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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, 2005
------------------------------
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
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Salisbury Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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 the latest practicable date: as of April 26, 2005,
there were 1,682,401 shares outstanding.
-----------------------------
1
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -March 31, 2005 (unaudited)
and December 31, 2004 4
Condensed Consolidated Statements of Income -three months ended March 31, 2005
and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows-three months ended March 31, 2005
and 2004 (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 17
Item 4. Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
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, 2005 and December 31, 2004
------------------------------------
March 31 December 31
2005 2004
---- ----
ASSETS (unaudited)
- ------
Cash and due from banks $ 6,708 $ 7,284
Interest bearing demand deposits with other banks 1,222 1,181
Money market mutual funds 992 942
Federal funds sold 845 2,271
--------- ---------
Cash and cash equivalents 9,767 11,678
Investments in available-for-sale securities (at fair value) 151,669 178,655
Investments in held-to-maturity securities (fair values of $215,000 as of
March 31, 2005 and $220,000 as of December 31, 2004) 214 218
Federal Home Loan Bank stock, at cost 5,413 5,413
Loansheld-for-sale 0 375
Loans, less allowance for loan losses of $2,591,000 as of March 31, 2005
and $2,512,000 as of December 31, 2004 202,943 201,978
Investment in real estate 75 75
Premises and equipment 6,431 5,934
Goodwill 9,509 9,509
Core deposit intangible 1,781 1,822
Accrued interest receivable 1,895 2,257
Cash surrender value of life insurance policies 3,323 3,294
Due from broker 1,090 0
Other assets 2,198 1,893
--------- ---------
Total assets $ 396,308 $ 423,101
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 61,802 $ 65,017
Interest-bearing 233,002 233,825
--------- ---------
Total deposits 294,804 298,842
Federal Home Loan Bank advances 58,739 79,213
Due to broker 0 1,083
Other liabilities 2,453 3,263
--------- ---------
Total liabilities 355,996 382,401
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding, 1,682,401 shares at March 31, 2005 and 1,682,401
at December 31, 2004 168 168
Paid-in capital 13,032 13,032
Retained earnings 29,130 28,223
Accumulated other comprehensive loss (2,018) (723)
--------- ---------
Total stockholders' equity 40,312 40,700
--------- ---------
Total liabilities and stockholders' equity $ 396,308 $ 423,101
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
SALISBURY BANCORP, INC.
-----------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(amounts in thousands, except per share data)
March 31, 2005 and 2004
-----------------------
(unaudited)
-----------
2005 2004
------ ------
Interest and dividend income:
Interest and fees on loans $3,210 $2,163
Interest on debt securities:
Taxable 1,102 1,022
Tax-exempt 656 532
Dividends on equity securities 48 26
Other interest 18 12
------ ------
Total interest and dividend income 5,034 3,755
------ ------
Interest expense:
Interest on deposits 908 619
Interest on Federal Home Loan Bank advances 737 650
------ ------
Total interest expense 1,645 1,269
------ ------
Net interest and dividend income 3,389 2,486
Provision for loan losses 90 60
------ ------
Net interest and dividend income after provision for
loan losses 3,299 2,426
------ ------
Noninterest income:
Trust Department income 388 354
Service charges on deposit accounts 144 145
Gain on sales of available-for-sale securities, net 486 356
Gain on sales of loans held-for-sale 91 51
Other income 280 186
------ ------
Total noninterest income 1,389 1,092
------ ------
Noninterest expense:
Salaries and employee benefits 1,808 1,262
Occupancy expense 186 90
Equipment expense 187 131
Trust department expense 96 49
Data processing 197 151
Insurance 40 29
Printing and stationery 59 45
Professional fees 74 57
Legal expense 26 25
Amortization of core deposit intangible 41 17
Other expense 312 221
------ ------
Total noninterest expense 3,026 2,077
------ ------
Income before income taxes 1,662 1,441
Income taxes 333 369
------ ------
Net income $1,329 $1,072
====== ======
Earnings per common share $ .79 $ .75
====== ======
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, 2005 and 2004
(unaudited)
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 1,329 $ 1,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 79 60
Gain on sales of available-for-sale securities, net (486) (356)
Provision for loan losses 90 60
Change in loans held-for-sale 375 67
Depreciation and amortization 126 17
Amortization of core deposit intangible 41 0
Amortization of fair value adjustments, net 13 12
Decrease in interest receivable 357 0
Increase in prepaid expenses (101) (57)
(Increase) decrease in other assets (848) 128
Increase (decrease) in taxes payable 217 (457)
Decrease in accrued expenses (374) (333)
(Decrease) increase in interest payable (31) 19
Increase in other liabilities 790 516
-------- --------
Net cash provided by operating activities 1,577 748
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock 0 (97)
Purchases of available-for-sale securities (25,750) (50,317)
Proceeds from sales of available-for-sale securities 25,877 22,335
Proceeds from maturities of available-for-sale securities 22,975 9,112
Proceeds from maturities of held-to-maturity securities 4 49
Loan originations and principal collections, net (1,106) 1,380
Recoveries of loans previously charged-off 5 2
Capital expenditures (615) (103)
-------- --------
Net cash provided by (used in) investing activities 21,390 (17,639)
-------- --------
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, 2005 and 2004
(unaudited)
(continued)
2005 2004
---- ----
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (1,828) (2,423)
Net (decrease) increase in time deposits (2,204) 2,535
Federal Home Loan Bank advances 0 15,000
Principal payments on advances from Federal Home Loan Bank (20,442) (262)
Dividends paid (404) (328)
-------- --------
Net cash (used in) provided by financing activities (24,878) 14,522
-------- --------
Net decrease in cash and cash equivalents (1,911) (2,369)
Cash and cash equivalents at beginning of year 11,678 12,129
-------- --------
Cash and cash equivalents at end of period $ 9,767 $ 9,760
======== ========
Supplemental disclosures:
Interest paid $ 1,676 $ 1,250
Income taxes paid 116 130
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"),
its wholly owned subsidiary Salisbury Bank and Trust Company (the "Bank"), and
the Bank's subsidiaries, S.B.T. Realty, Inc.. SBT Mortgage Service Corporation
(the "PIC") formed in April 2004 and CNB Insurance Agency, Inc. (acquired
September 10, 2004). 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, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. These
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 2004 Annual Report on Form 10-K.
On September 10, 2004 Canaan National Bancorp, Inc. merged with and into the
Company. The merger was accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded by
the Company at their fair values at the consummation date. Financial statement
amounts for Canaan National Bancorp, Inc. are included in the Company's
consolidated financial statements.
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
Three months ended
March 31
2005 2004
---- ----
(amounts in thousands)
Net income $ 1,329 $ 1,072
Net unrealized (losses) gains
on securities during period (1,295) 808
------- -------
Comprehensive income $ 34 $ 1,880
======= =======
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
- -------------------------------------------
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
8
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 did not have an impact 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.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans
acquired through a transfer, such as a business combination, where there are
differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Company's
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payments" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. It
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
This Statement was effective for the Company as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. However,
since the issuance of SFAS 123R, the SEC has delayed the effective date. The new
effective date is January 1, 2006. The Company does not believe the adoption of
this Statement will have a material impact on the Company's financial position
or results of operations.
9
NOTE 4 - DEFINED BENEFIT PENSION PLAN
- --------------------------------------
The following summarizes the net periodic benefit cost for the three months
March 31:
Three Months Ended
March 31, 2005
--------------
Components of net periodic benefit cost:
Service cost $ 83,542
Interest cost 60,930
Expected return on plan assets (50,228)
Amortization of:
Prior service costs 223
Transition obligation (asset) 693
Actuarial (gain) loss 17,412
Settlements and curtailments 0
---------
Net periodic benefit cost $ 112,572
=========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00%
Average wage increase Graded table%*
Return on plan assets 7.25%
The Company changed actuary for the pension plan during the first quarter of
2004. Information for the first quarter of 2004 10Q was not made available.
* 5% at age 20 grading down to 3% at age 60 and beyond (effective to
approximately 3.25%)
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 and Bank were formed in 1998 and 1848, respectively,
and the Company's sole subsidiary is the Bank, which has six (6) full service
offices, including a Trust Department, located in the towns of Lakeville,
Salisbury, Sharon and North Canaan, Connecticut and Sheffield and South
Egremont, Massachusetts. The sixth branch in Sheffield, Massachusetts opened
March 14, 2005. 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 the Company's Annual Report on Form 10-K for
the year ended December 31, 2004.
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company's net income for the three months ended March 31, 2005 was
$1,329,000. This compares to earnings of $1,072,000 for the same period in 2004.
Earnings per share for the three months ended March 31, 2005 totaled $.79 per
share which compared to earnings per share of $.75 for the corresponding period
in 2004. The increase is primarily the result of an increase in earning assets
resulting from the merger with Canaan National Bancorp. Inc. on September 10,
2004. The Company's assets at March 31, 2005 totaled $396,308,000 and compares
to total assets of $423,101,000 at December 31, 2004. The decrease is primarily
attributable to a reduction in the securities portfolio. Non-performing loans
totaled $2,278,000 at March 31, 2005 and compares to non-performing loans
totaling $2,267,000 at December 31, 2004. Deposits at March 31, 2005 totaled
$294,804,000 as compared to total deposits of $298,842,000 at December 31, 2004.
The decrease is primarily attributable to normal seasonal cash flows.
As a result of the Company's first quarter financial performance, the Board of
Directors declared a first quarter cash dividend of $.25 per common share,
payable April 27, 2005 to shareholders of record as of March 31, 2005. This
compares to a cash dividend of $.24 per common share that was paid for the first
quarter of 2004.
The Company's risk-based capital ratios at March 31, 2005, which include the
risk weighted assets and capital of the Bank, were 12.57% for tier 1 capital and
13.69% for total risk based capital. The Company's leverage ratio was 8.82% at
March 31, 2005.
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."
11
THREE MONTHS ENDED MARCH 31, 2005
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
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 portfolios 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)
Three months ended March 31 2005 2004
---- ----
Total Interest and Dividend Income $5,034 $3,755
(financial statements)
Tax Equivalent Adjustment 338 274
------ ------
Total Interest and Dividend Income
(on an FTE basis) 5,372 4,029
Total Interest Expense 1,645 1,269
------ ------
Net Interest and Dividend Income-FTE $3,727 $2,760
====== ======
Total interest and dividend income on a FTE basis for the three months ended
March 31, 2005, as compared to the same period in 2004, increased $1,343,000 or
approximately 33.3%. The increase was primarily attributable to an increase in
earning assets as well as an economic environment experiencing an increase in
interest rates.
Interest expense on deposits for the first three months of 2005 totaled
$908,000, an increase of 46.7% compared to the same period in 2004. This
increase is primarily the result of an increase in deposits resulting from the
merger with Canaan National Bancorp, Inc. in September 2004 as well as an
economic environment of generally higher interest rates. Interest expense on
Federal Home Loan Bank advances increased $87,000 when comparing the first
quarter of 2005 to 2004. Although Federal Home Loan Bank advances have
decreased, when comparing March 31, 2005 to December 31, 2004, the closing
balance at March 31, 2005 reflects the lowest total of advances taken for the
first quarter. In addition, borrowing rates on advances acquired in connection
with the Canaan National Bancorp, Inc. are generally higher than those of the
Company. Total interest expense for the three months ending March 31, 2005 was
$1,645,000, an increase of $376,000 or 29.6% when compared to the same period in
2004.
Overall, net interest and dividend income (on an FTE basis) increased $967,000
or 35.0% to $3,727,000 for the period ended March 31, 2005 when compared to the
same period in 2004.
Noninterest Income
- ------------------
Noninterest income totaled $1,389,000 for the three months ended March 31, 2005.
This is an increase of $297,000 or 27.2% compared to the three months ended
March 31, 2004. Continuing growth of the Trust Department has resulted in an
increase in Trust Department income of $34,000 or 9.6% to $388,000 for the first
three months of 2005, compared to the same period in 2004. Gains on sales of
available-for-sale securities increased 36.5% to $486,000 for the first three
months of 2005 compared to the corresponding period in 2004. This increase is
primarily attributable to management's efforts to maximize the spreads in the
portfolio. During the three month period ended March 31, 2005, there were
opportunities in the market that resulted in taking gains on sales while
increasing the yields in the portfolio at the same time. Service charges totaled
$144,000 on deposit accounts and was consistent when comparing 2005 and 2004.
Gains on sale of loans held-for-sale increased $40,000 or 78.4% to $91,000 for
the first three months of 2005. The increase is primarily attributable to an
increase in secondary mortgage market activity during the quarter. Other income
increased $94,000 or 50.5% to $280,000 in 2005 compared to $186,000
12
for the corresponding period in 2004. The increase is primarily the result of
increased activity in the secondary mortgage market business.
Noninterest Expense
- -------------------
Noninterest expense increased 45.7% for the first three months of 2005 as
compared to the same period in 2004. The increases in the noninterest expenses
listed in the table below are all primarily attributable to the merger with
Canaan National Bancorp, Inc. The components of noninterest expense and the
changes in the period were as follows (amounts in thousands):
2005 2004 Change % Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $1,808 $1,262 $ 546 43.3%
Occupancy expense 186 90 96 106.7
Equipment expense 187 131 56 42.8
Trust Department 96 49 47 95.9
Data processing 197 151 46 30.5
Insurance 40 29 11 37.9
Printing and stationery 59 45 14 31.1
Professional fees 74 57 17 29.8
Legal expense 26 25 1 4.0
Amortization of core deposit intangible 41 17 24 141.2
Other expense 312 221 91 41.2
------ ------ ------ -----
Total other expense $3,026 $2,077 $ 949 45.7%
====== ====== ====== =====
Income Taxes
- ------------
The income tax provision for the first three months of 2005 totaled $333,000 in
comparison to $369,000 for the same three month period in 2004. Although income
before taxes increased, there was a decrease in taxable income. In addition, the
Company formed a passive investment company in 2004. A passive investment
company's structure is such that income earned results in a reduction of tax
liability for the Company.
Net Income
- ----------
Overall, net income totaled $1,329,000 for the three months ended March 31,
2005. This compares to net income of $1,072,000 for the same period in 2004, an
increase of 24% and represents earnings of $.79 per share. This compares to
earnings per share of $.75 for the corresponding period in 2004. The increase in
net income is primarily the result of an increase in earning assets resulting
from the merger with Canaan National Bancorp, Inc.
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 2005 were $396,308,000, compared to $423,101,000 at
December 31, 2004, a decrease of 6.3%. The decrease is primarily the result of
sales and calls of available-for-sale securities in the portfolio during the
quarter.
Securities
- ----------
During the three months ended March 31, 2005, the securities portfolio,
including Federal Home Loan Bank stock, decreased $26,990,000 or 14.7% to
$157,296,000 from $184,286,000 at December 31, 2004. The decrease is primarily
the result of portfolio securities being sold and called during the quarter. 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 March 31, 2005, the
unrealized loss net of tax was $2,018,000. This compares to an unrealized loss
net of tax of $723,000 at December 31, 2004. The decline in market price is
13
primarily attributable to accelerated prepayments on the underlying collateral
and the changes in market interest rates. As management has the ability to hold
securities until maturity, or for the foreseeable future, no declines are deemed
to be other than temporary. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
- -------
New business development during the first quarter of 2005 resulted in an
increase in total loans outstanding to $205,534,000 at March 31, 2005. This
compares to total loans outstanding of $204,490,000 at December 31, 2004. This
is an increase of $1,044,000.
The following table represents the composition of the loan portfolio comparing
March 31, 2005 to December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 14,930 $ 15,127
Real Estate- construction and land
development 15,468 14,290
Real Estate- residential 129,208 130,414
Real Estate- commercial 37,109 35,487
Consumer 8,772 9,122
Other 63 69
--------- ---------
205,550 204,509
Unearned income (16) (19)
Allowance for loan losses (2,591) (2,512)
--------- ---------
Loans, net $ 202,943 $ 201,978
========= =========
Provisions and Allowance for Loan Losses
- ----------------------------------------
Net loans at March 31, 2005 increased to $202,943,000 when compared to net loans
of $201,978,000 at December 31, 2004. At March 31, 2005 approximately 88% of the
Bank's loan portfolio was related to real estate products. The concentration
remained consistent as approximately 88% of the portfolio was related to real
estate at December 31, 2004. 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 the 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, 2005 was $90,000 compared to $60,000 in the comparable period of
2004.
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, 2005. 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 ("SFAS No. 114"). 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;
14
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
three months ended March 31, 2005.
At March 31, 2005, the allowance for loan losses totaled $2,591,000,
representing 113.7% of nonperforming loans, which totaled $2,278,000, and 1.3%
of total loans of $205,550,000. This compares to an allowance for loan losses of
$2,512,000, representing 110.8% of nonperforming loans, which totaled
$2,267,000, and 1.1% of total loans of $204,509,000 at December 31, 2004. A
total of $15,000 of loans were charged off by the Bank during the three months
ended March 31, 2005. These charged-off loans consisted primarily of consumer
loans. This compares to loans charged off during the three month period ended
March 31, 2004 which totaled $18,000. A total of $5,000 of previously
charged-off loans was recovered during the three month period ended March 31,
2005. Recoveries for the same period in 2004 totaled $2,000. 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, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
-------------- -----------------
(amounts in thousands)
Demand $ 61,802 $ 65,017
NOW 26,563 29,569
Money Market 50,737 49,206
Savings 66,450 63,588
Time 89,252 91,462
-------- --------
Total Deposits $294,804 $298,842
======== ========
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, 2005, the Company had $58,739,000 in
outstanding advances from the Federal Home Loan Bank compared to $79,213,000 at
December 31, 2004. Management has reduced the balance of outstanding advances
during the first quarter of 2005, however, this strategy of supplementing
deposit growth with advances from the Federal Home Loan Bank will continue.
15
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, it is important that the Bank maintain an
appropriate process and set of measurement tools to enable it to identify and
quantify its primary sources of interest rate risk. The Bank also recognizes
that effective management of interest rate risk includes understanding when
potential changes in interest rates will flow through the earnings statement.
Accordingly, the Bank manages its position in order to monitor both short-term
and long-term interest rate exposure. The primary tool used in managing interest
rate risk in this manner will be the income simulations which will be utilized
to quantify the potential impact on earnings and capital of changes in interest
rates. The level of interest rate risk at March 31, 2005 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
fluctuations 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, 2005 the Company had approximately $50,610,000 in loan commitments
outstanding. Management believes that the current level of liquidity is adequate
to meet the Company's needs for both the present and foreseeable future.
Capital
- -------
At March 31, 2005, the Company had $40,312,000 in shareholders' equity. Earnings
for the three month period ended March 31, 2005 totaled $1,329,000. Market
conditions resulted in an increase in accumulated other comprehensive loss of
$1,295,000. 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. Per Management, no securities were deemed to
be other than temporarily impaired. The Company has declared a first quarter
dividend in 2005 resulting in a decrease in capital of $421,000. 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, 2005, the Company had a total risk-based
capital ratio of 12.13% compared to 12.13% at December 31, 2004. 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.
16
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
(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 and
capital requirements;
(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
2004. (See discussion regarding Interest Rate Risk above.)
17
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of March 31, 2005, 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 three
month period ended March 31, 2005 there were no changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings. Not applicable
Item 2. - Unregistered Sales of Equity 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
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.
18
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 11, 2005 by: /s/ John F. Perotti
------------ -------------------
John F. Perotti
President/Chief Executive Officer
Date: May 11, 2005 by: /s/ John F. Foley
------------ ----------------------------
John F. Foley
Chief Financial Officer
19