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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 June 30, 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 August 1, 2004
1,424,918
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -June 30, 2004 (unaudited)
and December 31, 2003 4
Condensed Consolidated Statements of Income -three and six months
ended June 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -six months ended
June 30, 2004 and 2003 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
Part II.OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 25
2
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements.
3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
June 30, 2004 and December 31, 2003
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
(unaudited)
ASSETS
Cash & due from banks $ 7,484 $ 7,688
Interest bearing demand deposits with other banks 1,235 1,668
Money market mutual funds 508 501
Federal funds sold 2,272
--------- --------
Cash and cash equivalents 9,227 12,129
Investment in available-for-sale securities (at fair value) 153,462 143,020
Investments in held to maturity securities (fair values of $223 as
of June 30, 2004 and $235 as of December 31, 2003) 224 229
Federal Home Loan Bank stock, at cost 4,122 3,771
Loans, less allowance for loan losses of $1,769 as of June 30, 2004
and $1,664 as of December 31, 2003 143,252 139,563
Loans held-for-sale 370 275
Investment in real estate 75 75
Premises and equipment 3,135 2,892
Goodwill 2,358 2,358
Core deposit intangible 698 732
Accrued interest receivable 1,829 1,876
Cash surrender value of life insurance 3,231 3,154
Other assets 2,788 1,026
--------- --------
Total Assets $ 324,771 $311,100
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 50,419 $ 43,631
Interest-bearing 169,355 174,826
--------- --------
Total Deposits 219,774 218,457
Federal Home Loan Bank advances 75,457 60,897
Other liabilities 2,302 2,896
--------- --------
Total Liabilities 297,533 282,250
--------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding 1,424,918 shares at June 30, 2004 142 142
and 1,424,078 shares at December 31,2003
Paid-in capital 2,359 2,327
Retained earnings 27,179 25,695
Accumulated other comprehensive income (loss) gain (2,442) 686
--------- --------
Total Shareholders' Equity 27,238 28,850
--------- --------
Total Liabilities and Shareholders' Equity $ 324,771 $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)
June 30, 2004 and 2003
(unaudited)
Six Months Ended Three Months Ended
June 30 June 30
2004 2003 2004 2003
------ ------ ------ ------
Interest and dividend income:
Interest and fees on loans $4,324 $4,632 $2,161 $2,345
Interest and dividends on securities:
Taxable 2,119 2,280 1,097 1,056
Tax-exempt 1,063 1,025 531 519
Dividends on equity securities 46 54 20 28
Other interest 18 14 6 7
------ ------ ------ ------
Total interest and dividend income 7,570 8,005 3,815 3,955
------ ------ ------ ------
Interest expense:
Interest on deposits 1,216 1,527 597 740
Interest on Federal Home Loan Bank advances 1,326 1,460 676 721
------ ------ ------ ------
Total interest expense 2,542 2,987 1,273 1,461
------ ------ ------ ------
Net interest and dividend income 5,028 5,018 2,542 2,494
Provision for loan losses 120 75 60 38
------ ------ ------ ------
Net interest and dividend income after provision
for loan losses 4,908 4,943 2,482 2,456
------ ------ ------ ------
Other income:
Trust department income 707 562 353 272
Service charges on deposit accounts 306 269 161 136
Gain on sales of available-for-sale securities, net 642 555 286 218
Gain on sale of loans held-for-sale 149 49 99 27
Other income 410 427 223 227
------ ------ ------ ------
Total other income 2,214 1,862 1,122 880
------ ------ ------ ------
Other expense:
Salaries and employee benefits 2,522 2,265 1,260 1,092
Occupancy expense 163 182 73 87
Equipment expense 281 241 150 125
Data processing 300 272 149 119
Insurance 58 51 29 24
Printing and stationery 113 89 68 55
Legal expense 62 71 37 34
Amortization of core deposit intangible 34 34 17 16
Other expense 804 795 477 406
------ ------ ------ ------
Total other expense 4,337 4,000 2,260 1,958
------ ------ ------ ------
Income before income taxes 2,785 2,805 1,344 1,378
Income taxes 617 775 248 377
------ ------ ------ ------
Net income $2,168 $2,030 $1,096 $1,001
====== ====== ====== ======
Earnings per common share $ 1.52 $ 1.43 $ .77 $ .70
====== ====== ====== ======
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)
Six months ended June 30, 2004 and 2003
(unaudited)
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 2,168 $ 2,030
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 162 188
Gain on sales of available-for-sale securities, net 642 555
Provision for loan losses 120 75
Net increase in loans held-for-sale (95) 0
Depreciation and amortization 133 158
Amortization of core deposit intangible 34 34
Accretion of fair value adjustment on deposits 0 (11)
Decrease in interest receivable 47 73
Deferred tax expense (5) (32)
Increase in prepaid expenses (173) (150)
Increase in other assets (170) (86)
Increase in taxes payable 77 164
Decrease in accrued expenses (229) (306)
Increase (decrease) in interest payable 3 (72)
Increase in other liabilities 14 29
-------- --------
Net cash provided by operating activities 2,728 2,649
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (351) (808)
Purchases of available-for-sale securities (64,474) (41,693)
Proceeds from sales of available-for-sale securities 32,593 19,359
Proceeds from maturities of available-for-sale securities 15,512 16,399
Proceeds from maturities of held-to-maturity securities 6 6
Loan originations and principal collections, net (3,818) (6,191)
Recoveries of loans previously charged-off 9 15
Capital expenditures (346) (248)
-------- --------
Net cash used in investing activities (20,869) (13,161)
-------- --------
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)
Six months ended June 30, 2004 and 2003
(unaudited)
(continued)
2004 2003
-------- --------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 3,024 2,450
Net decrease in time deposits (1,707) (2,279)
Advances from Federal Home Loan Bank 15,000 20,000
Principal payments on advances from Federal Home Loan Bank (441) (10,522)
Dividends paid (637) (616)
-------- --------
Net cash provided by financing activities 15,239 9,033
-------- --------
Net increase in cash and cash equivalents (2,902) (1,479)
Cash and cash equivalents at beginning of year 12,129 10,620
-------- --------
Cash and cash equivalents at end of period $ 9,227 $ 9,141
======== ========
Supplemental disclosures:
Interest paid $ 2,539 $ 3,059
Income taxes paid 545 643
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 six months ended June 30, 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 ("SFAS") 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
Six months ended Three months ended
June 30 June 30
2004 2003 2004 2003
------- ------ ------- ------
Net income $ 2,168 $2,030 $ 1,096 $1,001
Net unrealized (losses) gains
on securities during period (3,128) 752 (3,936) 849
------- ------ ------- ------
Comprehensive income $ (960) $2,782 $(2,840) $1,850
======= ====== ======= ======
8
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("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 had 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
NOTE 4 - EMPLOYEES' DEFINED BENEFIT PENSION PLAN
The following summarizes the net periodic benefit cost for the three months and
six months ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------------------- -------------------------
Components of net periodic benefit cost:
Service cost $ 49,848 $ 47,026 $ 99,695 $ 94,052
Interest cost 40,810 37,008 81,621 74,016
Expected return on plan assets (38,660) (26,753) (77,320) (53,505)
Amortization of:
Prior service costs 223 223 446 446
Transition obligation (asset) 2,168 2,168 4,336 4,336
Actuarial (gain) loss 7,004 0 14,008 0
Settlements and curtailments 0 0 0 0
-------- -------- --------- ---------
Net periodic benefit cost $ 61,393 $ 59,672 $ 122,786 $ 119,345
======== ======== ========= =========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.00% 6.00% 6.00%
Average wage increase 6.00% 6.00% 6.00% 6.00%
Return on plan assets 7.25% 7.25% 7.25% 7.25%
11
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
Overview
The Company's net income for the six months ended June 30, 2004 was $2,168,000,
an increase of $138,000 or 6.8% over the same period ended June 30, 2003.
Earnings per share also increased 6.3% and amounted to $1.52 per share as
compared to $1.43 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 June 30, 2004 totaled $324,771,000 which represents
growth of $13,671,000 or 4.4% since December 31, 2003. This increase is
primarily the result of a strategy to increase interest income. This strategy
involved a 23.9% 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 3.0% during the second quarter and loans totaled $145,391,000 at June
30, 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 six months of 2004,
non-performing loans increased $265,000 to $875,000. Management does not believe
that this increase represents any trends but is attributable to a few specific
loans. Deposits at June 30, 2004 totaled $219,774,000 and were basically flat
with total deposits at December 31, 2003 which totaled $218,457,000.
As a result of the Company's second quarter financial performance, the Board of
Directors declared a second quarter cash dividend of $.24 per common share,
payable July 30, 2004 to shareholders of record as of June 30, 2004. This is the
same as the cash dividend of $.24 per common share that was declared for the
first quarter of 2004.
The Company's risk based capital ratios at June 30, 2004, which include the risk
weighted assets and capital of the Bank, were 14.48% for tier 1 capital and
15.54% for total risk based capital. The Company's leverage ratio was 7.53% at
June 30, 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 an estimation of the
probable amount of future 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 changed conditions, which could have an adverse impact on reported
earnings in the future. See "Provisions and Allowance for Loan Losses".
12
SIX MONTHS ENDED JUNE 30, 2004
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 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 securities as if
such interest were taxed at the Company's federal tax rate of 34% for all
periods presented.
(amounts in thousands)
Six months ended June 30 2004 2003
------ ------
Total Interest and Dividend Income $7,570 $8,005
(financial statements)
Tax Equivalent Adjustment 548 528
------ ------
Total Interest and Dividend Income
(on an FTE basis) 8,118 8,533
Total Interest Expense 2,542 2,987
------ ------
Net Interest and Dividend Income-FTE $5,576 $5,546
====== ======
Interest and dividend income on an FTE basis for the six months ended June 30,
2004, as compared to the same period in 2003, decreased $415,000 or
approximately 4.9%. 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.
Interest expense on deposits for the first six months of 2004 totaled
$1,216,000, a decrease of 20.4% 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 $134,000 or 9.2%to $1,326,000. Total interest
expense for the six months ending June 30, 2004 was $2,542,000, a decrease of
$445,000 or 14.9% when compared to the same period in 2003.
Overall, net interest and dividend income (on an FTE basis) increased $30,000 to
$5,576,000 for the period ended June 30, 2004.
Noninterest Income
Noninterest income totaled $2,214,000 for the six months ended June 30, 2004.
This is an increase of $352,000 or 18.9% compared to noninterest income of
$1,862,000 for the six months ended June 30, 2003. Continuing growth of the
Trust Department has resulted in an increase in income of $145,000 or 25.8% to
$707,000 for the first six months of 2004, compared to $562,000 for the same
period in 2003. Gains on sales of available-for-sale securities increased 15.7%
to $642,000 for the first six months of 2004 compared to the corresponding
period in 2003. Service charges on deposit accounts totaled $306,000 which
reflects an increase of 13.8% for the period ended June 30, 2004 when compared
to the first six months of 2003.
13
Noninterest Expense
Noninterest expense increased 8.4% for the first six months of 2004 as compared
to the same period in 2003. The components of noninterest expense and the
changes in the period were as follows:
2004 2003 Change % Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $2,522 $2,265 $257 11.3
Occupancy expense 163 182 (19) (10.4)
Equipment expense 281 241 40 16.6
Data processing 300 272 28 10.3
Insurance 58 51 7 13.7
Printing and stationery 113 89 24 27.0
Legal expense 62 71 (9) (12.7)
Amortization of core deposit intangible 34 34 0 0
Other expense 804 795 9 1.1
------ ------ ----
Total other expense $4,337 $4,000 $337 8.4
====== ====== ====
The increase in salary and employee benefits is primarily due to an increase in
staff along with salary increases and the increase in the cost of employee
benefits. Occupancy expenses decreased as a result of a reduction in unscheduled
facility maintenance and repair costs for the period ended June 30, 2004. The
increased equipment expenses reflect some one-time maintenance costs incurred
during the first six months of 2004.
Income Taxes
The income tax provision for the first six months of 2004 totaled $617,000 in
comparison to $775,000 for the same six months period in 2003. This decrease
reflects a decrease in taxable income.
Net Income
Overall, net income totaled $2,168,000 for the six months ended June 30, 2004.
This compares to net income of $2,030,000 for the same period in 2003, an
increase of 6.8% and represents earnings of $1.52 per share. This compares to
earnings per share of $1.43 for the corresponding period in 2003. The
improvement in net income is primarily the result of an increase in noninterest
income, reductions in interest expense and reduced income taxes partially offset
by reductions in interest and dividend income and increased other expense.
THREE MONTHS ENDED JUNE 30, 2004
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Net Interest Income
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 June 30 2004 2003
------ ------
Total Interest and Dividend Income $3,815 $3,955
(financial statements)
Tax Equivalent Adjustment 274 267
------ ------
Total interest income (on an FTE basis) 4,089 4,222
Total Interest Expense 1,273 1,461
------ ------
Net Interest and Dividend Income-FTE $2,816 $2,761
====== ======
Interest and dividend income on an FTE basis for the three months ended June 30,
2004 decreased $133,000 or approximately 3.1% compared to the same period in
2003. Although there is an increase in earning assets, this decrease in interest
and dividend income is primarily the result of competition and an economic
environment of generally lower interest rates that continue to pressure interest
margins.
14
Interest expense on deposits decreased $143,000 or 19.3% for the quarter to
$597,000 compared to $740,000 for the same quarter in 2003. This decrease is
primarily the result of an economic environment of lower interest rates. Federal
Home Loan Bank advances have increased. Interest expense on these advances
however, decreased $45,000 or 6.2% and totaled $676,000 for the three months
ended June 30, 2004 compared to the corresponding period in 2003. Total interest
expense for the three months ending June 30, 2004 was $1,273,000 compared to
total interest expense for the same period in 2003 of $1,461,000 a decrease of
$188,000 or 12.9%.
Overall, net interest and dividend income (on an FTE basis) increased $55,000 to
$2,816,000 for the three period ended June 30, 2004 compared to the
corresponding period in 2003.
Noninterest Income
Noninterest income totaled $1,122,000 for the three months ended June 30, 2004
as compared to $880,000 for the three months ended June 30, 2003 an increase of
$242,000 or 27.5%. Continuing growth of the Trust Department has resulted in an
increase in income of $81,000 or 29.8% to $353,000 for the second quarter of
2004 compared to the same period in 2003. Gains on sales of available-for-sale
securities that totaled $286,000 for the second quarter of 2004 as compared to
$218,000 for the corresponding period in 2003. Service charges on deposit
accounts totaled $161,000 for the period ended June 30 2004 an increase of
$25,000 or 18.4% when compared to the second quarter of 2003. This increase is
attributable to an increase in deposit account transactions.
Noninterest Expense
Noninterest expense totaled $2,260,000 for the three month period ended June 30,
2004 as compared to $1,958,000 for the same period in 2003, an increase of
$302,000 or 15.4%. The components of noninterst expense and the changes in the
period were as follows:
2004 2003 Change % Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $1,260 $1,092 $168 15.4
Occupancy expense 73 87 (14) (16.1)
Equipment expense 150 125 25 20.0
Data processing 149 119 30 25.2
Insurance 29 24 5 20.8
Printing and stationery 68 55 13 23.6
Legal expense 37 34 3 8.8
Amortization of core deposit intangible 17 16 1 6.3
Other expense 477 406 71 17.5
------ ------ ----
Total other expense $2,260 $1,958 $302 15.4
====== ====== ====
Salary and employee benefit expenses increased primarily due to an increase in
staff along with salary increases and the increase in the cost of employee
benefits. In addition, as part of a continuing commitment to technology, the
Bank is planning for a system upgrade during the third quarter which requires
significant preparation time and resources which has resulted in an increase in
salary expenses. Occupancy expenses decreased as a result of a reduction in
unscheduled facility maintenance and repair costs for the three month period
ended June 30, 2004 as compared to the same period in 2003. Data processing
costs increased in 2004 when comparing the same period in 2003. This increase
however, reflects a timing difference of data processing expenses during 2003.
The increase in other operating expenses for the quarter ended June 30, 2004 are
also a reflection of timing when comparing the same period in 2003. When
comparing other operating expenses the first six months of 2004 to other
operating expenses for the same period in 2003, the actual increase is 1.1%
which reflects managements continuing efforts to control operating expenses.
Income Taxes
The income tax provision for the three months period ended June 30, 2004 totaled
$248,000 in comparison to $377,000 for the same three month period in 2003. This
decrease reflects a decrease in taxable income.
15
Net Income
Overall, net income totaled $1,096,000 for the three months ended June 30, 2004.
This compares to net income of $1,001,000 for the same period in 2003 an
increase of $95,000 or 9.5% and represents earnings of $.72 per share. This
compares to earnings per share of $.70 for the corresponding period in 2003. The
improvement in net income is primarily the result of an increase in noninterest
income, reductions in interest expense and reduced income taxes, partially
offset by reduced interest and dividend income and increased other expenses.
FINANCIAL CONDITION
Total assets at June 30, 2004 were $324,771,000, compared to $311,100,000 at
December 31, 2003, an increase of 4.4%. 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 six months ended June 30, 2004, the securities portfolio, including
Federal Home Loan Bank stock, increased $10,788,000 or 7.3% to $157,808,000 from
$147,020,000 at December 31, 2003. The increase is primarily a reflection of the
strategy to increase interest income as the additional 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
gains and losses on holdings (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 June 30, 2004, the
unrealized loss net of tax was $2,442,000. This compares to an unrealized gain
net of tax of $686,000 at December 31, 2003. The unrealized losses in these
securities are attributable to changes in market interest rates. The securities
that are currently in an unrealized loss position have been for only a short
period and management deems the securities are not other than temporarily
impaired. The securities reported as securities held-to-maturity are stated at
amortized cost.
Lending
New business development during the second quarter of 2004 coupled with a small
increase in loan demand resulted in an increase in total loans outstanding to
$145,391,000 at June 30, 2004. This compares to total loans outstanding of
$141,227,000 at December 31, 2003. This is an increase of $4,164,000 or 3.0%.
Competition for loans remains aggressive in the Bank's market area, especially
in the residential mortgage loan market.
The following table represents the composition of the loan portfolio comparing
June 30, 2004 to December 31, 2003:
June 30, 2004 December 31, 2003
------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 8,892 $ 9,149
Real Estate-construction and land
development 10,936 15,582
Real Estate-residential 97,221 90,806
Real Estate-commercial 21,548 19,200
Consumer 5,893 6,692
Other 901 73
--------- ---------
145,391 141,502
Allowance for loan losses (1,769) (1,664)
--------- ---------
Loans Outstanding $ 143,622 $ 139,838
========= =========
16
Provisions and Allowance for Loan Losses
Total net loans at June 30, 2004 increased 2.7% to $143,622,000 when compared to
total net loans of $139,838,000 at December 31, 2003. At June 30, 2004
approximately 89% 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 six-month period
ended June 30, 2004 was $120,000 compared to $75,000 in the comparable period of
2003.
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 June 30, 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 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
six months ended June 30, 2004.
At June 30, 2004, the allowance for loan losses totaled $1,769,000, representing
202.2% of nonperforming loans, which totaled $875,000, and 1.2% of total loans
of $145,391,000. 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 $141,502,000 at December 31, 2003. A total of $24,000 of loans
were charged off by the Bank during the six months ended June 30, 2004. These
charged-off loans consisted primarily of consumer loans. This compares to loans
charged off during the six month period ended June 30, 2003 which totaled
$22,000. A total of $9,000 of previously charged-off loans was recovered during
the six month period ended June 30, 2004. Recoveries for the same period in 2003
totaled $15,000. While management estimates loan losses using the best available
information,
17
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 June 30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
------------- -----------------
(amounts in thousands)
Demand $ 50,419 $ 43,631
NOW 18,761 21,437
Money Market 34,222 38,357
Savings 50,292 47,729
Time 66,080 67,303
-------- --------
Total Deposits $219,774 $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 June 30, 2004, the Company had $75,457,000 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.
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 June 30,
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 June 30, 2004 is within the limits approved by the Board
of Directors.
18
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 June 30, 2004 the Company had approximately $38,680,000 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 June 30, 2004, the Company had $27,238,000 in shareholder equity, a decrease
of 5.6% compared to December 31, 2003. Earnings for the six-month period ended
June 30, 2004 totaled $2,168,000. Market conditions resulted in a decrease in
accumulated other comprehensive income of $3,128,000.
A review and analysis of such securities has determined that there has been no
credit deterioration and that the market price decline is due to the current
interest rate environment, management deems the securities are not other than
temporarily impaired. The Company has declared two quarterly dividends resulting
in a decrease in capital of $683,000. The Company issued 840 new shares of
common stock under the terms of the Director Stock Retainer Plan that resulted
in an increase in capital of $32,000. 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 June 30, 2004, the Company had a risk-based capital ratio of 15.54%
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 levels 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.
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
19
(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 as of June 30, 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 six
month period ended June 30, 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.
20
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings. Not applicable
Item 2. - Changes in Securities and Use of Proceeds. On April 28, 2004, 840
shares of common stock were issued in the Directors' Stock Retainer Plan as
compensation for services as directors. This plan is not registered under the
Securities Act. These shares were issued pursuant to the exemption provided in
Section 4(2) of the Securities Act of 1933, for a private sale to directors of
the Company not involving a public offering of the securities.
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Shareholders of Salisbury Bancorp, Inc. (the
"Company"), the holding company for Salisbury Bank and Trust Company (the
"Bank") was held on Wednesday, April 28, 2004. Shareholders voted on the
election of directors and the ratification of the appointment of independent
auditors.
The results of the votes of shareholders regarding each proposal are set
forth below:
PROPOSAL 1
ELECTION OF DIRECTORS
Each of the two nominees received in excess of a plurality of the votes
cast at the meeting and were elected to serve until their term expires or their
successors are elected and qualified.
The vote for electing nominees as directors was as follows:
Withholding
For Authority
John F. Perotti Number of Shares: 1,099,272 25,640
(three (3) year term) Percentage of
Shares Voted: 97.7% 2.3%
Percentage of Shares
Entitled to Vote: 77.1% 1.9%
Withholding
For Authority
Michael A. Varet Number of Shares: 1,099,099 25,813
(three (3) year term) Percentage of
Shares Voted: 97.7% 2.3%
Percentage of Shares
Entitled to Vote: 77.1% 1.9%
The two (2) individuals elected at the 2004 Annual Meeting along with the
following individuals whose terms did not expire at such meeting constitute the
Board of Directors of the Company:
John R. H. Blum Gordon C. Johnson
Louise F. Brown Holly J. Nelson
Nancy F. Humphreys Walter C. Shannon, Jr.
21
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The appointment of Shatswell, MacLeod & Company, P.C. as independent
auditors for the Company for the year ending December 31, 2004 was approved
because the votes for such appointment exceeded the votes against such
appointment.
The vote to ratify the appointment by the Board of Directors of
Shatswell, MacLeod & Company, P.C. as independent auditors for the
year ending December 31, 2004 was as follows:
For Against Abstain
Number of Votes: 1,124,110 624 0
Percentage of Shares Voted: 99.9% 0.1% 0%
Percentage of Shares
Entitled to Vote: 78.9% 0% 0%
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 Certifications.
b. Reports on Form 8-K:
1. The Company filed a Form 8-K on April 29, 2004 to report the events
and results of the Company's Annual Meeting of Shareholders that was
held on Wednesday, April 28, 2004 and to report that the Company had
issued a press release announcing earnings for the first quarter of
2004.
2. The Company filed a Form 8-K on June 2, 2004 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.24 per share to be paid on July 30, 2004 to shareholders of record
as of June 30, 2004.
22
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: August 12. 2004 by: /s/ John F. Perotti
--------------- ------------------------------
John F. Perotti
President/Chief Executive Officer
Date: August 12, 2004 by: /s/ John F. Foley
--------------- ------------------------------
John F. Foley
Chief Financial Officer
23