SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ________
Commission file number 0-24751
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Salisbury Bancorp, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
--------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
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(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
--------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 [ ] Smaller reporting company [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:
The Company had 1,685,021 shares outstanding as of May 9, 2008.
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -March 31, 2008 (unaudited)
and December 31, 2007 4
Condensed Consolidated Statements of Income -three months ended March 31, 2008
and 2007 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -three months ended March 31, 2008
and 2007 (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- Not Applicable 16
Item 4. Controls and Procedures 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1A. Risk Factors- Not Applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 17
- 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)
March 31, 2008 and December 31, 2007
March 31 December 31
2008 2007
---- ----
ASSETS (unaudited)
------
Cash and due from banks $ 6,423 $ 12,811
Interest-bearing demand deposits with other banks 2,559 726
Money market mutual funds 1,361 1,341
Federal funds sold 6,615 300
----------- -----------
Cash and cash equivalents 16,958 15,178
Investments in available-for-sale securities (at fair value) 148,234 147,377
Investments in held-to-maturity securities (fair values of $70 and $71 as of
March 31, 2008 and December 31, 2007, respectively) 70 71
Federal Home Loan Bank stock, at cost 5,176 5,176
Loans held-for-sale 146 120
Loans, less allowance for loan losses of $2,535 as of March 31, 2008
and $2,475 as of December 31, 2007, respectively 276,075 268,191
Investment in real estate 75 75
Premises and equipment 6,944 6,803
Goodwill 9,829 9,829
Core deposit intangible 1,288 1,329
Accrued interest receivable 2,267 2,539
Cash surrender value of life insurance policies 3,718 3,688
Other assets 2,015 1,584
----------- -----------
Total assets $ 472,795 $ 461,960
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 65,246 $ 69,215
Interest-bearing 271,349 248,526
----------- -----------
Total deposits 336,595 317,741
Federal Home Loan Bank advances 86,166 95,011
Due to broker 1,045 0
Other liabilities 4,045 3,645
----------- -----------
Total liabilities 427,851 416,397
----------- -----------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,685,021 shares at March 31, 2008 and December 31, 2007 169 169
Paid-in capital 13,130 13,130
Retained earnings 35,910 35,583
Accumulated other comprehensive loss (4,265) (3,319)
----------- -----------
Total shareholders' equity 44,944 45,563
----------- -----------
Total liabilities and shareholders' equity $ 472,795 $ 461,960
=========== ===========
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)
March 31, 2008 and 2007
(unaudited)
Three Months Ended
March 31,
2008 2007
-------- ---------
Interest and dividend income:
Interest and fees on loans $ 4,632 $ 4,388
Interest on debt securities:
Taxable 1,287 1,431
Tax-exempt 574 526
Dividends on equity securities 78 78
Other interest 97 14
-------- ---------
Total interest and dividend income 6,668 6,437
-------- ---------
Interest expense:
Interest on deposits 1,973 2,030
Interest on Federal Home Loan Bank advances 1,035 1,041
-------- ---------
Total interest expense 3,008 3,071
-------- ---------
Net interest and dividend income 3,660 3,366
Provision for loan losses 60 0
-------- ---------
Net interest and dividend income after provision
for loan losses 3,600 3,366
-------- ---------
Noninterest income:
Trust and Wealth Advisory Services income 600 530
Service charges on deposit accounts 198 180
Gain on sales of available-for-sale securities, net 318 117
Gain on sales of loans held-for-sale 73 65
Other income 244 232
-------- ---------
Total noninterest income 1,433 1,124
-------- ---------
Noninterest expense:
Salaries and employee benefits 2,076 1,952
Occupancy expense 231 191
Equipment expense 211 191
Data processing 319 337
Insurance 44 38
Printing and stationery 60 64
Professional fees 234 165
Legal expense 61 55
Amortization of core deposit intangible 41 41
Other expense 374 285
-------- ---------
Total noninterest expense 3,651 3,319
-------- ---------
Income before income taxes 1,382 1,171
Income taxes 301 237
-------- ---------
Net income $ 1,081 $ 934
======== =========
Earnings per common share $ .64 $ .55
======== =========
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)
Three months ended March 31, 2008 and 2007
(unaudited)
2008 2007
---- ----
Cash flows from operating activities:
Net income $ 1,081 $ 934
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization of securities, net 24 17
Gain on sales of available-for-sale securities, net (318) (117)
Provision for loan losses (60) 0
Change in loans held-for-sale (26) 304
Change in deferred loan costs, net (20) (35)
Net decrease in mortgage servicing rights 18 28
Depreciation and amortization 162 540
Amortization of core deposit intangible 41 41
Accretion of fair value adjustment on deposits/borrowings (33) (36)
Amortization of fair value adjustment on loans 12 24
Decrease in interest receivable 274 189
Deferred tax benefit 2 (414)
Decrease in taxes receivable 0 317
Increase in prepaid expenses (37) (50)
Increase in cash surrender value of insurance policies (30) (30)
Increase in income taxes payable 253 323
Increase in other assets (173) (7)
(Decrease)/ increase in accrued expenses (65) 41
Increase in interest payable 46 42
Increase/ (decrease) in other liabilities 386 (57)
Decrease in unearned income on loans 6 1
---------- ----------
Net cash provided by operating activities 1,543 2,055
---------- ----------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock 0 (282)
Purchases of available-for-sale securities (64,317) (16,738)
Proceeds from sales of available-for-sale securities 63,349 25,219
Proceeds from maturities of held-to-maturity securities 1 1
Loan originations and principal collections, net (12,314) 7,229
Purchases of loans 4,483 (839)
Recoveries of loans previously charged-off 10 33
Capital expenditures (278) (690)
---------- ----------
Net cash provided by investing activities (9,066) 13,933
---------- ----------
Cash flows from financing activities:
Net increase/(decrease) in demand deposits, NOW and savings accounts 15,567 (2,371)
Net increase/(decrease) in time deposits 3,287 (6,194)
Federal Home Loan Bank advances 0 5,000
Principal payments on advances from Federal Home Loan Bank (176) (10,198)
Net change in short term advances from Federal Home Loan Bank (8,637) (5,000)
Dividends paid (738) (438)
---------- ----------
Net cash provided by (used in) financing activities 9,303 (19,201)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,780 (3,213)
Cash and cash equivalents at beginning of period 15,178 11,757
---------- ----------
Cash and cash equivalents at end of period $ 16,958 $ 8,544
========== ==========
Supplemental disclosures:
Interest paid $ 2,962 $ 3,029
Income taxes paid 46 11
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 condensed consolidated interim
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the three months ended March 31, 2008
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2007 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 primary
source of other comprehensive income is the net unrealized holding gain (loss)
on securities and the minimum pension liability adjustment.
Comprehensive Income
Three months ended
March 31,
2008 2007
---- ----
(amounts in thousands)
Net income $ 1,081 $ 934
Net change in unrealized holding gains or losses on
securities and minimum pension liability adjustment,
net of tax during period (946) (386)
------- -----
Comprehensive income $ 135 $ 548
======= =====
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which permits,
but does not require, fair value accounting for any hybrid financial instrument
that contains an embedded derivative that would otherwise require bifurcation in
accordance with SFAS 133. The statement also subjects beneficial interests
issued by securitization vehicles to the requirements of SFAS No. 133. The
statement is effective as of January 1, 2007. The adoption of SFAS 155 did not
have an impact on the Company's financial condition and results of operations.
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"). SFAS
156 requires any entity to recognize a servicing asset or servicing liability
each time it 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. The adoption of this statement did
not have a material impact on the Company's financial condition, results of
operations or cash flows.
- 7 -
In June 2006 the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement 109" (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return and provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS 157 retains the exchange price
notion and clarifies that the exchange price is the price that would be received
for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is
effective for the Company's consolidated financial statements for the year
beginning on January 1, 2008, with earlier adoption permitted. The adoption of
this statement did not have a material impact on its financial condition and
results of operations.
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements," (EITF Issue 06-4). EITF 06-4 requires companies with an
endorsement split-dollar life insurance arrangement to recognize a liability for
future postretirement benefits. The effective date is for fiscal years beginning
after December 15, 2007, with earlier application permitted. Companies should
recognize the effects of applying this issue through either (a) a change in
accounting principle through a cumulative effect adjustment to retained earnings
or (b) a change in accounting principle through retrospective application to all
periods. The adoption of EITF Issue 06-4 did not have a material impact on the
Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
The new standard is effective at the beginning of the Company's fiscal year
beginning January 1, 2008, and early application may be elected in certain
circumstances. The adoption of this statement did not have a material impact on
its financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2008), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS 141(R) applies
prospectively to business combinations for which acquisition date is on or after
January 1, 2009. The Company does not expect the adoption of this statement to
have a material impact on it's financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedge items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
- 8 -
NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------
The following summarizes the net periodic benefit cost of the Company's defined
benefit pension plan for the periods indicated:
Three Months Ended
March 31,
2008 2007
---------------------
Components of net periodic benefit cost:
Service cost $ 113,750 $ 114,090
Interest cost 95,000 88,977
Expected return on plan assets (105,750) (77,164)
Amortization of:
Prior service costs 223 223
Actuarial loss 15,750 21,173
--------- ---------
Net periodic benefit cost $ 118,973 $ 147,299
========= =========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.00%
Average wage increase Graded table* Graded table*
Return on plan assets 7.50% 7.50%
*5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
NOTE 5 - ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
-----------------------------------------------------------
($ in 000s) Fair Value Measurements at Reporting using:
Quoted Prices
in Active Significant
Markets for Significant Other Unobservable
Identical Assets Observable Inputs Inputs
Description 3/31/08 (Level 1) (Level 2) (Level 3)
----------- ------- --------- --------- ---------
Available-for-
sale securities 148,234 148,234 0 0
--------- ---------------- ----------------- ------------
Total 148,234 148,234 0 0
========= ================ ================= ============
- 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 seven (7)
full service offices located in the towns of North Canaan, Lakeville, Salisbury
and Sharon, Connecticut, Sheffield and South Egremont, Massachusetts and Dover
Plains, New York. A full Trust and Wealth Advisory Services Division is also
located in Lakeville Connecticut. The Company and Bank were formed in 1998 and
1848, respectively. In order to provide a strong foundation for building
shareholder value and servicing customers, the Company remains committed to
investing in the technological and human resources necessary to developing new
personalized financial products and services in order to better serve both
current and future customers in the Tri-State area. This discussion should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 2007.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's net income for the three months ended March 31, 2008 was
$1,081,000. This compares to net income of $934,000 for the same period in 2007.
Earnings per share for the three months ended March 31, 2008 totaled $.64 per
share, compared to earnings per share of $.55 for the corresponding period in
2007. The increase in earnings is primarily attributable to an increase in
earning assets, which has resulted in an increase in interest income, and
movement in the markets, which has created opportunities to generate gains in
securities transactions during the period, which contributed to the increase in
noninterest income.
The Company's assets at March 31, 2008 totaled $472,795,000 compared to total
assets of $461,960,000 at December 31, 2007. During the first three months of
2008, net loans outstanding, not including loans held-for-sale increased
$7,884,000 to $276,075,000. This compares to total net loans outstanding not
including loans held-for-sale of $268,191,000 at December 31, 2007. The increase
is primarily attributable to increased loan demand during the period.
Non-performing loans totaled $1,030,000 at March 31, 2008 as compared to
non-performing loans totaling $1,008,000 at December 31, 2007. This represents
an increase of $22,000 or 2.18%. 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 March 31, 2008
totaled $336,595,000 as compared to total deposits of $317,741,000 at December
31, 2007.
As of March 31, 2008, 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 Bank's total risk based
capital ratio was 14.47%; the Tier 1 capital ratio was 13.55%; and the leverage
ratio was 8.17%. The Board of Directors declared a first quarter cash dividend
of $.28 per common share, which was paid on April 28, 2008 to shareholders of
record as of March 28, 2008. This compared to a cash dividend of $.27 per common
share that was paid for the first quarter of 2007.
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 -
THREE MONTHS ENDED MARCH 31, 2008
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2007
Net Interest Income
-------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its noninterest income. Net interest and dividend
income is the difference between interest and dividends earned on the loan and
securities portfolio and interest paid on deposits and advances from the Federal
Home Loan Bank. Noninterest income is primarily derived from the Trust and
Wealth Advisory Services Division, service charges and other fees related to
deposit and loan accounts and from gains recognized on the sale of
available-for-sale securities. For the following discussion, net interest and
dividend income is presented on a fully taxable-equivalent ("FTE") basis. FTE
interest income restates reported interest income on tax exempt securities as if
such interest were taxed at the Company's federal tax rate of 34% for all
periods presented.
(amounts in thousands)
Three Months ended March 31, 2008 2007
------ ------
Total interest and dividend income $6,668 $6,437
(financial statements)
Tax equivalent adjustment 296 271
------ ------
Total interest and dividend income
(on an FTE basis) 6,964 6,708
Total interest expense 3,008 3,071
------ ------
Net interest and dividend income-FTE $3,956 $3,637
====== ======
Total interest and dividend income on an FTE basis for the three months ended
March 31, 2008, when compared to the same period in 2007, increased $256,000 or
approximately 3.82%. The increase was primarily attributable to an increase of
earning assets.
Interest expense on deposits for the first three months of 2008 totaled
$1,973,000, a decrease of $57,000 or 2.8% that compared to $2,030,000 for the
same period in 2007. This decrease is primarily the result of an environment of
generally lower interest rates. Interest expense on Federal Home Loan Bank
advances decreased $6,000 during the three-month period ended March 31, 2008 to
$1,035,000. Total interest expense for the three months ended March 31, 2008 was
$3,008,000, a decrease of $63,000 or 2% when compared to the same period in
2007.
Overall, net interest and dividend income (on an FTE basis) increased $319,000
or 8.8% to $3,956,000 for the period ended March 31, 2008 when compared to the
same period in 2007.
Noninterest Income
------------------
Noninterest income totaled $1,433,000 for the three months ended March 31, 2008,
an increase of $309,000 or 27.4% compared to noninterest income of $1,124,000
for the three months ended March 31, 2007. Continuing growth of the Trust and
Wealth Advisory Services Division has resulted in an increase in trust income of
$70,000 or 13.2% to $600,000 for the first three months of 2008. Gains on sales
of available-for-sale securities, net increased 171.8% to $318,000 for the first
three months of 2008 compared to the corresponding period in 2007. This increase
is primarily the result of the movement of market rates during the year, which
made it possible to take advantage of opportunities presented during the period.
Other income consists primarily of fees associated with transaction accounts,
fees related to the origination and servicing of mortgage loans and gains
related to the sale of mortgage loans. Other income for the first three months
of 2008 totaled $515,000 compared to $477,000 for the same period in 2007. This
is an increase of $38,000 or 7.9%.
- 11 -
Noninterest Expense
-------------------
Noninterest expense increased 10.00% for the first three months of 2008 as
compared to the corresponding period in 2007. Professional fees which are
included in noninterest expenses increased $69,000 or 41.82%. This increase is
primarily attributable to the Company's Trust and Wealth Advisory Services
division's working with Bradley Foster and Sargent, Inc., an investment advisory
firm that assists in providing a broader scope of highly personalized
professional investment services to clients. In addition, internal audit expense
increased. Although some increases in the described noninterest expenses in the
table below are attributable to normal volumes of business, the increase also
reflects the additional costs associated with the daily operation of our new
Dover Plains, New York branch, which opened in August of 2007.
The components of noninterest expense and the changes in the period were as
follows (amounts in thousands):
2008 2007 Change % Change
--------------------------------------------------------------------------------
Salaries and employee benefits $ 2,076 $ 1,952 $ 124 6.35
Occupancy expense 231 191 40 20.94
Equipment expense 211 191 20 10.47
Data processing 319 337 (18) (5.34)
Insurance 44 38 6 15.78
Printing and stationery 60 64 (4) (6.25)
Professional fees 234 165 69 41.82
Legal expense 61 55 6 10.90
Amortization of core deposit intangible 41 41 0 0
Other expense 374 285 89 31.23
------- ------- ------ ---------
Total noninterest expense $ 3,651 $ 3,319 $ 332 10.00
======= ======= ======
Income Taxes
------------
The income tax provision for the first three months of 2008 totaled $301,000 in
comparison to $237,000 for the same three-month period in 2007, due to increased
taxable income.
Net Income
----------
Overall, net income totaled $1,081,000 for the three months ended March 31, 2008
and represents earnings of $.64 per share. This compares to net income of
$934,000 or $.55 per share for the same period in 2007.
FINANCIAL CONDITION
-------------------
Total assets at March 31, 2008 were $472,795,000, compared to $461,960,000 at
December 31, 2007, an increase of approximately 2.3%. The increase is primarily
the result of an increase in earning assets that were funded by an increase in
deposits during the quarter.
Securities
----------
During the three months ended March 31, 2008, the securities portfolio, which
includes Federal Home Loan Bank stock, increased slightly by $856,000 or .56% to
$153,480,000 from $152,624,000 at December 31, 2007. 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 loss) are not included in earnings, but are reported as a net
amount (less expected tax) in a separate component of capital until realized. At
March 31, 2008, the unrealized loss net of tax was $3,229,000. This compares to
an unrealized loss net of tax of $2,273,000 at December 31, 2007. Management
monitors the market value fluctuations of its securities portfolio on a monthly
basis as well as associated credit
- 12 -
ratings to determine potential impairment of a security. The unrealized losses
in these securities are mainly 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
-------
Total loans outstanding of $278,284,000 at March 31, 2008 increased compared to
total loans outstanding of $270,361,000 at December 31, 2007. This is an
increase of $7,923,000 or 2.9%. New business development during the first three
months of 2008 coupled with an increase in loan demand resulted in the increase,
which was primarily with respect to real estate loans. Competition for loans
remains aggressive in the Bank's market area.
The following table represents the composition of the loan portfolio at March
31, 2008 and December 31, 2007:
March 31, 2008 December 31, 2007
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 18,073 $ 20,629
Real Estate-construction and land
development 30,341 28,928
Real Estate-residential 164,838 158,600
Real Estate-commercial 56,749 53,823
Consumer 7,978 8,005
Other 305 376
--------- ---------
278,284 270,361
Deferred costs, net 326 306
Unearned income 0 (1)
Allowance for loan losses (2,535) (2,475)
--------- ---------
Net Loans $ 276,075 $ 268,191
========= =========
At March 31, 2008 and December 31, 2007, approximately 90% of the Bank's loan
portfolio was related to real estate products.
Provisions and Allowance for Loan Losses
----------------------------------------
Credit risk is inherent in the business of extending loans. The Bank monitors
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Bank's objectives. Because of the risk associated
with extending loans, the Bank maintains an Allowance for Loan and Lease Losses
("ALLL") through charges to earnings. The Bank determined that a provision of
$60,000 was warranted for the first three months of 2008 to keep pace with the
growth of the loan portfolio. No provision for loan losses was warranted for the
first three month period of 2007.
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 March 31, 2008. 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.
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Any such commercial loan and/or residential mortgage will be considered for
impairment 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, based on 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 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.
Non-performing 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 March 31, 2008, nonperforming loans totaled
$1,030,000 or 0.37% of total loans outstanding of $278,284,000. The allowance
for loan losses totaled $2,535,000, representing 246.12% of nonperforming loans
and .91% of total loans outstanding at March 31, 2008. Nonperforming loans
totaled $1,008,000 or .37% of total loans outstanding of $270,361,000 at
December 31, 2007. The allowance for loan losses totaled $2,475,000 at December
31, 2007 and represented 245.53% of nonperforming loans and .92% of total loans
outstanding net of term federal funds sold. A total of $10,000 of loans was
charged off by the Bank during the three months ended March 31, 2008. These
charged-off loans consisted primarily of deposit overdrafts. This compares to
loans charged off during the three month period ended March 31, 2007 that
totaled $39,000. A total of $10,000 of previously charged-off loans was
recovered during the three month period ended March 31, 2008. Recoveries for the
same period in 2007 totaled $34,000. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans or other factors.
Additionally, future additions to the allowance may be necessary to maintain
adequate coverage ratios.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at March 31, 2008 and December 31, 2007:
March 31, 2008 December 31, 2007
-------------- -----------------
(amounts in thousands)
Demand $ 65,246 $ 69,215
NOW 22,679 23,652
Money Market 72,053 56,210
Savings 57,282 52,616
Time 119,335 116,048
---------- ----------
Total Deposits $ 336,595 $ 317,741
========== ==========
Deposits constitute the principal funding source of the Company's assets. A key
strategic objective is to grow the core deposit base. New product development
initiatives, added convenience, quality service and competitive pricing are
strategies focused on growing our financial relationships with existing
customers and establishing and building
- 14 -
relationships with new customers. Brokered deposits are also used as a means of
funds generation. Funding needs are considered and relative costs are analyzed
in determining the suitability of brokered deposits. At March 31, 2008, brokered
deposits totaled $22,325,000. This compares to brokered deposits totaling
$15,526,000 at December 31, 2007.
Borrowings
----------
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At March 31, 2008, the Company had $86,166,000 in
outstanding advances from the Federal Home Loan Bank compared to $95,011,000 at
December 31, 2007. While the volume of FHLB advances decreased by $9,845,000 or
10.36% from year-end, management expects that it will continue its strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
Interest Rate Risk
------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest-bearing liabilities
mature or reprice on a different basis than earning assets. In an attempt to
manage its exposure to changes in interest rates, the Bank's assets and
liabilities are managed in accordance with policies established and reviewed by
the Bank's Board of Directors. The Bank's Asset/Liability Management Committee
monitors asset and deposit levels, developments, and trends in interest rates,
liquidity and capital. One of the primary financial objectives is to manage
interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future, interest rate risk is monitored using
various analyses which identify the differences between assets and liabilities
that mature or reprice during specific time frames. In addition, model
simulation is used to develop scenario analyses of the Company's assets and
liability balances to measure how much net interest income is "at risk" from
sudden rate movements of 100, 200 and 300 basis points either upward or
downward. As interest rates rise or fall, these simulations incorporate expected
future lending rates, current and expected funding sources and cost, changes in
prepayment rates, and other factors which may be important in determining the
future growth of net interest income. The level of interest rate risk at March
31, 2008 is within the limits approved by the Board of Directors.
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At March 31, 2008, the Company had
approximately $58,109,000 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 March 31, 2008, the Company had $44,944,000 in shareholders' equity, a
decrease of $619,000 or 1.4 % when compared to December 31, 2007 shareholders'
equity totaling $45,563,000. The majority of the Company's investments are as
classified as available-for-sale and therefore are marked to market monthly.
Movement in the market during the quarter resulted in an increase in accumulated
other comprehensive loss to $4,265,000 at March 31, 2008 from $3,319,000 at
December 31, 2007. This reflects the decrease in capital as net income for the
three-month period ended March 31, 2008 totaled $1,081,000.
A review and analysis of securities has determined that there has been no credit
deterioration and that the unrealized
- 15 -
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. Under current regulatory definitions, the Bank is
considered to be "well capitalized" for capital adequacy purposes. As a result,
the Bank pays the lowest federal deposit insurance deposit premiums possible.
One primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk-weighted assets. This method of measuring
capital adequacy helps to establish capital requirements that are more sensitive
to the differences in risk associated with various assets. It takes into account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low-risk assets. At March 31, 2008, the Company
had a total consolidated risk based capital ratio of 14.47%, a Tier 1 risk based
capital ratio of 13.55% and a leverage ratio of 8.17%. This compares to a total
consolidated risk based capital ratio of 15.00%, a Tier 1 risk based capital
ratio of 14.06% and a leverage ratio of 8.24% at December 31, 2007. 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 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 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 environments 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.
- 16 -
Item 3. Quantitative and Qualitative Disclosures about Market Risk - Not
Applicable
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of March 31, 2008, as required by Rules
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's disclosure controls and procedures as defined in Rule 13a-15(e) of the
Exchange Act are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed is accumulated and communicated to the Company's
Management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely discussions regarding required disclosure.
During the three month period ended March 31, 2008, 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. None.
Item 1A. - Risk Factors. Not applicable
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds. None.
Item 3. - Defaults Upon Senior Securities. None.
Item 4. - Submission of Matters to a Vote of Security Holders. None.
Item 5. - Other Information. None.
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALISBURY BANCORP, INC.
Date: May 12, 2008 by: /s/ John F. Perotti
------------ -------------------
John F. Perotti
Chief Executive Officer
Date: May 12, 2008 by: /s/ John F. Foley
------------ -----------------
John F. Foley
Chief Financial Officer
- 17 -