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, 2006
--------------------------------------------------
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
-------
Salibury 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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated Filer" in Rule 12b-2 of the Exchange Act). (Check
one):
Large Accelerated Filer [_] Accelerated Filer [_] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
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 August 4, 2006, there
were 1,684,181 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, 2006 (unaudited)
and December 31, 2005 4
Condensed Consolidated Statements of Income -six and three months
ended June 30, 2006 and 2005 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -six months ended
June 30, 2006 and 2005 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
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 1A.Risk Factors 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, 2006 and December 31, 2005
-----------------------------------
June 30, December 31,
2006 2005
--------- ---------
ASSETS
(unaudited)
Cash and due from banks $ 7,208 $ 8,432
Interest bearing demand deposits with other banks 305 652
Money market mutual funds 824 1,120
--------- ---------
Cash and cash equivalents 8,337 10,204
Investments in available-for-sale securities (at fair value) 145,191 145,608
Investments in held-to-maturity securities (fair values of $77 as of
June 30, 2006 and $147 as of December 31, 2005) 77 147
Federal Home Loan Bank stock, at cost 4,553 5,413
Loans held-for-sale 117 0
Loans, less allowance for loan losses of $2,580 as of June 30, 2006
and $2,626 as of December 31, 2005 228,337 215,989
Investment in real estate 75 75
Premises and equipment 6,319 6,452
Goodwill 9,509 9,509
Core deposit intangible 1,576 1,658
Accrued interest receivable 2,392 2,363
Cash surrender value of life insurance policies 3,484 3,424
Other assets 3,198 2,080
--------- ---------
Total assets $ 413,165 $ 402,922
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 67,992 $ 63,996
Interest-bearing 230,442 223,275
--------- ---------
Total deposits 298,434 287,271
Federal Home Loan Bank advances 70,413 71,016
Other liabilities 3,313 3,193
--------- ---------
Total liabilities 372,160 361,480
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,684,181 shares at June 30, 2006 and 1,683,341 shares
at December 31, 2005 168 168
Paid-in capital 13,100 13,068
Retained earnings 32,379 31,101
Accumulated other comprehensive loss (4,642) (2,895)
--------- ---------
Total stockholders' equity 41,005 41,442
--------- ---------
Total liabilities and stockholders' equity $ 413,165 $ 402,922
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(amounts in thousands, except per share data)
June 30, 2006 and 2005
(unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2006 2005 2006 2005
------- ------- ------- -------
Interest and dividend income:
Interest and fees on loans $ 7,471 $ 6,449 $ 3,843 $ 3,239
Interest on debt securities:
Taxable 2,562 2,239 1,294 1,137
Tax-exempt 1,057 1,282 562 626
Dividends on equity securities 130 101 70 53
Other interest 29 32 20 14
------- ------- ------- -------
Total interest and dividend income 11,249 10,103 5,789 5,069
------- ------- ------- -------
Interest expense:
Interest on deposits 2,957 1,887 1,619 979
Interest on Federal Home Loan Bank advances 1,741 1,502 912 765
------- ------- ------- -------
Total interest expense 4,698 3,389 2,531 1,744
------- ------- ------- -------
Net interest and dividend income 6,551 6,714 3,258 3,325
Provision for loan losses 0 180 0 90
------- ------- ------- -------
Net interest and dividend income after
provision for loan losses 6,551 6,534 3,258 3,235
------- ------- ------- -------
Noninterest income:
Trust department income 935 777 450 389
Loan commissions 45 126 31 54
Service charges on deposit accounts 359 303 182 159
Gain (loss) on sales of available-for-sale 61 837 (13) 351
securities, net
Gain on sales of loans held-for-sale 230 136 168 45
Other income 397 436 183 228
------- ------- ------- -------
Total noninterest income 2,027 2,615 1,001 1,226
------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits 3,410 3,510 1,707 1,702
Occupancy expense 352 349 176 163
Equipment expense 381 374 194 187
Data processing 610 556 327 359
Insurance 63 75 32 35
Printing and stationery 129 163 76 104
Professional fees 180 134 90 60
Legal expense 63 101 38 75
Amortization of core deposit intangible 82 82 41 41
Other expense 559 647 311 239
------- ------- ------- -------
Total noninterest expense 5,829 5,991 2,992 2,965
------- ------- ------- -------
Income before income taxes 2,749 3,158 1,267 1,496
Income taxes 596 521 261 188
------- ------- ------- -------
Net income $ 2,153 $ 2,637 $ 1,006 $ 1,308
======= ======= ======= =======
Earnings per common share $ 1.28 $ 1.57 $ .60 $ .78
======= ======= ======= =======
Dividends per average share outstanding $ .52 $ 50 $ .26 $ .25
======= ======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Six months ended June 30, 2006 and 2005
(unaudited)
2006 2005
-------- --------
Cash flows from operating activities:
Net income $ 2,153 $ 2,637
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 67 152
Gain on sales of available-for-sale securities, net (61) (837)
Provision for loan losses 0 180
Change in loans held-for-sale (117) (23)
Net decrease in mortgage servicing rights 16 0
Depreciation and amortization 272 245
Amortization of core deposit intangible 82 82
Accretion of fair value adjustment on deposits/borrowings (69) (77)
Amortization of fair value adjustment on loans 63 107
Increase in interest receivable (28) (44)
Deferred tax benefit (187) (27)
Decrease (increase) in taxes receivable 280 (125)
Increase in prepaid expenses (344) (899)
Increase in cash surrender value of insurance policies (60) (60)
Decrease in other assets 0 291
Decrease in accrued expenses (682) (137)
Increase in interest payable 43 1
Increase in other liabilities 92 60
Issuance of shares for Directors' fees 32 36
Decrease in unearned income on loans (54) 0
-------- --------
Net cash provided by operating activities 1,498 1,562
-------- --------
Cash flows from investing activities:
Redemption of Federal Home Loan Bank stock 860 0
Purchases of available-for-sale securities (33,644) (49,235)
Proceeds from sales of available-for-sale securities 27,163 46,170
Proceeds from maturities of available-for-sale securities 4,900 26,419
Proceeds from maturities of held-to-maturity securities 70 11
Loan originations and principal collections, net (12,381) (4,523)
Recoveries of loans previously charged-off 22 14
Capital expenditures (125) (710)
-------- --------
Net cash (used in) provided by investing activities (13,135) 18,146
-------- --------
6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Six months ended June 30, 2006 and 2005
(unaudited)
(continued)
2006 2005
-------- --------
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (7,443) (5,780)
Net increase (decrease) in time deposits 18,609 (5,557)
Federal Home Loan Bank advances 10,000 11,560
Principal payments on advances from Federal Home Loan Bank (9,943) (20,786)
Net change in short term advances from Federal Home Loan Bank (594) 0
Dividends paid (859) (828)
-------- --------
Net cash provided by (used in) financing activities 9,770 (21,391)
-------- --------
Net decrease in cash and cash equivalents (1,867) (1,683)
Cash and cash equivalents at beginning of year 10,204 11,678
-------- --------
Cash and cash equivalents at end of period $ 8,337 $ 9,995
======== ========
Supplemental disclosures:
Interest paid $ 4,724 $ 3,388
Income taxes paid 503 673
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
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, 2006 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2005 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 holding gain (loss) on
securities.
Comprehensive Income (Loss)
Six months ended Three months ended
June 30, June 30,
2006 2005 2006 2005
------- ------- ------- -------
(amounts in thousands) (amounts in thousands)
Net income $ 2,153 $ 2,637 $ 1,006 $ 1,308
Net change in unrealized holding (losses) or gains
on securities during period (1,747) 78 (2,060) 1,373
------- ------- ------- -------
Comprehensive income (loss) $ 406 $ 2,715 $(1,054) $ 2,681
======= ======= ======= =======
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("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 is effective for the Company as
of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The adoption of this Statement is not anticipated to
have a material impact on the Company's financial position or results of
operations as there are no share-based payment arrangements with employees and
the compensation expense related to the Directors Stock Retainer Plan is not
anticipated to be material.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140. SFAS No. 156 requires
any entity to recognize a servicing asset or servicing liability each time it
8
undertakes an obligation to service a financial asset by entering into a
servicing contract in specific situations. Additionally, the servicing asset or
servicing liability shall be initially measured at fair value; however, an
entity may elect the "amortization method" or "fair value method" for subsequent
balance sheet reporting periods. SFAS No. 156 is effective as of an entity's
first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The Company does not expect the adoption of
this statement to have a material impact on its financial condition, results of
operations or cash flows.
NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------
The following summarizes the net periodic benefit cost for the six months and
three months ended June 30:
Six Months Ended Three Months Ended
June 30, June 30,
2006 2005 2006 2005
---------------------- ----------------------
Components of net periodic benefit cost:
Service cost $ 242,865 $ 233,285 $ 121,432 $ 149,743
Interest cost 163,496 145,413 81,748 84,483
Expected return on plan assets (142,833) (133,806) (71,416) (83,578)
Amortization of:
Prior service costs 447 446 224 223
Transition obligation 0 1,386 0 693
Actuarial loss 48,263 32,668 24,131 15,256
--------- --------- --------- ---------
Net periodic benefit cost $ 312,238 $ 279,392 $ 156,119 $ 166,820
========= ========= ========= =========
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* Graded table* Graded table* Graded table*
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 (roughly 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 that 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 and Investment Services Division located in
the towns of 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, 2005.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's net income for the six months ended June 30, 2006 was $2,153,000.
This compares to earnings of $2,637,000 for the same period in 2005. Earnings
per share for the six months ended June 30, 2006 totaled $1.28 per share that
compared to earnings per share of $1.57 for the corresponding period in 2005.
The decrease in earnings is primarily attributable to a decrease in non-interest
income; specifically, reduced income from gains in securities transactions when
comparing the two periods. During the first six months of 2006, the Company's
gains on sale of available-for-sale securities amounted to $61,000 as compared
with $837,000 during the same period in 2005. In addition, the Federal Reserve
Bank has moved interest rates upward. This action is raising short term rates
flattening the yield curve. As a result, the cost of deposits and the cost of
borrowed funds are increasing at a faster pace than the earnings yield on the
loan and securities portfolios. This interest rate environment compresses the
net interest margins for financial intermediaries like the Bank. Total
non-interest expense for the first six months of 2006 decreased $162,000 or
2.70% when comparing the corresponding period in 2005. This decrease is
primarily the result of managements continuing efforts to control operating
expenses.
The Company's assets at June 30, 2006 totaled $413,165,000 compared to total
assets of $402,922,000 at December 31, 2005. New business development efforts
have resulted in growth in net loans outstanding which totaled $228,454,000 at
June 30, 2006. This is an increase of $12,464,000 or 5.77% when compared to
total net loans of $215,989,000 at December 31, 2005. Non-performing loans
totaled $771,000 at June 30, 2006 as compared to non-performing loans totaling
$773,000 at December 31, 2005. 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. Deposits at June 30, 2006 totaled
$298,434,000 as compared to total deposits of $287,271,000 at December 31, 2005.
The increase is primarily the result of the Bank's decision to begin using
brokered deposits as part of a growth strategy. As of June 30, 2006, the most
recent notification from the Federal Deposit Insurance Corporation categorized
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. The Company's total risk based capital ratio was 16.13%; the
Tier 1 capital ratio was 15.00% and the leverage ratio was 8.54%. The Board of
Directors declared a second quarter cash dividend of $.26 per common share,
which was paid on July 31, 2006 to shareholders of record as of June 30, 2006.
This compared to a cash dividend of $.25 per common share that was paid for the
second quarter of 2005. Year-to-date dividends total $.52 per common share
outstanding for this year. This compares to total year-to-date dividends of $.50
per common share one year ago.
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
10
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."
SIX MONTHS ENDED JUNE 30, 2006
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
Net Interest Income
-------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its non-interest incomes. 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 and investment services division, service charges and other fees related
to deposit and loan accounts and income from gains in securities transactions.
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, 2006 2005
------- -------
Total Interest and Dividend Income
(financial statements) $11,249 $10,103
Tax Equivalent Adjustment 545 660
------- -------
Total Interest and Dividend Income
(on an FTE basis) 11,794 10,763
Total Interest Expense 4,698 3,389
------- -------
Net Interest and Dividend Income-FTE $ 7,096 $ 7,374
======= =======
Total interest and dividend income on an FTE basis for the six months ended June
30, 2006, when compared to the same period in 2005, increased $1,031,000 or
approximately 9.58%. The increase was primarily attributable to an economic
environment experiencing an increase in interest rates as well as an increase in
earning assets.
Interest expense on deposits for the first six months of 2006 totaled
$2,957,000, an increase of $1,070,000 or 56.70% which compared to $1,887,000 for
the same period in 2005. This increase reflects an economic environment of
generally higher interest rates as well as growth in deposits. Although Federal
Home Loan Bank advances decreased less than 1% during the six month period ended
June 30, 2006, interest expense on these advances increased 15.91% to
$1,741,000. This increase in interest expense is also attributable to an
economic environment of increasing interest rates. Total interest expense for
the six months ended June 30, 2006 was $4,698,000, an increase of $1,309,000 or
38.62% when compared to the same period in 2005.
Overall, net interest and dividend income (on an FTE basis) decreased $278,000
or 3.77% to $7,096,000 for the period ended June 30, 2006 when compared to the
same period in 2005.
Noninterest Income
------------------
Noninterest income totaled $2,027,000 for the six months ended June 30, 2006.
This is a decrease of $588,000 or 22.49% compared to noninterest income of
$2,615,000 for the six months ended June 30, 2005. Gains on sales of
available-for-sale securities decreased 92.71% to $61,000 for the first six
months of 2006 compared to the corresponding period in 2005. This decrease is
primarily the result of the movement of market rates during the quarter. The
yield curve continued to flatten and was inverted at times during the first six
months of 2006 which limited opportunities to generate gains on sales of
available-for-sale securities. However, continuing growth of the
11
trust and investment services division has resulted in an increase in trust
income of $158,000 or 20.33% to $935,000 for the first six months of 2006, which
compares to $777,000 for the same period in 2005.
Other income has remained consistent when comparing the first six months of 2006
to the same period in 2005. This category of income primarily consists of fees
associated with transaction accounts and in addition, fees related to the
origination and servicing of mortgage loans and gains related to the sale of
mortgage loans.
Noninterest Expense
Noninterest expense decreased 2.7% for the first six months of 2006 as compared
to the same period in 2005. Although there are some increases in noninterest
expenses which are attributable to normal volumes of business, the overall
decreases in the noninterest expenses listed in the table below are all
primarily attributable to management's continuing efforts to control operating
expenses. The components of noninterest expense and the changes in the period
were as follows (amounts in thousands):
2006 2005 Change% Change
-----------------------------------------------------------------------------
Salaries and employee benefits $3,410 $3,510 $ (100) (2.8)
Occupancy expense 352 349 3 .9
Equipment expense 381 374 7 1.9
Data processing 610 556 54 9.7
Insurance 63 75 (12) (16.0)
Printing and stationery 129 163 (34) (20.9)
Professional fees 180 134 46 34.3
Legal expense 63 101 (38) (37.6)
Amortization of core deposit intangible 82 82 0 0
Other expense 559 647 (88) (13.6)
------ ------ ------ ------
Total noninterest expense $5,829 $5,991 $ (162) (2.7)
====== ====== ====== ======
Income Taxes
------------
The income tax provision for the first six months of 2006 totaled $596,000 in
comparison to $521,000 for the same six month period in 2005. Pretax income in
2006 was $2,749,000 and included tax exempt income totaling $1,057,000. Pretax
income in 2005 was $3,158,000 and included tax exempt income totaling
$1,282,000. The increase in the income tax provision is primarily attributable
to an increase in taxable income.
Net Income
----------
Overall, net income totaled $2,153,000 for the six months ended June 30, 2006
and represents earnings of $1.28 per average share outstanding. This compares to
net income of $2,637,000 or $1.57 per average share outstanding for the same
period in 2005.
THREE MONTHS ENDED JUNE 30, 2006
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
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 2006 2005
------- -------
Total Interest and Dividend Income
(financial statements) $ 5,789 $ 5,069
Tax Equivalent Adjustment 290 322
------- -------
Total Interest and Dividend Income (on an FTE basis) 6,079 5,391
Total Interest (Expense) (2,531) (1,744)
------- -------
Net Interest and Dividend Income-FTE $ 3,548 $ 3,647
======= =======
12
Total interest and dividend income on an FTE basis for the three months ended
June 30, 2006 increased $688,000 or approximately 12.76% compared to the same
period in 2005. The increase was primarily attributable to an economic
environment with generally higher interest rates and an increase in earning
assets. Interest expense on deposits increased $640,000 or 65.37% for the
quarter to $1,619,000 compared to $979,000 for the same quarter in 2005. This
increase is primarily the result of an economic environment of increasing
interest rates coupled with an increased deposit base. Federal Home Loan Bank
advances have decreased slightly during the three month period ended June 30,
2006 when compared to the corresponding period in 2005. Interest expense on
these advances however, have increased $147,000 or 19.22% and totaled $912,000
for the three months ended June 30, 2006 compared to $765,000 for the
corresponding period in 2005. Total interest expense for the three months ending
June 30, 2006 was $2,531,000 compared to total interest expense for the same
period in 2005 of $1,744,000, an increase of $787,000 or 45.13%. This increase
is a reflection of an economic environment of rising interest rates and the
result of generally higher interest rates on Federal Home Loan Bank advances.
Overall, net interest and dividend income (on an FTE basis) decreased $99,000 or
2.71% to $3,548,000 for the three month period ended June 30, 2006 when compared
to the corresponding period in 2005.
Noninterest Income
------------------
Noninterest income totaled $1,001,000 for the three months ended June 30, 2006
as compared to $1,226,000 for the three months ended June 30, 2005. This
decrease of $225,000 or 18.35% is primarily attributable to reduced income from
gains in securities transactions. Losses on sales of available-for-sale
securities totaled $13,000 for the second quarter of 2006. This compares to
gains on sales of available-for-sale securities of $351,000 for the
corresponding period in 2005. This decrease is primarily the result of the
movement of market rates during the quarter. The yield curve continued to
flatten which limited opportunities to generate gains on sales of
available-for-sale securities. However, income from the trust and investment
services division increased $61,000 or 15.68% to $450,000 for the second quarter
of 2006 compared to the same period in 2005. This is primarily the result of
continued growth in assets under management. Other noninterest income is
primarily related to fees associated with transaction accounts and fees related
to the origination and servicing of mortgage loans and gains related to the sale
of mortgage loans. The volumes of these transactions are driven primarily by
consumer demand which results in variances from quarter to quarter. Year-to-date
volumes however, are consistent when comparing 2006 to 2005.
Noninterest Expense
-------------------
Noninterest expense totaled $2,992,000 for the three month period ended June 30,
2006 as compared to $2,965,000 for the same period in 2005, an increase of
$27,000 or 0.91%. The components of noninterest expense and the changes in the
period were as follows (amounts in thousands):
2006 2005 Change% Change
-----------------------------------------------------------------------------
Salaries and employee benefits $1,707 $1,702 $ 5 .3
Occupancy expense 176 163 13 8.0
Equipment expense 194 187 7 3.7
Data processing 327 359 (32) (8.9)
Insurance 32 35 (3) (.9)
Printing and stationery 76 104 (28) (26.9)
Professional fees 90 60 30 50.0
Legal expense 38 75 (37) (49.3)
------ ------ ------ ------
Amortization of core deposit intangible 41 41 0 0
Other expense 311 239 (72) (30.1)
------ ------ ------ ------
Total noninterest expense $2,992 $2,965 $ 27 91
====== ====== ====== ======
Income Taxes
------------
The income tax provision for the three month period ended June 30, 2006 totaled
$261,000 in comparison to $188,000 for the same three month period in 2005. The
increase in the income tax provision is attributable to an increase in taxable
income.
13
Net Income
----------
Overall, net income totaled $1,006,000 for the three months ended June 30, 2006
and represents earnings of $.60 per average share outstanding share. This
compares to net income of $1,308,000 for the same period in 2005, a decrease of
$302,000 or 23.09% and compares to earnings per share of $.78 for the period.
FINANCIAL CONDITION
-------------------
Total assets at June 30, 2006 were $413,165,000, compared to $402,922,000 at
December 31, 2005, an increase of approximately 2.54%. The increase is primarily
the result of an increase in loans during the period that were funded by an
increase in deposits.
Securities
----------
During the six months ended June 30, 2006, the securities portfolio, including
Federal Home Loan Bank stock, decreased $1,347,000 or .89% to $149,821,000 from
$151,168,000 at December 31, 2005. 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.
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, 2006, the unrealized loss net of tax was $4,642,000. This
compares to an unrealized loss net of tax of $2,895,000 at December 31, 2005.
The unrealized losses in these securities are attributable to changes in market
interest rates. Management deems the securities that are 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 2006 coupled with an increase
in loan demand resulted in an increase in total loans outstanding to
$230,917,000 at June 30, 2006. This compares to total loans outstanding of
$218,615,000 at December 31, 2005. This is an increase of $12,302,000 or 5.63%.
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, 2006 to December 31, 2005:
June 30, 2006 December 31, 2005
------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 14,903 $ 15,354
Real Estate-construction and land
development 17,843 18,814
Real Estate-residential 139,692 135,619
Real Estate-commercial 50,806 40,889
Consumer 7,596 7,900
Other 82 47
--------- ---------
230,922 218,623
Unearned income (5) (8)
Allowance for loan losses (2,580) (2,626)
--------- ---------
Net Loans $ 228,337 $ 215,989
========= =========
14
Provisions and Allowance for Loan Losses
----------------------------------------
Net loans at June 30, 2006 increased 5.72% to $228,337,000 when compared to net
loans of $215,989,000 at December 31, 2005. At June 30, 2006 approximately 90%
of the Bank's loan portfolio was related to real estate products. The
concentration remained consistent as approximately 89% of the portfolio was
related to real estate at December 31, 2005. 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 or reserve for
loan and lease losses through charges to earnings. There was no provision
expense for allowances for loan losses for the first six month period of 2006.
This compares to a loan loss provision of $180,000 made during the comparable
period in 2005.
The Bank evaluates the adequacy of the allowance no less frequently than on a
quarterly 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, 2006. Such evaluations are based on assessments of credit quality
and "risk rating" of loans by senior management, which is reviewed by the Bank's
Loan Committee on a regular basis. 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 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
commercial loans with balances outstanding of $100,000 or more and residential
real estate mortgages with balances of $300,000 or more. Such loans are
considered impaired 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 loan and/or residential mortgage 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;
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.
15
Nonperforming loans, which include all loans that are on a non-accrual status
along with loans that are 90 days or more past due and still accruing, are
closely monitored by management. At June 30, 2006, nonperforming loans totaled
$771,000 or 0.33% of total loans outstanding of $230,917,000. The allowance for
loan losses totaled $2,580,000 representing 334.63% of nonperforming loans.
Nonperforming loans totaled $773,000 or 0.35% of total loans outstanding of
$218,615,000 at December 31, 2005. The allowance for loan losses totaled
$2,626,000 at December 31, 2005 and represented 339.71% of nonperforming loans.
A total of $68,000 of loans were charged off by the Bank during the six months
ended June 30, 2006. These charged-off loans consisted primarily of consumer
loans. This compares to loans charged off during the six month period ended June
30, 2005 which totaled $33,000. A total of $22,000 of previously charged-off
loans was recovered during the six month period ended June 30, 2006. Recoveries
for the same period in 2005 totaled $14,000. 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, 2006 and December 31, 2005:
June 30, 2006 December 31, 2005
------------- -----------------
(amounts in thousands)
Demand $ 67,992 $ 63,996
NOW 23,151 25,900
Money Market 53,034 57,401
Savings 47,244 51,567
Time 107,013 88,407
-------- --------
Total Deposits $298,434 $287,271
======== ========
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, 2006, the Company had $70,413,000 in
outstanding advances from the Federal Home Loan Bank compared to $71,016,000 at
December 31, 2005. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
Off-Balance Sheet Arrangements
In the normal course of business the Company enters into certain relationships
characterized as lending related off-balance sheet arrangements. These lending
commitments have various terms and are designed to accommodate the financial
needs of consumers, businesses and other entities. Many of these loan
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of these commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
Loan commitments have credit risk essentially the same as that involved in
extending loans to customers. They are subject to normal credit approval
procedures and policies. Collateral is obtained based on management's assessment
of the customer's credit. The accompanying table summarizes the Company's off
balance sheet lending-related financial instruments by remaining maturity at
June 30, 2006:
16
June 30, 2006
(amounts in thousands)
By remaining maturity Less than 1 year 1-3 years 4-5 years After 5 years Total
---------------------------------------------------------------------------------------------------------------------
Off balance sheet lending-related
Financial Instruments
Residential real estate related $ 5,094 $ 2,539 $ $ 33,224 $ 40,857
Commercial related 4,478 7,233 1,162 12,873
Consumer related
Standby letters of credit 22 22
---------------------------------------------------------------------------------------------------------------------
Total $ 9,572 $ 9,794 $ 34,386 $ 34,386 $ 53,752
---------------------------------------------------------------------------------------------------------------------
Interest Rate Risk
------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets. In an attempt to
manage its exposure to changes in interest rates, the Bank's assets and
liabilities are managed in accordance with policies established and reviewed by
the Bank's Board of Directors. The Bank's Asset/Liability Management Committee
monitors asset and deposit levels, developments and trends in interest rates,
liquidity and capital. One of the primary financial objectives is to manage
interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
2006, the Company maintains a liability sensitive (negative gap) position. This
would suggest that during a period of declining interest rates, the Company
would be in a better position to increase net interest income. To the contrary,
during a period of rising interest rates, a negative gap would result in a
decrease in interest income. The level of interest rate risk at June 30, 2006 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 June 30, 2006 the Company had
approximately $53,752,000 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, 2006, the Company had $41,005,000 in stockholders' equity, a
decrease of 1.05% when compared to December 31, 2005 stockholders' equity
totaling $41,442,000. Earnings for the six-month period ended June 30, 2006
totaled $2,153,000. Market conditions resulted in an increase in accumulated
other comprehensive loss to $4,642,000 from $2,895,000 at December 31, 2005.
17
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 $875,000. The Company
issued 840 new shares of common stock under the terms of the Director Stock
Retainer Plan that resulted in an increase in capital of $32,000. Under current
regulatory definitions, the Company and the Bank are considered to be "well
capitalized" for capital adequacy purposes. As a result, the Bank pays the
lowest federal deposit insurance 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, 2006, the Company had a total risk based
capital ratio of 16.13% compared to 15.76% at December 31, 2005. Maintaining
strong capital is essential to bank safety and soundness. However, the effective
management of capital resources requires generating attractive returns on equity
to build value for shareholders while maintaining appropriate levels of capital
to fund growth, meet regulatory requirements and be consistent with prudent
industry practices. Management believes that the capital levels of the Company
and Bank are adequate to continue to meet the foreseeable capital needs of the
institutions.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation, although interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Although not a material factor 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.
18
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 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 2005.
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, 2006, 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, 2006 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 1A. Risk Factors. Not applicable
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities and Use of Proceeds. On May 10, 2006,
the Company issued 840 shares of common stock to members of its Board of
Directors under the terms of the Director Stock Retainer Plan. The shares were
issued in a private transaction in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended. No cash
consideration was received upon issuance of the shares.
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Incorporated by
reference from Form 8-K filed May 12, 2006.
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 11, 2006 by: /s/ John F. Perotti
--------------- --------------------
John F. Perotti
Chief Executive Officer
Date: August 11, 2006 by: /s/ John F. Foley
--------------- ------------------
John F. Foley
Chief Financial Officer