SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
-------
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 |X| No |_|
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 July 30, 2005, there were 1,683,341 shares outstanding.
-----------------------------
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets - June 30, 2005 (unaudited)
and December 31, 2004 4
Condensed Consolidated Statements of Income - three and six months ended June 30, 2005
and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2005
and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits 19
Signatures 20
2
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(amounts in thousands, except per share data)
June 30, 2005 and December 31, 2004
-----------------------------------
June 30, December 31,
2005 2004
---- ----
ASSETS (unaudited)
- ------
Cash and due from banks $ 8,038 $ 7,284
Interest bearing demand deposits with other banks 931 1,181
Money market mutual funds 1,026 942
Federal funds sold 0 2,271
--------- ---------
Cash and cash equivalents 9,995 11,678
Investments in available-for-sale securities (at fair value) 154,220 178,655
Investments in held-to-maturity securities (fair values of $209,000 as of
June 30, 2005 and $220,000 as of December 31, 2004) 207 218
Federal Home Loan Bank stock, at cost 5,413 5,413
Loans held-for-sale 398 375
Loans, less allowance for loan losses of $2,673,000 as of June 30, 2005
and $2,512,000 as of December 31, 2004 206,209 201,978
Investment in real estate 75 75
Premises and equipment 6,399 5,934
Goodwill 9,509 9,509
Core deposit intangible 1,740 1,822
Accrued interest receivable 2,297 2,257
Cash surrender value of life insurance policies 3,355 3,294
Due from broker 813 0
Other assets 2,618 1,893
--------- ---------
Total assets $ 403,248 $ 423,101
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 65,068 $ 65,017
Interest-bearing 222,424 233,825
--------- ---------
Total deposits 287,492 298,842
Federal Home Loan Bank advances 69,922 79,213
Due to broker 0 1,083
Other liabilities 3,225 3,263
--------- ---------
Total liabilities 360,639 382,401
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding, 1,683,341 shares at June 30, 2005 and
1,682,401 shares at December 31, 2004 168 168
Paid-in capital 13,068 13,032
Retained earnings 30,018 28,223
Accumulated other comprehensive loss (645) (723)
--------- ---------
Total stockholders' equity 42,609 40,700
--------- ---------
Total liabilities and stockholders' equity $ 403,248 $ 423,101
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
June 30, 2005 and 2004
(unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 6,449 $ 4,324 $ 3,239 $ 2,161
Interest and dividends on securities:
Taxable 2,239 2,119 1,137 1,097
Tax-exempt 1,282 1,063 626 531
Dividends on equity securities 101 46 53 20
Other interest 32 18 14 6
------- ------- ------- -------
Total interest and dividend income 10,103 7,570 5,069 3,815
------- ------- ------- -------
Interest expense:
Interest on deposits 1,887 1,216 979 597
Interest on Federal Home Loan Bank advances 1,502 1,326 765 676
------- ------- ------- -------
Total interest expense 3,389 2,542 1,744 1,273
------- ------- ------- -------
Net interest and dividend income 6,714 5,028 3,325 2,542
Provision for loan losses 180 120 90 60
------- ------- ------- -------
Net interest and dividend income after provision
for loan losses 6,534 4,908 3,235 2,482
------- ------- ------- -------
Noninterest income:
Trust department income 777 707 389 353
Service charges on deposit accounts 303 306 159 161
Gains on sales of available-for-sale securities, net 837 642 351 286
Gains on sales of loans held-for-sale 136 149 45 99
Other income 562 410 282 223
------- ------- ------- -------
Total noninterest income 2,615 2,214 1,226 1,122
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 3,510 2,522 1,702 1,260
Occupancy expense 349 163 163 73
Equipment expense 374 281 187 150
Trust department expense 217 179 121 129
Data processing 393 300 196 149
Insuranc 5 58 35 29
Printing and stationery 148 113 89 68
Professional fees 134 115 60 61
Legal expense 68 62 42 37
Amortization of core deposit intangible 82 34 41 17
Other expense 641 510 329 287
------- ------- ------- -------
Total noninterest expense 5,991 4,337 2,965 2,260
------- ------- ------- -------
Income before income taxes 3,158 2,785 1,496 1,344
Income taxes 521 617 188 248
------- ------- ------- -------
Net income $ 2,637 $ 2,168 $ 1,308 $ 1,096
======= ======= ======= =======
Earnings per common share $ 1.57 $ 1.52 $ .78 $ .77
======= ======= ======= =======
Dividends per share $ .50 $ .48 $ .25 $ .24
======= ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Six months ended June 30, 2005 and 2004
(unaudited)
2005 2004
---- ----
Cash flows from operating activities:
Net income $ 2,637 $ 2,168
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 152 162
Gain on sales of available-for-sale securities, net (837) (642)
Provision for loan losses 180 120
Change in loans held-for-sale (23) (95)
Depreciation and amortization 245 133
Amortization of core deposit intangible 82 34
Amortization of fair value adjustments, net 30 0
(Increase) decrease in interest receivable (44) 47
Deferred tax benefit (27) (5)
Increase in prepaid expenses (899) (173)
Decrease (increase) in other assets 231 (170)
(Increase) decrease in taxes receivable (125) 77
Decrease in accrued expenses (137) (229)
Increase in interest payable 1 3
Increase in other liabilities 60 14
-------- --------
Net cash provided by operating activities 1,526 1,444
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock 0 (351)
Purchases of available-for-sale securities (49,235) (64,474)
Proceeds from sales of available-for-sale securities 46,170 33,877
Proceeds from maturities of available-for-sale securities 26,419 15,512
Proceeds from maturities of held-to-maturity securities 11 6
Loan originations and principal collections, net (4,523) (3,818)
Recoveries of loans previously charged-off 14 9
Capital expenditures (710) (370)
Net cash provided by (used in) investing activities 18,146 (19,609)
-------- --------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and
savings accounts (5,780) 3,024
Net decrease in time deposits (5,557) (1,707)
Proceeds from Federal Home Loan Bank advances 11,560 15,000
Principal payments on advances from Federal Home Loan Bank (20,786) (441)
Dividends paid (828) (637)
Proceeds from issuance of common stock 36 24
-------- --------
Net cash (used in) provided by financing activities (21,355) 15,263
-------- --------
Net decrease in cash and cash equivalents (1,683) (2,902)
Cash and cash equivalents at beginning of year 11,678 12,129
-------- --------
Cash and cash equivalents at end of period $ 9,995 $ 9,227
======== ========
Supplemental disclosures:
Interest paid $ 3,388 $ 2,539
Income taxes paid 673 545
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
SALISBURY BANCORP, INC. AND SUBSIDIARY
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. and SBT Mortgage Service
Corporation (the "PIC") formed in April 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 six months ended June 30, 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 beginning on the acquisition date.
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 holding gain (loss) on
securities.
Comprehensive Income (Loss)
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
(amounts in thousands) (amounts in thousands)
Net income $ 2,637 $ 2,168 $ 1,308 $ 1,096
Net change in unrealized holding losses or gains
on securities during period 78 (3,128) 1,373 (3,936)
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,715 $ (960) $ 2,681 $ (2,840)
========= ========= ========= =========
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
7
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.
8
NOTE 4 - DEFINED BENEFIT PENSION PLAN
- -------------------------------------
The following summarizes the net periodic benefit cost for the three months and
six months ended June 30:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
--------------------------------- ---------------------------------
Components of net periodic benefit cost:
Service cost $ 149,743 $ 49,848 $ 233,285 $ 99,695
Interest cost 84,483 40,810 145,413 81,621
Expected return on plan assets (83,578) (38,660) (133,806) (77,320)
Amortization of:
Prior service costs 223 223 446 446
Transition obligation 693 2,168 1,386 4,336
Actuarial loss 15,256 7,004 32,668 14,008
-------------- -------------- -------------- --------------
Net periodic benefit cost $ 166,820 $ 61,393 $ 279,392 $ 122,786
============== ============== ============== ==============
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% on average).
9
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 six (6) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield 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, 2004.
RESULTS OF OPERATIONS
- ---------------------
Overview
- --------
The Company's net income for the six months ended June 30, 2005 was $2,637,000,
an increase of $469,000 or 21.63% over the same period ended June 30, 2004.
Earnings per share also increased 3.29% and amounted to $1.57 per share as
compared to $1.52 earnings per share for the same period one year ago. The
improvement in net income is primarily the result of an increase in earning
assets as a result of the merger with Canaan National Bancorp, Inc. on September
10, 2004.
The Company's assets at June 30, 2005 totaled $403,248,000 compared to total
assets of $423,101,000 at December 31, 2004. The decrease is primarily
attributable to a reduction in the securities portfolio. During the first six
months of 2005 total loans outstanding increased $4,392,000 or 2.15% to
$208,882,000. This compares to total loans outstanding of $204,490,000 at
December 31, 2004. The Bank continues to monitor the quality of the loan
portfolio to ensure that loan quality will not be sacrificed for growth or
otherwise compromise the Company's objectives. Nonperforming loans totaled
$2,021,000 at June 30, 2005 as compared to nonperforming loans totaling
$2,267,000 at December 31, 2004. This represents a decrease of $246,000 or
10.85%. Deposits at June 30, 2005 totaled $287,492,000 as compared to total
deposits of $298,842,000 at December 31, 2004. Although at June 30 total
deposits on the balance sheet reflected a decrease of $11,350,000 when compared
to December 31, 2004, average deposits for the six months ended June 30, 2005
totaled $296,273,000. The decrease at quarter end is primarily attributable to
seasonal cash flows.
As a result of the Company's second quarter financial performance, the Board of
Directors declared a second quarter cash dividend of $.25 per common share,
which was paid on July 29, 2005 to shareholders of record as of June 30, 2005.
This is the same as the cash dividend of $.25 per common share that was paid for
the first quarter of 2005. Year-to-date dividends total $.50 per common share
for this year. This compares to total year-to-date dividends of $.48 per common
share one year ago. The Company's risk based capital ratios at June 30, 2005,
which include the risk weighted assets and capital of the Bank, were 13.89% for
tier 1 capital and 15.14% for total risk based capital. The Company's leverage
ratio was 7.58% at June 30, 2005 which compares to 7.53% for the corresponding
period in 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."
10
SIX MONTHS ENDED JUNE 30, 2005
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Net Interest Income
- -------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its non-interest income from its community
banking operations. Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities portfolio and interest
paid on deposits and advances from the Federal Home Loan Bank. Non-interest
income is primarily derived from the Trust Department, service charges and other
fees related to deposit and loan accounts and from gains taken on the sale of
available-for-sale securities. For the following discussion, net interest and
dividend income is presented on a fully taxable-equivalent ("FTE") basis. FTE
interest income restates reported interest income on tax exempt securities as if
such interest were taxed at the Company's federal tax rate of 34% for all
periods presented.
(amounts in thousands)
Six months ended June 30 2005 2004
---- ----
Total Interest and Dividend Income $10,103 $ 7,570
(financial statements)
Tax Equivalent Adjustment 660 548
------- -------
Total Interest and Dividend Income
(on an FTE basis) 10,763 8,118
Total Interest Expense 3,389 2,542
------- -------
Net Interest and Dividend Income-FTE $ 7,374 $ 5,576
======= =======
Total interest and dividend income on an FTE basis for the six months ended June
30, 2005, when compared to the same period in 2004, increased $2,645,000 or
approximately 32.58%. 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 six months of 2005 totaled
$1,887,000, an increase of 55.18% compared to the same period in 2004. This
increase is primarily the result of the additional deposit accounts resulting
from the merger with Canaan National Bancorp, Inc. in September of 2004 as well
as an economic environment of generally higher interest rates. Although Federal
Home Loan Bank advances have decreased during the six month period ended June
30, 2005, interest expense on these advances increased 13.27% to $1,502,000.
This increase in interest expense is attributable to an economic environment of
increasing interest rates coupled with generally higher rates on Federal Home
Loan Bank advances that were acquired in connection with the previously
mentioned merger. Total interest expense for the six months ending June 30, 2005
was $3,389,000, an increase of $847,000 or 33.32% when compared to the same
period in 2004.
Overall, net interest and dividend income (on an FTE basis) increased $1,798,000
or 32.25% to $7,374,000 for the period ended June 30, 2005 when compared to the
same period in 2004.
Noninterest Income
- ------------------
Noninterest income totaled $2,615,000 for the six months ended June 30, 2005.
This is an increase of $401,000 or 18.11% compared to noninterest income of
$2,214,000 for the six months ended June 30, 2004. Continuing growth of the
Trust Department has resulted in an increase in trust income of $70,000 or 9.90%
to $777,000 for the first six months of 2005, compared to $707,000 for the same
period in 2004. This increase was partially offset by an increase in Trust
Department expense, which increased $38,000 or 21.23%. Gains on sales of
available-for-sale securities increased 30.37% to $837,000 for the first six
months of 2005 compared to the corresponding period in 2004.
11
Noninterest Expense
- -------------------
Noninterest expense increased 38.14% for the first six 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. with the exception of the Trust Department
expense, which reflects additional costs associated with the continuing growth
of new accounts in the department. 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 $3,510 $2,522 $ 988 39.2
Occupancy expense 349 163 186 114.1
Equipment expense 374 281 93 33.1
Trust department expense 217 179 38 21.2
Data processing 393 300 93 31.0
Insurance 75 58 17 29.3
Printing and stationery 148 113 35 31.0
Professional fees 134 115 19 16.5
Legal expense 68 62 6 9.7
Amortization of core deposit intangible 82 34 48 141.2
Other expense 641 510 131 25.7
------ ------ ------
Total noninterest expense $5,991 $4,337 $1,654 38.1
====== ====== ======
Income Taxes
- ------------
The income tax provision for the first six months of 2005 totaled $521,000 in
comparison to $617,000 for the same six 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 April of 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 $2,637,000 for the six months ended June 30, 2005
and represents earnings of $1.57 per share. This compares to net income of
$2,168,000 for the same period in 2004, an increase of 21.63% and compares to
earnings per share of $1.52 for the corresponding period in 2004. The
improvement in net income is primarily the result of an increase in earning
assets resulting from the merger with Canaan National Bancorp, Inc.
12
THREE MONTHS ENDED JUNE 30, 2005
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
Net Interest Income
- -------------------
For the following discussion, net interest and dividend income is presented on a
fully taxable-equivalent ("FTE") basis. FTE interest income restates reported
interest income on tax exempt loans and securities as if such interest were
taxed at the Company's federal tax rate of 34% for all periods presented.
(amounts in thousands)
Three months ended June 30 2005 2004
------ ------
Total Interest and Dividend Income $5,069 $3,815
(financial statements)
Tax Equivalent Adjustment 322 274
------ ------
Total Interest and Dividend Income (on an FTE basis) 5,391 4,089
Total Interest Expense 1,744 1,273
------ ------
Net Interest and Dividend Income-FTE $3,647 $2,816
====== ======
Total interest and dividend income on an FTE basis for the three months ended
June 30, 2005 increased $1,302,000 or approximately 31.84% compared to the same
period in 2004. The increase was primarily attributable to an increase in
earning assets as well as an economic environment with generally higher interest
rates.
Interest expense on deposits increased $382,000 or 63.99% for the quarter to
$979,000 compared to $597,000 for the same quarter in 2004. This increase is
primarily the result of the increased deposit base and an economic environment
of increasing interest rates. Federal Home Loan Bank advances have decreased for
the three month period ended June 30, 2005 when compared to the corresponding
period in 2004. Interest expense on these advances however, increased $89,000 or
13.17% and totaled $765,000 for the three months ended June 30, 2005 compared to
the corresponding period in 2004. Total interest expense for the three months
ending June 30, 2005 was $1,744,000 compared to total interest expense for the
same period in 2004 of $1,273,000, an increase of $471,000 or 37.00%. This
increase is a reflection an economic environment of rising interest rates and
the result of generally higher interest rates on Federal Home Loan Bank advances
that were acquired in connection with the merger of Canaan National Bancorp,
Inc. with the Company.
Overall, net interest and dividend income (on an FTE basis) increased $831,000
or 29.51% to $3,647,000 for the three month period ended June 30, 2005 when
compared to the corresponding period in 2004.
Noninterest Income
- ------------------
Noninterest income totaled $1,226,000 for the three months ended June 30, 2005
as compared to $1,122,000 for the three months ended June 30, 2004 an increase
of $104,000 or 9.27%. Continuing growth of the Trust Department has resulted in
an increase in income of $36,000 or 10.20% to $389,000 for the second quarter of
2005 compared to the same period in 2004. Gains on sales of available-for-sale
securities totaled $351,000 for the second quarter of 2005 as compared to
$286,000 for the corresponding period in 2004. This increase is primarily
attributable to management's efforts to maximize the spreads in the portfolio.
During the quarter there were opportunities in the market that resulted in
taking gains on sales while increasing the yields in the portfolio at the same
time.
13
Noninterest Expense
- -------------------
Noninterest expense totaled $2,965,000 for the three month period ended June 30,
2005 as compared to $2,260,000 for the same period in 2004, an increase of
$705,000 or 31.20%. The increases 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 Chan % Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $1,702 $1,260 $ 442 35.1
Occupancy expense 163 73 90 123.3
Equipment expense 187 150 37 24.7
Trust department expense 121 129 (8) (6.2)
Data processing 196 149 47 31.5
Insurance 35 29 6 20.7
Printing and stationery 89 68 21 30.9
Professional fees 60 61 (1) (1.6)
Legal expense 42 37 5 13.5
Amortization of core deposit intangible 41 17 24 141.1
Other expense 329 287 42 14.6
------ ------ ------
Total noninterest expense $2,965 $2,260 $ 705 31.2
====== ====== ======
Income Taxes
- ------------
The income tax provision for the three month period ended June 30, 2005 totaled
$188,000 in comparison to $248,000 for the same three month period in 2004.
Although income before taxes increased, there was a decrease in taxable income.
Net Income
- ----------
Overall, net income totaled $1,308,000 for the three months ended June 30, 2005
and represents earnings of $.78 per share. This compares to net income of
$1,096,000 for the same period in 2004, an increase of $212,000 or 19.34% and
compares to earnings per share of $.77 for the corresponding period in 2004. The
improvement in net income is primarily the result of an increase in earning
assets and reduced income taxes, and is partially offset by the current economic
condition of compressing interest spreads.
FINANCIAL CONDITION
- -------------------
Total assets at June 30, 2005 were $403,248,000, compared to $423,101,000 at
December 31, 2004, a decrease of 4.69%. The decrease is primarily the result of
sales and calls of available-for-sale securities in the portfolio during the
period ended June 30, 2005.
Securities
- ----------
During the six months ended June 30, 2005, the securities portfolio, including
Federal Home Loan Bank stock, decreased $24,446,000 or 13.26% to $159,840,000
from $184,286,000 at December 31, 2004. The decrease is primarily a reflection
of portfolio securities being sold and called during the period with the
proceeds being used to fund loan growth and reduce total advances outstanding at
the Federal Home Loan Bank of Boston.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage-backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities are
classified as available-for-sale. The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company. Unrealized
holding gains and losses on available-for-sale securities (accumulated other
comprehensive income/loss) are not included in earnings, but are reported as a
net amount (less expected tax) in a separate component of capital until
realized. At June 30, 2005, the unrealized loss net of tax was $645,000. This
compares to an unrealized loss net of tax of $723,000 at December 31, 2004. The
unrealized losses in these securities are attributable to changes in market
interest rates. Management deems the securities that are
14
currently in an unrealized loss position as not other than temporarily impaired.
The securities reported as securities held-to-maturity are stated at amortized
cost.
Lending
- -------
New business development during the first half of 2005 coupled with a small
increase in loan demand resulted in an increase in total loans outstanding to
$208,882,000 at June 30, 2005. This compares to total loans outstanding of
$204,490,000 at December 31, 2004. This is an increase of $4,392,000 or 2.15%.
Competition for loans remains aggressive in the Bank's market area, especially
in the residential mortgage loan market.
The following table represents the composition of the loan portfolio comparing
June 30, 2005 to December 31, 2004:
June 30, 2005 December 31, 2004
------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 14,683 $ 15,127
Real Estate-construction and land
development 14,391 14,290
Real Estate-residential 133,166 130,414
Real Estate-commercial 37,770 35,487
Consumer 8,513 9,122
Other 372 69
--------- ---------
208,895 204,509
Unearned income (13) (19)
Allowance for loan losses (2,673) (2,512)
--------- ---------
Net Loans $ 206,209 $ 201,978
========= =========
Provisions and Allowance for Loan Losses
- ----------------------------------------
Total net loans at June 30, 2005 increased 2.09% to $206,209,000 when compared
to total net loans of $201,978,000 at December 31, 2004. At June 30, 2005
approximately 89% 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 this risk
associated with extending loans, the Bank maintains an allowance for loan losses
through charges to earnings. The loan loss provision for the six-month period
ended June 30, 2005 was $180,000 compared to $120,000 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 June 30, 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.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment records, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
15
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Bank does not separately identify individual
consumer and residential loans for impairment disclosures.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
six months ended June 30, 2005.
At June 30, 2005, the allowance for loan losses totaled $2,673,000, representing
132.26% of nonperforming loans, which totaled $2,021,000, and 1.28% of total
loans of $208,882,000. This compares to an allowance for loan losses of
$2,512,000, representing 110.81% of nonperforming loans, which totaled
$2,267,000, and 1.23% of total loans of $204,490,000 at December 31, 2004. A
total of $33,000 of loans were charged off by the Bank during the six months
ended June 30, 2005. These charged-off loans consisted primarily of consumer
loans. This compares to loans charged off during the six month period ended June
30, 2004 which totaled $24,000. A total of $14,000 of previously charged-off
loans was recovered during the six month period ended June 30, 2005. Recoveries
for the same period in 2004 totaled $9,000. 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 June 30, 2005 and December 31, 2004:
June 30, 2005 December 31, 2004
------------- -----------------
(amounts in thousands)
Demand $ 65,068 $ 65,017
NOW 25,040 29,569
Money Market 53,344 49,206
Savings 58,148 63,588
Time 85,892 91,462
-------- --------
Total Deposits $287,492 $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 June 30, 2005, the Company had $69,922,000 in
outstanding advances from the Federal Home Loan Bank compared to $79,213,000 at
December 31, 2004. 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.
16
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
2005, the Company was slightly asset sensitive (positive gap). This would
suggest that during a period of rising interest rates, the Company would be in a
better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at June 30, 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
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At June 30, 2005 the Company had
approximately $49,552,000 in loan commitments outstanding. Management believes
that the current level of liquidity is ample to meet the Company's needs for
both the present and foreseeable future.
Capital
- -------
At June 30, 2005, the Company had $42,609,000 in stockholders' equity, an
increase of 4.69 % when compared to December 31, 2004 stockholders' equity
totaling $40,700,000. Earnings for the six-month period ended June 30, 2005
totaled $2,637,000. Market conditions resulted in a decrease in accumulated
other comprehensive loss to $645,000 from $723,000 at December 31, 2004.
A review and analysis of securities has determined that there has been no credit
deterioration and that the unrealized loss on securities available-for-sale is
due to the current interest rate environment and management deems the securities
to be not other than temporarily impaired. The Company has declared two
quarterly dividends resulting in a decrease in capital of $841,000. The Company
issued 940 new shares of common stock under the terms of the Director Stock
Retainer Plan that resulted in an increase in capital of $36,000. Under current
regulatory definitions, the Company and the Bank are considered to be "well
capitalized" for capital adequacy purposes. As a result, the Bank pays the
lowest federal deposit insurance deposit premiums possible. One primary measure
of capital adequacy for regulatory purposes is based on the ratio of risk-based
capital to risk-weighted assets. This method of measuring capital adequacy helps
to establish capital requirements that are more sensitive to the differences in
risk associated with various assets. It takes into account off-balance sheet
exposure in assessing capital adequacy and it minimizes disincentives to holding
liquid, low-risk assets. At June 30, 2005, the Company had a risk-based capital
ratio of 15.14% 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.
17
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 interest rates 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;
(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.
18
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 the interest rate sensitivity 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. Please refer to Interest Rate Risk and Liquidity under Item 2.
The Company's interest rate risk and liquidity position has not significantly
changed from year end 2004.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of June 30, 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 six
month period ended June 30, 2005 there were no changes in the Company's internal
control over financial reporting that materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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.
19
SALISBURY BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salisbury Bancorp, Inc.
Date: August 12, 2005 by: /s/ John F. Perotti
----------------- --------------------
John F. Perotti
Chief Executive Officer
Date: August 12, 2005 by: /s/ John F. Foley
--------------- -----------------
John F. Foley
Chief Financial Officer
20