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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 0-24751
Salisbury Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 (or for such shorter period that the
registrant was required to file such reports), 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 an accelerated filer.
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 26, 2004
1,424,078
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -March 31, 2004 (unaudited)
and December 31, 2003 4
Condensed Consolidated Statements of Income -three months
ended March 31, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -three months
ended March 31, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
2
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements.
3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
March 31, 2004 and December 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
---- ----
(unaudited)
ASSETS
Cash & due from banks $ 7,044 $ 7,688
Interest bearing demand deposits with other banks 1,189 1,668
Money market mutual funds 507 501
Federal funds sold 1,020 2,272
-------- --------
Cash and cash equivalents 9,760 12,129
Investment in available-for-sale securities (at fair value) 163,465 143,020
Investments in held to maturity securities (fair values of $229,000 as
of March 31, 2004 and $235,000 as of December 31, 2003) 226 229
Federal Home Loan Bank stock, at cost 3,868 3,771
Loans, less allowance for loan losses of $1,708,000 as of March 31, 2004
and $1,664,000 as of December 31, 2003 137,359 139,563
Loans held-for-sale 1,037 275
Investment in real estate 75 75
Premises and equipment 2,945 2,892
Other real estate owned 0 0
Goodwill 2,358 2,358
Core deposit intangible 715 732
Accrued interest receivable 1,864 1,876
Cash surrender value of life insurance 3,192 3,154
Other assets 899 1,026
-------- --------
Total Assets $327,763 $311,100
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 43,583 $ 43,631
Interest-bearing 174,986 174,826
-------- --------
Total Deposits 218,569 218,457
Federal Home Loan Bank advances 75,635 60,897
Other liabilities 3,171 2,896
-------- --------
Total Liabilities 297,375 282,250
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding 1,424,078 shares at December 31, 2003 142 142
and 1,424,078 shares at March 31, 2004
Paid-in capital 2,327 2,327
Retained earnings 26,425 25,695
Accumulated other comprehensive income 1,494 686
-------- --------
Total Shareholders' Equity 30,388 28,850
-------- --------
Total Liabilities and Shareholders' Equity $327,763 $311,100
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
March 31, 2004 and 2003
(unaudited)
Three Months Ended
March 31
2004 2003
-------- --------
Interest and dividend income:
Interest and fees on loans $ 2,163 $ 2,287
Interest and dividends on securities:
Taxable 1,022 1,224
Tax-exempt 532 506
Dividends on equity securities 26 26
Other interest 12 7
-------- --------
Total interest and dividend income 3,755 4,050
-------- --------
Interest expense:
Interest on deposits 619 787
Interest on Federal Home Loan Bank advances 650 739
-------- --------
Total interest expense 1,269 1,526
-------- --------
Net interest and dividend income 2,486 2,524
Provision for loan losses 60 37
-------- --------
Net interest and dividend income after provision
for loan losses 2,426 2,487
-------- --------
Other income:
Trust department income 354 290
Service charges on deposit accounts 145 133
Gain on sales of available-for-sale securities, net 356 337
Gain on sale of loans held-for-sale 51 22
Other income 186 200
-------- --------
Total other income 1,092 982
-------- --------
Other expense:
Salaries and employee benefits 1,262 1,173
Occupancy expense 90 95
Equipment expense 131 116
Data processing 151 153
Insurance 29 27
Printing and stationery 45 34
Legal expense 25 37
Amortization of core deposit intangible 17 18
Other expense 327 389
-------- --------
Total other expense 2,077 2,042
-------- --------
Income before income taxes 1,441 1,427
Income taxes 369 398
-------- --------
Net income $ 1,072 $ 1,029
======== ========
Earnings per common share $ .75 $ .72
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2004 and 2003
(unaudited)
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 1,072 $ 1,029
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 60 78
Gain on sales of available-for-sale securities, net (356) (337)
Provision for loan losses 60 37
Depreciation and amortization 67 81
Amortization of core deposit intangible 17 18
Accretion of fair value adjustment on deposits 0 (10)
Decrease (increase) in interest receivable 12 (89)
Deferred tax expense 0 13
Increase in prepaid expenses (57) (91)
Increase in other assets 128 (71)
(Decrease) increase in income tax payable (457) 276
Decrease in accrued expenses (333) (310)
Increase (decrease) in interest payable 19 (2)
Increase in other liabilities 748 27
-------- --------
Net cash provided by operating activities 699 649
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (97) (808)
Purchases of available-for-sale securities (50,317) (29,171)
Proceeds from sales of available-for-sale securities 22,335 9,386
Proceeds from maturities of available-for-sale securities 9,112 4,316
Proceeds from maturities of held-to-maturity securities 49 3
Loan originations and principal collections, net 1,380 (4,389)
Recoveries of loans previously charged-off 2 3
Capital expenditures (103) (118)
-------- --------
Net cash used in investing activities (17,639) (20,778)
-------- --------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2004 and 2003
(unaudited)
(continued)
2004 2003
---- ----
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (2,423) (3,078)
Net increase in time deposits 2,535 783
Advances from Federal Home Loan Bank 15,000 20,000
Principal payments on advances from Federal Home Loan Bank (262) (259)
Dividends paid (328) 313
-------- --------
Net cash provided by financing activities 14,522 17,133
-------- --------
Net decrease in cash and cash equivalents (2,369) (2,996)
Cash and cash equivalents at beginning of year 12,129 10,620
-------- --------
Cash and cash equivalents at end of period $ 9,760 $ 7,624
======== ========
Supplemental disclosures:
Interest paid $ 1,250 $ 1,528
Income taxes paid 130 109
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
SALISBURY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Salisbury Bancorp, Inc. (the "Company"),
those of Salisbury Bank and Trust Company (the "Bank"), its wholly-owned
subsidiary and the Bank's subsidiary, S.B.T. Realty, Inc. The 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 with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2003 Annual Report on Form 10-K.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 -COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for disclosure of comprehensive income, which
includes net income and any changes in equity from non-owner sources that are
not recorded in the income statement (such as changes in the net unrealized
gains (losses) on securities). The purpose of reporting comprehensive income is
to report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company's one source of other
comprehensive income is the net unrealized gain (loss) on securities.
Comprehensive Income
Three months ended
March 31
2004 2003
---- ----
Net income $1,072 $ 1,029
Net unrealized gains (losses)
on securities during period 808 (97)
------ -------
Comprehensive income $1,880 $ 932
====== =======
8
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. Paragraph 5 of SFAS No. 147, which relates to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition was on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in paragraphs 8-14 were effective on October 1, 2002, with
earlier application permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 its recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of December
31, 2003. The Company determined that its reclassified goodwill as of those
dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
9
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003. There was
no substantial impact on the Company's consolidated financial statements on
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. The
Company is required to apply FIN 46, as revised, to all entities subject to it
no later than the end of the first reporting period ending after March 15, 2004.
However, prior to the required application of FIN 46, as revised, the Company
shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be
special-purpose entities as of the end of the first fiscal year or interim
period ending after December 15, 2003. The adoption of this interpretation has
not and is not expected to have a material effect on the Company's consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.
10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Business
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and Bank were
formed in 1998 and 1848, respectively. In order to provide a strong foundation
for building shareholder value and servicing customers, the Company remains
committed to investing in the technological and human resources necessary to
developing new personalized financial products and services to meet the needs of
customers. This discussion should be read in conjunction with Salisbury Bancorp,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003. On
November 18, 2003, the Company announced it had entered into an Agreement and
Plan of Merger providing for the merger of Canaan National Bancorp, Inc. with
and into the Company. The transaction is expected to close in the third quarter
of 2004, subject to the approval of the shareholders of Canaan National Bancorp,
Inc. and other conditions.
RESULTS OF OPERATIONS
For the three month period ended March 31, 2004 and 2003
Overview
The Company's net income for the three months ended March 31, 2004 was
$1,072,000, an increase of $43,000 or 4.2% over the same period ended March 31,
2003. Earnings per share also increased 4.2% and amounted to $.75 per share as
compared to $.72 earnings per share for the same period a year ago. The
improvement in net income is primarily the result of a reduction in interest
expense as well as an increase in other noninterest income.
The Company's assets at March 31, 2004 totaled $327,763,000 which represents
growth of $16,663,000 or 5.4% since December 31, 2003. This increase is
primarily the result of a strategy to increase interest income. This strategy
involved a 24.2% increase in funding advances from the Federal Home Loan Bank of
Boston which were invested in securities yielding a rate greater than the
borrowing rate, resulting in an increase in interest income. Loan demand
decreased 1.6% during the first quarter and net loans totaled $137,359,000 at
March 31, 2004. The Bank continues to monitor the quality of the loan portfolio
to ensure that loan quality will not be sacrificed for growth or otherwise
compromise the Company's objectives. During the first three months of 2004,
non-performing loans increased $204,000 to $814,000. Management does not believe
that this increase represents any trends but is attributable to a few specific
loans. Deposits at March 31, 2004 totaled $218,569,000 and were basically flat
with total deposits at December 31, 2003.
As a result of the Company's first quarter financial performance, the Board of
Directors declared a first quarter cash dividend of $.24 per common share,
payable April 28, 2004 to shareholders of record as of March 31, 2004. This
compares to a cash dividend of $.23 per common share that was declared for the
first quarter of 2003.
The Company's risk based capital ratios at March 31, 2004, which include the
risk weighted assets and capital of the Bank, were 15.89% for tier 1 capital and
17.00% for total risk based capital. The Company's leverage ratio was 8.19% at
March 31, 2004.
Critical Accounting Estimates
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
11
changed conditions, which could have an adverse impact on reported earnings in
the future. See "Provisions and Allowance for Loan Losses".
THREE MONTHS ENDED MARCH 31, 2004
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Interest Income
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its noninterest income, from its community
banking operations. Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities portfolio and interest
paid on deposits and advances from the Federal Home Loan Bank. Noninterest
income is primarily derived from the Trust Department, service charges and other
fees related to deposit and loan accounts and from gains taken on the sale of
available-for-sale securities. For the following discussion, net interest and
dividend income is presented on a fully taxable-equivalent ("FTE") basis. FTE
interest income restates reported interest income on tax exempt loans and
securities as if such interest were taxed at the Company's federal tax rate of
34% for all periods presented.
(amounts in thousands)
Three months ended March 31 2004 2003
Interest and Dividend Income $3,755 $4,050
(financial statements)
Tax Equivalent Adjustment 274 261
------ ------
Total Interest and Dividend Income
(on an FTE basis) 4,029 4,311
Interest Expense 1,269 1,526
Net Interest and Dividend Income-FTE $2,760 $2,785
====== ======
Interest and dividend income on an FTE basis for the three months ended March
31, 2004 totaled $4,029,000, as compared to $4,311,000 for the same period in
2003. This is a decrease of $282,000 or approximately 6.5%. Although there was
an increase in earning assets, this decrease in interest and dividend income was
primarily the result of competition and an economic environment of generally
lower interest rates that continue to pressure interest margins. A continuing
change in the mix of earning assets has resulted in an increase of 5.0% in the
tax equivalent adjustment for the first three months of 2004.
Interest expense on deposits for the first three months of 2004 totaled
$619,000, a decrease of 21.4% compared to the same period in 2003. This decrease
is primarily the result of an economic environment of lower interest rates.
Although Federal Home Loan Bank advances have increased, interest expense on
these advances decreased $89,000 or 12.0% compared to the corresponding period
in 2003. Total interest expense for the three months ending March 31, 2004 was
$1,269,000, a decrease of 16.8% compared to the same period in 2003.
Overall, net interest and dividend income (on an FTE basis) decreased $25,000 to
$2,760,000 for the period ended March 31, 2004.
Noninterest Income
Noninterest income totaled $1,092,000 for the three months ended March 31, 2004,
an increase of 11.2% compared to the three months ended March 31, 2003.
Continuing growth of the Trust Department has resulted in an increase in income
of $64,000 or 22.1% to $354,000 for the first quarter of 2004, compared to the
same period in 2003. Gains on sales of available-for-sale securities increased
5.6% for the first three months of 2004 as compared to the corresponding period
in 2003. Service charges on deposit accounts increased 10.5% for the period
ended March 31, 2004 when compared to the first quarter of 2003.
12
Noninterest Expense
Noninterest expense increased 1.7% for the first three months of 2004 as
compared to the same period in 2004. Salary and employee benefit expenses
increased $89,000 or 7.6%, primarily due to an increase in staff along with
salary increases and the increase in the cost of employee benefits. Occupancy
expenses decreased $5,000 or 5.26% when comparing the first three months of 2004
to the same three months expense in 2003. Equipment expense increased 12.9% when
comparing the same periods in 2004 and 2003. This increase reflects some one
time maintenance costs incurred during the 2004 period. Legal expenses decreased
to $25,000 at March 31, 2004 compared to legal expenses of $37,000 at March 31,
2003. Other operating expenses decreased 15.9% at March 31, 2004 from $389,000
at March 31, 2003. These decreases reflect management's continuing efforts to
control operating expenses.
Income Taxes
The income tax provision for the first three months of 2004 totaled $369,000 in
comparison to $398,000 for the same three months period in 2003. This decrease
reflects a decrease in taxable income.
Net Income
Overall, net income totaled $1,072,000 for the three months ended March 31,
2004. This compares to net income of $1,029,000 for the same period in 2003, an
increase of 4.2% and represents earnings of $.75 per share. This compares to
earnings per share of $.72 for the corresponding period in 2003. The improvement
in net income is primarily the result of an increase in noninterest income and
reductions in interest expense.
FINANCIAL CONDITION
Total assets at March 31, 2004 were $327,763,000, compared to $311,100,000 at
December 31, 2003, an increase of 5.4%. The increase was primarily due to
increased investment in available-for-sale securities funded by additional
advances taken from the Federal Home Loan Bank as part of a strategy to increase
interest income.
Securities
During the three months ended March 31, 2004, the securities portfolio,
including Federal Home Loan Bank stock, increased $20,539,000 or 14.0% to
$167,559,000 from $147,020,000 at December 31, 2003. The increase is primarily a
reflection of the strategy to increase interest income as the advances from the
Federal Home Loan Bank were used to purchase securities.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities are
classified as available-for-sale. The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company. Unrealized
holding gains and losses (accumulated other comprehensive income/loss) are not
included in earnings, but are reported as a net amount (less expected tax) in a
separate component of capital until realized. At March 31, 2004, the unrealized
gain net of tax was $1,494,000. This compares to an unrealized gain net of tax
of $686,000 at December 31, 2003. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
Competition for loans remains aggressive in the Bank's market area. Coupled with
an economic environment of generally lower interest rates that promotes
refinancing to shorter-term fixed rate products and a local economy that
anxiously awaits the arrival of spring, these factors have resulted in a
decrease in the loan portfolio at March 31, 2004 as compared to December 31,
2003. The following table represents the composition of the loan portfolio
comparing March 31, 2004 to December 31, 2003:
13
March 31, 2004 December 31, 2003
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 8,687 $ 9,149
Real Estate-construction and land
development 12,238 15,307
Real Estate-residential 92,579 90,806
Real Estate-commercial 19,654 19,200
Consumer 5,833 6,692
Other 76 73
--------- ---------
139,067 141,227
Allowance for loan losses (1,708) (1,664)
--------- ---------
Loans Outstanding $ 137,359 $ 139,563
========= =========
Provisions and Allowance for Loan Losses
Total net loans at March 31, 2004 decreased 1.6% when compared to total net
loans at December 31, 2003. At March 31, 2004 approximately 90% of the Bank's
loan portfolio was related to real estate products. The concentration remained
consistent as approximately 89% of the portfolio was related to real estate at
December 31, 2003. There were no material changes in the composition of the loan
portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Bank's objectives. Because of this risk
associated with extending loans, the Bank maintains an allowance for loan losses
through charges to earnings. The loan loss provision for the three-month period
ended March 31, 2004 was $60,000
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
uses in making this determination during the period ended March 31, 2004. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which are submitted to the Bank's Board of Directors
for approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Impaired loans are defined in the Bank's Loan Policy as residential real estate
mortgages with balances of $300,000 or more and commercial loans of $100,000 or
more when it is probable that the Bank will not be able to collect all principal
and interest due according to the terms of the note. Any such commercial loans
and residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors
14
are also evaluated on a periodic basis. Historical average net losses by loan
type are examined as well as trends by type. The Bank's loan mix over the same
period of time is also analyzed. A loan loss allocation is made for each type of
loan multiplied by the loan mix percentage for each loan type to produce a
weighted average factor. There have been no reallocations within the allowance
during the three months ended March 31, 2004.
At March 31, 2004, the allowance for loan losses totaled $1,708,000,
representing 209.8% of nonperforming loans, which totaled $814,000, and 1.2% of
total loans of $139,067,000. This compares to an allowance for loan losses of
$1,664,000, representing 272.8% of nonperforming loans, which totaled $610,000,
and 1.18% of total loans of $141,227,000 at December 31, 2003. A total of
$18,000 of loans were charged off by the Bank during the three months ended
March 31, 2004. These charged-off loans consisted primarily of consumer loans.
No loans were charged off during the three month period ended March 31, 2003. A
total of $2,000 of previously charged-off loans was recovered during the three
month period ended March 31, 2004. Recoveries for the same period in 2003
totaled $3,000. While management estimates loan losses using the best available
information, no assurances can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans or other factors. Additionally, future additions to
the allowance may be necessary to maintain adequate coverage ratios.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at March 31, 2004 and December 31, 2003:
March 31, 2004 December 31, 2003
-------------- -----------------
(amounts in thousands)
Demand $ 43,583 $ 43,147
NOW 19,251 21,437
Money Market 35,006 38,357
Savings 50,406 47,729
Time 70,323 67,787
-------- --------
Total Deposits $218,569 $218,457
======== ========
Deposits constitute the principal funding source of the Company's assets.
Borrowings
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At March 31, 2004, the Company had $75,635,000 in
outstanding advances from the Federal Home Loan Bank compared to $60,897,000 at
December 31, 2003. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
Interest Rate Risk
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
15
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At March 31,
2004, the Company was slightly asset sensitive (positive gap). This would
suggest that during a period of rising interest rates, the Company would be in a
better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at March 31, 2004 is within the limits approved by the Board
of Directors.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings.
At March 31, 2004 the Company had approximately $31,740,000 in loan commitments
outstanding. Management believes that the current level of liquidity is ample to
meet the Company's needs for both the present and foreseeable future.
Capital
At March 31, 2004, the Company had $30,388,000 in shareholder equity, an
increase of 5.3% compared to December 31, 2003. Several components contributed
to the change. Earnings for the three-month period ended March 31, 2004 totaled
$1,072,000. Market conditions have resulted in an increase in accumulated other
comprehensive income of $808,000. The Company also declared a quarterly dividend
resulting in a decrease in capital of $350,000. Under current regulatory
definitions, the Company and the Bank are considered to be "well capitalized"
for capital adequacy purposes. As a result, the Bank pays the lowest federal
deposit insurance deposit premiums possible. One primary measure of capital
adequacy for regulatory purposes is based on the ratio of risk-based capital to
risk-weighted assets. This method of measuring capital adequacy helps to
establish capital requirements that are more sensitive to the differences in
risk associated with various assets. It takes into account off-balance sheet
exposure in assessing capital adequacy and it minimizes disincentives to holding
liquid, low-risk assets. At March 31, 2004, the Company had a risk-based capital
ratio of 16.26% compared to 16.4% at December 31, 2003. Maintaining strong
capital is essential to bank safety and soundness. However, the effective
management of capital resources requires generating attractive returns on equity
to build value for shareholders while maintaining appropriate levels of capital
to fund growth, meet regulatory requirements and be consistent with prudent
industry practices. Management believes that the capital ratios of the Company
and Bank are adequate to continue to meet the foreseeable capital needs of the
institutions.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation although they do not necessarily move in the same direction
or with the same magnitude as the prices of goods and services. Although not an
influence in recent years, inflation could impact earnings in future periods.
16
Forward Looking Statements
This Form 10-Q and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business; and
(b) expectations for revenues and earnings for the Company and Bank.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The main components of market risk for the Company are interest rate risk and
liquidity risk. The Company manages interest rate risk and liquidity risk
through an ALCO Committee comprised of outside Directors and senior management.
The committee monitors compliance with the Bank's Asset/Liability Policy which
provides guidelines to analyze and manage gap, which is the difference between
the amount of assets and the amounts of liabilities which mature or reprice
during specific time frames. Model simulation is used to measure earnings
volatility under both rising and falling rate scenarios. The Company's interest
rate risk and liquidity position has not significantly changed from year end
2003.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation within the 90 days prior to the filing date of
this report as of March 31, 2004, the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. During the quarter ended March 31,
2004 there were no changes in the Company's internal control over financial
reporting that materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
17
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings. Not applicable
Item 2. - Changes in Securities and Use of Proceeds. Not applicable
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. - Other Information. Not applicable
Item 6. - Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings per Share.
31.1. Rule 13a-14(a)/15d-14(a) Certification.
31.2. Rule 13a-14(a)/15d-14(a) Certification.
32. Section 1350 Certification.
b. Reports on Form 8-K:
1. The Company filed a Form 8-K on March 3, 2004 to report that the
Company had issued a press release announcing earnings for the year
ended December 31, 2003 and that the Company's Board of Directors
declared a quarterly cash dividend of $.24 per share to be paid on
April 28, 2004 to shareholders of record as March 31, 2004.
SALISBURY BANCORP, INC.
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.
Salisbury Bancorp, Inc.
Date: May 14, 2004 by: /s/ John F. Perotti
------------ ----------------------------------
John F. Perotti
President/Chief Executive Officer
Date: May 14, 2004 by: /s/ John F. Foley
------------ ----------------------------------
John F. Foley
Chief Financial Officer
18