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 September 30, 2007
----------------------
Commission file number 000-23904
-------------
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) 4,009,353 outstanding
shares as of October 31, 2007.
----------------------------------------------------
1
TABLE OF CONTENTS
Part I
ITEM 1 - Financial Statements (Unaudited) 3
* Consolidated Balance Sheets - September 30, 2007
and December 31, 2006
* Consolidated Statements of Income - Three Months Ended
September 30, 2007 and 2006
* Consolidated Statements of Income - Nine months ended
September 30, 2007 and 2006
* Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 2007
* Consolidated Statements of Cash Flows - Nine months ended
September 30, 2007 and 2006
* Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 31
ITEM 4 - Controls and Procedures 33
Part II
ITEM 1 - Legal Proceedings 34
ITEM 1A - Risk Factors 34
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 34
ITEM 3 - Defaults Upon Senior Securities 35
ITEM 4 - Submission of Matters to a Vote of Security Holders 35
ITEM 5 - Other Information 35
ITEM 6 - Exhibits 35
2
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2007 December 31, 2006
------------------ -----------------
Assets (In thousands)
------
Cash and due from banks $ 11,390 $ 19,448
Interest-bearing deposits with other banks 550 1,007
Federal funds sold 9,535 1,900
-------- --------
Cash and cash equivalents 21,475 22,355
Interest-bearing certificates of deposit with other banks 100 100
Securities available for sale 86,422 105,603
Securities held to maturity (fair value approximates $20,251
as of September 30, 2007 and $24,219 as of December 31, 2006) 20,673 24,623
Federal Home Loan Bank stock, at cost 7,644 6,856
Loans, net of allowance for loan losses of $4,467 at
September 30, 2007 and $4,385 at December 31, 2006 445,099 422,370
Premises and equipment, net 7,522 5,587
Goodwill 2,173 2,173
Accrued interest receivable 2,466 2,311
Bank-owned life insurance 12,548 12,317
Deferred tax asset, net 1,949 2,039
Other assets 1,141 1,426
-------- --------
$609,212 $607,760
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 75,231 $ 79,101
Interest-bearing 324,555 344,905
-------- --------
Total deposits 399,786 424,006
Short-term borrowings 5,000 -
Long-term borrowings 139,279 119,058
Subordinated debentures 10,310 10,310
Accrued expenses and other liabilities 3,394 3,141
-------- --------
Total liabilities 557,769 556,515
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 5,000,000
shares; issued and outstanding 4,009,353 shares at
September 30, 2007 and 4,102,242 shares at December 31, 2006 40 41
Additional paid-in capital 30,016 31,444
Retained earnings 22,489 21,111
Accumulated other comprehensive loss (158) (464)
Unearned compensation (944) (887)
-------- --------
Total stockholders' equity 51,443 51,245
-------- --------
$609,212 $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 September 30,
2007 2006
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 7,246 $ 7,077
Interest and dividends on securities:
Taxable 1,523 1,501
Tax-exempt 45 61
Interest on federal funds sold 161 44
Other interest 19 10
---------- ----------
Total interest and dividend income 8,994 8,693
---------- ----------
Interest expense:
Interest on deposits 2,639 2,616
Interest on Federal Home Loan Bank advances 1,693 1,196
Interest on subordinated debentures 217 217
---------- ----------
Total interest expense 4,549 4,029
---------- ----------
Net interest and dividend income 4,445 4,664
Provision for loan losses 170 -
---------- ----------
Net interest income, after provision for loan losses 4,275 4,664
---------- ----------
Noninterest income:
Service charges on deposit accounts 349 373
Gain on sales and calls of available-for-sale
securities, net 377 19
Increase in cash surrender value of life
insurance policies 126 107
Other income 245 233
---------- ----------
Total noninterest income 1,097 732
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,411 2,044
Occupancy and equipment expense 499 478
Professional fees 311 378
Marketing expense 106 86
Data processing 245 221
Other expense 551 531
---------- ----------
Total noninterest expense 4,123 3,738
---------- ----------
Income before income taxes 1,249 1,658
Provision for income taxes 417 615
---------- ----------
Net income $ 832 $ 1,043
========== ==========
Earnings per share:
Basic $ 0.21 $ 0.25
========== ==========
Diluted $ 0.21 $ 0.25
========== ==========
Average common shares outstanding:
Basic 4,011,313 4,162,753
========== ==========
Diluted 4,024,550 4,174,460
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended September 30,
2007 2006
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 21,320 $ 20,197
Interest and dividends on securities:
Taxable 4,653 4,051
Tax-exempt 140 196
Interest on federal funds sold 376 109
Other interest 44 27
---------- ----------
Total interest and dividend income 26,533 24,580
---------- ----------
Interest expense:
Interest on deposits 8,030 6,783
Interest on Federal Home Loan Bank advances 4,862 3,561
Interest on subordinated debentures 642 612
---------- ----------
Total interest expense 13,534 10,956
---------- ----------
Net interest and dividend income 12,999 13,624
Provision for loan losses 170 39
---------- ----------
Net interest income, after provision for loan losses 12,829 13,585
---------- ----------
Noninterest income:
Service charges on deposit accounts 1,030 1,032
Gain (loss) on sales and calls of
available-for-sale securities, net 516 (150)
Increase in cash surrender value of life
insurance policies 346 320
Other income 747 779
---------- ----------
Total noninterest income 2,639 1,981
---------- ----------
Noninterest expense:
Salaries and employee benefits 6,424 6,442
Occupancy and equipment expense 1,497 1,461
Professional fees 903 1,178
Marketing expense 434 273
Data processing 818 420
Other expense 1,593 1,666
---------- ----------
Total noninterest expense 11,669 11,440
---------- ----------
Income before income taxes 3,799 4,126
Provision for income taxes 1,302 1,550
---------- ----------
Net income $ 2,497 $ 2,576
========== ==========
Earnings per share:
Basic $ 0.62 $ 0.62
========== ==========
Diluted $ 0.62 $ 0.62
========== ==========
Average common shares outstanding:
Basic 4,045,921 4,079,396
========== ==========
Diluted 4,058,893 4,094,752
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(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 at December 31, 2006 4,102,242 $41 $31,444 $21,111 $(464) $(887) $51,245
Comprehensive income:
Net income - - - 2,497 - - 2,497
Other comprehensive loss - - - - 306 - 306
-------
Comprehensive income 2,803
-------
Issuance of common stock 15,665 - 275 - - - 275
Stock options exercised 18,000 - 254 - - - 254
Excess tax benefit from stock
based comepensation - - 19 - - - 19
Stock-based compensation - - 115 - - - 115
Purchase of treasury stock (121,831) (1) (2,069) - - (2,070)
Purchase of stock for award plan (12,723) - - - - (225) (225)
Restricted shares awarded
(8,000 shares vested) 8,000 - (22) - - 168 146
Dividends declared ($.27 per share) - - - (1,119) - - (1,119)
-----------------------------------------------------------------------------------------
Balance at September 30, 2007 4,009,353 $40 $30,016 $22,489 $(158) $(944) $51,443
=========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2007 2006
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 2,497 $ 2,576
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization, net of accretion of securities (5) 74
(Gain) loss on sales and calls of available-for-sale
securities, net (516) 150
Amoritization of net deferred loan fees (40) (45)
Provision for loan losses 170 39
Deferred tax benefit (38) (152)
Depreciation and amortization 636 653
(Gain) loss on sale of assets (3) 5
Increase in cash surrender value of life insurance (346) (320)
Stock-based compensation 261 185
Excess tax benefits from stock-based compensation (19) (82)
Net change in:
Other assets 285 233
Accrued interest receivable (155) (161)
Other liabilities 186 54
--------- --------
Net cash provided by operating activities 2,913 3,209
--------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (8,453) (35,714)
Sales 11,309 15,382
Maturities, calls and pay-downs 17,361 7,790
Activity in held-to-maturity securities:
Maturities, calls and pay-downs 3,888 3,515
Purchases of Federal Home Loan Bank stock (788) (552)
Loan originations, net of principal payments (22,771) (16,812)
Recoveries of loans previously charged off, net (21) (2)
Capital expenditures (2,591) (475)
Proceeds from sale of property and equipment 23 24
Proceeds from redemption of Bank Owned Life Insurance 115 -
--------- --------
Net cash used in investing activities (1,928) (26,844)
--------- --------
The accompanying notes are an integral part of these consolidated financial statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
2007 2006
---- ----
(In thousands)
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits $ (3,870) $ (4,067)
Net (decrease) increase in interest-bearing deposits (20,350) 10,892
Short-term advances from Federal Home Loan Bank 285,315 33,000
Long-term advances from Federal Home Loan Bank 45,000 40,000
Payments on Federal Home Loan Bank short-term advances (280,315) (40,000)
Payments on Federal Home Loan Bank long-term advances (24,779) (19,927)
Proceeds from issuance of common stock 275 448
Stock options exercised 254 305
Excess tax benefits from stock-based compensation 19 82
Purchase of treasury stock (2,070) (570)
Unearned compensation (225) (475)
Dividends paid on common stock (1,119) (1,128)
--------- --------
Net cash provided by financing activities (1,865) 18,560
--------- --------
Net decrease in cash and cash equivalents (880) (5,075)
Cash and cash equivalents at beginning of period 22,355 20,018
--------- --------
Cash and cash equivalents at end of period $ 21,475 $ 14,943
========= ========
Supplemental disclosures:
Interest paid $ 13,531 $ 11,039
Income taxes paid $ 1,564 $ 737
The accompanying notes are an integral part of these consolidated financial statements.
8
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2007
Note A - Recent Developments
----------------------------
On October 11, 2007, Independent Bank Corp., parent of Rockland Trust Company,
and the Company jointly announced the signing of a definitive merger agreement
by which Independent Bank Corp. will acquire the Company and the Bank will
merge into Rockland Trust. The acquisition is expected to close during the
first quarter of 2008, pending regulatory and shareholder approval.
Note B - 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 nine months
ended September 30, 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 C - 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 D.
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 D - 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. The adoption of FIN 48 had no impact on
the Company's consolidated financial statements.
9
Note E - Pension Plan
---------------------
The components of net periodic pension expense cost are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2007 2006 2007 2006
---- ---- ---- ----
(In thousands)
Interest cost $ 11 $ 15 $ 34 $ 48
Service cost and expenses 7 - 20 -
Expected return on plan assets (19) (26) (58) (84)
Settlements - 108 38 241
Recognized net actuarial loss 5 6 13 21
---- ---- ----- ----
$ 4 $103 $ 47 $226
==== ==== ==== ====
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 F - 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. The 2004 Plan also provides for the granting of
Unrestricted Stock Awards, Restricted Stock Awards, and Deferred Stock Awards.
On July 17, 2007, the Compensation Committee of the Company's Board of
Directors (the "Committee") approved the granting of (1) 24,000 Incentive Stock
Options to purchase shares of Company common stock, of which 8,000 vested
immediately, 8,000 vest on May 31, 2008 and 8,000 vest on May 31, 2009, and (2)
32,000 Restricted Stock Awards, of which 6,500 vested on September 1, 2007,
6,500 vest on May 31, 2008, 12,500 vest on May 31, 2009 and 6,500 vest on May
31, 2010. On August 9, 2007, the Committee granted 29,000 Restricted Stock
Awards, of which 7,250 vest each August 31, 2008, 2009, 2010 and 2011.
Compensation expense related to these awards for the three months ended
September 30, 2007 was $170,000. An additional 1,500 shares vested on September
4, 2007 due to the passing of one director. Total compensation expense for
share awards for the nine months ending September 30, 2007 was $261,000.
10
A summary of options under the 2004 Plan as of September 30, 2007, and changes
during the nine months then ended, (shares in thousands) is presented below:
Weighted
Average
Remaining
Contractual Aggregate
Weighted Average Term Intrinsic
Shares Exercise Price (in years) Value
------ ---------------- ----------- ---------
Outstanding at January 1, 2007 231 $18.18
Granted 34 16.34
Exercised (18) 14.15
Forfeited - -
Expired (19) 18.27
--- ------ --- -----
Outstanding at September 30, 2007 228 18.21 4.4 $ -
=== ====== === =====
Exercisable at September 30, 2007 189 $18.37 3.9 $ -
--- ------ --- -----
A summary of restricted shares under the 2004 Plan as of September 30, 2007,
and changes during the nine months then ended, (shares in thousands) is
presented below:
Weighted Average
Grant Date Fair
Shares Value
------ ----------------
Nonvested at January 1, 2007 - -
Granted 61 15.77
Vested (8) 16.02
Forfeited - -
-- -----
Nonvested at September 30, 2007 53 15.74
== =====
11
Note G - 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2007 2006 2007 2006
---- ---- ---- ----
(In thousands)
Unrealized gains (losses) on securities available for sale $1,125 $1,244 $ 969 $ 603
Reclassification adjustment for losses (gains) realized
in income (377) (19) (516) 150
------ ------ ----- -----
Net unrealized gains 748 1,225 453 753
Tax effect (292) (460) (163) (274)
------ ------ ----- -----
Net unrealized gains after tax effect 456 765 290 479
Change in unrecognized net actuarial loss -
defined benefit plan 26 - 26 -
Tax Effect (10) - (10) -
------ ------ ----- -----
Net change in unrecognized actuarial loss -
defined benefit plan 16 - 16 -
------ ------ ----- -----
Net-of-tax amount $ 472 $ 765 $ 306 $ 479
====== ====== ===== =====
The components of accumulated other comprehensive loss, included in
stockholders' equity, are as follows:
12
September 30, December 31,
2007 2006
------------- ------------
(In thousands)
Net unrealized gains (losses) on securities
available for sale $ 73 $(380)
Tax effect (24) 139
----- -----
Net-of-tax amount 49 (241)
----- -----
Unrecognized net actuarial loss pertaining
to defined benefit plan (351) (377)
Tax effect 144 154
----- -----
Net-of-tax amount (207) (223)
----- -----
$(158) $(464)
===== =====
13
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 $609.2
million, consolidated net loans and leases of $445.1 million, consolidated
deposits of $399.8 million and consolidated shareholders' equity of $51.4
million as of September 30, 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 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;
(5) changes in assumptions used in making such forward-looking
statements; and
(6) the impact of the proposed acquisition of Slade's Ferry Bancorp by
Independent Bank Corp.
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.
14
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 September 30, 2007 and December 31, 2006
-----------------------------------------------------------------------------
General
-------
Total assets increased from $607.8 million at December 31, 2006 to $609.2
million at September 30, 2007. Total net loans increased by $22.7 million, from
$422.4 million to $445.1 million. Deposits decreased from $424.0 million at
December 31, 2006 to $399.8 million at September 30, 2007.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents decreased by $880,000, from $22.4 million at December
31, 2006 to $21.5 million at September 30, 2007. A decrease in cash deposits of
$8.1 million was partially offset by an increase in the balance of federal
funds sold of $7.6 million. Management is investing cash not used for loan
growth in overnight investments to maximize investment returns.
15
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
$114.7 million at September 30, 2007, a decrease of $22.3 million, or 16.3%. The
decrease is the result of the maturity, calls, paydowns and sales of certain
obligations of government-sponsored enterprises, state and municipal obligations
and mortgage-backed securities. Those funds were used to provide liquidity for
current loan growth. The current investment strategy is to reduce the investment
portfolio through normal paydowns and maturities and selected investment sales
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 September 30, 2007, the
portfolio duration was 3.2 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 $20.7 million at September
30, 2007. Management has designated the 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 September 30, 2007 and December 31, 2006.
September 30, 2007 December 31, 2006
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- --------------------
(In thousands)
State and municipal obligations $ 3,983 $ 4,040 $ 5,001 $ 5,069
Mortgage-backed securities 16,690 16,211 19,622 19,150
------- ------- ------- -------
Total securities held to maturity $20,673 $20,251 $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. Management sold selected securities from the available
for sale portfolio to fund loan growth and purchase new marketable equities
during 2007.
16
The following table shows the amortized cost basis and fair value of securities
available for sale at September 30, 2007 and December 31, 2006.
September 30, 2007 December 31, 2006
------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------- ---------------------
(In thousands)
Debt Securities:
Government-sponsored enterprises $24,480 $24,398 $ 34,462 $ 33,957
Corporate 9,151 8,996 9,221 9,080
Mortgage-backed 48,178 48,270 57,946 57,980
------- ------- -------- --------
Total debt securities 81,809 81,664 101,629 101,017
Marketable equity securities 3,322 3,568 3,139 3,389
Mutual funds 1,215 1,190 1,215 1,197
------- ------- -------- --------
Total securities available for sale $86,346 $86,422 $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 73.1% of total assets at September 30, 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 $217.7 million and
comprised 48.4% of total gross loans at September 30, 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.
17
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 chosen not to sell these loans, but to maintain them
in portfolio, consistent with our income and interest rate risk management
targets.
Residential real estate loans totaled $134.1 million and comprised of 29.8% of
total gross loans at September 30, 2007. At December 31, 2006, residential real
estate loans totaled $132.4 million, or 31.0% of total gross loans.
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 $49.8 million and comprised 11.1% of total gross loans
at September 30, 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. In addition, the Company has commercial construction loans that
consist primarily of owner occupied commercial real estate, new and
rehabilitation multi-family residential, assisted living and nursing home
facilities.
Construction loans totaled $31.9 million and comprised 7.1% of total gross
loans at September 30, 2007. At December 31, 2006, the construction loan
portfolio totaled $21.0 million or 4.9% of total gross loans. As of December
31, 2006, residential construction loans were $3.9 million, while commercial
construction loans were $17.1 million. As of September 30, 2007, residential
construction loans were $3.4 million, while commercial construction loans were
$28.5 million.
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 $13.7 million and comprised 4.3% of total
gross loans at September 30, 2007. At December 31, 2006, the home equity line
of credit portfolio totaled $13.9 million, or 3.3% of total gross loans.
18
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 $2.5 million at September 30, 2007 and $2.8 million at
December 31, 2006 or 0.6% of total gross loans at both dates.
The following table summarizes our loan portfolio by category at September 30,
2007 and December 31, 2006.
Percentage
September 30, 2007 December 31, 2006 Increase/(Decrease)
------------------ ----------------- -------------------
(Dollars in thousands)
Real estate mortgage loans:
Multi-Family and Commercial $217,724 $209,172 4.09%
Residential 134,098 132,381 1.30%
Construction 31,907 20,988 52.02%
Home equity lines of credit 13,674 13,917 -1.75%
Commercial 49,809 47,736 4.34%
Consumer 2,519 2,766 -8.93%
-------- -------- ------
Total loans 449,731 426,960 5.33%
Less: Allowance for loan losses (4,467) (4,385) 1.87%
Net deferred loan fees (165) (205) -19.51%
-------- -------- ------
Loans, net $445,099 $422,370 5.38%
======== ======== ======
The increases in the loan portfolio are the result of increased demand across a
number of loan categories, primarily construction loans.
The following table presents information with respect to non-performing loans
as of the dates indicated.
September 30, 2007 December 31, 2006
------------------ -----------------
(Dollars in thousands)
Non-accrual loans $1,887 $600
Loans 90 days or more past due and still accruing 152 -
------ ----
Total non-performing loans $2,039 $600
====== ====
Percentage of non-accrual loans to total gross loans 0.42% 0.14%
Percentage of allowance for loan losses to non-accrual loans 236.7% 730.8%
19
The $1.9 million in non-accrual loans as of September 30, 2007 consists of $1.6
million of commercial real estate loans, $357,000 of residential real estate
loans, and $67,000 of consumer loans. The increase in non-accrual loans is due
primarily to one commercial loan with an outstanding balance of $1.0 million,
which management reviewed and determined not to be impaired as of September 30,
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 the 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
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 at the lower of cost or net realizable value.
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.
All watch list loans are individually evaluated for impairment. At September 30,
2007, there were $169,000 of loans which we have determined to be impaired, with
a related allowance for loan losses for the full balance outstanding. These
loans are 90 days past due, and are, therefore, not accruing at September 30,
2007.
20
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the allowance for loan losses for
the periods indicated.
Nine Months Ended September 30,
-------------------------------
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 (25) -
Home equity lines of credit - -
Commercial - -
Consumer - (6)
------ ------
(25) (6)
------ ------
Recoveries:
Real estate mortgage loans:
Multi-family and commercial 3 -
Residential 1 -
Home equity lines of credit - -
Commercial - -
Consumer - -
------ ------
4 -
------ ------
Net loan charge-offs (21) (6)
Provision for loan losses 170 39
Transfer of off-balance sheet credit exposures
to other liabilities (67) -
------ ------
Balance at end of period $4,467 $4,366
====== ======
Allowance for loan losses as a percent of loans 0.99% 1.02%
====== ======
Ratio of net loan charge-offs to average
loans outstanding (0.01)% 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.
21
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 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 Company maintains a reserve for potential credit risk related to off
balance sheet lines of credit. The Company monitors changes to outstanding
lines and adjusts the reserve when appropriate. Prior to December 31, 2006, the
reserve was included as a component of the allowance. Effective January 1,
2007, the amount is included as "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 recorded a provision for loan
losses of $170,000 for the three months ended September 30, 2007, compared to
no provision for loan losses for the three months ended September 30, 2006. The
provision for the nine months ended September 30, 2007 was also $170,000,
compared to $39,000 for the nine months ended September 30, 2006. In 2007, a
review of the allowance for loan losses resulted in a reallocation of the
allowance based on qualitative factor analysis, the introduction of commercial
loan risk ratings in the analysis, and the transfer of the off-balance-sheet
component of the allowance to other liabilities. This allowance reallocation
contributed to a decrease in the allowance for loan losses as a percentage of
total loans outstanding which declined from 1.03% at December 31, 2006 to .99%
at September 30, 2007.
The table below shows an allocation of the allowance for loan losses at the
dates indicated.
September 30, 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 $ 886 11.1% $ 718 11.2%
Real estate construction 329 7.1% 260 4.9%
Real estate mortgage 3,088 81.2% 3,181 83.3%
Consumer 164 0.6% 226 0.6%
------ ----- ------ -----
$4,467 100.0% $4,385 100.0%
====== ===== ====== =====
22
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 $399.8 million
at September 30, 2007, a decrease of $24.2 million. Customers have shown a
preference for higher rate money market products compared to lower rate savings
and certificates of deposits. As a result, we had obtained brokered
certificates of deposit during prior quarters to offset a decline in our lower
cost deposit products. All brokered certificates of deposit totaling $23.3
million matured during the quarter ending September 30, 2007.
The following table presents deposits by category at September 30, 2007 and
December 31, 2006.
Percentage
September 30, 2007 December 31, 2006 Increase/(Decrease)
------------------ ----------------- -------------------
(Dollars in thousands)
Demand deposits $ 75,231 $ 79,101 -4.89%
NOW 58,825 55,071 6.82%
Regular and other savings 62,787 77,189 -18.66%
Money market deposits 43,479 24,021 81.00%
-------- -------- ------
Total non-certificate accounts 240,322 235,382 2.10%
-------- -------- ------
Term certificates of $100,000 or greater 63,429 66,894 -5.18%
Term certificates less than $100,000 96,035 121,730 -21.11%
-------- -------- ------
Total certificate accounts 159,464 188,624 -15.46%
-------- -------- ------
Total deposits $399,786 $424,006 -5.71%
======== ======== ======
Long-Term Borrowings
--------------------
Long-term borrowings consist of advances from the Federal Home Loan Bank which
totaled $139.2 million at September 30, 2007, as compared to $119.1 million at
December 31, 2006, an increase of $20.2 million or 17%. Management is utilizing
advances from the Federal Home Loan Bank in conjunction with investment
portfolio paydowns, maturities and sales to fund loan growth and deposit runoff.
Short-Term Borrowings
---------------------
Short term borrowings consist of overnight advances from the Federal Home Loan
Bank of Boston. The balance of these advances was $5.0 million as of September
30, 2007.
23
Comparison of Results of Operations for the Three Months Ended September 30,
----------------------------------------------------------------------------
2007 and 2006
-------------
General
-------
Net income decreased from $1 million or $0.25 per share on a diluted basis, for
the three months ended September 30, 2006 to $832,000, or $0.21 per share on a
diluted basis, for the three months ended September 30, 2007, a decrease of
20.6%. Net interest and dividend income decreased by $219,000, or 4.7%, to $4.4
million when comparing the three months ended September 30, 2006 and 2007. A
provision for loan losses of $170,000 was recorded for the three months ended
September 30, 2007, while no provision for loan loss was recorded for the three
months ending September 30, 2006. Non-interest income increased by $360,000 or
48.8% from $737,000 to $1.1 million for the three months ended September 30,
2006 and 2007, respectively. Non-interest expense increased by $385,000, or
10.3%, to $4.1 million for the three months ended September 30, 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 $301,000 or 3.5%, from $8.7 million
for the three months ended September 30, 2006 to $9.0 million for the three
months ended September 30, 2007. This increase is partially attributed to
growth in the loan portfolio, as the average balance of loans increased by $5.8
million or 1.3%, as well as a higher yield on the loan portfolio which
increased from 6.50% for the three months ended September 30, 2006 to 6.57% for
the three months ended September 30, 2007. Also, the increase in Federal Funds
sold reflected an increase in the average balance of the outstanding federal
funds sold for the three months ended September 30, 2007 compared to the same
period in 2006, as a result of maintaining higher balances in liquid assets to
fund loans in the pipeline.
Interest Expense
----------------
Total interest expense increased by $520,000 or 12.9%, from $4.0 million for
the three months ended September 30, 2006 to $4.5 million for the three months
ended September 30, 2007. The increase is primarily due to the migration of
deposits to higher cost money market accounts when comparing average balances
at September 30, 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 slightly, by $23,000, to $2.6 million when comparing the three months
ended September 30, 2007 and 2006. As a result of the deposit rate increases,
the weighted average cost of deposits increased from 2.98% for the three months
ended September 30, 2006 to 3.14% for the three months ended September 30, 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 24 basis points from
3.32% for the three months ended September 30, 2006 to 3.08 % for the three
months ended September 30, 2007. The compression in net interest margin was
mostly due to balance sheet growth in an environment with a difficult yield
curve and the corresponding compressed margins on loans and investments,
combined with intense competition for deposits and increased wholesale funding
costs.
24
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 September 30, 2007, and 2006. Average balances reported are daily
averages.
Three Months Ended September 30,
-----------------------------------------------------------------------------------
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 $ 48,657 $ 951 7.75% $ 50,928 $ 984 7.67%
Commercial real estate 235,958 4,089 6.88% 229,519 3,864 6.68%
Residential real estate 150,521 2,168 5.71% 148,845 2,142 5.71%
Consumer 2,578 38 5.85% 2,660 87 12.98%
----------------------- ----------------------
Total loans 437,714 7,246 6.57% 431,952 7,077 6.50%
Federal funds sold 12,241 161 5.22% 2,947 44 5.92%
Taxable debt securities 109,478 1,373 4.98% 108,547 1,288 4.71%
Tax-exempt debt securities (2) 4,159 69 6.60% 5,654 94 6.59%
Marketable equity securities 4,808 32 2.64% 4,331 40 3.66%
FHLB stock 7,418 118 6.31% 6,415 173 10.70%
Other investments 650 19 11.60% 650 10 6.11%
----------------------- ----------------------
Total interest earning assets 576,468 9,018 6.21% 560,496 8,726 6.18%
------ ------
Allowance for loan losses (4,302) (4,368)
Deferred loan fees (171) (326)
Cash and due from banks 14,735 12,970
Other assets 26,733 38,009
-------- --------
$613,463 $606,781
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Interest bearing liabilities
Savings accounts $ 65,432 $ 168 1.02% $ 80,255 $ 302 1.49%
NOW accounts 58,059 294 2.01% 53,506 170 1.26%
Money market accounts 39,324 334 3.37% 26,966 182 2.68%
Time deposits 170,434 1,843 4.29% 187,837 1,962 4.14%
FHLB advances 139,365 1,693 4.82% 106,472 1,196 4.46%
Subordinated debt 10,310 217 8.35% 10,310 217 8.35%
----------------------- ----------------------
Total interest bearing liabilities 482,924 4,549 3.74% 465,346 4,029 3.44%
------ ------
Demand deposits 76,810 75,343
Other liabilities 2,636 16,269
-------- --------
Total liabilities 562,370 556,958
Total stockholders' equity 51,093 49,823
-------- --------
$613,463 $606,781
======== ========
Net interest income $4,469 $4,697
====== ======
Net interest spread 2.47% 2.74%
===== =====
Net interest margin 3.08% 3.32%
===== =====
(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 tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $24,000 in 2007 and $33,000 in 2006.
25
The following table presents the changes in components of net interest income
for the three months ended September 30, 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 September 30,
2007 vs. 2006 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ (33) $(44) $ 11
Commercial real estate 225 108 117
Residential real estate 26 24 2
Consumer loans (49) (3) (46)
Federal funds sold 117 139 (22)
Taxable debt securities 85 11 74
Tax-exempt debt securities (25) (25) -
Marketable equity securities (8) 4 (12)
FHLB Stock (55) 27 (82)
Other investments 9 - 9
-----------------------------
Total interest income 292 241 51
-----------------------------
Savings accounts (134) (56) (78)
NOW accounts 124 14 110
Money market accounts 152 83 69
Time deposits (119) (182) 63
FHLB advances 497 370 127
Subordinated debt - - -
-----------------------------
Total interest expense 520 229 291
-----------------------------
Net interest income $(228) $ 12 $(240)
=============================
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. In
2007, a review of the allowance for loan losses resulted in a reallocation of
the allowance based on qualitative factor analysis, the introduction of
commercial loan risk ratings in the analysis, and the transfer of the
off-balance-sheet component of the allowance to other liabilities. Management
recorded a provision for loan losses of $170,000 for the three months ended
September 30, 2007. Included in the determination of the provision amount are
two loans with outstanding balances of $157,000 and $12,000 that management
determined to be impaired as of September 30, 2007. A loan loss reserve for the
full outstanding balance has been allocated to the two impaired loans. No
provision for loan losses was recorded for the three months ended September 30,
2006.
26
Non-Interest Income
-------------------
Non-interest income increased from $737,000 for the three months ended
September 30, 2006 to $1.1 million for the three months ended September 30,
2007, an increase of $360,000 or 48.8%. The gain on the sale of
available-for-sale securities was $377,000 for the three months ended September
30, 2007, compared to a gain of $19,000 for the three months ended September
30, 2006, an increase of $358,000. In 2007, after reviewing the investment
market and the investment portfolio, management determined that the sale of
certain securities to realize market appreciation and provide liquidity was
appropriate. Service charges on deposit accounts decreased $24,000, or 6.4%, to
$349,000 due to a change in fees on dormant accounts. Other income increased
from $238,000 for the three months ended September 30, 2006 to $245,000 for the
three months ended September 30, 2007, an increase of 2.9%, due to growth in
ATM and debit card income.
Non-Interest Expense
--------------------
Non-interest expense increased by $385,000 to $4.1 million for the three months
ended September 30, 2007 compared to the three months ended September 30, 2006,
an increase of 10.3%. Salaries and employee benefits increased by $367,000 or
18%, from $2.0 million for the three months ended September 30, 2006 to $2.4
million for the three months ended September 30, 2007. The increase in salaries
and benefits was primarily attributable to increased salary and benefit
accruals related to the implementation of certain supplemental retirement plans
and stock awards, offset by a decline of $100,000 in pension expense due to
fewer settelements in 2007 compared to 2006.
Professional fees decreased $67,000 as a result of the non-recurrence of
various accounting and regulatory matters that occurred during the three months
ended September 30, 2006. Marketing expense increased $20,000 to $106,000 for
the three months ended September 30, 2007 from $86,000 for the three months
ended September 30, 2006. This increase is attributable to continued support of
our rebranding initiative and a new deposit product. Data processing expenses
increased $24,000 from $221,000 for the three months ended September 30, 2006
to $245,000 for the three months ended September 30, 2007. The increase was
primarily due to pricing and volume increases. Other expenses increased $20,000
or 3.8% from $531,000 for the three months ended September 30, 2006 to $551,000
for the three months ended September 30, 2007, due to general cost increases
for these items.
Provision for Income Taxes
--------------------------
Income before income taxes was $1.2 million for the three months ended
September 30, 2006 as compared to $1.7 million for the three months ended
September 30, 2007. The provision for income taxes totaled $417,000 and
$615,000 for the quarters ended September 30, 2007 and 2006, respectively,
representing effective tax rates of 33.4% and 37.0%, respectively. The lower
effective tax rate is due primarily to an increase in investment income at the
Company's securities corporations, which receive favorable state tax treatment.
27
Comparison of Results of Operations for the Nine months ended September 30,
---------------------------------------------------------------------------
2007 and 2006
-------------
General
-------
Net income decreased from $2.6 million, or $0.62 per share on a diluted basis,
for the nine months ended September 30, 2006 to $2.5 million, or $0.62 per
share on a diluted basis, for the nine months ended September 30, 2007, a
decrease of 3.1%. Net interest and dividend income decreased by $625,000, or
4.6%, to $13.0 million, when comparing the nine months ended September 30, 2006
and 2007. A provision for loan losses of $170,000 was recorded for the nine
months ended September 30, 2007 while $39,000 was recorded for the same nine
month period in 2006. Non-interest income increased by $658,000 or 33.2% from
$2.0 million to $2.6 million for the nine months ended September 30, 2006 and
2007, respectively. Non-interest expense increased by $229,000, or 2.0%, to
$11.7 million for the nine months ended September 30, 2007, from $11.4 million
for the nine months ended September 30, 2006.
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 $2.0 million or 8.0%, from $24.6
million for the nine months ended September 30, 2006 to $26.5 million for the
nine months ended September 30, 2007. This increase is partially attributed to
both growth in the loan portfolio, as the average balance of loans increased by
$10.9 million or 2.6%, as well as a higher yield on the loan portfolio which
increased from 6.37% for the nine months ended September 30, 2006 to 6.55% for
the nine months ended September 30, 2007. These increases were related
principally to commercial and total real estate loans. Also, interest and
dividends on investments and Federal Funds sold increased by $813,000 for the
nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006. 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 nine months
ended September 30, 2007 compared to the same period in 2006. In addition,
dividends received from the FHLB increased by $93,000 for the nine months ended
September 30, 2007 compared to the same period in 2006, due to an increase in
the average balance of FHLB stock, from $6.3 million in 2006 to $7.2 million in
2007, as well as an increase in the rate earned.
Interest Expense
----------------
Total interest expense increased by $2.6 million or 23.5%, from $11.0 million
for the nine months ended September 30, 2006 to $13.5 million for the nine
months ended September 30, 2007. The increase is due to both increased deposit
and borrowing levels and higher interest rates. Management's strategy is to
utilize increased FHLB borrowings as a funding source for loan growth, in
addition to investment cash flows. Average outstanding borrowings from the FHLB
increased from $109.5 million to $135.2 million when comparing the nine months
ended September 30, 2006 and September 30, 2007. Market interest rates and our
own deposit rates have increased. Interest on deposits increased by $1.2
million or 18.4% when comparing the nine months ended September 30, 2007 and
2006. As a result of the rate increases, the weighted average cost of deposits
increased from 2.66% for the nine months ended September 30, 2006 to 3.17% for
the nine months ended September 30, 2007.
Net Interest Margin
-------------------
As a result of the current interest rate environment, an increase in average
outstanding borrowings, rate increases on borrowings and on deposit accounts,
the net interest margin has compressed 29
28
basis points from 3.32% for the nine months ended September 30, 2006 to 3.03%
at September 30, 2007. The compression in net interest margin was mostly due to
balance sheet growth in an environment with a difficult yield curve and the
corresponding compressed margins on loans and investments, combined with
intense competition for deposits and increased wholesale funding costs.
29
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 nine months
ended September 30, 2007, and 2006. Average balances reported are daily
averages.
Nine Months Ended September 30,
-----------------------------------------------------------------------------------
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 $ 51,090 $ 3,087 8.08% $ 46,611 $ 2,643 7.58%
Commercial real estate 231,021 11,659 6.75% 229,006 11,183 6.53%
Residential real estate 150,145 6,454 5.75% 145,864 6,208 5.69%
Consumer 2,684 120 5.98% 2,592 163 8.41%
------------------------------------- -------------------------------------
Total loans 434,940 21,320 6.55% 424,073 20,197 6.37%
Federal funds sold 9,473 376 5.31% 2,811 109 5.14%
Taxable debt securities 114,498 4,202 4.91% 109,321 3,683 4.51%
Tax-exempt debt securities (2) 4,319 215 6.67% 6,057 302 6.66%
Marketable equity securities 5,536 102 2.46% 4,347 112 3.44%
FHLB stock 7,190 349 6.49% 6,341 256 5.40%
Other investments 650 44 9.05% 650 27 5.55%
------------------------------------- -------------------------------------
Total interest earning assets 576,606 26,608 6.17% 553,600 24,686 5.96%
------- -------
Allowance for loan losses (4,330) (4,361)
Deferred loan fees (191) (329)
Cash and due from banks 14,759 12,958
Other assets 26,647 26,234
-------- --------
$613,491 $588,102
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Interest bearing liabilities
Savings accounts $ 70,278 $ 665 1.27% $ 82,533 $ 830 1.34%
NOW accounts 55,235 653 1.58% 55,633 531 1.28%
Money market accounts 31,745 707 2.98% 26,921 440 2.19%
Time deposits 181,709 6,005 4.42% 175,866 4,982 3.79%
FHLB advances 135,239 4,862 4.81% 109,447 3,561 4.35%
Subordinated debt 10,310 642 8.33% 10,310 612 7.94%
------------------------------------- -------------------------------------
Total interest bearing liabilities 484,516 13,534 3.73% 460,710 10,956 3.18%
------- -------
Demand deposits 74,587 74,334
Other liabilities 2,580 12,641
-------- --------
Total liabilities 561,683 547,685
Total stockholders' equity 51,808 40,417
-------- --------
$613,491 $588,102
======== ========
Net interest income $13,074 $13,730
======= =======
Net interest spread 2.45% 2.78%
==== ====
Net interest margin 3.03% 3.32%
==== ====
(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 tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $75,000 in 2007 and $106,000 in 2006.
30
The following table presents the changes in components of net interest income
for the nine months ended September 30, 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.
Nine Months Ended September 30,
2007 vs. 2006 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
-------------------------------
(In thousands)
Commercial loans $ 444 $ 262 $ 182
Commercial real estate 476 101 375
Residential real estate 246 183 63
Consumer loans (43) 5 (48)
Federal funds sold 267 260 7
Taxable debt securities 519 185 334
Tax-exempt debt securities (87) (87) -
Marketable equity securities (10) 26 (36)
FHLB Stock 93 38 55
Other investments 17 - 17
------------------------------
Total interest income 1,922 973 949
------------------------------
Savings accounts (165) (121) (44)
NOW accounts 122 (3) 125
Money market accounts 267 94 173
Time deposits 1,023 181 842
FHLB advances 1,301 883 418
Subordinated debt 30 - 30
------------------------------
Total interest expense 2,578 1,034 1,544
------------------------------
Net interest income $ (656) $ (61) $ (595)
==============================
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. In
2007, a review of the allowance for loan losses resulted in a reallocation of
the allowance based on qualitative factor analysis, the introduction of
commercial loan risk ratings in the analysis, and the transfer of the
off-balance-sheet component of the allowance to other liabilities. Due to the
growth and change in the composition of the loan portfolio and a slight
deterioration of credit quality, management deemed it prudent to provide
$170,000 for possible loan losses for the nine months ended September 30, 2007
as compared to a provision of $39,000 for the nine months ended September 30,
2006. Included in the determination of the provision amount are two loans with
outstanding balances of $157,000 and $12,000 that management determined to be
impaired as of September 30, 2007. A loan loss reserve for the full outstanding
balance has been allocated to the two impaired loans.
31
Non Interest Income
-------------------
Non-interest income increased from $2.0 million for the nine months ended
September 30, 2006 to $2.6 million for the nine months ended September 30,
2007, an increase of $658,000 or 33.2%. The increase was mainly due to the gain
on the sale of available-for-sale securities which changed from a loss of
$150,000 for the nine months ended September 30, 2006 to a gain of $516,000 for
the nine months ended September 30, 2007, an increase of $666,000. In 2007,
after reviewing the investment market and the investment portfolio, management
determined that the sale of certain securities to realize market appreciation
and provide additional liquidity was appropriate. In 2006, the Company
restructured the investment portfolio by selling $14.5 million of low-yielding
obligations of government sponsored enterprises, resulting in realized losses
of $176,000 during the quarter ending June 30, 2006.
Service charges on deposit accounts were $1.0 million for the nine months ended
September 30, 2006 September 30, 2007. Other income decreased $32,000, or 4.1%,
from $779,000 for the nine months ended September 30, 2006 to $747,000 for the
nine months ended September 30, 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, whereas in
2007 the function has been outsourced, and the Company now records income net
of commissions and other expenses.
Non-Interest Expense
--------------------
Non-interest expense increased from $11.4 million for the nine months ended
September 30, 2006 to $11.7 million for the nine months ended September 30,
2007, an increase of $229,000 or 2.0%. Salaries and employee benefits was $6.4
million for the nine months ended September 30, 2006 and September 30, 2007.
Staff reductions and a reduction in pension expense on a comparable nine month
basis were offset by increased salary and benefit accruals related to the
implementation of certain supplemental retirement plans and stock awards. Staff
reductions resulted primarily from outsourcing the Company's core item
processing, back office proof operations and internal audit in 2006. Pension
expense decreased due to $241,000 of expense for settlement accounting
recognized on the Bank's defined benefit pension plan in 2006, compared to
$38,000 in 2007.
Professional fees decreased $275,000 as a result of the non-recurrence of
various accounting and regulatory matters that occurred during the nine months
ended September 30, 2006. Marketing expense increased $161,000 to $434,000 for
the nine months ended September 30, 2007 from $273,000 for the nine months
ended September 30, 2006, reflecting continued support of our rebranding
initiative and the launch of a new deposit product in 2007. Data processing
expenses increased $398,000 from $420,000 for the nine months ended September
30, 2006 to $818,000 for the nine months ended September 30, 2007. The increase
was primarily due to expenses associated with outsourced core processing, item
processing and statement rendering functions that were done in-house until May
of 2006. Other expenses decreased $73,000 or 4.4% from $ 1.7 million for the
nine months ended September 30, 2006 to $1.6 million for the nine months ended
September 30, 2007, due primarily to reduced Board committee meeting expenses.
Provision for Income Taxes
--------------------------
Income before income taxes was $3.8 million for the nine months ended September
30, 2007 as compared to $4.1 million for the nine months ended September 30,
2006. The provision for income taxes totaled $1.3 million and $1.6 million for
the nine months ended September 30, 2007 and 2006, respectively, representing
effective tax rates of 34.3% and 37.6%, respectively. The lower effective tax
rate is primarily due to an increase in interest income at the Company's
securities corporations, which receive favorable state tax treatment.
32
Capital
-------
At September 30, 2007, our total stockholders' equity was $51.4 million, an
increase of $198,000 from $51.2 million at December 31, 2006. Additions
consisted primarily of net income of $2.5 million for the nine months ended
September 30, 2007. Common stock issued and outstanding is 4,009,353 shares at
September 30, 2007, and 4,102,242 shares at December 31, 2006, a decrease of
92,889 shares. The decrease in outstanding shares is due to several
transactions, including the repurchase of 121,831 shares of common stock under
our stock repurchase program and the purchase of 12,723 shares for our stock
award plan, offset by the issuance of 15,665 shares under the Company's
dividend reinvestment plan, the exercise of 18,000 stock options and the
vesting of 8,000 restricted shares.
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 September 30, 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 9.74% and 12.91%, respectively, at September
30, 2007. The Company's Tier I Capital leverage ratio and Tier I Capital to
risk weighted assets ratio at 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 8.26% and 10.87%, respectively, at
September 30, 2007. The Bank's Tier I Capital leverage ratio and Tier I Capital
to risk weighted assets ratio at December 31, 2006 were 8.78% and 12.60%,
respectively.
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.
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 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 deposit
base.
Our investment securities portfolio provides us with liquidity. Our policy of
purchasing shorter-term debt securities reduces market risk in the bond
portfolio while providing significant cash flow. For the nine months ended
September 30, 2007, cash flow from maturities, calls and pay-downs of
securities was $17.4 million, proceeds from sales of securities totaled $11.3
million, compared to maturities, calls and pay-downs of securities of $7.8
million, and proceeds from sales of securities of $15.4 million for the nine
months ended September 30, 2006. Purchases of securities totaled $8.5 million
and $35.7 million for the nine months ended September 30, 2007 and September
30, 2006, respectively.
33
Amortization and pay-offs of the loan portfolio also provide us with 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 also use borrowed funds as a source of liquidity. At September 30, 2007, the
Bank's outstanding borrowings from the FHLB were $144.3 million. The Bank has
the capacity to borrow an additional $9.2 million from the FHLB as of September
30, 2007. The Bank has the ability to increase this capacity with additional
asset pledges. The Bank had obtained brokered certificates of deposits of $23.3
as an additional funding source during the quarter ending June 30, 2007, all of
which have matured and were not renewed. Management has no short term plans to
obtain additional brokered certificates of deposit. We expect that FHLB
borrowings will remain the primary source of additional liquidity. Overnight
FHLB borrowings of $5.0 million were outstanding as of September 30, 2007.
Loan originations for the nine months ended September 30, 2007 totaled $92.2
million. Commitments to originate loans at September 30, 2007 were $21.1
million, excluding unadvanced construction funds totaling $13.4 million,
unadvanced commercial lines of credit totaling $26.4 million, unadvanced home
equity lines totaling $16.4 million and $614,000 due on uncompleted commercial
real estate. Management believes that adequate liquidity is available to fund
loan commitments utilizing deposits, loan amortization, maturities of
securities, or borrowings.
34
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 -11.49% (22)
-200 6.15% 12
35
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 13.07% N/A
+200 11.94% -1.13%
-200 13.68% 0.61%
36
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 September 30, 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.
37
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 previously disclosed in
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006,
except for the following risks associated with our pending merger with
Independent Bank Corp:
* The merger is subject to a number of contingencies, including approval
by our shareholders, the receipt of required regulatory approvals and
other customary closing conditions, each of which must either be
satisfied or waived prior to the closing.
* Our stock price may fluctuate prior to the completion of the merger
due to (1) market assessments regarding the expected timing of the
merger and risks related to completion of the merger, and (2) the
trading price of Independent Bank Corp. common stock, as the value of
the merger consideration to be received by our shareholders at the
closing is based, in part, on the value of Independent Bank Corp.
common stock.
* If the merger is not completed, our stock price will be subject to
decline to the extent that the current trading price reflects a market
assumption that the merger will be completed.
* We could lose important personnel as a result of the departure of
employees who decide to pursue other opportunities in light of the
proposed merger.
* We have and will continue to incur significant expenses related to the
merger prior to its closing, which must be paid even if the merger is
not completed.
* Depending upon the circumstances, we may be obligated to pay
Independent Bank Corp. a termination fee of $3.5 million under the
terms of the merger agreement.
* The merger agreement with Independent Bank Corp. also imposes
restrictions on our ability to conduct our business prior to the
completion of the merger, which could potentially leave us unable to
respond effectively to competitive pressures, industry developments
and future opportunities or may otherwise harm its financial condition
or results of operations.
38
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 September 30, 2007.
----------------------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum Number (or
(a) Total Shares Purchased as Approximate Dollar Value)
Number of (b) Average Part of Publicly of Shares that may yet be
Shares Price Paid Announced Plans or Purchased under the Plans
Period Purchased per Share Programs (1) or Programs (1)
----------------------------------------------------------------------------------------------------------------------------
July 1, 2007 through July 31, 2007 26,875 $16.10 26,875 56,762
----------------------------------------------------------------------------------------------------------------------------
August 1, 2007 through August 31, 2007 - $ - - 56,762
----------------------------------------------------------------------------------------------------------------------------
September 1, 2007 through September 30, 2007 - $ - - 56,762
----------------------------------------------------------------------------------------------------------------------------
Total 26,875 $16.10 26,875 56,762
----------------------------------------------------------------------------------------------------------------------------
(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.
39
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
None
40
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
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)
November 14, 2007 /s/ Mary Lynn D. Lenz
----------------------- -----------------------------------
(Date) Mary Lynn D. Lenz
President
Chief Executive Officer
(Principal Executive Officer)
November 14, 2007 /s/ Deborah A. McLaughlin
----------------------- -----------------------------------
(Date) Deborah A. McLaughlin
Executive Vice President
Chief Financial Officer &
Chief Operations Officer
(Principal Financial and Accounting
Officer)
41
EXHIBIT INDEX
Exhibit No. Description Item
----------- ----------- ----
2.1 Agreement Plan of Merger dated as of October 11, 2007 by and among Independent (1)
Bank Corp., Rockland Trust Company, Slade's Ferry Bancorp and
Slades Ferry Trust Company
3.1 Amended and Restated Articles of Incorporation of Slade's Ferry Bancorp. (2)
3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (3)
3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation (4)
of Slade's Ferry Bancorp
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (5)
10.2 Amended and Restated Supplemental Executive Retirement Agreement between (6)
Slade's Ferry Bancorp. and Manuel J. Tavares
10.3 Amended and Restated Supplemental Executive Retirement Agreement between (7)
Slade's Ferry Bancorp. and Mary Lynn D. Lenz
10.4 Employment Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (8)
10.5 Employment Agreement between Slade's Ferry Bancorp. and Deborah A. McLaughlin (9)
10.6 Employment Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (10)
10.7 Form Change of Control Agreement (11)
10.8 Severance Pay Plan (12)
10.9 Slade's Ferry Bancorp. 2004 Equity Incentive Plan (13)
10.10 Form of Amendment to Directors' Supplemental Retirement Program for (14)
Non-Employee Directors
11.1 Statement Regarding Computation of Per Share Earnings
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 Form 8-K filed on October 12, 2007.
(2) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the
Commission on April 14, 1997.
(3) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on June 26, 2006.
(4) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 21,
2004.
(5) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June 30, 1999.
(6) Incorporated by reference to the Registrant's Form 8K filed with the Commission on July 18, 2007.
(7) Incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K filed on August 24, 2007.
(8) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended
June 30, 2004.
(9) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(10) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(11) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13,
2005.
(12) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14,
2005.
(13) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004
(14) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 22,
2006.
42