The Company considers nonaccrual loans, loans past due 90 days or more but
still accruing, restructured loans not performing in accordance with
amended terms, and real estate acquired through foreclosure as
nonperforming assets. Nonperforming assets as a total decreased to $4.7
Million at year end 1998, from $4.9 Million reported at year end 1997.
Nonaccrual loans is the largest component of nonperforming assets, and at
December 31, 1998, this category decreased to $3.3 Million from $4.6
Million reported at the end of the previous year.
The Company places a loan on nonaccrual status, when, in the opinion of
management, the collectability of the principal and interest becomes
doubtful. Generally, when a commercial loan, commercial real estate loan
or a residential real estate loan becomes past due 90 days or more, the
Company discontinues the accrual of interest and reverses previously
accrued interest. The loan remains in the nonaccrual status until the loan
is current and six months of payments are made. Then it is reclassified as
an accruing loan.
If it is determined that the collectibility of the loan no longer exists,
the loan is charged off to the Allowance for Loan Losses, or if applicable,
any real estate collateralizing the loan is acquired through foreclosure,
and categorized as Other Real Estate Owned.
Loans 90 days or more past due but still accruing increased to $317,000
from $147,000 reported at year end 1997. Management continues to accrue on
these loans due to the excess values of collateral securing these loans
compared to their outstanding balances.
Real estate acquired by foreclosure or substantively repossessed increased
to $1,026,000 at December 31, 1998 compared to $159,000 reported at the end
of the prior year. This amount represents five separate pieces of
property. The Bank currently has one purchase and sales agreement on hand
which is targeted for an early 1999 sale.
The percentage of nonaccrual loans to total loans decreased substantially
from prior years due to the reduction in the nonaccrual category and the
growth of the loan portfolio. In addition, the percentage of nonaccrual
loans, restructured loans and real estate acquired by foreclosure to total
assets also decreased as a result of increased asset levels. The $867,000
of restructured loans represent several borrowers whose original loan terms
were amended and are current in their payments under the amended terms.
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" applies to all loans except large
groups of smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the
collateral if the loan is collateral dependent. Smaller-balance
homogeneous loans are considered by the Company to include consumer
installment loans and credit card loans.
At December 31, 1998, there were $5.2 Million of loans which the Company
has determined to be impaired, of which $1.3 Million has a related
allowance for credit losses of $0.3 Million and $3.9 Million has no related
allowance for credit losses.
Nonperforming Assets
- --------------------
<TABLE>
<CAPTION>
December 31
- -------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $3,331 $4,597 $4,352 $2,695 $3,238
Loans 90 days or more past
due and still accruing 317 147 112 23 204
Real estate acquired by foreclosure
or substantively repossessed 1,026 159 308 633 888
- -------------------------------------------------------------------------------------------
Total nonperforming assets $4,674 $4,903 $4,772 $3,351 $4,330
- -------------------------------------------------------------------------------------------
Restructured debt performing in
accordance with amended terms,
not included above $ 867 $1,265 $ 819 $ 459 $ 139
- -------------------------------------------------------------------------------------------
Percentage of nonaccrual loans
to total loans 1.53% 2.15% 2.19% 1.78% 2.38%
Percentage of nonaccrual loans,
restructured loans, and real estate
acquired by foreclosure or substantively
repossessed to total assets 1.54% 2.00% 1.88% 1.62% 2.30%
Percentage of allowance for loan losses
to nonaccrual loans 107.15% 80.36% 77.07% 92.69% 71.22%
</TABLE>
Management is not aware of any other loans that pose a potential credit
risk or where the loans are current but the borrowers are experiencing
financial difficulty.
Allowance for Loan Losses
- -------------------------
The Allowance for Loan Losses is available to absorb losses on loans deemed
by management as uncollectible. In assessing the adequacy of the level of
the allowance, management considers the status of nonaccrual loans and
specific borrower situations, the current and anticipated economic climate
of the area including national credit trends and the historical credit
experiences within the region. Additions to the Allowance are provided by
charges to earnings and recoveries on previously charged- off loans.
Deductions from the Allowance are transacted as a charge off when a loan is
deemed uncollectible. The Allowance for Loan Losses as a percentage of
outstanding loans at December 31, 1998 was 1.64% compared to 1.73% reported
at year end 1997. The ratios at years ending 1996, 1995 and 1994 were
1.69%, 1.65% and 1.70% respectively. In 1998 the Company provided $600,000
to the allowance and recovered $67,724 from previously charged off loans.
Loans charged off during 1998 totaled $792,307. This resulted in net
charge-offs of $724,583. Net charge-offs for prior years were $160,446,
- -0-, $358,085, and $293,003 for 1997, 1996, 1995 and 1994 respectively.
In addition to management's assessment of the Allowance for Loan Losses,
the allowance is also evaluated by regulatory agencies and independent
accountants as part of their examination and audit procedures.
The table below illustrates the changes in the Allowance for Loan Losses
for the periods indicated.
<TABLE>
<CAPTION>
December 31
- ----------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $3,694 $3,354 $2,498 $2,306 $1,954
Charge Offs:
Commercial (0) (40) (144) (184) (22)
Real estate construction (0) (0) (0) (0) (0)
Real estate mortgage (716) (147) (136) (79) (246)
Installment/Consumer (76) (68) (159) (134) (93)
----------------------------------------------
(792) (255) (439) (397) (361)
----------------------------------------------
Recoveries:
Commercial 8 41 59 1 51
Real estate construction 0 0 0 0 0
Real estate mortgage 43 16 333 16 2
Installment/Consumer 16 38 47 22 15
----------------------------------------------
67 95 439 39 68
----------------------------------------------
Net charge offs (725) (160) (0) (358) (293)
----------------------------------------------
Additions charged to operations 600 500 400 550 645
Allowance attributable to acquisition 0 0 456 0 0
----------------------------------------------
Balance at end of period $3,569 $3,694 $3,354 $2,498 $2,306
==============================================
Allowance for Loan Losses as a percent
of year end loans 1.64% 1.73% 1.69% 1.65% 1.70%
Ratio of net charge offs to average
loans outstanding 0.34% 0.08% 0.00% 0.25% 0.23%
</TABLE>
Liquidity
- ---------
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements and investment maturities in
light of prevailing economic conditions. Through this assessment, the Bank
manages its liquidity level to optimize earnings and respond to
fluctuations in customer borrowing needs.
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
deposit accounts, loan origination, draw-downs on loan commitments,
acquisitions of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest
component of the Company's deposit base is term certificates which extend
out to a maximum of three years. The Company does not participate in
brokered deposits. Deposits are obtained from consumers and commercial
customers within the Bank's community reinvestment area, being Bristol
County, Massachusetts and several abutting towns in Rhode Island.
The Company also has the ability to borrow funds for liquidity purposes
from correspondent banks, the Federal Home Loan Bank, as well as the
Federal Reserve Bank of Boston by pledging various investment securities as
collateral. Tax payments made by our customers which are owed to the
Federal Reserve Bank Treasury Tax and Loan account are classified as Other
Borrowed Funds. Note Payable represents a note due to Fleet Bank. The
note is attributable to Fairbank, Inc. and was assumed at the time of the
merger. It has a final maturity in November, 1999. Due to the applicable
prepayment fees, it is advantageous for the Bank to continue with the
applicable terms of the note. Advances from the Federal Home Loan Bank
represents the match funding program that is available to qualified
borrowers.
Excess available funds are invested on a daily basis into Federal Funds
Sold. An appropriate level of Federal Funds Sold is maintained to meet
loan commitments, anticipated loan growth and deposit forecasts. Funds
exceeding this level are then used to purchase investment securities that
are suitable in yields and maturities for the investment portfolio.
Liquidity in 1998 was primarily provided by the maturity and sales of
securities totaling $43.5 Million, and the increase in deposits of $32.5
Million. This was offset by the purchases of additional securities of
$64.0 Million and the net increase in loans totaling $6.2 Million. Other
events that affected liquidity were advances from the Federal Home Loan
Bank of $4.1 Million, investment in life insurance policies of $1.6
Million, capital expenditures of $1.6 Million, and other factors including
cash provided by operating and financing activities as indicated in the
cash flow statements.
Capital
- -------
At December 31, 1998, the Company had total capital of $29,707,385, up by
$3,270,959 from $26,436,426 reported at year end 1997. The increase
consists primarily of net earnings totaling $3,363,042 offset by cash
dividends of $959,693 and $8,117 paid for fractional shares resulting from
the 5% stock dividend issued in February 1998. Other additions to capital
consisted of $215,924 of optional cash contributions, $473,242 of dividend
reinvestment associated with the Dividend Reinvestment Program and proceeds
from exercised stock options of $51,789. Also affecting capital is the net
increase in other comprehensive income which consists of the net increase
in unrealized Available-for-Sale securities from December 31, 1997 to
December 31, 1998 of $215,657, net of taxes, and the minimum pension
liability adjustment of $80,885, net of taxes, for a total of $134,772.
Under the requirements for Risk-Based and Leverage Capital of the federal
banking agencies, a minimum level capital will vary among banks based on
safety and soundness of operations. Risk-Based Capital ratios are
calculated with reference to risk-weighted assets, which include both on
and off balance sheet exposure.
In addition to meeting the minimum requirements, the Company and the Bank's
capital ratios meet the criteria for the "well capitalized" category
established by the federal banking agencies at December 31, 1998.
The following table illustrates the capital position of Slade's Ferry
Bancorp and Slade's Ferry Trust Company for years ending December 31, 1998
and 1997.
<TABLE>
<CAPTION>
Slade's Ferry Bancorp 1998 1997
- ------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $ 29,647 12.80% $ 25,907 12.04%
Minimum required 18,536 8.00 17,210 8.00
Excess 11,111 4.80 8,697 4.04
Tier I Capital (to Risk Weighted Assets) 26,569 11.47% 23,206 10.74
Minimum required 9,268 4.00 8,645 4.00
Excess 17,301 7.47 14,561 6.74
Risk Adjusted Assets, net of goodwill,
nonqualifying intangibles, excess
allowance and excess deferred tax assets $231,700 $215,174
Tier I Capital (Leverage Ratio) $ 26,569 8.12% $ 23,206 7.79%
Minimum required 13,081 4.00 11,910 4.00
Excess 13,488 4.12 11,296 3.79
Quarterly average total assets, net of
goodwill, nonqualifying intangibles and
excess deferred tax assets $327,025 $297,895
<CAPTION>
Slade's Ferry Trust Company 1998 1997
- ------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) $ 27,034 11.69% $ 24,022 11.18%
Minimum required 18,500 8.00 17,183 8.00
Excess 8,534 3.69 6,839 3.18
Tier I Capital (to Risk Weighted Assets) 23,961 10.36 21,325 9.88
Minimum required 9,250 4.00 8,631 4.00
Excess 14,711 6.36 12,694 5.88
Risk Adjusted Assets, net of goodwill,
nonqualifying intangibles, excess
allowance and excess deferred tax assets $231,250 $214,865
Tier I Capital (Leverage Ratio) $ 23,961 7.38% $ 21,325 7.18%
Minimum required 12,989 4.00 11,876 4.00
Excess 10,972 3.38 9,449 3.18
Quarterly average total assets, net of
goodwill, nonqualifying intangibles and
excess deferred tax assets $324,725 $296,900
</TABLE>
Year 2000 Compliance
- --------------------
The approaching Year 2000 presents companies in all industries with a
myriad of challenges including the ongoing operation of their data systems
to check proper interpretation of calendar year digits and resulting
calculations. To meet these challenges, the Company has completed an
assessment of Year 2000 issues, developed a plan to resolve these issues,
and commenced the implementation of changes and testing required to achieve
compliance.
The Company is on schedule to complete changes and testing of essential
systems by March 31, 1999 utilizing both internal and external resources.
Essential systems have been identified as the applications for processing
depositors' and borrowers' accounts, stockholder information, origination
and receiving of electronic charges and credits (ACH) items, general ledger
processing and the PC network system, including the teller system. The
first two phases of a four phase testing schedule have been completed and
verified. The remaining phases three and four have been installed and are
currently in the process of final testing and verification.
The final phase of testing on the Federal Reserve Bank's fedline system,
which provides the Company the ability to perform various operations
including originating and receiving ACH items, performing wire transfers
and purchasing securities, was completed and verified in December 1998.
The necessary upgrade to the teller system has been installed and is being
tested with final verification by February 1999. The ATM renovation and
testing is in process and due for completion by June 1999.
Key vendors and customers have been identified and contacted to determine
any vulnerability the Company may have due to the failure of these parties
to remedy their own Year 2000 issues. The above mentioned testing has been
performed using the resources of the key vendors and the Company's own
internal resources. To the extent that key vendors, customers or other
general suppliers, not affiliated with the Company, such as communications
and electric suppliers, are unsuccessful in properly addressing the Year
2000 issue, the Company could possibly be negatively impacted.
Although the Company does not anticipate any system to be non-compliant,
should a problem arise with a key vendor, customer or general supplier, the
Company is finalizing a contingency plan to deal with these issues. It is
impossible at this time to determine what effect this could have on the
Company's operations, liquidity and financial condition.
The total cost of the Year 2000 project is estimated at $40,000 to $50,000.
These costs are not expected to be material to the Company's operations,
liquidity and financial condition. These estimated costs are based upon
management's best estimates which have been derived from numerous
assumptions of future events which include the availability of certain
resources, third party modification plans and other factors. However, there
is no guarantee that these estimates will hold true and actual results
could differ from those anticipated. The Company has incurred Year 2000
related expenses of $5,300 during 1998.
The Federal Deposit Insurance Corporation (FDIC) has established Year 2000
standards for safety and soundness consistent with the Federal Financial
Institutions Examination Council (FFIEC) guidance papers describing certain
essential steps that each FDIC-supervised financial institution must take
to become Year 2000 ready. There is ongoing regulatory oversight by the
FDIC of all insured financial institution, including the Company,
concerning Year 2000 compliance.
Other Matters
- -------------
The Bank is involved in a civil suit brought in Plymouth Superior Court by
a former employee of the National Bank of Fairhaven, which primarily
alleges a breach of contract. The original demand by the plaintiff was
$550,000 to settle the case, which was lowered to $250,000 by the plaintiff
in 1998. Discovery has been completed and the case is currently scheduled
for trial on February 22, 1999. The Company believes there are meritorious
defenses to the plaintiff's claim and it intends to vigorously defend the
suit. The Company believes that the suit will not have a material adverse
effect on the Company's financial condition, results of operation, or
liquidity; and no reserves have been accrued to cover the potential
liability.
[LOGO of Shatswell, MacLeod & Company, P.C.
The Board of Directors
and Stockholders
Slade's Ferry Bancorp
Somerset, Massachusetts
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Slade's
Ferry Bancorp and Subsidiary as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 1998. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Slade's Ferry Bancorp and Subsidiary as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 15, 1999
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1998 and 1997
--------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ------------ ------------
<S> <C> <C>
Cash and due from banks $ 15,686,520 $ 13,323,501
Federal funds sold 14,500,000 7,000,000
------------ ------------
Cash and cash equivalents 30,186,520 20,323,501
Interest bearing time deposits with other banks 106,688
Investments in available-for-sale
securities (at fair value) 58,199,292 40,176,218
Investments in held-to-maturity securities (fair
values of $21,282,941 as of December 31, 1998
and $17,748,500 as of December 31, 1997) 20,921,254 17,601,536
Federal Home Loan Bank stock 899,900 890,600
Loans, net 213,938,277 209,309,840
Premises and equipment 6,687,271 5,718,534
Goodwill 2,853,768 3,080,568
Other real estate owned 1,026,095 159,373
Accrued interest receivable 1,598,282 1,796,467
Cash surrender value of life insurance 1,613,517
Other assets 2,430,544 2,407,260
------------ ------------
Total assets $340,354,720 $301,570,585
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 48,281,278 $ 44,228,157
Savings and NOW deposits 100,678,225 95,043,420
Time deposits 154,826,362 132,050,673
------------ ------------
Total deposits 303,785,865 271,322,250
Note payable 847,990 945,308
Advances from Federal Home Loan Bank 4,475,454 430,000
Other borrowed funds 42,329 1,200,000
Due to brokers 255,000
Other liabilities 1,495,697 981,601
------------ ------------
Total liabilities 310,647,335 275,134,159
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share;
authorized 5,000,000 shares; issued and
outstanding 3,446,413.8 in 1998 and
3,236,712.7 shares in 1997 34,464 32,367
Paid-in capital 22,285,220 18,978,598
Retained earnings 7,103,642 7,276,174
Accumulated other comprehensive income 284,059 149,287
------------ ------------
Total stockholders' equity 29,707,385 26,436,426
------------ ------------
Total liabilities and stockholder's equity $340,354,720 $301,570,585
============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $19,754,777 $18,981,050 $15,626,903
Interest and dividends on securities:
Taxable 3,491,490 3,251,526 2,810,656
Tax-exempt 424,661 302,616 266,866
Other interest 635,688 615,267 790,506
----------- ----------- -----------
Total interest and dividend income 24,306,616 23,150,459 19,494,931
----------- ----------- -----------
Interest expense:
Interest on deposits 10,509,873 10,266,135 8,992,244
Interest on Federal Home Loan Bank advances 72,213 1,555
Interest on other borrowed funds 129,259 52,318 59,688
Interest on notes payable 92,470 26,139
----------- ----------- -----------
Total interest expense 10,711,345 10,412,478 9,078,071
----------- ----------- -----------
Net interest and dividend income 13,595,271 12,737,981 10,416,860
Provision for loan losses 600,000 500,000 400,000
----------- ----------- -----------
Net interest and dividend income after
provision for loan losses 12,995,271 12,237,981 10,016,860
----------- ----------- -----------
Other income:
Service charges on deposit accounts 634,129 654,749 628,997
Overdraft service charges 247,835 247,330 220,428
Securities gains, net 382,370 313,844 112,631
Other income 303,778 346,334 343,441
----------- ----------- -----------
Total other income 1,568,112 1,562,257 1,305,497
----------- ----------- -----------
Other expense:
Salaries and employee benefits 5,480,191 5,317,620 4,328,402
Occupancy expense 684,112 715,094 567,458
Equipment expense 570,518 570,773 504,489
Stationary and supplies 229,344 311,546 243,653
FDIC deposit insurance premium 32,353 71,880 6,278
(Gain) loss on sales of other real estate owned, net (54,590) 42,457 21,008
Writedown of other real estate owned 67,480 30,000
Other expense 2,042,253 1,936,657 1,678,873
----------- ----------- -----------
Total other expense 8,984,181 9,033,507 7,380,161
----------- ----------- -----------
Income before income taxes 5,579,202 4,766,731 3,942,196
Income taxes 2,216,160 1,920,741 1,564,001
----------- ----------- -----------
Net income $ 3,363,042 $ 2,845,990 $ 2,378,195
=========== =========== ===========
Earnings per common share $ .99 $ .89 $ .82
=========== =========== ===========
Earnings per common share assuming dilution $ .98 $ .89 $ .82
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Common Paid-in Retained Income
Stock Capital Earnings (Loss) Total
------ ------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $26,172 $13,136,923 $4,630,608 $ 33,022 $17,826,725
Comprehensive income:
Net income 2,378,195
Net change in unrealized holding gain
on available-for-sale securities, net
of tax effect of $29,704 (35,650)
Comprehensive income 2,342,545
Issuance of 5% common stock dividend 1,304 1,124,644 (1,129,308) (3,360)
Issuance of common stock from
dividend reinvestment plan 375 312,572 312,947
Stock issuance relating to optional
cash contribution plan 40 33,160 33,200
Dividends declared ($.23 per share) (664,732) (664,732)
------- ----------- ---------- -------- -----------
Balance, December 31, 1996 27,891 14,607,299 5,214,763 (2,628) 9,847,325
Comprehensive income:
Net income 2,845,990
Net change in unrealized holding loss on
available-for-sale securities, net of tax
effect of $103,844 151,915
Comprehensive income 2,997,905
Issuance of common stock from dividend
reinvestment plan 308 351,141 351,449
Stock issuance relating to optional
cash contribution plan 138 158,017 158,155
Net proceeds from stock offering 4,030 3,862,141 3,866,171
Dividends declared ($.24 per share) (784,579) (784,579)
------- ----------- ---------- -------- -----------
Balance, December 31, 1997 32,367 18,978,598 7,276,174 149,287 26,436,426
Comprehensive income:
Net income 3,363,042
Total other comprehensive income 134,772
Comprehensive income 3,497,814
Issuance of 5% common stock dividend 1,617 2,566,147 (2,575,881) (8,117)
Issuance of common stock from dividend
reinvestment plan 304 472,938 473,242
Stock issuance relating to optional
cash contribution plan 134 215,790 215,924
Stock options exercised 42 37,772 37,814
Tax benefit from exercise of stock options 13,975 13,975
Dividends declared ($.28 per share) (959,693) (959,693)
------- ----------- ---------- -------- -----------
Balance, December 31, 1998 $34,464 $22,285,220 $7,103,642 $284,059 $29,707,385
======= =========== ========== ======== ===========
Reclassification disclosure for the year ended December 31, 1998:
Net unrealized gains on available-for-sale securities $731,683
Less reclassification adjustment for realized gains or losses in net income (382,370)
--------
Other comprehensive income before income tax effect 349,313
Income tax expense (133,656)
-------- $215,657
Minimum pension liability (146,825)
Income tax benefit 65,940
-------- (80,885)
--------
Total other comprehensive income, net of tax $134,772
========
</TABLE>
Accumulated other comprehensive income as of December 31, 1998 consists of
net unrealized holding gains on available-for-sale securities, net of taxes
of $364,944 less minimum pension liability adjustment of $80,885 net of
taxes. Accumulated other comprehensive income as of December 31, 1997 and
1996 consists of net unrealized holding gains (losses) on available-for-sale
securities, net of taxes.
The accompanying notes are an integral part
of these consolidated financial statements.
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,363,042 $ 2,845,990 $ 2,378,195
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of goodwill 226,800 226,800 98,000
Accretion, net of amortization of fair market value
adjustments (5,718) (5,718) (1,429)
Gain on sale of fixed assets (2,700) (4,000) (8,702)
Securities gains, net (382,370) (313,844) (112,631)
Depreciation and amortization 668,354 653,344 500,378
Provision for loan losses 600,000 500,000 400,000
Deferred tax (benefit) expense 204,267 (90,885) (92,207)
Increase (decrease) in taxes payable (189,796) 184,331 (103,889)
Decrease in interest receivable 198,185 57,316 384,435
Decrease in interest payable (13,901) (12,184) (49,768)
Increase in accrued expenses 192,315 60,838 88,631
Increase in prepaid expenses (7,401) (78,662) (130,768)
Increase (decrease) in other liabilities (221,286) 29 (139,617)
(Increase) decrease in other assets 19,892 345,234 (322,275)
Accretion, net of amortization of securities (96,783) (220,167) (430,515)
Change in unearned income 1,080 47,142 115,825
(Gain) loss on sales of other real estate owned, net (54,590) 42,457 21,008
Writedown of other real estate owned 67,480 30,000
Decrease in cash surrender value of life insurance policies 11,483
----------- ----------- -----------
Net cash provided by operating activities 4,510,873 4,305,501 2,624,671
----------- ----------- -----------
Cash flows from investing activities:
Investment in life insurance policies (1,625,000)
Purchases of available-for-sale securities (50,687,039) (18,776,994) (10,128,087)
Proceeds from sales of available-for-sale securities 1,098,937 1,171,136 661,644
Proceeds from maturities of available-for-sale securities 32,262,437 14,786,873 14,859,193
Purchases of held-to-maturity securities (13,283,524) (14,714,192) (16,141,095)
Proceeds from maturities of held-to-maturity securities 10,094,867 17,142,658 19,514,788
Net (increase) decrease in interest bearing time deposits
with other banks 106,688 42,910 (7,519)
Purchases of Federal Home Loan Bank stock (9,300) (409,400)
Redemption of Federal Home Loan Bank stock 93,600
Proceeds from sales of fixed assets 2,700 4,000 8,702
Proceeds from sales of other real estate owned 136,281 291,293 147,458
Net increase in loans (6,234,254) (15,258,154) (14,971,481)
Cash and cash equivalents of $19,936,591 acquired in the
purchase of Fairbank, Inc., less cash of $8,575,284 paid
for the common stock of Fairbank, Inc. 11,361,307
Capital expenditures (1,630,689) (394,602) (1,085,521)
Recoveries of loans previously charged off 67,724 94,405 439,788
----------- ----------- -----------
Net cash provided by (used in) investing activities (29,700,172) (15,610,667) 4,343,377
----------- ----------- -----------
Cash flows from financing activities:
Fractional shares paid in cash (8,117) (3,360)
Proceeds from issuance of common stock 726,980 4,438,376 346,147
Cost of stock issuance (62,601)
Net increase (decrease) in demand deposits, NOW and
savings accounts 9,687,926 (1,230) 1,912,803
Net increase (decrease) in time deposits 22,772,689 3,529,471 (3,191,933)
Net increase (decrease) in other borrowed funds (1,157,671) 458,227
Advances from Federal Home Loan Bank 4,071,600 430,000
Dividends paid (914,943) (734,073) (658,165)
Payments on Federal Home Loan Bank advances (26,146)
Payment on notes payable (100,000) (100,000) (243,013)
----------- ----------- -----------
Net cash provided by (used in) financing activities 35,052,318 7,499,943 (1,379,294)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 9,863,019 (3,805,223) 5,588,754
Cash and cash equivalents at beginning of year 20,323,501 24,128,724 18,539,970
----------- ----------- -----------
Cash and cash equivalents at end of year $30,186,520 $20,323,501 $24,128,724
=========== =========== ===========
Supplemental disclosures:
Loans transferred to other real estate owned $ 1,107,063 $ 446,612 $ 144,741
Loans originating from the sales of other real estate owned 158,650 193,600 435,000
Interest paid 10,725,246 10,424,662 9,127,839
Income taxes paid 2,201,689 1,827,295 1,760,097
In 1996 the Company purchased all of the common stock of
Fairbank, Inc. for $8,575,284. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $65,141,843
Cash paid for the common stock 8,575,284
-----------
Liabilities assumed $56,566,559
===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Slade's Ferry Bancorp (Company) (formerly known as Weetamoe Bancorp) is a
Massachusetts corporation that was organized in 1990 to become the holding
company of Slade's Ferry Trust Company (Bank). In December of 1996 the
stockholders of the Company approved the change of the name of the Company
to Slade's Ferry Bancorp effective January 1, 1997. The Company's primary
activity is to act as the holding company for the Bank. The Bank is a state
chartered bank, which was incorporated in 1959 and is headquartered in
Somerset, Massachusetts. The Bank operates its business from ten banking
offices located in Massachusetts. The Bank is engaged principally in the
business of attracting deposits from the general public and investing those
deposits in residential and real estate loans, and in commercial, consumer
and small business loans.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company and its subsidiary
conform to generally accepted accounting principles and predominant
practices within the banking industry. The consolidated financial
statements were prepared using the accrual basis of accounting. The
significant accounting policies are summarized below to assist the reader in
better understanding the consolidated financial statements and other data
contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank and the Bank's
wholly-owned subsidiaries, Slade's Ferry Realty Trust and Slade's
Ferry Securities Corporation. Slade's Ferry Realty Trust was formed
to hold ownership of real estate and Slade's Ferry Securities
Corporation was formed to hold securities for tax benefits in
Massachusetts. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, cash items, due from banks and federal funds
sold.
Cash and due from banks as of December 31, 1998 includes $4,551,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be
classified as held-to-maturity only if the Company has the positive
intent and ability to hold them to maturity. Trading securities are
defined as those bought and held principally for the purpose of
selling them in the near term. All other securities must be
classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the balance sheet. Unrealized holding gains and losses are
not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on the
balance sheet. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding principal
balances reduced by amounts due to borrowers on unadvanced loans, by
any charge-offs, the allowance for loan losses and any deferred fees
or costs on originated loans, or unamortized premiums or discounts on
purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Company is amortizing these amounts
over the contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized
as interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income
on an impaired loan on a cash basis is appropriate, the amount of
income that is recognized is limited to that which would have been
accrued on the net carrying amount of the loan at the contractual
interest rate. Any cash interest payments received in excess of the
limit and not applied to reduce the net carrying amount of the loan
are recorded as recoveries of charge-offs until the charge-offs are
fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations
and is decreased by loan losses, net of recoveries. The provision for
loan losses is based on management's evaluation of current and
anticipated economic conditions, changes in the character and size of
the loan portfolio, and other indicators.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. The Company measures impaired loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
The Company considers for impairment all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Company considers
its residential real estate loans and consumer loans that are not
individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Company
reviews its loans for impairment on a loan-by-loan basis. The Company
does not apply impairment to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a
loan is not generally accrued when the loan becomes ninety or more
days overdue. The Company may place a loan on nonaccrual status but
not classify it as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms
of the loan or (ii) the loan is an individually insignificant
residential mortgage loan or consumer loan. Impaired loans are
charged-off when management believes that the collectibility of the
loan's principal is remote. Substantially all of the Company's loans
that have been identified as impaired have been measured by the fair
value of existing collateral.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with
any gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
GOODWILL:
Goodwill arising from the acquisition of Fairbank, Inc. is reported
net of accumulated amortization. Goodwill is being amortized on a
straight-line basis over a period of fifteen years.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated cost to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining
these assets, subsequent writedowns and gains or losses recognized
upon sale are included in other expense.
In accordance with Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan," the Company
classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires that the Company
disclose estimated fair value for its financial instruments. Fair
value methods and assumptions used by the Company in estimating its
fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets'
fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its
fair value.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings, and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for FHLB advances are
estimated using a discounted cash flow technique that applies interest
rates currently being offered on advances to a schedule of aggregated
expected monthly maturities on FHLB advances.
Note payable and other borrowed funds: Fair values for the note
payable and other borrowed funds are estimated using discounted cash
flow analyses based on the Company's current incremental borrowing
rates for similar borrowings.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments and the unadvanced portion of loans,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the
obligation with the counterparties at the reporting date.
EARNINGS PER SHARE:
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share" is effective for periods ending after December
15, 1997. SFAS No. 128 simplifies the standards of computing earnings
per share (EPS) previously found in APB Opinion No. 15. It replaces
the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face
of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
The Company has computed and presented EPS for the years ended
December 31, 1998 and 1997 in accordance with SFAS No. 128. EPS as so
computed does not differ materially from EPS that would have resulted
if APB Opinion No. 15 had been applied. In accordance with SFAS No.
128 EPS data presented for the year ended December 31, 1996 has been
restated. EPS so restated does not differ materially from EPS
previously presented.
STOCK BASED COMPENSATION:
Prior to 1997, the Company did not make stock-based compensation
awards. In 1997, the Company began making such awards and had the
option, under SFAS No. 123, of accounting for stock-based compensation
using the intrinsic value approach in APB No. 25 and the fair value
method introduced in SFAS No. 123. The Company elected to use the APB
No. 25 method. Entities electing to follow the provisions of APB No.
25 must make pro forma disclosure of net income and earnings per
share, as if the fair value method of accounting defined in SFAS No.
123 had been applied. The Company has made the pro forma disclosures
required by SFAS No. 123.
NOTE 3 - ACQUISITION OF FAIRBANK, INC.
- --------------------------------------
On August 23, 1996 the Company effected its acquisition of Fairbank, Inc., a
Massachusetts corporation, and its wholly owned subsidiary, the National
Bank of Fairhaven, through the Company's wholly owned subsidiary, Slade's
Ferry Trust Company. The acquisition was accomplished by the payment by
Slade's Ferry Trust Company of $8,575,284 in cash from its capital funds for
all of the outstanding shares of the common stock of Fairbank, Inc. As a
result of the acquisition, Fairbank, Inc. was dissolved, and the National
Bank of Fairhaven was merged into Slade's Ferry Trust Company. The National
Bank of Fairhaven's two banking offices in Fairhaven and New Bedford,
Massachusetts have become branches of Slade's Ferry Trust Company.
The acquisition has been accounted for as a purchase, and the results of
operations of Fairbank, Inc. since the date of the acquisition are included
in the consolidated financial statements. Goodwill reflected by the
purchase accounting amounted to $3,405,368 and is being amortized over 15
years on a straight-line basis.
The following summary, prepared on an unaudited pro forma basis presents the
results of operations as though the Company and Fairbank, Inc. had been
merged as of the beginning of the year ended December 31, 1996:
<TABLE>
<S> <C>
Net interest income after provision for loan losses $12,077,046
Noninterest income 1,349,224
-----------
Total 13,426,270
Noninterest expense 9,251,100
-----------
Income before income taxes 4,175,170
Income taxes 1,543,200
-----------
Net income $ 2,631,970
===========
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire year of
1996. In addition, they are not intended to be a projection of future
results and do not reflect any effects that might be achieved from combined
operations.
NOTE 4 - SECURITIES
- -------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities
and their approximate fair values are as follows as of December 31:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities:
December 31, 1998:
Debt securities issued by the U.S. Treasury and
Other U.S. government corporations and agencies $44,619,465 $211,625 $ 54,380 $44,776,710
Mortgage-backed securities 10,862,100 52,277 22,877 10,891,500
Asset-backed securities 222,479 1,021 223,500
Marketable equity securities 1,918,129 550,951 161,498 2,307,582
----------- -------- -------- -----------
$57,622,173 $815,874 $238,755 $58,199,292
=========== ======== ======== ===========
Available-for-sale securities:
December 31, 1997:
Debt securities issued by the U.S. Treasury and
Other U.S. government corporations and agencies $30,401,644 $ 84,683 $ 91,311 $30,395,016
Mortgage-backed securities 7,747,509 23,504 19,934 7,751,079
Asset-backed securities 234,136 279 233,857
Marketable equity securities 1,565,123 301,666 70,523 1,796,266
----------- -------- -------- -----------
$39,948,412 $409,853 $182,047 $40,176,218
=========== ======== ======== ===========
Held-to-maturity securities:
December 31, 1998:
Debt securities issued by the U.S. Treasury and
Other U.S. government corporations and agencies $ 8,810,623 $116,949 $ 12 $ 8,927,560
Debt securities issued by states of the United
States and political subdivisions of the states 11,996,833 256,936 13,334 12,240,435
Mortgage-backed securities 113,798 1,148 114,946
----------- -------- -------- -----------
$20,921,254 $375,033 $ 13,346 $21,282,941
=========== ======== ======== ===========
December 31, 1997:
Debt securities issued by the U.S. Treasury and
Other U.S. government corporations and agencies $ 9,415,554 $ 55,276 $ 3,871 $ 9,466,959
Debt securities issued by states of the United
States and political subdivisions of the states 7,975,728 106,237 13,079 8,068,886
Mortgage-backed securities 209,254 2,384 211,638
Other debt securities 1,000 17 1,017
----------- -------- -------- -----------
$17,601,536 $163,914 $ 16,950 $17,748,500
=========== ======== ======== ===========
</TABLE>
The scheduled maturities of held-to-maturity securities and available-for-
sale securities (other than equity securities) were as follows as of
December 31, 1998:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
securities: securities:
-------------------------- -------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
----------- ----------- ----------- -----------
<S> <C> <C>
Debt securities other than mortgage-backed
and asset backed securities:
Due within one year $ 7,068,393 $ 7,089,356 $ 499,698 $ 505,312
Due after one year through five years 7,493,403 7,683,856 23,174,886 23,248,457
Due after five years through ten years 5,914,397 6,062,008 20,944,881 21,022,941
Due after ten years 331,263 332,775
Mortgage-backed securities 113,798 114,946 10,862,100 10,891,500
Asset-backed securities 222,479 223,500
----------- ----------- ----------- -----------
$20,921,254 $21,282,941 $55,704,044 $55,891,710
=========== =========== =========== ===========
</TABLE>
During 1998, proceeds from sales of available-for-sale securities amounted
to $1,098,937. Gross realized gains on those sales amounted to $382,370.
There were no gross realized losses during the period. During 1997,
proceeds from sales of available-for-sale securities amounted to $1,171,136.
Gross realized gains and gross realized losses on those sales amounted to
$315,281 and $1,437, respectively. During 1996, proceeds from sales of
available-for-sale securities amounted to $661,644. Gross realized gains
and gross realized losses on those sales amounted to $117,911 and $5,280,
respectively.
There were no securities of issuers whose aggregate carrying amount exceeded
10% of stockholders' equity as of December 31, 1998.
A total carrying amount of $6,139,687 of debt securities was pledged to
secure treasury tax and loan, trust department and public funds on deposit
and the loan from Fleet National Bank as of December 31, 1998.
NOTE 5 - LOANS
- --------------
Loans consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural $ 43,776,923 $ 36,640,703
Real estate - construction and land development 3,773,286 6,677,684
Real estate - residential 51,219,684 55,477,271
Real estate - commercial 112,912,865 108,007,972
Consumer 6,476,963 6,746,866
Obligations of states and political subdivisions 2,700 9,372
Other 67,616 176,635
------------ ------------
218,230,037 213,736,503
Allowance for loan losses (3,569,282) (3,693,865)
Unearned income (691,128) (690,048)
Unamortized adjustment to fair value (31,350) (42,750)
------------ ------------
Net loans, carrying amount $213,938,277 $209,309,840
============ ============
</TABLE>
Certain directors and executive officers of the Company and companies in
which they have significant ownership interest were customers of the Bank
during 1998. Total loans to such persons and their companies amounted to
$3,878,974 as of December 31, 1998. During the year ended December 31,
1998, $2,902,306 of advances were made and repayments totaled $3,435,863.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period $3,693,865 $3,354,311 $2,497,774
Loans charged off (792,307) (254,851) (439,229)
Provision for loan losses 600,000 500,000 400,000
Recoveries of loans previously charged off 67,724 94,405 439,788
Transfer of Fairbank, Inc.'s allowance
to Slade's Ferry Trust Company 455,978
---------- ---------- ----------
Balance at end of period $3,569,282 $3,693,865 $3,354,311
========== ========== ==========
</TABLE>
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Loans for which there is a related allowance for credit losses $1,284,340 $324,887 $1,776,557 $623,570
Loans for which there is no related allowance for credit losses 3,875,975 3,792,560
---------- -------- ---------- --------
Totals $5,160,315 $324,887 $5,569,117 $623,570
========== ======== ========== ========
Average recorded investment in impaired loans during
the year ended December 31 $5,773,697 $6,173,640
========== ==========
Related amount of interest income recognized during the
time, in the year ended December 31, that the loans
were impaired
Total recognized $ 97,448 $ 79,340
========== ==========
Amount recognized using a cash-basis method
of accounting $ 0 $ 0
========== ==========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,760,948 $ 1,145,368
Buildings 5,104,082 4,456,550
Furniture and equipment 3,405,848 3,050,179
Leasehold improvements 1,376,689 1,376,689
----------- -----------
11,647,567 10,028,786
Accumulated depreciation and amortization (4,960,296) (4,310,252)
----------- -----------
$ 6,687,271 $ 5,718,534
=========== ===========
</TABLE>
NOTE 7 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $26,007,313 and
$23,111,663 as of December 31, 1998 and 1997, respectively.
For time deposits as of December 31, 1998, the aggregate amount of
maturities for each of the following three years ended December 31, are:
<TABLE>
<S> <C>
1999 $122,343,417
2000 18,836,059
2001 13,649,136
Less: Unamortized adjustment to fair value (2,250)
------------
$154,826,362
============
</TABLE>
NOTE 8 - OTHER BORROWED FUNDS
- -----------------------------
Other borrowed funds consist of treasury tax and loan deposits and generally
are repaid within one to 120 days from the transaction date.
NOTE 9 - NOTE PAYABLE
- ---------------------
Note payable consisted of the following as of December 31, 1998:
Note payable by the Bank to Fleet National Bank. The note payable was
assumed by the Bank in the acquisition of Fairbank, Inc. Minimum quarterly
principal payments of $25,000 are payable on the last business day of each
calendar quarter. The interest rate on the loan is 3 month LIBOR plus 1.2%
floating, which has been swapped to yield a 9.01% fixed rate. Interest
payments are due quarterly and the maturity of the loan is November 25,
1999. Collateral for the loan consists of U. S. Treasury or agency
securities owned by the Bank.
NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
- --------------------------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the Federal Home Loan Bank of Boston for the
five fiscal years ending after December 31, 1998 and thereafter are
summarized as follows:
<TABLE>
<CAPTION>
INTEREST RATE RANGE AMOUNT
------------------- ------
<S> <C> <C>
1999 5.89% - 6.15% $ 97,289
2000 5.89% - 6.15% 103,656
2001 5.89% - 6.15% 109,572
2002 5.89% - 6.15% 118,417
2003 5.89% - 6.15% 125,728
Thereafter 5.66% - 6.15% 3,920,792
----------
$4,475,454
==========
</TABLE>
Advances are secured by the Bank's stock in that institution, its
residential real estate mortgage portfolio and the remaining U.S. government
and agencies obligations not otherwise pledged.
NOTE 11 - INCOME TAXES
- ----------------------
The components of income tax expense are as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $1,544,874 $1,463,401 $1,204,212
State 467,019 548,225 451,996
---------- ---------- ----------
2,011,893 2,011,626 1,656,208
---------- ---------- ----------
Deferred:
Federal 120,677 (71,848) (51,722)
State 83,590 (19,037) (40,485)
---------- ---------- ----------
204,267 (90,885) (92,207)
---------- ---------- ----------
Total income tax expense $2,216,160 $1,920,741 $1,564,001
========== ========== ==========
</TABLE>
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
% of % of % of
Income Income Income
------ ------ -------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (2.9) (2.2) (2.3)
Dividends received deduction (.2) (.3)
Unallowable expenses .7 .5 .6
Amortization of goodwill 1.4 1.6 .8
State tax, net of federal tax benefit 6.5 6.6 6.9
---- ---- ----
39.7% 40.3% 39.7%
==== ==== ====
</TABLE>
The Company had gross deferred tax assets and gross deferred tax liabilities
as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Operating loss carryover $ 4,884 $ 173,663
Allowance for loan losses 1,226,287 1,309,659
Deferred loan fees 224,960 256,635
Interest on non-performing loans 225,480 211,491
Accrued employee benefits 220,626 153,011
Other real estate owned valuation 985
Minimum pension liability adjustment 65,940
Other adjustments 17,573 3,317
---------- ----------
Gross deferred tax assets 1,985,750 2,108,761
---------- ----------
Deferred tax liabilities:
Accelerated depreciation (242,049) (232,613)
Prepaid pensions (68,269) (63,341)
Discount accretion (2,091) (1,139)
Net unrealized holding gain on available-for-sale securities (212,175) (78,520)
---------- ----------
Gross deferred tax liabilities (524,584) (375,613)
---------- ----------
Net deferred tax assets $1,461,166 $1,733,148
========== ==========
</TABLE>
Deferred tax assets as of December 31, 1998 and 1997 have not been reduced
by a valuation allowance because management believes that it is more likely
than not that the full amount of deferred tax assets will be realized.
As of December 31, 1998, the Company had approximately $14,000 in operating
loss carryovers for tax purposes which expire in 2010.
NOTE 12 - EMPLOYEE BENEFITS
- ---------------------------
The Company has a defined benefit pension plan (plan) covering substantially
all of its full time employees who meet certain eligibility requirements.
Employees are eligible under the plan upon attaining age 21 and completing
one year of service. The benefits paid are based on 1.5% of total salary
plus .5% of compensation in excess of integration level per year of service.
The integration level is the first $750 of monthly compensation. The
accrued benefit is based on years of service. As of December 31, 1998 the
Bank has suspended the plan so that employees no longer earn additional
defined benefits for future service.
The following tables set forth information about the plan as of December 31
and the years then ended:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,424,299 $ 875,433
Service cost 3,150 97,214
Interest cost 148,243 104,822
Change in assumptions 307,199
Actuarial loss 193,463 370,702
Benefits paid (82,847) (23,872)
Effect of plan curtailment (382,792)
---------- ----------
Benefit obligation at end of year 1,610,715 1,424,299
---------- ----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,131,394 916,360
Actual return on plan assets 159,422 95,773
Expense paid from plan assets (35,805) (32,367)
Employer contribution 191,672 175,500
Benefits paid (82,847) (23,872)
---------- ----------
Fair value of plan assets at end of year 1,363,836 1,131,394
---------- ----------
Funded status (246,879) (292,905)
Unrecognized net actuarial loss 404,042 656,570
Unrecognized prior service cost (18,339) (338,714)
Unamortized net obligation existing at date of adoption of SFAS No. 87 118,393 126,400
---------- ----------
Net amount recognized $ 257,217 $ 151,351
========== ==========
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 257,217 $ 151,351
Accrued benefit liability (246,879)
Intangible asset 100,054
Accumulated other comprehensive 146,825
---------- ----------
Net amount recognized $ 257,217 $ 151,351
========== ==========
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% for 1998 and 8.5% for
1997 and 1996, respectively. The weighted-average expected long-term rate
of return on assets was 7.0% for 1998, and 8.5% for 1997 and 1996,
respectively.
Components of net periodic benefit cost:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Service cost $ 3,150 $ 97,214 $92,434
Interest cost on benefit obligation 148,243 104,822 65,745
Expected return on assets (90,331) (83,382) (70,423)
Amortization of net transition obligation 8,007 8,007 8,007
Amortization of prior service cost (13,176) (27,002) (27,022)
Recognized actuarial loss 29,913 52,188 13,316
-------- -------- -------
Net periodic benefit cost $ 85,806 $151,847 $82,057
======== ======== =======
</TABLE>
Securities of the Company included in plan assets as of December 31, 1998
and 1997 consist of 3,553 and 3,385 shares, respectively, of Slade's Ferry
Bancorp stock.
The Company has a 401K plan for eligible employees who attain age 21 and
complete one year of service. The Company contributes a discretionary
amount to be allocated to eligible participants. Current contributions vest
fully after seven years of continuous service. The amount that may be
deferred by the employees is limited by the amount that will not cause the
plan to exceed IRS limitations. Contributions made by the Company charged
to employee benefit expense amounted to $9,750, $9,500 and $7,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company adopted a profit-sharing plan, ("Plan") effective October 1,
1998. The Company contributes amounts to the plan at the Company's
discretion.
Cost recognized by the Company for the profit-sharing plan amounted to
$80,000 for the year ended December 31, 1998.
NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The Company is obligated under certain agreements issued during the normal
course of business which are not reflected in the accompanying consolidated
financial statements.
The Company is obligated under various lease agreements covering branch
offices and equipment. These agreements are considered to be operating
leases. The total minimum rental due in future periods under these
agreements is as follows as of December 31, 1998:
<TABLE>
<S> <C>
1999 $104,111
2000 99,875
2001 92,952
2002 87,354
2003 75,501
Thereafter 224,448
--------
Total minimum lease payments $684,241
========
</TABLE>
Certain leases contain provisions for escalation of minimum lease payments
contingent upon increases in real estate taxes and percentage increases in
the consumer price index. The total rental expense amounted to $114,848 for
1998, $90,210 for 1997 and $66,223 for 1996.
NOTE 14 - FINANCIAL INSTRUMENTS
- -------------------------------
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheets. The contract amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
Collateral held varies, but may include secured interests in mortgages,
accounts receivable, inventory, property, plant and equipment and income-
producing properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Of the total standby
letters of credit outstanding as of December 31, 1998, $199,880 are secured
by deposits at the Bank.
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, are as follows as
of December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 30,186,520 $ 30,186,520 $ 20,323,501 $ 20,323,501
Interest bearing time deposits with other banks 106,688 106,688
Available-for-sale securities 58,199,292 58,199,292 40,176,218 40,176,218
Held-to-maturity securities 20,921,254 21,282,941 17,601,536 17,748,500
Federal Home Loan Bank stock 899,900 899,900 890,600 890,600
Loans 213,938,277 214,366,000 209,309,840 209,036,000
Accrued interest receivable 1,598,282 1,598,282 1,796,467 1,796,467
Financial liabilities:
Note payable 847,990 847,990 945,308 945,340
Other borrowed funds 42,329 42,329 1,200,000 1,200,000
Advances from Federal Home Loan Bank 4,475,454 4,558,000 430,000 396,000
Deposits 303,785,865 304,672,000 271,322,250 271,637,000
</TABLE>
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheet under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The notional amounts of financial instrument liabilities with off-balance
sheet credit risk are as follows as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Commitments to originate loans $ 5,379,456 $10,148,013
Standby letters of credit 2,307,880 2,356,380
Unadvanced portions of loans:
Consumer loans (including credit card loans and student loans) 2,924,220 3,396,496
Commercial real estate loans 145,251 851,935
Home equity loans 1,235,275 1,501,126
Commercial loans 15,273,024 14,182,074
Construction loans 6,428,943 2,768,196
----------- -----------
$33,694,049 $35,204,220
=========== ===========
</TABLE>
There is no material difference between the notional amounts and the
estimated fair values of the off-balance sheet liabilities.
The Company has no derivative financial instruments subject to the
provisions of SFAS No. 119 "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments" other than the interest
rate swap described in Note 9.
NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------------------------
Most of the Bank's business activity is with customers located within the
state. There are no concentrations of credit to borrowers that have similar
economic characteristics. The majority of the Bank's loan portfolio is
comprised of loans collateralized by real estate located in the state of
Massachusetts.
NOTE 16 - EARNINGS PER SHARE (EPS)
- ----------------------------------
Earnings per share were calculated using the weighted average number of
shares outstanding.
Earnings per share as previously stated has been reduced to reflect the
issuance of a 5% stock dividend in February of 1998, as follows. EPS in
1997 was reduced by $.05 and EPS in 1996 was reduced by $.04. Dividends per
share was reduced by $.01 for both 1997 and 1996.
Reconciliation of the numerators and the denominators of the basic and
diluted per share computations for net income are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Year ended December 31, 1998
Basic EPS
Net income and income available to common stockholders $3,363,042 3,402,218 $.99
Effect of dilutive securities, options 14,007
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $3,363,042 3,416,225 $.98
========== =========
Year ended December 31, 1997
Basic EPS
Net income and income available to common stockholders $2,845,990 3,184,857 $.89
Effect of dilutive securities, options 5,230
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,845,990 3,190,087 $.89
========== =========
Year ended December 31, 1996
Basic EPS
Net income and income available to common stockholders $2,378,195 2,903,131 $.82
Effect of dilutive securities, options 0
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversion $2,378,195 2,903,131 $.82
========== =========
</TABLE>
NOTE 17 - REGULATORY MATTERS
- ----------------------------
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory - and
possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the Company's and the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. Their capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes
have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $29,647 12.80% $18,536 >/=8.0% N/A
Slade's Ferry Trust Company 27,034 11.69 18,500 >/=8.0 $23,124 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 26,569 11.47 9,268 >/=4.0 N/A
Slade's Ferry Trust Company 23,961 10.36 9,250 >/=4.0 13,875 >/= 6.0
Tier 1 Capital (to Average Assets):
Consolidated 26,569 8.12 13,081 >/=4.0 N/A
Slade's Ferry Trust Company 23,961 7.38 12,989 >/=4.0 16,236 >/= 5.0
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $25,907 12.04% $17,210 >/=8.0% N/A
Slade's Ferry Trust Company 24,022 11.18 17,183 >/=8.0 $21,479 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 23,206 10.74 8,645 >/=4.0 N/A
Slade's Ferry Trust Company 21,325 9.88 8,631 >/=4.0 12,947 >/= 6.0
Tier 1 Capital (to Average Assets):
Consolidated 23,206 7.79 11,910 >/=4.0 N/A
Slade's Ferry Trust Company 21,325 7.18 11,876 >/=4.0 14,845 >/= 5.0
</TABLE>
The declaration of cash dividends is dependent on a number of factors,
including regulatory limitations, and the Company's operating results and
financial condition. The stockholders of the Company will be entitled to
dividends only when, and if, declared by the Company's Board of Directors
out of funds legally available therefore. Under the Massachusetts Business
Corporation Law, a dividend may not be declared if the corporation is
insolvent or if the declaration of the dividend would render the corporation
insolvent. The declaration of future dividends, whether by the Board of
Directors of the Company or the Bank, will be subject to favorable operating
results, financial conditions, tax considerations, and other factors.
As of December 31, 1998 the Company would be restricted from declaring
dividends in an amount greater than $29,707,385 as such declaration would
render the corporation insolvent. As of December 31, 1998 the Bank would be
restricted from declaring dividends in an amount greater than approximately
$8,534,000 as such declaration would decrease capital below the Bank's
required minimum level of regulatory capital.
NOTE 18 - STOCK OPTION PLAN
- ---------------------------
At the 1996 annual meeting stockholders approved a 1996 stock option plan
(Plan). No options were granted in 1996. A summary of the Plan is as
follows.
The Plan is divided into two separate equity incentive programs, a
Discretionary Grant Program and an Automatic Grant Program. The maximum
number of shares of common stock issuable over the term of the Plan may not
exceed 262,500 shares and the maximum aggregate number of shares issuable
under both programs in any plan year may not exceed 52,500 shares. Unless
sooner terminated by the Board, the Plan will in all events terminate on
March 11, 2006.
Under the Discretionary Grant Program, key employees, including officers,
may be granted incentive stock options to purchase shares of common stock.
The option exercise price per share may not be less than one hundred percent
of the fair market value of common stock at grant date and generally become
exercisable in periodic installments over the optionee's period of service.
Two types of stock appreciation rights are authorized for issuance: (1)
tandem rights, which require the option holder to elect between the exercise
of the underlying option for shares of common stock and the surrender of
such option for appreciation distribution and (2) limited rights, which are
automatically exercised upon the occurance of a hostile takeover.
Eligibility for participation in the Automatic Grant Program is limited to
non-employee directors of the Company or its subsidiary who have completed
three full years of service as directors. Under the Automatic Grant Program
a nonstatutory option for 2,000 shares of common stock shall be granted each
plan year to eligible directors. The exercise price per share will be equal
to one hundred percent of the fair market value per share of common stock at
grant date and each option will have a maximum five year term. In 1998 the
Board voted to amend the plan so that each option under the Automatic Grant
Program will be immediately vested.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of FASB Statement
123, the Company's net income and earnings per share for the years ended
December 31, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C> <C>
Net income As reported $3,363,042 $2,845,990
Pro forma $3,298,016 $2,807,466
Basic earnings per share As reported $.99 $.89
Pro forma $.97 $.88
Diluted earnings per share As reported $.98 $.89
Pro forma $.97 $.88
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended December 31, 1998 and 1997:
dividend yield of 2 percent; expected volatility of 13 percent, risk-free
interest rate of 5.7 percent and 6.7 percent, respectively; and expected
lives of 4 years.
A summary of the status of the Company's stock option plan as of December
31, 1998 and 1997 and changes during the years then ending are presented
below:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Weighted-Average Weighted-Average
Options Shares Exercise Price Shares Exercise Price
- -------------------------------- ------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 32,550 $ 8.90 0
Granted 32,250 17.00 32,550 $8.90
Exercised (4,250) 8.90 0
Forfeited 0 0
------ ------
Outstanding at end of year 60,550 13.21 32,550 $8.90
====== ======
Options exercisable at year-end 60,550 32,550
Weighted-average fair value of
options granted during the year $2.78 $1.65
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
---------------------------------------------------------------------
Weighted-Average
Number Remaining Weighted-Average
Exercise Price Outstanding Contractual Life Exercise Price
-------------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$ 8.90 28,300 3.7 years $ 8.90
17.00 32,250 4.7 years 17.00
13.21 60,550 4.2 years 13.21
</TABLE>
Exercise prices and options outstanding have been adjusted to reflect the 5%
stock dividend declared in February of 1998.
NOTE 19 - LITIGATION
- --------------------
The Bank is involved in a civil suit brought by a former employee of the
National Bank of Fairhaven, which primarily alleges a breach of contract and
other related claims. The demand by the plaintiff is $250,000 to settle the
case. The case is presently scheduled for trial in February 1999. The
Company estimates its potential liability to be less than $250,000 and it
believes it has meritorious defenses to the claim. The Company believes
that the suit will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
NOTE 20 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior year have been reclassified to be consistent
with the current year's statement presentation.
NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------
The following condensed financial statements are for Slade's Ferry Bancorp
(Parent Company Only) and should be read in conjunction with the
consolidated financial statements of Slade's Ferry Bancorp and Subsidiary.
SLADE'S FERRY BANCORP
---------------------
(Parent Company Only)
CONDENSED FINANCIAL STATEMENTS
------------------------------
<TABLE>
<CAPTION>
Balance sheets December 31,
1998 1997
----------- -----------
ASSETS
- ------
<S> <C> <C>
Cash $ 489,437 $ 319,437
Investments in available-for-sale securities (at fair value) 1,949,984 1,446,722
Investments in held-to-maturity securities (fair value of $295,873
as of December 31, 1998 and $246,917 as of December 31, 1997) 295,763 247,465
Investment in subsidiary, Slade's Ferry Trust Company 27,098,674 24,557,163
Premises and equipment 22,355
Accrued interest receivable 28,357 5,977
Other assets 38,003 38,539
----------- -----------
$29,922,573 $26,615,303
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Other liabilities $ 215,188 $ 178,877
----------- -----------
Total liabilities 215,188 178,877
----------- -----------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 5,000,000
shares; issued and outstanding 3,446,413.80 shares in 1998
and 3,236,712.7 shares in 1997 34,464 32,367
Paid-in capital 22,285,220 18,978,598
Retained earnings 7,103,642 7,276,174
Accumulated other comprehensive income 284,059 149,287
----------- -----------
Total stockholders' equity 29,707,385 26,436,426
----------- -----------
$29,922,573 $26,615,303
=========== ===========
</TABLE>
Statements of income and comprehensive income
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiary $ 950,000 $ 475,000 $ 360,000
Interest and dividends on securities:
Taxable 111,127 40,199
Other interest income 6,111 4,267 2,474
Management fee income from subsidiary 432,002 438,479 415,904
Other income 4,000
---------- ---------- ----------
Total income 1,499,240 961,945 778,378
---------- ---------- ----------
Salaries and employee benefits 376,940 333,410 311,038
Equipment expense 379 4,449 20,596
Other expense 146,641 124,676 96,872
---------- ---------- ----------
Total expense 523,960 462,535 428,506
---------- ---------- ----------
Income before income taxes (benefit) and equity
in undistributed net income of subsidiary 975,280 499,410 349,872
Income taxes (benefit) 20,384 16,754 (2,400)
---------- ---------- ----------
Income before equity in undistributed net income
of subsidiary 954,896 482,656 352,272
Equity in undistributed net income of subsidiary 2,408,146 2,363,334 2,025,923
---------- ---------- ----------
Net income 3,363,042 2,845,990 2,378,195
---------- ---------- ----------
Other comprehensive income, net of tax
Unrealized holding gains (losses) on available-for-sale
securities, parent company only 1,408 (1,792)
Unrealized holding gains (losses) on available-for-sale
securities, subsidiary 214,249 153,707 (35,650)
Minimum pension liability adjustment, net of tax effect (80,885)
---------- ---------- ----------
Total other comprehensive income, net of tax 134,772 151,915 (35,650)
---------- ---------- ----------
Comprehensive income $3,497,814 $2,997,905 $2,342,545
========== ========== ==========
</TABLE>
SLADE'S FERRY BANCORP
---------------------
(Parent Company Only)
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
Statements of cash flows
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $3,363,042 $2,845,990 $2,378,195
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of subsidiary (2,408,146) (2,363,334) (2,025,923)
Accretion, net of amortization of securities (8,159) (34,220)
Depreciation and amortization 379 4,448 10,677
Increase (decrease) in taxes payable 12,686 5,007 (5,668)
Increase in accrued expenses 2,888 775 910
(Increase) decrease in prepaid expenses 4,748 (13,223) (210)
Increase in interest receivable (22,380) (5,977)
(Increase) decrease in other assets (7,450) 13,639 (14,785)
Increase (decrease) in other liabilities (7,750) 6,988 (636)
---------- ---------- ----------
Net cash provided by operating activities 929,858 460,093 342,560
---------- ---------- ----------
Cash flows from investing activities:
Additional investment in subsidiary bank (2,300,000)
Capital expenditures (22,734)
Purchases of held-to-maturity securities (590,583) (2,613,316)
Proceeds from maturities of held-to-maturity securities 550,000 2,400,000
Proceeds from maturities of available-for-sale securities 2,350,000
Purchases of available-for-sale securities (2,850,461) (1,449,649)
---------- ---------- ----------
Net cash used in investing activities (563,778) (3,962,965)
---------- ---------- ----------
Cash flows from financing activities:
Fractional shares paid in cash (8,117) (3,360)
Dividends paid (914,943) (734,073) (658,165)
Net proceeds from issuance of common stock 726,980 4,375,775 346,147
---------- ---------- ----------
Net cash provided by (used in) financing activities (196,080) 3,641,702 (315,378)
---------- ---------- ----------
Net increase in cash and cash equivalents 170,000 138,830 27,182
Cash and cash equivalents at beginning of year 319,437 180,607 153,425
---------- ---------- ----------
Cash and cash equivalents at end of year $ 489,437 $ 319,437 $ 180,607
========== ========== ==========
Supplemental disclosure:
Income taxes paid $ 7,698 $ 11,747 $ 3,268
</TABLE>
The Parent Company Only Statements of Changes in Stockholders' Equity are
identical to the Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996, and therefore are not
reprinted here.
<TABLE>
<S> <C> <C>
Board of Directors Officers Peter G. Collias
Slade's Ferry Bancorp- Slade's Ferry Bancorp Corporate Secretary
Slade's Ferry Trust Company ---------------------
- ---------------------------
Donald T. Corrigan Sandra Curtis
Thomas B. Almy Chairman of the Board Compliance Review Officer
Architect - I.T. Almy Associates
Kenneth R. Rezendes Luisa DiManno
James D. Carey President Assistant Treasurer
Executive Vice President of Bancorp Chief Executive Officer
President of Bank William E. Diskin
Chief Executive Officer of Bank James D. Carey Vice President
Executive Vice President
Peter G. Collias, Esquire Raymond L. Foster
Clerk/Secretary of Bancorp and Bank Ralph S. Borges Vice President
Treasurer
Donald T. Corrigan Joseph J. Ganem
Chairman of the Board of Bancorp Executive Management Vice President
Chairman of the Board of Bank Slade's Ferry Trust Company
--------------------------- Joseph Gesualdo
Melvyn A. Holland James D. Carey Vice President
Managing Partner President
Rosenfield, Holland & Raymon PC Chief Executive Officer Russell F. Godin
Certified Public Accountants Vice President
Ralph S. Borges
William Q. MacLean, Jr. Executive Vice President/Treasurer Elaine M. Guillemette
Vice President Assistant Vice President
Cornish & Co. Inc. Insurance Susan R. Hajder
Senior Vice President Sandra Medeiros
Francis A. Macomber Assistant Treasurer
President - LeComtes All Star Dairy Inc. Charlene J. Jarest
Vice President Charlotte C. Nadeau
Assistant Vice President
Majed Mouded MD Carol A. Martin
Physician Senior Vice President Cecelia M. Machado
Vice President
Shaun O'Hearn, Sr. Manuel J. Tavares
President - Bolger & O'Hearn Inc. Senior Vice President Jeannine M. Paliotti
Vice President
Lawrence J. Oliveira DDS Officers
Orthodontist Slade's Ferry Trust Company Janice R. Partridge
--------------------------- Vice President
Peter Paskowski James H. Anctil
Past President of Bank Vice President Fatima M. Rapoza
Assistant Vice President
Kenneth R. Rezendes Isola A. Anctil
President/CEO of Bancorp Assistant Vice President Michelle Rivera
President - K.R. Rezendes, Inc. Assistant Clerk/Secretary Assistant Treasurer
William J. Sullivan Cherie Ashton Deborah A. Silvia
President - Sullivan Funeral Homes Assistant Vice President Assistant Treasurer
Charles Veloza Maria C. Barbosa Eduardo F. Sousa
President - Charlie's Oil Co., Inc. Vice President Assistant Treasurer
David F. Westgate Edward Bernardo Jr. Nancy E. Stokes
President Vice President Vice President
Quequechan Management Corp.
Catherine Blakey Mary M. Sullivan
Honorary Directors Assistant Vice President Vice President
- ------------------
Edward S. Machado Noelia M. Brum Doreen Teixeira
Past President of Bank Assistant Treasurer Assistant Treasurer
Bernard T. Shuman Michelle Caron Richard Van Blarcom
Past President/Treasurer Assistant Treasurer Vice President
Priscilla Dress Corp.
Corporate Headquarters General Counsels Shareholder Services
Slade's Ferry Bancorp Atty. Peter G. Collias Slade's Ferry Bancorp
100 Slade's Ferry Avenue 84 North Main Street 100 Slade's Ferry Avenue
Somerset, Massachusetts 02726 Fall River, Massachusetts 02720 Somerset, Massachusetts 02726
Tel. (508) 675-2121 Tel. (508) 675-7894 Tel. (508) 675-2121
Fax (508) 675-1751
Thomas H. Tucker, Esq. Annual Meeting
459 Washington St., Suite 27 The Annual Meeting of Stockholders
BRANCH LOCATIONS Duxbury, MA 02332 of Slade's Ferry Bancorp will be
Tel. (781) 934-8200 held at 7:30 p.m. on April 12, 1999
Fairhaven, MA at the Venus de Milo Restaurant,
75 Huttleston Avenue Independent Certified 75 GAR Highway
Public Accountants Swansea, Massachusetts.
Fall River, MA Shatswell MacLeod & Company PC
249 Linden Street Certified Public Accountants Dividend Reinvestment Plan
855 Brayton Avenue 83 Pine Street The Plan provides for:
1601 South Main Street West Peabody, Massachusetts 01960 * Reinvestment of all of the
Tel. (978) 535-0206 dividends
New Bedford, MA * Voluntary cash contributions
838 Pleasant Street Form 10-KSB of up to $5,000 annually,
833 Ashley Boulevard A copy of the Annual Report on minimum $100.
Form 10-KSB for Slade's Ferry * No service fees or
Seekonk, MA Bancorp as filed with the commissions
1400 Fall River Avenue (Rte.6) Securities and Exchange
Commission will be forwarded Information may be obtained by
Somerset, MA without charge to any stockholder contacting Shareholder Services
100 Slade's Ferry Avenue upon written request to: at (508) 675-2121
2722 County Street
Somerset High School Ralph S. Borges, Treasurer Stock Trading
Slade's Ferry Bancorp The common stock of Slade's
Swansea, MA 100 Slade's Ferry Avenue Ferry Bancorp is listed on the
Swansea Mall Somerset, MA 02726 NASDAQ Small Cap Market
2388 G.A.R. Highway under the symbol SFBC.
</TABLE>
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01950-3535
TELEPHONE (978) 535-0208
FACSIMILE (978) 535-9908
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Annual Report on
Form 10-K of Slade's Ferry Bancorp of our report dated January 15, 1999.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,686,520
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,199,292
<INVESTMENTS-CARRYING> 20,921,254
<INVESTMENTS-MARKET> 21,282,941
<LOANS> 218,230,037
<ALLOWANCE> 3,569,282
<TOTAL-ASSETS> 340,354,720
<DEPOSITS> 303,785,865
<SHORT-TERM> 42,329
<LIABILITIES-OTHER> 1,495,697
<LONG-TERM> 5,323,444
0
0
<COMMON> 34,464
<OTHER-SE> 29,672,921
<TOTAL-LIABILITIES-AND-EQUITY> 340,354,720
<INTEREST-LOAN> 19,754,777
<INTEREST-INVEST> 3,916,151
<INTEREST-OTHER> 635,688
<INTEREST-TOTAL> 24,306,616
<INTEREST-DEPOSIT> 10,509,873
<INTEREST-EXPENSE> 10,711,345
<INTEREST-INCOME-NET> 13,595,271
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> 382,370
<EXPENSE-OTHER> 8,984,181
<INCOME-PRETAX> 5,579,202
<INCOME-PRE-EXTRAORDINARY> 5,579,202
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,363,042
<EPS-PRIMARY> 0.99
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 4.70
<LOANS-NON> 3,331,417
<LOANS-PAST> 317,472
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,693,865
<CHARGE-OFFS> 792,307
<RECOVERIES> 67,724
<ALLOWANCE-CLOSE> 3,569,282
<ALLOWANCE-DOMESTIC> 3,569,282
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
