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, 2007
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24751
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Salisbury Bancorp, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street Lakeville Connecticut 06039
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(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
----------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is 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:
The Company had 1,684,181shares outstanding as of May 9, 2007.
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -March 31, 2007
(unaudited) and December 31, 2006 4
Condensed Consolidated Statements of Income -three months
ended March 31, 2007 and 2006 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -three
months ended March 31, 2007 and 2006 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1A. Risk Factors
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
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CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(amounts in thousands, except per share data)
March 31, 2007 and December 31, 2006
March 31 December 31
2007 2006
---- ----
ASSETS (unaudited)
------
Cash and due from banks $ 6,043 $ 8,988
Interest-bearing demand deposits with other banks 1,072 569
Money market mutual funds 1,229 1,200
Federal funds sold 200 1,000
--------- ---------
Cash and cash equivalents 8,544 11,757
Investments in available-for-sale securities (at fair value) 146,632 156,493
Investments in held-to-maturity securities (fair values of $74 as of
March 31, 2007 and $75 as of December 31, 2006) 74 75
Federal Home Loan Bank stock, at cost 4,946 4,664
Loans held-for-sale 0 304
Loans, less allowance for loan losses of $2,469 as of March 31, 2007
and $2,474 as of December 31, 2006 246,053 252,464
Investment in real estate 75 75
Premises and equipment 6,296 6,135
Goodwill 9,509 9,509
Core deposit intangible 1,452 1,493
Accrued interest receivable 2,290 2,484
Cash surrender value of life insurance policies 3,585 3,555
Other assets 1,661 1,331
--------- ---------
Total assets $ 431,117 $ 450,339
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 65,263 $ 70,502
Interest-bearing 239,754 243,084
--------- ---------
Total deposits 305,017 313,586
Federal Home Loan Bank advances 76,863 87,093
Due to broker 699 1,580
Other liabilities 4,095 3,731
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Total liabilities 386,674 405,990
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Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,684,181 shares at March 31, 2007 and December 31, 2006 168 168
Paid-in capital 13,100 13,100
Retained earnings 34,083 33,603
Accumulated other comprehensive loss (2,908) (2,522)
--------- ---------
Total shareholders' equity 44,443 44,349
--------- ---------
Total liabilities and shareholders' equity $ 431,117 $ 450,339
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
- 4 -
SALISBURY BANCORP, INC. AND SUBSIDIARY
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(amounts in thousands, except per share data)
March 31, 2007 and 2006
(unaudited)
Three Months Ended
March 31,
2007 2006
------ ------
Interest and dividend income:
Interest and fees on loans $4,388 $3,628
Interest on debt securities:
Taxable 1,431 1,268
Tax-exempt 526 495
Dividends on equity securities 78 60
Other interest 14 9
------ ------
Total interest and dividend income 6,437 5,460
------ ------
Interest expense:
Interest on deposits 2,030 1,338
Interest on Federal Home Loan Bank advances 1,041 829
------ ------
Total interest expense 3,071 2,167
------ ------
Net interest and dividend income 3,366 3,293
------ ------
Noninterest income:
Trust department income 530 485
Loan commissions 4 14
Service charges on deposit accounts 180 177
Gain on sales of available-for-sale securities, net 117 74
Gain on sales of loans held-for-sale 65 62
Other income 228 214
------ ------
Total noninterest income 1,124 1,026
------ ------
Noninterest expense:
Salaries and employee benefits 1,952 1,703
Occupancy expense 191 176
Equipment expense 191 187
Data processing 337 283
Insurance 38 31
Printing and stationery 64 53
Professional fees 165 90
Legal expense 55 25
Amortization of core deposit intangible 41 41
Other expense 285 248
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Total noninterest expense 3,319 2,837
------ ------
Income before income taxes 1,171 1,482
Income taxes 237 335
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Net income $ 934 $1,147
====== ======
Earnings per common share $ .55 $ .68
====== ======
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, 2007 and 2006
(unaudited)
2007 2006
-------- --------
Cash flows from operating activities:
Net income $ 934 $ 1,147
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 17 44
Gain on sales of available-for-sale securities, net (117) (74)
Provision for loan losses 0 0
Change in loans held-for-sale 304 (444)
Change in deferred loan costs, net (35) 0
Net decrease in mortgage servicing rights 28 30
Depreciation and amortization 540 138
Amortization of core deposit intangible 41 41
Accretion of fair value adjustment on deposits/borrowings (36) (37)
Amortization of fair value adjustment on loans 24 38
Decrease in interest receivable 189 288
Deferred tax benefit (414) (178)
Decrease in taxes receivable 317 509
Increase in prepaid expenses (50) (571)
Increase in cash surrender value of insurance policies (30) (30)
Increase in income taxes payable 323 0
Increase in other assets (7) 0
Increase in accrued expenses 41 (486)
Increase in interest payable 42 19
Decrease in other liabilities (57) (72)
Increase (decrease) in unearned income on loans 1 (16)
-------- --------
Net cash provided by operating activities 2,055 346
-------- --------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (282) 0
Purchases of available-for-sale securities (16,738) (21,573)
Proceeds from sales of available-for-sale securities 25,219 22,169
Proceeds from maturities of available-for-sale securities 0 2,671
Proceeds from maturities of held-to-maturity securities 1 9
Loan originations and principal collections, net 7,229 (2,105)
Purchases of loans (839) 0
Recoveries of loans previously charged-off 33 7
Capital expenditures (690) (22)
-------- --------
Net cash provided by investing activities 13,933 1,216
-------- --------
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (2,371) (8,881)
Net (decrease) increase in time deposits (6,194) 11,296
Federal Home Loan Bank advances 5,000 10,000
Principal payments on advances from Federal Home Loan Bank (10,198) (295)
Net change in short term advances from Federal Home Loan Bank (5,000) (9,834)
Dividends paid (438) (421)
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Net cash (used in) provided by financing activities (19,201) 1,865
-------- --------
Net (decrease) increase in cash and cash equivalents (3,213) 3,427
Cash and cash equivalents at beginning of period 11,757 10,204
-------- --------
Cash and cash equivalents at end of period $ 8,544 $ 13,631
======== ========
Supplemental disclosures:
Interest paid $ 3,029 $ 2,203
Income taxes paid 11 5
The accompanying notes are an integral part of these condensed
consolidated financial statements.
- 6 -
SALISBURY BANCORP, INC. AND SUBSIDIARY
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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, 2007
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2007. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2006 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.
Comprehensive Income
Three months ended
March 31,
2007 2006
------ ------
(amounts in thousands)
Net income $ 934 $1,147
Net change in unrealized holding gains or losses
on securities and minimum pension liability
adjustment, net of tax during period (386) 313
------ ------
Comprehensive income $ 548 $1,460
====== ======
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 is not
expected to have a material impact on the Company's financial condition and
results of operations.
- 7 -
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. SFAS 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.
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 Company does
not expect the adoption of this statement to have a material impact on its
financial condition and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132 (R)" ("SFAS 158"). SFAS 158 requires 1) the
recognition of an asset or liability for the over-funded or under-funded status
of a defined benefit plan, 2) the recognition of actuarial gains and losses and
prior service costs and credits in other comprehensive income, 3) measurement of
plan assets and benefit obligations as of the employer's balance sheet date,
rather than at interim measurement dates as currently allowed, and 4) disclosure
of additional information concerning actuarial gains and losses and prior
service costs and credits recognized in other comprehensive income. This
statement is effective for financial statements with fiscal years ending after
December 15, 2006. The Company does not believe the adoption of this Statement
will have a material impact on the Company's financial position or result of
operations.
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 Company is currently evaluating and has not yet determined
the impact the new standard is expected to have on its financial position,
results of operations or cash flows.
- 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,
2007 2006
-----------------------
Components of net periodic benefit cost:
Service cost $ 114,090 $ 121,433
Interest cost 88,977 81,748
Expected return on plan assets (77,164) (71,417)
Amortization of:
Prior service costs 223 223
Actuarial loss 21,173 24,132
--------- ---------
Net periodic benefit cost $ 147,299 $ 156,119
========= =========
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).
- 9 -
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Business
--------
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has six (6) full
service offices including a Trust 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, 2006.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's net income for the three months ended March 31, 2007 was $934,000.
This compares to earnings of $1,147,000 for the same period in 2006. Earnings
per share for the three months ended March 31, 2007 totaled $.55 per share,
compared to earnings per share of $.68 for the corresponding period in 2006. The
decrease in earnings is primarily attributable to an increase in noninterest
expense, specifically, additional staff to support new marketing strategies,
growth and our branch expansion into New York State. Total noninterest expense
for the first quarter of 2007 increased 16.99% when compared to the
corresponding period in 2006.
The Company's assets at March 31, 2007 totaled $431,117,000 compared to total
assets of $450,339,000 at December 31, 2006. During the first three months of
2007, net loans outstanding decreased $6,411,000 to $246,053,000. This compares
to total net loans outstanding of $252,464,000 at December 31, 2006. The
decrease is attributable to the $12,000,000 in Term Fed Funds that matured in
the first quarter of 2007, and has been partially offset by loan portfolio
growth. Non-performing loans totaled $829,000 at March 31, 2007 as compared to
non-performing loans totaling $886,000 at December 31, 2006. This represents a
decrease of $57,000 or 6.4%. 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, 2007
totaled $305,017,000 as compared to total deposits of $313,586,000 at December
31, 2006. The decrease at quarter end is primarily attributable to seasonal cash
flows and a $4,582,000 brokered CD, which matured the end of March and was not
replaced.
As of March 31, 2007, 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 13.38%; the Tier 1 capital ratio was 12.52%; and the leverage
ratio was 8.28%. As a result of the Company's first quarter financial
performance, the Board of Directors declared a first quarter cash dividend of
$.27 per common share, which was paid on April 30, 2007 to shareholders of
record as of March 31, 2007. This compared to a cash dividend of $.26 per common
share that was paid for the first quarter of 2006.
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, 2007
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2006
Net Interest Income
-------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its noninterest income, from its community
banking operations. Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities portfolio and interest
paid on deposits and advances from the Federal Home Loan Bank. Noninterest
income is primarily derived from the Trust and Investment Service 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, 2007 2006
------ ------
Total interest and dividend income $6,437 $5,460
(financial statements)
Tax equivalent adjustment 271 255
------ ------
Total interest and dividend income
(on an FTE basis) 6,708 5,715
Total interest expense 3,071 2,167
------ ------
Net interest and dividend income-FTE $3,637 $3,548
====== ======
Total interest and dividend income on an FTE basis for the three months ended
March 31, 2007, when compared to the same period in 2006, increased $993,000 or
approximately 17.4%. The increase was primarily attributable to an economic
environment of increased interest rates.
Interest expense on deposits for the first three months of 2007 totaled
$2,030,000, an increase of $692,000 or 51.7% that compared to $1,338,000 for the
same period in 2006. This increase is primarily the result of an economic
environment of generally higher interest rates. Although Federal Home Loan Bank
advances have decreased during the three-month period ended March 31, 2007,
interest expense on these advances increased 25.6% to $1,041,000. This increase
in interest expense is attributable to the increased monthly average balance of
overnight borrowings. Total interest expense for the three months ended March
31, 2007 was $3,071,000, an increase of $904,000 or 41.7% when compared to the
same period in 2006.
Overall, net interest and dividend income (on an FTE basis) increased $89,000 or
2.5% to $3,637,000 for the period ended March 31, 2007 when compared to the same
period in 2006.
Noninterest Income
------------------
Noninterest income totaled $1,124,000 for the three months ended March 31, 2007,
an increase of $98,000 or 9.6% compared to noninterest income of $1,026,000 for
the three months ended March 31, 2006. Continuing growth of the Trust and
Investment Service Division has resulted in an increase in trust income of
$45,000 or 9.3% to $530,000 for the first three months of 2007. Gains on sales
of available-for-sale securities, net increased 58.1% to $117,000 for the first
three months of 2007 compared to the corresponding period in 2006. 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 by the positive
slope of yields during that time. Other income consists primarily 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. Other income for the first three months of 2007 totaled $228,000
compared to $214,000 for the same period in 2006.
- 11 -
Noninterest Expense
-------------------
Noninterest expense increased 16.99% for the first three months of 2007 as
compared to the same period in 2006. The increases in the noninterest expenses
listed in the table below are primarily attributable to additional staff to
support new marketing strategies, growth and our branch expansion into New York
State and fees associated with various projects under consideration. The
components of noninterest expense and the changes in the period were as follows
(amounts in thousands):
2007 2006 Change % Change
--------------------------------------------------------------------------------
Salaries and employee benefits $ 1,952 $ 1,703 $ 249 14.62
Occupancy expense 191 176 15 8.52
Equipment expense 191 187 4 2.14
Data processing 337 283 54 19.08
Insurance 38 31 7 22.58
Printing and stationery 64 53 11 20.75
Professional fees 165 90 75 83.33
Legal expense 55 25 30 120.00
Amortization of core deposit intangible 41 41 0 0
Other expense 285 248 37 14.92
-------- -------- -------- --------
Total noninterest expense $ 3,319 $ 2,837 $ 482 16.99
======== ======== ========
Income Taxes
------------
The income tax provision for the first three months of 2007 totaled $237,000 in
comparison to $335,000 for the same three-month period in 2006 as a result of
less taxable income.
Net Income
----------
Overall, net income totaled $934,000 for the three months ended March 31, 2007
and represents earnings of $.55 per share. This compares to net income of
$1,147,000 or $.68 per share for the same period in 2006.
FINANCIAL CONDITION
-------------------
Total assets at March 31, 2007 were $431,117,000, compared to $450,339,000 at
December 31, 2006, a decrease of approximately 4.3%. The decrease is primarily
the result of a decrease in earning assets during the quarter.
Securities
----------
During the three months ended March 31, 2007, the securities portfolio, which
includes Federal Home Loan Bank stock, decreased $9,580,000 or 5.9% to
$151,652,000 from $161,232,000 at December 31, 2006. The decrease is primarily a
reflection of portfolio available-for-sale securities being sold and called
during the period with the proceeds being used primarily to fund loan growth and
seasonal cash flow of transaction accounts.
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 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, 2007, the unrealized loss net of tax was $1,589,000. This compares to
an unrealized loss net of tax of $1,190,000 at December 31, 2006. 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.
- 12 -
Lending
-------
Total loans outstanding of $248,319,000 at March 31, 2007 decreased compared to
total loans outstanding of $254,773,000 at December 31, 2006. This is a decrease
of $6,454,000 or 2.53%. New business development during the first three months
of 2007 coupled with a small increase in loan demand nearly offset the
$12,000,000 maturity in Term Federal Funds that was included in the loan
portfolio at December 31, 2006. 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 at March
31, 2007 and December 31, 2006:
March 31, 2007 December 31, 2006
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 17,722 $ 16,465
Real Estate-construction and land
development 22,288 21,169
Real Estate-residential 149,736 145,395
Real Estate-commercial 50,108 50,859
Consumer 8,395 8,816
Term federal funds 0 12,000
Other 71 69
------------ ------------
248,320 254,773
Deferred costs, net 204 168
Unearned income (2) (3)
Allowance for loan losses (2,469) (2,474)
------------ ------------
Net Loans $ 246,053 $ 252,464
============ ============
At March 31, 2007 and December 31, 2006, 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 this risk associated
with extending loans, the Bank maintains an Allowance for Loan and Lease Losses
("ALLL") through charges to earnings. The Bank determined that no provision for
loan losses was warranted for the first three month period of 2007 and 2006.
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, 2007. 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 for
impairment under any of the following circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
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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.
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 March 31, 2007, nonperforming loans totaled
$829,000 or 0.33% of total loans outstanding of $248,320,000. The allowance for
loan losses totaled $2,469,000, representing 297.83% of nonperforming loans and
..99% of total loans outstanding at March 31, 2007. Nonperforming loans totaled
$964,000 or .38% of total loans outstanding of $254,773,000 at December 31,
2006. The allowance for loan losses totaled $2,474,000 at December 31, 2006 and
represented 256.91% of nonperforming loans and 1.02% of total loans outstanding
net of term federal funds sold. A total of $39,000 of loans was charged off by
the Bank during the three months ended March 31, 2007. These charged-off loans
consisted primarily of credit card and consumer installment loans. This compares
to loans charged off during the three months period ended March 31, 2006 that
totaled $41,000. A total of $33,000 of previously charged-off loans was
recovered during the three month period ended March 31, 2007. Recoveries for the
same period in 2006 totaled $7,000. 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, 2007 and December 31, 2006:
March 31, 2007 December 31, 2006
-------------- -----------------
(amounts in thousands)
Demand $ 65,263 $ 70,502
NOW 24,648 21,461
Money Market 55,908 57,015
Savings 45,034 44,246
Time 114,164 120,362
-------- --------
Total Deposits $305,017 $313,586
======== ========
Deposits constitute the principal funding source of the Company's assets.
Borrowings
----------
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At March 31, 2007, the Company had $76,863,000 in
outstanding advances from the Federal Home Loan Bank compared to $87,093,000 at
December 31, 2006. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
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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 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 March 31, 2007, the
Company maintains a slight asset sensitive (positive gap) position. This would
suggest that during a period of rising interest rates, the Company would be in a
better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at March 31, 2007 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, 2007, the Company had
approximately $52,550,000 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, 2007, the Company had $44,443,000 in shareholders' equity, an
increase of .2 % when compared to December 31, 2006 shareholders' equity
totaling $44,349,000. Net income for the three-month period ended March 31, 2007
totaled $934,000. Market conditions resulted in an increase in accumulated other
comprehensive loss to $2,908,000 at March 31, 2007 from $2,522,000 at December
31, 2006.
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. Under current regulatory definitions,
the Company and the Bank are considered to be "well capitalized" for capital
adequacy purposes. As a result, the Bank pays the lowest federal deposit
insurance deposit premiums possible. One primary measure of capital adequacy for
regulatory purposes is based on the ratio of risk-based capital to risk-weighted
assets. This method of measuring capital adequacy helps to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets. It takes into account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low-risk
assets. At March 31, 2007, the Company had a total consolidated risk based
capital ratio of 13.38%, a Tier 1 risk based capital ratio of 12.52% and a
leverage ratio of 8.28%. This compares to a total consolidated risk based
capital ratio of 15.28%, a Tier 1 risk based capital ratio of 14.28% and a
leverage ratio
- 15 -
of 8.43% at December 31, 2006. 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.
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 that mature or reprice during specific periods. Model simulation is
used to measure earnings volatility under both rising and falling rate
scenarios. Please refer to Interest Rate Risk and Liquidity under Part I, Item
2, Management's Discussion and Analysis of Financial Condition and Results of
Operation, of this Form 10-Q. The Company's interest rate risk and liquidity
position has not significantly changed from year-end 2006.
- 17 -
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of March 31, 2007, the Company's disclosure
controls and procedures are effective and designed 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 and 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, 2007, 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.
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. - Other Information. Not applicable
Item 6. - Exhibits.
11 - Computation of Earnings per Share.
31.1 - Rule 13a-14(a)/15d-14(a) Certification.
31.2 - Rule 13a-14(a)/15d-14(a) Certification.
32 - Section 1350 Certifications.
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 10, 2007 by: /s/ John F. Perotti
-------------- -------------------
John F. Perotti
Chief Executive Officer
Date: May 10, 2007 by: /s/ John F. Foley
-------------- -----------------
John F. Foley
Chief Financial Officer
- 18 -