UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
--------------
Commission file number 000-23904
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SLADE'S FERRY BANCORP.
--------------------------------------------------------
(Exact name of registrant as specified in its character)
Massachusetts 04-3061936
---------------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue 02726
Somerset, Massachusetts ------------------------------
---------------------------------------- (Zip code)
(Address of principal executive offices)
(508) 675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($0.01 par value) 4,057,027 outstanding
shares as of April 30, 2007.
----------------------------------------------------
1
TABLE OF CONTENTS
Part I
ITEM 1 - Financial Statements (Unaudited) 3
* Consolidated Balance Sheets - March 31, 2007 and
December 31, 2006
* Consolidated Statements of Income - Three Months Ended
March 31, 2007 and 2006
* Consolidated Statement of Changes in Stockholders' Equity -
Three Months Ended March 31, 2007
* Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2007 and 2006
* Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 26
ITEM 4 - Controls and Procedures (See attached) 28
Part II
ITEM 1 - Legal Proceedings 29
ITEM 1A- Risk Factors 29
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 29
ITEM 3 - Defaults Upon Senior Securities 30
ITEM 4 - Submission of Matters to a Vote of Security Holders 30
ITEM 5 - Other Information 30
ITEM 6 - Exhibits 30
2
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2007 December 31, 2006
-------------- -----------------
Assets (In thousands)
------
Cash and due from banks $ 16,225 $ 19,448
Interest-bearing deposits with other banks 1,062 1,007
Federal funds sold 2,300 1,900
-------- --------
Cash and cash equivalents 19,587 22,355
Interest-bearing certificates of deposit with other banks 100 100
Securities available for sale 103,695 105,603
Securities held to maturity (fair value approximates of $22,206
as of March 31, 2007 and $24,219 as of December 31, 2006) 22,561 24,623
Federal Home Loan Bank stock, at cost 6,953 6,856
Loans, net of allowance for loan losses of $4,318 at March 31, 2007
and $4,385 at December 31, 2006 429,224 422,370
Premises and equipment, net 5,963 5,587
Goodwill 2,173 2,173
Accrued interest receivable 2,429 2,311
Bank-owned life insurance 12,423 12,317
Deferred tax asset, net 1,914 2,039
Other assets 1,947 1,426
-------- --------
$608,969 $607,760
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 71,397 $ 79,101
Interest-bearing 338,524 344,905
-------- --------
Total deposits 409,921 424,006
Short-term borrowings 4,700 -
Long-term borrowings 129,961 119,058
Subordinated debentures 10,310 10,310
Accrued expenses and other liabilities 3,215 3,141
-------- --------
Total liabilities 558,107 556,515
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 10,000,000 shares;
issued and outstanding 4,039,063 shares at March 31, 2007 and
4,102,242 shares at December 31, 2006 42 41
Additional paid-in capital 30,578 31,444
Retained earnings 21,606 21,111
Accumulated other comprehensive loss (252) (464)
Unearned compensation (1,112) (887)
-------- --------
Total stockholders' equity 50,862 51,245
-------- --------
$608,969 $607,760
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------------
2007 2006
---------- ----------
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 6,922 $ 6,435
Interest and dividends on securities:
Taxable 1,582 1,333
Tax-exempt 50 69
Interest on federal funds sold 36 11
Other interest 10 8
---------- ----------
Total interest and dividend income 8,600 7,856
---------- ----------
Interest expense:
Interest on deposits 2,689 1,911
Interest on Federal Home Loan Bank advances 1,519 1,156
Interest on subordinated debentures 211 224
---------- ----------
Total interest expense 4,419 3,291
---------- ----------
Net interest and dividend income 4,181 4,565
Provision for loan losses - 39
---------- ----------
Net interest income, after provision for loan losses 4,181 4,526
---------- ----------
Noninterest income:
Service charges on deposit accounts 328 307
Gain on sales and calls of available-for-sale securities, net 61 3
Increase in cash surrender value of life insurance policies 106 107
Other income 231 286
---------- ----------
Total noninterest income 726 703
---------- ----------
Noninterest expense:
Salaries and employee benefits 1,997 2,111
Occupancy and equipment expense 492 493
Professional fees 275 412
Marketing expense 56 78
Data processing 297 81
Other expense 439 575
---------- ----------
Total noninterest expense 3,556 3,750
---------- ----------
Income before income taxes 1,351 1,479
Provision for income taxes 478 572
---------- ----------
Net income $ 873 $ 907
========== ==========
Earnings per share:
Basic $ 0.21 $ 0.22
========== ==========
Diluted $ 0.21 $ 0.22
========== ==========
Average common shares outstanding:
Basic 4,080,047 4,149,686
========== ==========
Diluted 4,084,660 4,160,028
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended March 31, 2007
(Unaudited)
Accumulated
Shares of Additional Other
Common Common Paid-in Retained Comprehensive Unearned
Stock Stock Capital Earnings Loss Compensation Total
---------------------------------------------------------------------------------------
(In thousands, except per share data)
Balance, December 31, 2006 4,102,242 $41 $31,444 $21,111 $(464) $(887) $51,245
Comprehensive income:
Net income - - - 873 - - 873
Other comprehensive income - - - - 212 - 212
-------
Comprehensive income 1,085
-------
Issuance of common stock 7,549 1 133 - - - 134
Stock options exercised 4,000 - 56 - - 56
Tax benefit of stock options exercised - - 5 - - 5
Stock-based compensation - - 37 - - 37
Purchase of treasury stock (62,005) - (1,097) - - (1,097)
Unearned compensation (12,723) - - - - (225) (225)
Dividends declared ($.09 per share) - - - (378) - - (378)
---------------------------------------------------------------------------------------
Balance at March 31, 2007 4,039,063 $42 $30,578 $21,606 $(252) $(1,112) $50,862
=======================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2007 2006
--------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 873 $ 907
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, net of accretion of securities 9 32
Gain on sales and calls of available-for-sale securities, net (61) (3)
Amoritization of net deferred loan fees (1) (15)
Provision for loan losses - 39
Deferred tax (benefit) provision (3) 80
Depreciation and amortization 205 221
Increase in cash surrender value of life insurance (106) (107)
Stock-based compensation 37 65
Excess tax benefits from stock-based compensation (5) (69)
Net change in:
Other assets (521) (131)
Accrued interest receivable (118) (56)
Other liabilities (32) (384)
--------- --------
Net cash provided by operating activities 277 579
--------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (465) (489)
Sales 453 665
Maturities, calls and pay-downs 2,345 1,602
Activity in held-to-maturity securities:
Maturities, calls and pay-downs 2,034 1,092
Purchases of Federal Home Loan Bank stock (97) -
Loan originations, net of principal payments (6,786) (4,810)
Capital expenditures (581) (161)
--------- --------
Net cash used in investing activities (3,097) (2,101)
--------- --------
The accompanying notes are an integral part of these consolidated financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended March 31,
----------------------------
2007 2006
--------- --------
(In thousands)
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits $ (7,704) $ (4,951)
Net decrease in interest-bearing deposits (6,381) (3,106)
Short-term advances from Federal Home Loan Bank 280,315 17,000
Long-term advances from Federal Home Loan Bank 15,000 10,000
Payments on Federal Home Loan Bank short-term advances (275,615) (13,500)
Payments on Federal Home Loan Bank long-term advances (4,097) (7,113)
Proceeds from issuance of common stock 134 155
Stock options exercised 56 228
Excess tax benefits from stock-based compensation 5 69
Purchase of treasury stock (1,058) (126)
Unearned compensation (225) -
Dividends paid on common stock (378) (375)
--------- --------
Net cash provided (used) by financing activities 52 (1,719)
--------- --------
Net decrease in cash and cash equivalents (2,768) (3,241)
Cash and cash equivalents at beginning of period 22,355 20,018
--------- --------
Cash and cash equivalents at end of period $ 19,587 $ 16,777
========= ========
Supplemental disclosures:
Interest paid $ 4,485 $ 3,291
Income taxes paid $ 388 $ 475
The accompanying notes are an integral part of these consolidated financial statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2007
Note A - Basis of Presentation
------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial statements.
In the opinion of the management of Slade's Ferry Bancorp. (the "Company"), all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007.
The year-end consolidated financial data was derived from audited financial
statements, but does not include all disclosures required by GAAP. This Form
10-Q should be read in conjunction with the Company's Annual Report filed on
Form 10-K for the year ended December 31, 2006.
Note B - Accounting Policies
----------------------------
The accounting principles followed by Slade's Ferry Bancorp. and subsidiary and
the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used for the year ended December
31, 2006, except for the adoption of Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN48),
effective January 1, 2007. See Note C.
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, Slade's Ferry Trust Company (the "Bank") and the
Bank's wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. The Company accounts for
its other wholly-owned subsidiary, Slade's Ferry Statutory Trust I, using the
equity method.
Note C - Recent Accounting Pronouncements
-----------------------------------------
The Company adopted FIN 48 effective January 1, 2007, which clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. Management has evaluated FIN 48 and
determined that there is no impact on the Company's consolidated financial
statements.
8
Note D - Pension Plan
---------------------
The components of net periodic pension expense (benefit) are as follows:
Three Months Ended March 31,
----------------------------
2007 2006
---- ----
(In thousands)
Interest cost $ 11 $ 17
Service cost and expenses 7 -
Expected return on plan assets (19) (29)
Settlements 38 -
Recognized net actuarial loss 4 7
---- ----
Net periodic pension expense (benefit) $ 41 $ (5)
==== ====
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2006 that it expects to make no contributions to
the plan in 2007.
Note E - 2004 Equity Incentive Plan
-----------------------------------
Stock options granted under the Slade's Ferry Bancorp. 2004 Equity Incentive
Plan (the "2004 Plan") may be either incentive stock options or non-qualified
stock options. The exercise price for incentive stock options granted to
employees shall not be less than 100 percent of the fair market value at grant
date. No stock option shall be exercisable more than 10 years after the date
the stock option is granted.
A summary of options under the 2004 Plan as of March 31, 2007, and changes
during the three months then ended, (shares in thousands) is presented below:
Weighted
Average
Remaining
Contractual
Weighted Average Term Aggregate
Shares Exercise Price (in years) Intrinsic Value
------ ---------------- ----------- ---------------
Outstanding at January 1, 2007 231 $18.18
Granted - -
Exercised (4) 14.15
Forfeited - -
Expired - -
--- ------ --- ---
Outstanding at March 31, 2007 227 18.25 4.3 $ -
=== ====== === ===
Exercisable at March 31, 2007 195 $18.12 4.1 $ -
=== ====== === ===
9
Note F - Comprehensive Income
-----------------------------
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive loss and related tax effects are as
follows:
Three Months Ended March 31,
----------------------------
2007 2006
----- ----
(In thousands)
Unrealized gains (losses) on securities
available for sale $ 406 $(66)
Reclassification adjustment for losses
(gains) realized in income (61) (3)
----- ----
Net unrealized gains (losses) 345 (69)
Tax effect (133) 30
----- ----
Net-of-tax amount $ 212 $(39)
===== ====
The components of accumulated other comprehensive loss, included in
stockholders' equity, are as follows:
Three Months Ended March 31,
----------------------------
2007 2006
----- -------
(In thousands)
Net unrealized losses on securities available
for sale $ (35) (1,984)
Tax effect 6 747
----- -------
Net-of-tax amount (29) (1,237)
----- -------
Unrecognized net actuarial loss pertaining
to defined benefit plan (377) -
Tax effect
154 -
----- -------
Net-of-tax amount (223) -
----- -------
$(252) $(1,237)
===== =======
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Slade's Ferry Bancorp., a Massachusetts corporation, is a bank holding company
headquartered in Somerset, Massachusetts with consolidated assets of $609.0
million, consolidated net loans and leases of $429.2 million, consolidated
deposits of $409.9 million and consolidated shareholders' equity of $50.9
million as of March 31, 2007. We conduct our business principally through our
wholly-owned subsidiary, Slade's Ferry Trust Company (referred to herein as the
"Bank"), a Massachusetts-chartered trust company. Our common stock is listed in
the NASDAQ Capital Market under the symbol SFBC.
Forward-looking Statements
--------------------------
This Form 10-Q contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including statements
regarding the strength of the company's capital and asset quality. Such
statements may be identified by words such as "believes," "will," "expects,"
"project," "may," "could," "developments," "strategic," "launching,"
"opportunities," "anticipates," "estimates," "intends," "plans," "targets" and
similar expressions. These statements are based upon the current beliefs and
expectations of management and are subject to significant risks and
uncertainties. Actual results may differ materially from those set forth in the
forward-looking statements as a result of numerous factors.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements:
(1) enactment of adverse government regulation;
(2) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on
pricing, spending, third-party relationships and revenues;
(3) the strength of the United States economy in general and
specifically the strength of the New England economies may be
different than expected, resulting in, among other things, a
deterioration in overall credit quality and borrowers' ability to
service and repay loans, or a reduced demand for credit, including
the resultant effect on the our loan portfolio, levels of
charge-offs and non-performing loans and allowance for loan losses;
(4) changes in the interest rate environment may reduce interest
margins and adversely impact net interest income; and
(5) changes in assumptions used in making such forward-looking
statements.
Should one or more of these risks materialize or should underlying beliefs or
assumptions prove incorrect, actual results could differ materially from those
discussed.
All subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp. or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp. does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
As used throughout this report, the terms "we," "our," "us," or the "Company"
refer to Slade's Ferry Bancorp. and its consolidated subsidiary, unless context
otherwise requires.
11
Critical Accounting Policies
----------------------------
Our significant accounting policies are incorporated by reference to Note 1 to
our Consolidated Financial Statements filed within Form 10-K for the year ended
December 31, 2006. In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and other-than-temporary
impairment losses.
Allowance for loan losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Other than temporary impairment. In estimating other-than-temporary-impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Comparison of Financial Condition at March 31, 2007 and December 31, 2006
-------------------------------------------------------------------------
General
-------
Total assets increased from $607.8 million at December 31, 2006 to $609.0
million at March 31, 2007. Total net loans increased by $6.8 million, from
$422.4 million to $429.2 million. Deposits decreased from $424.0 million at
December 31, 2006 to $409.9 million at March 31, 2007, a decrease of 3.3%. The
decrease in deposits was offset by an increase in Federal Home Loan Bank
("FHLB") advances totaling $15.6 million.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents decreased by $2.8 million, from $22.4 million at
December 31, 2006 to $19.6 million at March 31, 2007. The decrease funded a
portion of the growth in the loan portfolio.
Investment Portfolio
--------------------
The main objectives of our investment portfolio are to achieve a competitive
rate of return over a reasonable time period and to provide liquidity.
Our total investment portfolio decreased from $137.1 million at December 31,
2006 to $133.2 million at March 31, 2007, a decrease of 2.8%. The decrease is
the result of the maturity, calls and paydowns of certain state and municipal
obligations and mortgage-backed securities. Those funds were used to provide
liquidity for current loan growth.
12
The current investment strategy is to reduce the investment portfolio through
normal paydowns and maturities and reinvest these funds into higher yielding
loans. Our investment policy also permits investments in mortgage-backed
securities, usually having a longer weighted average life. Our investment
policy, however, limits the duration of the aggregate investment portfolio to 5
years. At March 31, 2007, the portfolio duration was 3.3 years. We do not
purchase investments with imbedded derivative characteristics, or free-standing
derivative instruments such as swaps, options, or futures.
Securities Held to Maturity
The held-to-maturity portfolio consists of mortgage-backed securities and
securities issued by states and municipalities. Held-to-maturity securities
decreased from $24.6 million at December 31, 2006 to $22.6 million at March 31,
2007. Management has designated these mortgage-backed securities to secure
advances from the FHLB. We have the positive intent and ability to hold these
securities to maturity.
The following table shows the amortized cost basis and fair value of securities
held to maturity at March 31, 2007 and December 31, 2006.
March 31, 2007 December 31, 2006
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
(In thousands)
State and municipal obligations $ 4,230 $ 4,292 $ 5,001 $ 5,069
Mortgage-backed securities 18,331 17,914 19,622 19,150
------- ------- ------- -------
Total securities held to maturity $22,561 $22,206 $24,623 $24,219
======= ======= ======= =======
Securities Available for Sale
Securities not designated as held-to-maturity are designated as available for
sale. Although we do not anticipate the sale of these securities, the
designation as available for sale allows us the flexibility to alter our
investment strategies and sell these securities when conditions warrant.
Additionally, marketable equity securities that have no maturity date must be
designated as available-for-sale. These securities are carried at fair value.
The available-for-sale securities portfolio includes obligations and
mortgage-backed securities of government-sponsored enterprises, corporate debt
and equity securities.
13
The following table shows the amortized cost basis and fair value of securities
available for sale at March 31, 2007 and December 31, 2006.
March 31, 2007 December 31, 2006
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
(In thousands)
Debt Securities:
Government-sponsored enterprises $ 34,468 $ 34,129 $ 34,462 $ 33,957
Corporate 9,197 9,057 9,221 9,080
Mortgage-backed 55,638 55,964 57,946 57,980
-------- -------- -------- --------
Total debt securities 99,303 99,150 101,629 101,017
Marketable equity securities 3,212 3,345 3,139 3,389
Mutual funds 1,215 1,200 1,215 1,197
-------- -------- -------- --------
Total securities available for sale $103,730 $103,695 $105,983 $105,603
======== ======== ======== ========
Loans
-----
Our loan portfolio consists primarily of residential, multi-family and
commercial real estate, construction and land development, commercial, and
consumer loans and home equity lines of credit originated primarily in our
market area. There are no foreign loans outstanding. Interest rates charged on
loans are affected principally by the demand for such loans, the supply of
money available for lending purposes and the rates offered by our competitors.
Total net loans were 70.5% of total assets at March 31, 2007, as compared to
69.5% of total assets at December 31, 2006.
Multi-Family and Commercial Real Estate Lending
We originate multi-family and commercial real estate loans that are generally
secured by five or more unit apartment buildings and properties used for
business purposes such as small office buildings, restaurants or retail
facilities. These loans generally involve larger principal amounts and a
greater degree of risk than one-to-four family residential mortgage loans.
Because payments on loans secured by multi-family and commercial real estate
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. We seek to minimize these risks through our
underwriting standards.
Multi-family and commercial real estate loans totaled $210.8 million and
comprised 48.6% of the total gross loan portfolio at March 31, 2007. At
December 31, 2006, the multi-family and commercial real estate loan portfolio
totaled $209.2 million, or 49.0% of total gross loans.
Residential Lending
We currently offer fixed-rate, one-to-four family mortgage loans with terms
from 10 to 30 years and a number of adjustable-rate mortgage loans with terms
of up to 30 years and interest rates which adjust every one or three years from
the outset of the loan.
14
We generally underwrite our residential real estate loans to comply with
secondary market standards established by the Federal National Mortgage
Association. Although loans are underwritten to standards that make them
readily salable, we have not chosen to sell these loans, rather to maintain
them in portfolio, consistent with our income and interest rate risk management
targets.
Residential real estate loans totaled $134.6 million at March 31, 2007 and
totaled $132.4 million at December 31, 2006, which comprised 31.0% of total
gross loans at both dates.
Commercial Loans
The commercial loan portfolio consists of loans and lines predominantly
collateralized by inventory, furniture and fixtures, and accounts receivable.
In assessing the collateral for this type of loan, we apply a 50% liquidation
value to inventories; 25% to furniture, fixtures and equipment; and 70% to
accounts receivable less than 90 days of invoice date.
Commercial loans totaled $50.9 million and comprised 11.7% of the total gross
loan portfolio at March 31, 2007. At December 31, 2006, the commercial loan
portfolio totaled $47.7 million, or 11.2% of total gross loans.
Construction Lending
Fixed-rate construction loans are originated for the development of one-to-four
family residential properties. Although we do not generally make loans secured
by raw land, our policies permit the origination of such loans. Construction
loan proceeds are disbursed periodically in increments as construction
progresses and as inspections by an independent construction specialist
warrant.
Construction and land development loans totaled $22.2 million and comprised
5.1% of total gross loan portfolio at March 31, 2007. At December 31, 2006,
construction and land development loan portfolio totaled $21.0 million or 4.9%
of total gross loans.
Home Equity Lines of Credit
Home equity lines of credit are secured by second mortgages on owner-occupied,
one-to-four family residences located in our primary market area. Our home
equity lines of credit generally have interest rates, indexed to the Wall
Street Journal Prime Rate, that adjust on a monthly basis.
Home equity lines of credit totaled $12.7 million and comprised 2.9% of the
total gross loan portfolio at March 31, 2007. At December 31, 2006, the home
equity line of credit portfolio totaled $13.9 million, or 3.3% of total gross
loans.
Consumer Lending
Consumer loans secured by rapidly depreciable assets such as recreational
vehicles and automobiles entail greater risks than one-to-four family,
residential mortgage loans. Consumer loans are typically made based on the
borrower's ability to repay the loan through continued financial stability. We
endeavor 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 loan. Consumer loans are both secured and unsecured borrowings.
Consumer loans totaled $2.6 million at March 31, 2007 and $2.8 million at
December 31, 2006 or 0.6% of total gross loans at both dates.
15
The following table summarizes our loan portfolio by category at March 31, 2007
and December 31, 2006.
Percentage
March 31, 2007 December 31, 2006 Increase/(Decrease)
-------------- ----------------- -------------------
(Dollars in thousands)
Real estate mortgage loans:
Multi-family and commercial $210,757 $209,172 0.76%
Residential 134,604 132,381 1.68%
Construction 22,151 20,988 5.54%
Home equity lines of credit 12,700 13,917 -8.74%
Commercial 50,881 47,736 6.59%
Consumer 2,653 2,766 -4.09%
-------- -------- -----
Total loans 433,746 426,960 1.59%
Less: Allowance for loan losses (4,318) (4,385) -1.53%
Net deferred loan fees (204) (205) -0.49%
-------- -------- -----
Loans, net $429,224 $422,370 1.62%
======== ======== =====
The increases in the loan portfolio are the result of the continued demand by
small businesses for commercial loans and the normal origination process for
residential loans. These increases were partially offset by the overall general
market environment with declining market values which restricts home equity
lines of credit and consumer lending.
The following table presents information with respect to non-performing loans
as of the dates indicated.
March 31, 2007 December 31, 2006
-------------- -----------------
(Dollars in thousands)
Non-accrual loans $484 $600
Loans 90 days or more past due and still accruing - -
---- ----
Total non-performing loans $484 $600
==== ====
Percentage of non-accrual loans to total gross loans 0.11% 0.14%
Percentage of allowance for loan losses to non-accrual loans 892.1% 730.8%
The $484,000 in non-accrual loans as of March 31, 2007 consists of $106,000 of
commercial real estate loans, and $378,000 of residential real estate loans.
There were no restructured loans included in non-accrual loans for the first
three months of 2007.
It is our policy to manage our loan portfolio in order to recognize problem
loans at an early stage and thereby minimize loan losses. Loans are considered
delinquent when any payment of principal or interest is one month or more past
due. We generally commence collection procedures when accounts are 15 days past
due. Generally, when a loan becomes past due 90 days or more, management
discontinues the accrual of interest and reverses previously accrued interest,
unless the credit is well-secured and in process of collection. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured. When a loan is determined to be uncollectible, it is charged to the
16
allowance for loan losses or, if applicable, any real estate that is securing
the loan is acquired through foreclosure, and recorded as other real estate
owned. Management defines non-performing loans to include non-accrual loans,
loans past due 90 days or more and still accruing, and restructured loans not
performing in accordance with amended terms.
At March 31, 2007 there were $341,000 of loans which we have determined to be
impaired, with no related allowance for loan losses. These loans were not 90
days past due, and were, therefore, still accruing at March 31, 2007.
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the Allowance for Loan Losses for
the periods indicated.
Three Months Ended March 31,
----------------------------
2007 2006
------ ------
(Dollars in thousands)
Balance at beginning of period $4,385 $4,333
Charge-offs:
Real estate mortgage loans:
Multi-family and commercial - -
Residential - -
Home equity lines of credit - -
Commercial - -
Consumer - -
------ ------
- -
------ ------
Recoveries:
Real estate mortgage loans:
Multi-family and commercial - -
Residential - -
Home equity lines of credit - -
Commercial - -
Consumer - -
------ ------
- -
------ ------
Net loan recoveries (charge-offs) - -
Provision for loan losses - 39
Transfer of off-balance sheet credit exposures
to other liabilities (67) -
------ ------
Balance at end of period $4,318 $4,372
====== ======
Allowance for loan losses as a percent of loans 1.01% 1.04%
====== ======
Ratio of net loan recoveries (charge-offs)
to average loans outstanding 0.00% 0.00%
====== ======
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as impaired. For such
loans, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of
17
that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the
portfolio.
The above table reflects the Company's reclassification from the allowance for
loan losses the portion that represented management's estimate of loss for
off-balance sheet credit exposures which consisted of unused lines of credit.
The amount was reclassified to "Other Liabilities" in accordance with generally
accepted accounting principles and Financial Institution Letter (FIL) 105-2006
which was issued in December 2006.
As the composition of the loan portfolio changes and diversifies, a different
allowance level may be required. After thorough review and analysis of the
adequacy of the loan loss allowance, management determined no provision for
losses were required for the three months ended March 31, 2007 as compared to a
provision of $39,000 for the three months ended March 31, 2006. The allowance
for loan losses as a percentage of total loans outstanding declined from 1.03%
at December 31, 2006 to 1.01% at March 31, 2007. This decrease can be
attributed to stronger underwriting guidelines and an overall improvement in
the credit quality of existing loans which results in a decrease in the degree
of credit risk embedded in the loan portfolio.
This table below shows an allocation of the allowance for loan losses at the
dates indicated.
March 31, 2007 December 31, 2006
----------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(Dollars in thousands)
Commercial $ 675 11.7% $ 718 11.2%
Real estate construction 131 5.1% 260 4.9%
Real estate mortgage 3,356 82.6% 3,181 83.3%
Consumer 156 0.6% 226 0.6%
------ ----- ------- -----
$4,318 100.0% $4,385 100.0%
====== ===== ======= =====
18
Deposits
--------
We solicit deposits from our primary market area using rates and services
designed to appeal to customers across a broad spectrum of ages and income
levels. We compete for deposit customers with community banks and credit
unions, as well as local branches of regional and national banks. Our total
deposits decreased from $424.0 million at December 31, 2006 to $409.9 million
at March 31, 2007, a decrease of $14.1 million or 3.3%. This decrease, common
to most community banks, occurred primarily in our lower cost deposit products.
The following table presents deposits by category at March 31, 2007 and
December 31, 2006.
Percentage
March 31, 2007 December 31, 2006 Increase/(Decrease)
-------------- ----------------- -------------------
(Dollars in thousands)
Demand deposits $ 71,397 $ 79,101 -9.74%
NOW 51,056 55,071 -7.29%
Regular and other savings 73,897 77,189 -4.26%
Money market deposits 25,755 24,021 7.22%
-------- -------- -----
Total non-certificate accounts 222,105 235,382 -5.64%
-------- -------- -----
Term certificates less than $100,000 120,817 121,730 -0.75%
Term certificates of $100,000 or more 66,999 66,894 0.16%
-------- -------- -----
Total certificate accounts 187,816 188,624 -0.43%
-------- -------- -----
Total deposits $409,921 $424,006 -3.32%
======== ======== =====
Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank totaled $134.7 million at March 31,
2007, as compared to $119.1 million at December 31, 2006, an increase of $15.6
million or 13.1%. Management's strategy is to utilize advances from the Federal
Home Loan Bank, in conjunction with investment portfolio maturities and
repayments, to fund loan growth and deposit runoff.
19
Comparison of Results of Operations for the Three Months Ended March 31,
------------------------------------------------------------------------
2007 and 2006
-------------
General
-------
Net income decreased from $907,000, or $0.22 per share on a diluted basis, for
the three months ended March 31, 2006 to $873,000, or $0.21 per share on a
diluted basis, for the three months ended March 31, 2007, a decrease of 3.8%.
Net interest and dividend income decreased by $384,000, or 8.4%, from $4.6
million to $4.2 million when comparing the three months ended March 31, 2006
and 2007. The provision for loan losses decreased by $39,000 for the three
months ended March 31, 2007 when compared to the same three-month period in
2006. Non-interest income increased by $23,000 or 3.3% from $703,000 to
$726,000 for the three months ended March 31, 2006 and 2007, respectively.
Non-interest expense decreased by $194,000, or 5.2%, from $3.8 million for the
three months ended March 31, 2006 to $3.6 million for the three months ended
March 31, 2007.
Interest Income
---------------
Our operating performance is dependent on net interest and dividend income, the
difference between interest and dividend income we earn on loans and
investments and interest expense we pay on deposits and borrowed funds. The
level of net interest income and dividend income is significantly impacted by
factors such as economic conditions, interest rates, asset/liability
management, and strategic planning.
Interest and dividend income increased by $744,000 or 9.5%, from $7.9 million
for the three months ended March 31, 2006 to $8.6 million for the three months
ended March 31, 2007. This increase is principally attributed to both growth in
the loan portfolio, as the average balance of loans increased by $13.5 million
or 3.24%, as well as a higher yield on the loan portfolio which increased from
6.26% for the three months ended March 31, 2006 to 6.52% for the three months
ended March 31, 2007. These increases were related principally to commercial
and total real estate loans reflecting current market conditions. Also,
interest and dividends on investments increased by $230,000 for the three
months ended March 31, 2007 compared to the three months ended March 31, 2006,
respectively. The increase in interest and dividends on investments reflected a
higher yield on the components of the investment portfolio combined with an
increase in the average balance of the portfolio for the three months ended
March 31, 2007 compared to the same period in 2006.
Interest Expense
----------------
Total interest expense increased by $1.1 million or 34.3%, from $3.3 million
for the three months ended March 31, 2006 to $4.4 million for the three months
ended March 31, 2007. The increase is primarily from the migration of deposits
to higher cost certificates of deposits when comparing average balances at
March 31, 2006 and 2007, combined with management's strategy to utilize FHLB
advances to supplement deposit runoff experienced in 2007. Market interest
rates and our own deposit rates have also increased. Interest on deposits
increased by $778,000 or 40.7% when comparing the three months ended March 31,
2007 and 2006. As a result of the rate increases, the weighted average cost of
deposits increased from 2.33% for the three months ended March 31, 2006 to
3.19% for the three months ended March 31, 2007.
Net Interest Margin
-------------------
As a result of the current interest rate environment and our rate increases on
deposit accounts, the net interest margin has compressed 41 basis points from
3.41% for the three months ended March 31, 2006 to 3.00% at March 31, 2007. The
compression in net interest margin was mostly due to balance sheet growth in an
environment with an inverted yield curve and the corresponding compressed
margins on loans and investments, combined with intense competition for
deposits.
20
The following table sets forth our average assets, liabilities, and stockholders' equity, interest earned and interest paid,
average rates earned and paid, net interest spread and the net interest margin for the three months ended March 31, 2007, and
2006. Average balances reported are daily averages.
Three Months Ended March 31,
-----------------------------------------------------------------------------------
2007 2006
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
--------------------------------------- ---------------------------------------
Assets: (Dollars in thousands)
-------
Interest earning assets (1)
Loans:
Commercial $ 53,145 $ 1,041 7.94% $ 42,701 $ 773 7.34%
Commercial real estate 225,089 3,705 6.68% 228,934 3,609 6.39%
Residential real estate 149,796 2,135 5.78% 142,962 2,015 5.72%
Consumer 2,626 41 6.33% 2,550 38 6.04%
-------- ------- -------- -------
Total loans 430,656 6,922 6.52% 417,147 6,435 6.26%
Federal funds sold 2,814 36 5.19% 1,072 11 4.16%
Taxable debt securities 118,902 1,431 4.88% 110,937 1,211 4.43%
Tax-exempt debt securities (2) 4,574 77 6.82% 6,422 106 6.69%
Marketable equity securities 5,306 35 2.68% 4,332 40 3.74%
FHLB stock 6,892 116 6.83% 6,304 82 5.28%
Other investments 650 10 6.24% 650 8 4.99%
-------- ------- -------- -------
Total interest earning assets 569,794 8,627 6.14% 546,864 7,893 5.85%
------- -------
Allowance for loan losses (4,382) (4,342)
Deferred loan fees (204) (349)
Cash and due from banks 16,494 13,295
Other assets 26,096 26,721
-------- --------
$607,798 582,189
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Interest bearing liabilities
Savings accounts $ 74,780 $ 264 1.43% $ 85,090 $ 257 1.22%
NOW accounts 54,005 178 1.34% 55,772 173 1.26%
Money market accounts 24,552 147 2.43% 28,100 109 1.57%
Time deposits 188,165 2,100 4.53% 163,980 1,372 3.39%
FHLB advances 128,345 1,519 4.80% 111,197 1,156 4.22%
Subordinated debt 10,310 211 8.30% 10,310 224 8.81%
----------------------- -----------------------
Total interest bearing liabilities 480,157 4,419 3.73% 454,449 3,291 2.94%
------- -------
Demand deposits 73,594 76,137
Other liabilities 12,374 2,350
-------- --------
Total liabilities 566,125 532,936
Total stockholders' equity 41,673 49,253
-------- --------
$607,798 $582,189
======== ========
Net interest income $ 4,208 $ 4,602
======= =======
Net interest spread 2.41% 2.91%
===== ====
Net interest margin 3.00% 3.41%
===== ====
(1) Average balance includes non-accruing loans. The effect of including such loans, although not material, is to reduce the
average rate earned on the Company's loans.
(2) On a fully taxable basis based on a tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $27,000 in 2007 and $37,000 in 2006.
21
The following table presents the changes in components of net interest income
for the three months ended March 31, 2007 and 2006, which are the result of
changes in interest rates and the changes that the result of changes in volume
of the underlying asset or liability. Changes that are attributable to the
changes in both rate and volume have been allocated equally to rate and volume.
Three Months Ended March 31,
2007 vs. 2006 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ 268 $ 197 $ 71
Commercial real estate 96 (62) 158
Residential real estate
120 97 23
Consumer loans 3 1 2
Federal funds sold 25 20 5
Taxable debt securities 220 91 129
Tax-exempt debt securities (29) (31) 2
Marketable equity securities (5) 8 (13)
FHLB Stock 34 9 25
Other investments 2 - 2
-----------------------------
Total interest income 734 330 404
-----------------------------
Savings accounts 7 (34) 41
NOW accounts 5 (6) 11
Money market accounts 38 (18) 56
Time deposits 728 236 492
FHLB advances 363 191 172
Subordinated debt (13) - (13)
-----------------------------
Total interest expense 1,128 369 759
-----------------------------
Net interest income $ (394) $ (39) $(355)
=============================
Provision for Loan Losses
-------------------------
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
After thorough review and analysis of the adequacy of the loan loss reserve,
including a review of numerous qualitative factors which comprised, among other
items, a low loan delinquency rate and a lower risk profile, management
concluded that no provision for possible loan losses was required for the three
months ended March 31, 2007, as compared to $39,000 for possible loan losses
for the three months ended March 31, 2006.
Non-Interest Income
-------------------
Non-interest income increased from $703,000 for the three months ended March
31, 2006 to $726,000 for the three months ended March 31, 2007, an increase of
$23,000 or 3.3%. Service charges on deposit accounts increased by $21,000 from
$307,000 for the three months ended March 31, 2006 to $328,000 for the three
22
months ended March 31, 2007. The increase was attributable to our "bounce"
protection program, and the associated deposit fees. Additionally, the gain on
the sale of available-for-sale securities grew from $3,000 for the three months
ended march 31, 2006 to $61,000 for the three months ended March 31, 2007.
Other income decreased from $286,000 for the three months ended March 31, 2006
to $231,000 for the three months ended March 31, 2007. This was the result of
decreased volumes of sales of non-deposit investment products combined with a
changed sales environment. The Company formerly recorded gross income on sales
of these investment products, whereas now that the function has been
outsourced, the Company now records income net of commissions and other
expenses.
Non-Interest Expense
--------------------
Non-interest expense decreased from $3.8 million for the three months ended
March 31, 2006 to $3.6 for the three months ended March 31, 2007, a decrease of
$194,000 or 5.2%. Salaries and employee benefits decreased by $114,000 or 5.4%,
from $2.1 million for the three months ended March 31, 2006 to $2.0 million for
the three months ended March 31, 2007. The decrease in salaries and benefits
was primarily attributable to reduced SFAS 123(R) expenses of $28,500
associated with the Company's stock-based employee compensation plan and staff
reductions on a comparable three month basis. Professional fees decreased
$137,000 as a result of the non-recurrence of various accounting and regulatory
matters that occurred during the three months ended March 31, 2006. Marketing
expense decreased $22,000 to $56,000 for the three months ended March 31, 2007
from $78,000 for the three months ended March 31, 2006. This decrease is
attributable to the timing of certain advertising and community sponsorship
initiatives in 2007. Data processing expenses increased $216,000 from $81,000
for the three months ended March 31, 2006 to $297,000 for the three months
ended March 31, 2007. The increase was primarily due to expenses associated
with outsourced core processing, item processing and statement rendering
functions that were done in-house during the first three months of 2006. Other
expenses decreased $136,000 or 23.7% from $575,000 for the three months ended
March 31, 2006 to $439,000 for the three months ended March 31, 2007, due to a
combination of factors including reduced Board committee meetings, lower
collection expenses, and decreased expenses for meetings, conferences and
training among others.
Provision for Income Taxes
--------------------------
Income before income taxes was $1.5 million for the three months ended March
31, 2006 as compared to $1.4 million for the three months ended March 31, 2007.
The provision for income taxes totaled $572,000 and $478,000 for the quarters
ended March 31, 2006 and 2007, respectively, representing effective tax rates
of 38.7% and 35.4%, respectively.
Liquidity
---------
Our principal sources of funds are customer deposits, amortization and payoff
of existing loan principal, and sales, amortization or maturities of various
investment securities. The Bank is a voluntary member of the the FHLB and as
such, may take advantage of the FHLB's borrowing programs to enhance liquidity
and leverage its favorable capital position. The Bank also may draw on lines of
credit at the FHLB or the Federal Reserve Board, and enter into repurchase or
reverse repurchase agreements with authorized brokers. These various sources of
liquidity are used to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling cost of funds.
Sales-oriented programs to attract new depositors and the cross-selling of
various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services, which will aid in retaining our base of
lower-costing deposits.
Maturities and sales of investment securities provide us with liquidity. Our
policy of purchasing shorter-term
23
debt securities reduces market risk in the bond portfolio while providing
significant cash flow. For the three months ended March 31, 2007, cash flow
from maturities of securities was $4.4 million, proceeds from sales of
securities totaled $0.5 million, compared to maturities of securities of $2.7
million, and proceeds from sales of securities of $0.7 million for the three
months ended March 31, 2006. Purchases of securities totaled $0.5 million for
the three months ended March 31, 2007 and March 31, 2006.
Amortization and pay-offs of the loan portfolio also provide us with
significant liquidity. Traditionally, amortization and pay-offs are reinvested
into loans. Excess liquidity is invested in federal funds sold and overnight
investments at the FHLB.
We have also used borrowed funds as a source of liquidity. At March 31, 2007,
the Bank's outstanding borrowings from the FHLB were $134.7 million. The Bank
has the capacity to borrow an additional $535,000 from the FHLB as of March 31,
2007. The Bank has the ability to increase this capacity with additional asset
pledges.
Loan originations for the three months ended March 31, 2007 totaled $36.0
million. Commitments to originate loans at March 31, 2007 were $11.8 million,
excluding unadvanced construction funds totaling $16.4 million, unadvanced
commercial lines of credit totaling $24.7 million and unadvanced home equity
lines totaling $17.4 million. Management believes that adequate liquidity is
available to fund loan commitments utilizing deposits, loan amortization,
maturities of securities, or borrowings.
The decline in liquidity is due to the utilization of advances from the FHLB in
conjunction with the investment portfolio maturities, calls and paydowns of
certain state and municipal obligations and mortgage-backed securities that
were used to provide liquidity for the current loan growth and deposit runoff.
Capital
-------
At March 31, 2007, our total shareholders' equity was $50.9 million, a decrease
of $383,000 from $51.2 million at December 31, 2006. Additions consisted
primarily of net income of $873,000 for the quarter ended March 31, 2007. There
were 7,549 shares of common stock issued at a value of $134,000, pursuant to
our Dividend Reinvestment Program, or for optional cash contributions, and
stock options were exercised, resulting in the issuance of 4,000 shares at a
value of $56,000, including a tax benefit of $5,000. Other comprehensive income
was $212,000. Reductions in capital related to dividends declared of $378,000,
the repurchase of 62,005 shares of common stock under our stock repurchase
program at a cost of $1.1 million, and the purchase of 12,723 shares of stock
at a cost of $225,000 to be used to grant potential stock awards.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of 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 required levels, the Company's and the Bank's
capital ratios meet the criteria of the well-capitalized category established
by the federal banking agencies as of March 31, 2007 and at December 31, 2006.
The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets
ratio for the Company are 9.77% and 13.29%, respectively, for the three months
ended March 31, 2007. The Company's Tier I Capital leverage ratio and Tier I
Capital to risk weighted assets ratio for the year ended December 31, 2006 were
9.90% and 14.18%, respectively. The Tier I Capital leverage ratio and Tier I
Capital to risk weighted assets ratio for the Bank are 8.12% and 10.97%,
respectively, for the three months ended March 31, 2007. The Bank's Tier I
Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the
year ended December 31, 2006 were 8.78% and 12.60%, respectively.
24
Off-Balance Sheet Arrangements
------------------------------
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors with the exception of the unused lines
of credit mentioned as part of the Analysis of the Allowance for Loan Losses.
25
ITEM 3
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider interest rate risk to be a significant market risk as it could
potentially have an effect on our financial condition and results of operation.
The definition of interest rate risk is the exposure of our earnings to adverse
movements in interest rates, arising from the differences in the timing of the
repricing of assets and liabilities; the differences in the various pricing
indices inherent in our assets and liabilities; and the effects of overt and
embedded options in our assets and liabilities. Our Asset/Liability Committee,
comprised of executive management, is responsible for managing and monitoring
interest rate risk, and reviewing with the Board of Directors, at least
quarterly, the interest rate risk positions, the impact changes in interest
rates would have on net interest income, and the maintenance of interest rate
risk exposure within approved guidelines.
The potentially volatile nature of market interest rates requires us to manage
interest rate risk on an active and dynamic basis. Our objective is to reduce
and control the volatility of net interest income to within tolerance levels
established by the Board of Directors, by managing the relationship of
interest-earning assets and interest-bearing liabilities. In order to manage
this relationship, the Asset/Liability Committee utilizes an income simulation
model to measure the net interest income at risk under differing interest rate
scenarios. Additionally, the Committee uses an Economic Value of Equity ("EVE")
analysis to measure the effects of changing interest rates on the market values
of rate-sensitive assets and liabilities, taken as a whole. The Board of
Directors and management believe that static measures of timing differences,
such as "gap analysis", do not accurately assess the levels of interest rate
risk inherent in our balance sheet. Gap analysis does not reflect the effects
of overt and embedded options on net interest income, given a shift in interest
rates; nor does it take into account basis risk, the risk arising from using
various different indices on which to base pricing decisions.
The income simulation model currently utilizes a 200 basis point increase in
interest rates and a 200 basis point decrease in rates. The interest rate
movements used assume an instant and parallel change in interest rates and no
implementation of any strategic plans are made in response to the change in
rates. Prepayment speeds for loans are based on median dealer forecasts for
each interest rate scenario.
The Board of Directors has established a risk limit of a 5.00% change in net
interest income for each 100 basis point shift in market interest rates. The
limit established by the Board provides an internal tolerance level to control
interest rate risk. We were slightly outside our policy-mandated risk limit for
net interest income at risk due to a management decision, with the Board of
Directors concurrence, not to extend long-term funding in light of what we
believe to be temporarily overpriced short and long term funding costs.
The following table reflects our estimated exposure as a percentage of net
interest income and the change in basis points for the next twelve months,
assuming an immediate change in interest rates set forth below:
Rate Change Estimated Exposure as a Percentage Change
(Basis Points) of Net Interest Income (Basis Points)
------------------------------------------------------------------------
+200 -15.15% (27)
-200 9.35% 17
26
Additionally we use the model to estimate the effects of changes in interest
rates on our EVE. EVE represents our theoretical market value, given the rate
shocks applied in the model. The Board of Directors has established a risk
limit for EVE which provides that the EVE will not fall below 6.00%, the FDIC's
minimum capital level to be classified as "well capitalized". We are within our
risk limit for EVE.
The following table presents the changes in EVE given rate shocks.
Rate Change Economic Value Change from
(Basis Points) of Equity Flat Rates
-------------------------------------------------
Flat 13.04% N/A
+200 11.43% -1.61%
-200 12.14% -0.89%
27
ITEM 4
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the
end of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer of
the effectiveness of the Company's disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of March 31, 2007 to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms and (ii)
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding disclosure. In connection with the rules
regarding disclosure and control procedures, we intend to continue to review
and document our disclosure controls and procedures, including our internal
controls and procedures for financial reporting, and may from time to time make
changes aimed at enhancing their effectiveness and to ensure that our systems
evolve with our business.
(b) Changes in Internal Controls over Financial Reporting
There has been no change in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial reporting.
28
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings that would have a material
impact on our consolidated financial condition and results of operations.
ITEM 1A
RISK FACTORS
There have been no material changes to the risk factors that are included in
our Annual Report on Form 10-K for the year ended December 31, 2006 that could
affect our business, results of operations or financial condition.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides certain information with respect to our purchase of our
common stock during the quarter ended March 31, 2007.
---------------------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum Number (or
(a) Total Shares Purchased as Approximate Dollar Value) of
Number of (b) Average Part of Publicly Shares that may yet be
Shares Price Paid Announced Plans or Purchased under the Plans or
Period Purchased (2) per Share Programs (1) Programs (1)
---------------------------------------------------------------------------------------------------------------------------
Jan. 1, 2007 through Jan. 31, 2007 13,056 $17.53 11,333 167,260
---------------------------------------------------------------------------------------------------------------------------
Feb. 1, 2007 through Feb. 28, 2007 21,014 $17.58 15,992 151,268
---------------------------------------------------------------------------------------------------------------------------
March 1, 2007 through March 31, 2007 40,658 $17.78 34,680 116,588
---------------------------------------------------------------------------------------------------------------------------
Total 74,728 $17.69 62,005 N/A
---------------------------------------------------------------------------------------------------------------------------
(1) On July 18, 2006, the Company announced that its Board of Directors approved a repurchase program pursuant to which
the Company may repurchase up to 208,036 shares of its common stock.
(2) During the first quarter of 2007, 12,723 shares were repurchased in open market transactions to fund possible future
restricted stock grants. These shares were purchased by an independent trustee and held in trust.
29
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the first quarter of 2007, no matters were submitted to a vote of our
stockholders.
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP.
-----------------------------------
(Registrant)
May 15, 2007 /s/ Mary Lynn D. Lenz
------------------------------ -----------------------------------
(Date) Mary Lynn D. Lenz
President
Chief Executive Officer
(Principal Executive Officer)
May 15, 2007 /s/ Deborah A. McLaughlin
------------------------------ -----------------------------------
(Date) Deborah A. McLaughlin
Executive Vice President
Chief Financial Officer &
Chief Operations Officer
(Principal Financial and Accounting
Officer)
31
EXHIBIT INDEX
Exhibit No. Description Item
----------- ----------- ----
3.1 Amended and Restated Articles of Incorporation of Slade's Ferry Bancorp. (1)
3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (2)
3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation (3)
of Slade's Ferry Bank
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4)
10.2 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (5)
and Manuel J. Tavares
10.3 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (6)
and Mary Lynn D. Lenz
10.4 Employment Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (7)
10.5 Employment Agreement between Slade's Ferry Bancorp. and Deborah A. McLaughlin (8)
10.6 Employment Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (9)
10.7 Form Change of Control Agreement (10)
10.8 Severance Pay Plan (11)
10.9 Slade's Ferry Bancorp. 2004 Equity Incentive Plan (12)
10.10 Form of Amendment to Directors' Supplemental Retirement Program for (13)
Non-Employee Directors
10.11 Form of Amendment to Directors' Supplemental Retirement Program for (13)
Francis A. Macomber and Melvyn A. Holland
11.1 Statement Regarding Computation of Per Share Earnings
14.1 Code of Ethics (14)
21.1 List of Subsidiaries (15)
23.1 Consent of Wolf & Company, P.C.
23.2 Consent of Shatswell & Company, P.C.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
--------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the
Commission on April 14, 1997.
(2) Incorporated by reference to the Registrant's Form 10-Q filed with the Commission on May 12, 2006.
32
(3) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 21,
2004.
(4) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June 30, 1999.
(5) Incorporated by reference to the Registrant's Form 10-K/ASB for the fiscal year ended December 31,
1996.
(6) Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter ended
March 31, 2003.
(7) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended
June 30, 2004.
(8) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(9) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(10) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13,
2005.
(11) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14,
2005.
(12) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004.
(13) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 22,
2006.
(14) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31,
2003.
(15) Incorporated by reference to Part I, Item 1 - "General".
33