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 September 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
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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
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(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 October 31, 2004,
there were 1,682,401 shares outstanding.
-----------------------------
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -September 30, 2004 (unaudited)
and December 31, 2003 4
Condensed Consolidated Statements of Income -three and nine months
ended September 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -nine months ended
September 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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
2
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements.
3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
September 30, 2004 and December 31, 2003
SEPTEMBER 30, DECEMBER 31,
2004 2003
---- ----
(unaudited)
ASSETS
- ------
Cash & due from banks $ 8,920 $ 7,688
Interest bearing demand deposits with other banks 8,727 1,668
Money market mutual funds 480 501
Federal funds sold 30 2,272
-------- --------
Cash and cash equivalents 18,157 12,129
Investment in available-for-sale securities (at fair value) 177,094 143,020
Investments in held to maturity securities (fair values of $222 as
of September 30, 2004 and $235 as of December 31, 2003) 221 229
Federal Home Loan Bank stock, at cost 5,413 3,771
Loans, less allowance for loan losses of $2,462 as of September 30, 2004
and $1,664 as of December 31, 2003 201,848 139,563
Loans held-for-sale 156 275
Investment in real estate 75 75
Premises and equipment 5,735 2,892
Goodwill 9,764 2,358
Core deposit intangible 1,863 732
Accrued interest receivable 2,247 1,876
Cash surrender value of life insurance policies 3,271 3,154
Other assets 1,511 1,026
-------- --------
Total Assets $427,355 $311,100
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 65,961 $ 43,631
Interest-bearing 232,741 174,826
-------- --------
Total Deposits 298,702 218,457
Federal Home Loan Bank advances 81,218 60,897
Due to Brokers 2,292 0
Other liabilities 3,886 2,896
-------- --------
Total Liabilities 386,098 282,250
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding 1,682,401 shares at September 30, 2004
and 1,424,078 shares at December 31, 2003 168 142
Paid-in capital 13,032 2,327
Retained earnings 27,571 25,695
Accumulated other comprehensive income 486 686
-------- --------
Total Shareholders' Equity 41,257 28,850
-------- --------
Total Liabilities and Shareholders' Equity $427,355 $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)
September 30, 2004 and 2003
(unaudited)
Nine Months Ended Three Months Ended
September 30 September 30
2004 2003 2004 2003
------ ------ ------ ------
Interest and dividend income:
Interest and fees on loans $6,700 $6,947 $2,376 $2,315
Interest and dividends on securities:
Taxable 3,253 3,239 1,134 959
Tax-exempt 1,614 1,555 551 530
Dividends on equity securities 71 83 25 29
Other interest 37 30 19 16
------ ------ ------ ------
Total interest and dividend income 11,675 11,854 4,105 3,849
------ ------ ------ ------
Interest expense:
Interest on deposits 1,876 2,211 660 684
Interest on Federal Home Loan Bank advances 2,056 2,092 730 632
------ ------ ------ ------
Total interest expense 3,932 4,303 1,390 1,316
------ ------ ------ ------
Net interest and dividend income 7,743 7,551 2,715 2,533
Provision for loan losses 180 113 60 38
------ ------ ------ ------
Net interest and dividend income after provision
for loan losses 7,563 7,438 2,655 2,495
------ ------ ------ ------
Other income:
Trust department income 1,007 862 300 300
Service charges on deposit accounts 463 403 157 134
Gain on sales of available-for-sale securities, net 1,029 767 387 212
Gain on sale of loans held-for-sale 212 198 63 150
Other income 627 587 217 159
------ ------ ------ ------
Total other income 3,338 2,817 1,124 955
------ ------ ------ ------
Other expense:
Salaries and employee benefits 4,142 3,461 1,620 1,196
Occupancy expense 259 266 96 84
Equipment expense 404 420 123 179
Data processing 465 419 165 147
Insurance 87 77 29 26
Printing and stationery 153 129 40 40
Legal expense 69 88 7 17
Amortization of core deposit intangible 56 51 22 17
Other expense 1,687 1,163 883 368
------ ------ ------ ------
Total other expense 7,322 6,074 2,985 2,074
------ ------ ------ ------
Income before income taxes 3,579 4,181 794 1,376
Income taxes (benefit) 615 1,136 (2) 361
------ ------ ------ ------
Net income $2,964 $3,045 $ 796 $1,015
====== ====== ====== ======
Earnings per common share $ 2.05 $ 2.14 $ .54 $ .71
====== ====== ====== ======
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)
Nine months ended September 30, 2004 and 2003
(unaudited)
2004 2003
---- ----
Cash flows from operating activities:
Net income $ 2,964 $ 3,045
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 231 300
Gain on sales of available-for-sale securities, net 1,029 (767)
Provision for loan losses 180 113
Net decrease in loans held-for-sale 119 0
Depreciation and amortization 285 300
Amortization of core deposit intangible 60 51
Net accretion of fair value adjustments (4) (11)
(Increase) decrease in interest receivable (371) 126
Increase in prepaid expenses (414) (202)
Decrease (increase) increase in other assets 1,009 (118)
(Decrease) increase in taxes payable (69) 137
Decrease in accrued expenses (89) (265)
Increase (decrease) in interest payable 100 (92)
Increase in other liabilities 1,188 50
-------- --------
Net cash provided by operating activities 6,218 2,667
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (351) (826)
Purchases of available-for-sale securities (99,049) (63,840)
Proceeds from sales of available-for-sale securities 78,524 32,049
Proceeds from maturities of available-for-sale securities 28,200 26,734
Proceeds from maturities of held-to-maturity securities 9 89
Investment in life insurance policies 0 (3,000)
Loan originations and principal collections, net (7,694) (9,245)
Recoveries of loans previously charged-off 17 24
Capital expenditures (772) (437)
Cash paid to Canaan National Bancorp, Inc. shareholders (6,020) 0
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc. net of expenses paid of $310,000 2,487 0
-------- --------
Net cash used in investing activities (4,649) (18,452)
-------- --------
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)
Nine months ended September 30, 2004 and 2003
(unaudited)
(continued)
2004 2003
---- ----
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 5,892 893
Net decrease in time deposits (1,188) (774)
Advances from Federal Home Loan Bank (FHLB) 34,295 26,325
Principal payments on advances from Federal Home Loan Bank (33,561) (10,756)
Dividends paid (1,011) (982)
Issuance of common stock 32 24
-------- --------
Net cash provided by financing activities 4,459 14,730
-------- --------
Net increase in cash and cash equivalents 6,028 (1,055)
Cash and cash equivalents at beginning of year 12,129 10,620
-------- --------
Cash and cash equivalents at end of period $ 18,157 $ 9,565
======== ========
Supplemental disclosures:
Interest paid $ 3,832 $ 4,395
Income taxes paid 545 999
Canaan National Bancorp, Inc. merger:
Cash and cash equivalents acquired $ 2,797
Securities portfolio including FHLB stock acquired 44,124
Loans acquired 54,787
Fixed assets acquired 2,356
Other assets acquired 1,193
Identifiable intangible assets 1,191
--------
106,448
--------
Deposits assumed 75,541
Borrowings assumed 19,587
Other liabilities assumed 1,698
--------
96,826
--------
Net assets acquired 9,622
Merger costs 17,028
--------
Goodwill $ 7,406
========
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 nine months ended September 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
Nine months ended Three months ended
September 30 September 30
2004 2003 2004 2003
---- ---- ---- ----
Net income $ 2,964 $ 3,045 $ 796 $ 1,015
Net unrealized (losses) gains
on securities during period (200) (1,239) 2,928 (1,991)
------- ------- ------- -------
Comprehensive income (loss) $ 2,764 $ 1,806 $ 3,724 $ (976)
======= ======= ======= =======
8
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
- -------------------------------------------
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, it's 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. 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 that date was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its then existing core deposit intangible asset and
accounted for it as an asset apart from the unidentifiable intangible asset and
not as goodwill.
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.
9
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 was 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
applied 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.
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 or operations.
10
NOTE 4 - EMPLOYEES' DEFINED BENEFIT PENSION PLAN
- ------------------------------------------------
The following summarizes the net periodic benefit cost for the three months and
nine months ended September 30:
Nine Months Ended Three Months Ended
September 30, September 30,
2004 2003 2004 2003
----------------------- -------------------------
Components of net periodic benefit cost:
Service cost $ 180,701 $ 141,078 $ 81,006 $ 47,026
Interest cost 165,401 111,024 83,780 37,008
Expected return on plan assets (147,336) (80,258) (70,016) (26,753)
Amortization of:
Prior service costs 89,842 669 89,396* 223
Transition obligation (asset) 53,423 6,504 49,087** 2,168
Actuarial (gain) loss 45,701 0 31,693 0
Settlements and curtailments 0 0 0 0
--------- --------- --------- ---------
Net periodic benefit cost $ 387,732 $ 179,017 $ 264,946 $ 59,672
========= ========= ========= =========
* Includes a one-time charge of $89,172 to reconcile unrecognized amounts
with amortization schedule.
** Includes a one-time charge of $46,921 to reconcile unrecognized amounts
with amortization schedule.
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 Graded table%* 6.00% Graded table%* 6.00%
Return on plan assets 7.25% 7.25% 7.25% 7.25%
* 5% at age 20 grading down to 3% at age 60 and beyond (effective to
approximately 3.25%)
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 five (5) full
service offices including a Trust Department located in the towns of Lakeville,
Salisbury, Sharon and North Canaan, Connecticut and South Egremont,
Massachusetts. 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 September 10, 2004, Canaan
National Bancorp, Inc. merged with and into the Company and those offices
acquired opened as branch offices of the Bank on September 13, 2004.
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company's net income for the nine months ended September 30, 2004 was
$2,964,000. This compares to earnings of $3,045,000 for the same period in 2003.
Earnings per share for the nine months ended September 30, 2004 totaled $2.05
per share which compared to earnings per share of $2.14 for the corresponding
period in 2003. The decrease is primarily the result of costs relating to the
merger with Canaan National Bancorp, Inc. and the upgrading of the Company's
core account processing system.
The Company's assets at September 30, 2004 totaled $427,355,000 which represents
growth of $116,255,000 or 37.4% since December 31, 2003. This increase is
primarily attributable to the Bank's merger with Canaan National Bancorp, Inc.,
which was completed during September 2004. In connection with this transaction,
the Bank received approximately $54,000,000 in loans, a securities portfolio
totaling approximately $44,000,000, and recorded goodwill of $7.4 million. Also
included in the merger were Canaan National Bancorp, Inc.'s fixed assets and
bank premises. During the first nine months of 2004, non-performing loans
increased $1,264,000 to $1,874,000. Management does not believe that this
increase is indicative of any trends, but rather is attributable to a few
specific loans. Deposits at September 30, 2004 totaled $298,702,000 as compared
to total deposits of $218,457,000 at December 31, 2003. The increase is
primarily attributable to the approximately $76,000,000 in deposits that were
assumed in the merger with of Canaan National Bancorp, Inc.
As a result of the Company's third quarter financial performance, the Board of
Directors declared a third quarter cash dividend of $.24 per common share,
payable October 29, 2004 to shareholders of record as of September 30, 2004.
This is the same as the cash dividend of $.24 per common share that was declared
for the first and second quarters of 2004.
The Company's risk based capital ratios at September 30, 2004, 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
September 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
NINE MONTHS ENDED SEPTEMBER 30, 2004
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 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 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)
Nine months ended September 30 2004 2003
---- ----
Total Interest and Dividend Income $11,675 $11,854
(financial statements)
Tax Equivalent Adjustment 831 801
------- -------
Total Interest and Dividend Income
(on an FTE basis) 12,506 12,655
Total Interest Expense 3,932 4,303
------- -------
Net Interest and Dividend Income-FTE $ 8,574 $ 8,352
======= =======
Interest and dividend income on an FTE basis for the nine months ended September
30, 2004, as compared to the same period in 2003, decreased $149,000 or
approximately 1.2%. The decrease was primarily the result of a decrease in
interest and fees on loans, due to competition and an economic environment of
generally lower interest rates.
Interest expense on deposits for the first nine months of 2004 totaled
$1,876,000, a decrease of 15.2% 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 $36,000 or 1.7% to $2,056,000. Total interest
expense for the nine months ending September 30, 2004 was $3,932,000, a decrease
of $371,000 or 8.6% when compared to the same period in 2003.
Overall, net interest and dividend income (on an FTE basis) increased $222,000
or 2.7% to $8,574,000 for the period ended September 30, 2004 when compared to
the same period in 2003.
Noninterest Income
- ------------------
Noninterest income totaled $3,338,000 for the nine months ended September 30,
2004. This is an increase of $521,000 or 18.5% compared to the nine months ended
September 30, 2003. Continuing growth of the Trust Department has resulted in an
increase in trust department income of $145,000 or 16.8% to $1,007,000 for the
first nine months of 2004, compared to the same period in 2003. Gains on sales
of available-for-sale securities increased 34.2% to $1,029,000 for the first
nine months of 2004 compared to the corresponding period in 2003.This increase
is primarily attributable to management's efforts to maximize the spreads in the
portfolio. During the nine month period ended September 30, 2004, 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 on
deposit accounts totaled $463,000 which reflects an increase of 14.9% for the
period ended September 30, 2004 when compared to the first nine months of 2003.
13
Noninterest Expense
- -------------------
Noninterest expense increased 20.5% for the first nine 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 (amounts in thousands):
2004 2003 Change % Change
- --------------------------------------------------------------------------------------
Salaries and employee benefits $4,142 $3,461 $ 681 19.7
Occupancy expense 259 266 (7) (2.6)
Equipment expense 404 420 (16) (3.8)
Data processing 465 419 46 11.0
Insurance 87 77 10 13.0
Printing and stationery 153 129 24 18.6
Legal expense 69 88 (19) (21.6)
Amortization of core deposit intangible 56 51 5 9.8
Nonrecurring expenses of merger and data
processing conversion 546 0 546 100.0
Other expense 1,141 1,163 (22) (1.9)
------ ------ ------
Total other expense $7,322 $6,074 $1,248 20.5
====== ====== ======
The increase in salary and employee benefits is primarily due to an increase in
staff attributable to the merger with Canaan National Bancorp, Inc. and the
required employee time needed to make the extensive system changes relating to
the core processing system, along with salary increases and the increase in the
cost of employee benefits. The increase in data processing costs are
attributable to the changes made in the core processing system during the third
quarter coupled with additional costs related to the merger. In connection with
the merger with Canaan National Bancorp, Inc. and the related conversion to the
new data processing system, the Company incurred various nonrecurring expenses
aggregating $546,000.
Income Taxes
- ------------
The income tax provision for the first nine months of 2004 totaled $615,000 in
comparison to $1,136,000 for the same nine month period in 2003. This decrease
is primarily attributable to a decrease in taxable income. In addition, the
Company formed a passive investment company. 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 $2,964,000 for the nine months ended September 30,
2004. This compares to net income of $3,045,000 for the same period in 2003, a
decrease of 2.7% and represents earnings of $2.05 per share. This compares to
earnings per share of $2.14 for the corresponding period in 2003. The decrease
in net income is primarily the result of additional expenses relating to
enhancing the core account processing system along with the additional expenses
associated with the merger with Canaan National Bancorp, Inc.
THREE MONTHS ENDED SEPTEMBER 30, 2004
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 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 September 30 2004 2003
---- ----
Total Interest and Dividend Income $4,105 $3,849
(financial statements)
Tax Equivalent Adjustment 284 273
------ ------
Total Interest and Dividend Income
(on an FTE basis) 4,389 4,122
Total Interest Expense 1,390 1,316
------ ------
Net Interest and Dividend Income-FTE $2,999 $2,806
====== ======
14
Interest and dividend income on an FTE basis for the three months ended
September 30, 2004 increased $267,000 or approximately 6.5% compared to the same
period in 2003. The increase is primarily attributable to an increase in earning
assets that is the result of the merger with Canaan National Bancorp, Inc.,
which closed in September 2004.
Interest expense on deposits decreased $24,000 or 3.5% for the period ended
September 30, 2004 compared to the same period in 2003. Although total deposits
have increased, a continuing economic environment of lower interest rates has
caused this decrease. Federal Home Loan Bank advances have increased. Interest
expense on these advances have increased $98,000 or 15.5% and totaled $730,000
for the three months ended September 30, 2004 compared to the corresponding
period in 2003. Total interest expense for the three months ending September 30,
2004 was $1,390,000 compared to total interest expense for the same period in
2003 of $1,316,000 an increase of $74,000 or 5.6%.
Overall, net interest and dividend income (on an FTE basis) increased $193,000
to $2,999,000 for the three month period ended September 30, 2004 compared to
the corresponding period in 2003.
Noninterest Income
- ------------------
Noninterest income totaled $1,124,000 for the three months ended September 30,
2004, an increase of $169,000 or 17.7% as compared to $955,000 for the three
months ended September 30, 2003. Gains on sales of available-for-sale securities
totaled $387,000 for the third quarter of 2004 as compared to the corresponding
period in 2003, an increase of $175,000 or 83.0%.
Noninterest Expense
- -------------------
Noninterest expense totaled $2,985,000 for the three month period ended
September 30, 2004, and increase of $911,000 or 43.9% as compared to $2,074,000
for the same period in 2003. The components of noninterst expense and the
changes in the period were as follows:
2004 2003 Change % Change
- -------------------------------------------------------------------------------------
Salaries and employee benefits $1,620 $1,196 $ 424 35.5
Occupancy expense 96 84 12 14.3
Equipment expense 123 179 (56) (31.3)
Data processing 165 147 18 12.2
Insurance 29 26 3 11.5
Printing and stationery 40 40 0 0
Legal expense 7 17 (10) 58.8
Amortization of core deposit intangible 22 17 5 29.4
Nonrecurring expenses of merger and data
processing conversion 506 0 506 100.0
Other expense 377 368 9 2.4
------ ------ ------
Total other expense $2,985 $2,074 $ 911 43.9
====== ====== ======
Salary and employee benefit expenses increased due to an increase in staff as
the result of the Canaan National Bancorp, Inc. merger, as well as salary
increases and the increase in the cost of employee benefits of the Company's
staff during the first nine months of 2004. As part of a continuing commitment
to technology, and as the result of the previously mentioned merger, preparation
time and resources have resulted in an increase in salary expenses. Equipment
expenses have decreased as a result of a reduction in unscheduled facility and
equipment maintenance and repair costs for the three month period ended
September 30, 2004 as compared to the same period in 2003. Data processing costs
increased in 2004 when compared to the same period in 2003. This increase is
primarily the result of costs related to maintaining two processing systems
during the merger. In connection with the merger with Canaan National Bancorp,
Inc. and the related conversion to the new data processing system, the Company
incurred various nonrecurring expenses aggregating $506,000.
Income Taxes
- ------------
The income tax benefit for the three month period ended September 30, 2004
totaled $2,000 in comparison to an income tax provision of $361,000 for the same
three month period in 2003 reflecting a decrease in taxable income.
15
In addition, the Company formed a passive investment company. The structure of
the company creates tax advantages that result in a reduction of tax liability
for the Company.
Net Income
- ----------
Overall, net income totaled $796,000 for the three months ended September 30,
2004. This compares to net income of $1,015,000 for the same period in 2003, a
decrease of $219,000 or 21.6%. Earnings per share for the quarter ended
September 30, 2004 totaled $.54 per share. This compares to earnings per share
of $.71 for the corresponding period in 2003. The decrease in net income is
attributable to an increase in expenses that are directly related to the changes
in the core processing system enhancements and the merger with Canaan National
Bancorp, Inc., which was consummated during the third quarter of 2004 and
appears to be not indicative of any trend.
FINANCIAL CONDITION
- -------------------
Total assets at September 30, 2004 were $427,355,000, compared to $311,100,000
at December 31, 2003, an increase of 37.4%. The increase reflects the assets
acquired from the merger with Canaan National Bancorp, Inc.
Securities
- ----------
During the nine months ended September 30, 2004, the securities portfolio,
including Federal Home Loan Bank stock, increased $35,708,000 or 24.3% to
$182,728,000 from $147,020,000 at December 31, 2003. The increase is
attributable to the assets acquired as part of the merger previously mentioned.
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 September 30, 2004, the
unrealized gain net of tax was $486,000. This compares to an unrealized gain net
of tax of $686,000 at December 31, 2003. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
- -------
New business development during the third quarter of 2004, coupled with the
loans acquired as part of the previously described merger, resulted in an
increase in total loans outstanding to $204,310,000 at September 30, 2004. This
compares to total loans outstanding of $141,227,000 at December 31, 2003. This
is an increase of $63,083,000 or 44.7%.
The following table represents the composition of the loan portfolio comparing
September 30, 2004 to December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 13,551 $ 9,149
Real Estate-construction and land
development 13,193 15,307
Real Estate-residential 130,885 90,806
Real Estate-commercial 34,535 19,200
Consumer 9,797 6,692
Other 2,349 73
--------- ---------
204,310 141,227
Allowance for loan losses (2,462) (1,664)
--------- ---------
Loans, net $ 201,848 $ 139,563
========= =========
16
Provisions and Allowance for Loan Losses
- ----------------------------------------
Total net loans at September 30, 2004 increased 44.7% to $201,848,000 when
compared to total net loans of $139,563,000 at December 31, 2003, reflecting the
merger with Canaan National Bancorp, Inc as well as growth within the loan
portfolio. As a result of the merger, the Bank received approximately
$54,000,000 in loans. At September 30, 2004 approximately 87% 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 nine-month period
ended September 30, 2004 was $180,000 compared to $113,000 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 September 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 ("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;
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
nine months ended September 30, 2004.
At September 30, 2004, the allowance for loan losses totaled $2,462,000,
representing 131.4% of nonperforming loans, which totaled $1,874,000, and 1.2%
of total loans of $204,310,000. This compares to an allowance for loan losses of
$1,664,000, representing 272.8% of nonperforming loans, which totaled $610,000,
and 1.2% of total loans of $141,227,000 at December 31, 2003. A total of $38,000
of loans were charged off by the Bank during the nine months ended September 30,
2004. These charged-off loans consisted primarily of consumer loans. This
compares to loans charged off during the nine month period ended September 30,
2003 which totaled $142,000. A total of
17
$17,000 of previously charged-off loans was recovered during the nine month
period ended September 30, 2003. Recoveries for the same period in 2003 totaled
$24,000. 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 September 30, 2004 and December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
(amounts in thousands)
Demand $ 65,961 $ 43,631
NOW 28,533 21,437
Money Market 43,271 38,357
Savings 68,062 47,729
Time 92,875 67,303
-------- --------
Total Deposits $298,702 $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 September 30, 2004, the Company had $81,218,000 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 September
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
18
period of falling interest rates, a positive gap would result in a decrease in
interest income. The level of interest rate risk at September 30, 2004 is within
the limits approved by the Board of Directors.
Liquidity
- ---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
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 September 30, 2004 the Company had approximately $43,498,000 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 September 30, 2004, the Company had $41,257,000 in shareholders' equity.
Earnings for the nine month period ended September 30, 2004 totaled $2,964,000.
Market conditions resulted in a decrease in accumulated other comprehensive
income of $200,000. 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 three quarterly
dividends in 2004 resulting in a decrease in capital of $1,088,000. The Company
issued 840 new shares of common stock under the terms of the Director Stock
Retainer Plan in April 2004 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 September 30, 2004, the
Company had a total risk-based capital ratio of 13.69% 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. As a result
of the merger, each shareholder of Canaan National Bancorp, Inc. received 1.3371
shares of the Company, in addition to $31.20 in cash, for each share of Canaan
National Bancorp, Inc. stock. As of September 10, 2004 a total of 257,670 shares
of the Company were issued to shareholders of Canaan National Bancorp, Inc. and
the Company paid to such shareholders approximately $6.0 million cash in
aggregate. Fractional shares of the Company were not issued as a result of the
merger, but were paid at a price of $41.06 per share. At September 30, 2004, a
total of 1,682,401 shares of Company common stock were issued and outstanding.
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.
19
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
2003. (See discussion regarding Interest Rate Risk above.)
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of September 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 nine month period ended September 30, 2004 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.
20
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.
21
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: November 15, 2004 by: /s/ John F. Perotti
----------------- -------------------
John F. Perotti
President/Chief Executive Officer
Date: November 15, 2004 by: /s/ John F. Foley
----------------- -----------------
John F. Foley
Chief Financial Officer
22