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, 2006
----------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number 0-24751
Salisbury Bancorp, Inc.
-------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
-------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
---------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of April 20, 2006, there
were 1,683,341 shares outstanding.
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -March 31, 2006 (unaudited)
and December 31, 2005 4
Condensed Consolidated Statements of Income -three months ended March 31, 2006
and 2005 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -three months ended March 31, 2006
and 2005 (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 15
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits 16
Signatures 16
-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, 2006 and December 31, 2005
March 31 December 31
2006 2005
---- ----
ASSETS (unaudited)
------
Cash and due from banks $ 7,009 $ 8,432
Interest bearing demand deposits with other banks 935 652
Money market mutual funds 706 1,120
Federal funds sold 4,981 0
--------- ---------
Cash and cash equivalents 13,631 10,204
Investments in available-for-sale securities (at fair value) 142,400 145,608
Investments in held-to-maturity securities (fair values of $78,000 as of
March 31, 2006 and $147,000 as of December 31, 2005) 78 147
Federal Home Loan Bank stock, at cost 5,413 5,413
Loans held-for-sale 444 0
Loans, less allowance for loan losses of $2,592,000 as of March 31, 2006
and $2,626,000 as of December 31, 2005 218,065 215,989
Investment in real estate 75 75
Premises and equipment 6,345 6,452
Goodwill 9,509 9,509
Core deposit intangible 1,617 1,658
Accrued interest receivable 2,075 2,363
Cash surrender value of life insurance policies 3,454 3,424
Other assets 2,127 2,080
--------- ---------
Total assets $ 405,233 $ 402,922
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 63,066 $ 63,996
Interest-bearing 226,616 223,275
--------- ---------
Total deposits 289,682 287,271
Federal Home Loan Bank advances 70,854 71,016
Other liabilities 1,795 3,193
--------- ---------
Total liabilities 362,331 361,480
--------- ---------
Stockholders' equity:
Common stock, par value $.10 per share; authorized
3,000,000 shares; issued and outstanding, 1,683,341 shares
at March 31, 2006 and December 31, 2005 168 168
Paid-in capital 13,068 13,068
Retained earnings 32,248 31,101
Accumulated other comprehensive loss (2,582) (2,895)
--------- ---------
Total stockholders' equity 42,902 41,442
--------- ---------
Total liabilities and stockholders' equity $ 405,233 $ 402,922
========= =========
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, 2006 and 2005
(unaudited)
Three Months Ended
March 31, 2006
2006 2005
------ ------
Interest and dividend income:
Interest and fees on loans $3,628 $3,210
Interest on debt securities:
Taxable 1,268 1,102
Tax-exempt 495 656
Dividends on equity securities 60 48
Other interest 9 18
------ ------
Total interest and dividend income 5,460 5,034
------ ------
Interest expense:
Interest on deposits 1,338 908
Interest on Federal Home Loan Bank advances 829 737
------ ------
Total interest expense 2,167 1,645
------ ------
Net interest and dividend income 3,293 3,389
Provision for loan losses 0 90
------ ------
Net interest and dividend income after provision for
loan losses 3,293 3,299
------ ------
Noninterest income:
Trust department income 485 388
Loan commissions 14 72
Service charges on deposit accounts 177 144
Gain on sales of available-for-sale securities, net 74 486
Gain on sales of loans held-for-sale 62 94
Other income 214 205
------ ------
Total noninterest income 1,026 1,389
------ ------
Noninterest expense:
Salaries and employee benefits 1,703 1,808
Occupancy expense 176 186
Equipment expense 187 187
Data processing 283 197
Insurance 31 40
Printing and stationery 53 59
Professional fees 90 74
Legal expense 25 26
Amortization of core deposit intangible 41 41
Other expense 248 408
------ ------
Total noninterest expense 2,837 3,026
------ ------
Income before income taxes 1,482 1,662
Income taxes 335 333
------ ------
Net income $1,147 $1,329
====== ======
Earnings per common share $ .68 $ .79
====== ======
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, 2006 and 2005
(unaudited)
2006 2005
-------- --------
Cash flows from operating activities:
Net income $ 1,147 $ 1,329
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 44 79
Gain on sales of available-for-sale securities, net (74) (486)
Provision for loan losses 0 90
Change in loans held-for-sale (444) 375
Net decrease in mortgage servicing rights 30 0
Depreciation and amortization 138 126
Amortization of core deposit intangible 41 41
Accretion of fair value adjustment on deposits/borrowings (37) (34)
Amortization of fair value adjustment on loans 38 47
Decrease in interest receivable (178) 0
Deferred tax benefit
Decrease in taxes receivable 0 509
Increase in prepaid expenses (571) (101)
Increase in cash surrender value of insurance policies (30) (30)
Increase in income taxes payable 0
217
Increase in other assets (818)
Decrease in accrued expenses (486) (374)
Increase (decrease) in interest payable 19 (31)
(Decrease) increase in other liabilities (72) 790
Decrease in unearned income on loans (16) 0
-------- --------
Net cash provided by operating activities 346 1,577
-------- --------
Cash flows from investing activities:
Purchases of available-for-sale securities (21,573) (25,750)
Proceeds from sales of available-for-sale securities 22,169 25,877
Proceeds from maturities of available-for-sale securities 2,671 22,975
Proceeds from maturities of held-to-maturity securities 69 4
Loan originations and principal collections, net (2,105) (1,106)
Recoveries of loans previously charged-off 7 5
Capital expenditures (22) (615)
-------- --------
Net cash provided by investing activities 1,216 21,390
-------- --------
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (8,881) (1,828)
Net increase (decrease) in time deposits 11,296 (2,204)
Federal Home Loan Bank advances 10,000
Principal payments on advances from Federal Home Loan Bank (295) (20,442)
Net change in short term advances from Federal Home Loan Bank (9,834)
Dividends paid (421) (404)
-------- --------
Net cash provided by (used in) financing activities 1,865 (24,878)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,427 (1,911)
Cash and cash equivalents at beginning of period 10,204 11,678
-------- --------
Cash and cash equivalents at end of period $ 13,631 $ 9,767
======== ========
Supplemental disclosures:
Interest paid $ 2,203 $ 1,676
Income taxes paid 5 116
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, 2006
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2005 Annual Report on Form 10-K
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE INCOME
-----------------------------
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure of comprehensive
income which includes net income and any changes in equity from non-owner
sources that are not recorded in the income statement (such as changes in the
net unrealized gains (losses) on securities). The purpose of reporting
comprehensive income is to report a measure of all changes in equity that result
from recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. The Company's one source
of other comprehensive income is the net unrealized holding gain (loss) on
securities.
Comprehensive Income
Three months ended
March 31,
2006 2005
------- -------
(amounts in thousands)
Net income $ 1,147 $ 1,329
Net change in unrealized holding gains or losses
on securities during period 313 (1,295)
------- -------
Comprehensive income $ 1,460 $ 34
======= =======
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
in an effort to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. In December 2003, the FASB revised
Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)").
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that, by
requiring a variable interest entity to be consolidated by a company only if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The Company was required to apply FIN 46, as revised,
to all entities subject to it no later than the end of the first reporting
period ending after March 15, 2004. The adoption of this interpretation did not
have an impact on the Company's consolidated financial statements as the Company
did not have any financial interests in variable interest entities at December
31, 2005 or March 31, 2006.
-7-
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. It
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
This Statement is effective for the Company as of the beginning of the first
annual reporting period that begins after December 15, 2005. The adoption of
this Statement did not have an impact on the Company's financial position or
results of operations as there are no share-based payment arrangements with
employees and the compensation expense related to the Directors Stock Retainer
Plan is not anticipated to be material.
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,
2006 2005
----------------------
Components of net periodic benefit cost:
Service cost $ 121,433 $ 83,542
Interest cost 81,748 60,930
Expected return on plan assets (71,417) (50,228)
Amortization of:
Prior service costs 223 223
Transition obligation 0 693
Actuarial loss 24,132 17,412
--------- ---------
Net periodic benefit cost $ 156,119 $ 112,572
========= =========
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 7.25% 7.25%
*5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
-8-
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, 2005.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's net income for the three months ended March 31, 2006 was
$1,147,000. This compares to earnings of $1,329,000 for the same period in 2005.
Earnings per share for the three months ended March 31, 2006 totaled $.68 per
share, compared to earnings per share of $.79 for the corresponding period in
2005. The decrease in earnings is primarily attributable to a decrease in
noninterest income specifically, reduced income from gains on sales of
securities when comparing the two periods. Increasing short-term interest rates
and unchanging long-term interest rates have created a flat and sometimes
inverted yield curve during the first quarter of 2006. This environment impacts
market opportunities to increase portfolio yields and enhance duration for
improving portfolio performance. In addition, this environment of generally
increasing interest rates has slowed the activity in the secondary mortgage
market, which has resulted in a decrease in income from sales of mortgage loans
in the secondary market. Total noninterest expense for the first quarter of 2006
decreased 6.2% when comparing the corresponding period in 2005. This decrease is
primarily the result of managements continuing efforts to control operating
expenses.
The Company's assets at March 31, 2006 totaled $405,233,000 compared to total
assets of $402,922,000 at December 31, 2005. During the first three months of
2006 net loans outstanding increased $2,076,000 to $218,065,000. This compares
to total net loans outstanding of $215,989,000 at December 31, 2005.
Non-performing loans totaled $832,000 at March 31, 2006 as compared to
non-performing loans totaling $773,000 at December 31, 2005. This represents an
increase of $59,000 or 7.6%. 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, 2006
totaled $289,682,000 as compared to total deposits of $287,271,000 at December
31, 2005. The increase at quarter end is primarily attributable to seasonal cash
flows.
As of March 31, 2006, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. The Bank's total risk based
capital ratio was 16.15%; the Tier 1 capital ratio was 14.92% and the leverage
ratio was 8.68%. As a result of the Company's first quarter financial
performance, the Board of Directors declared a first quarter cash dividend of
$.26 per common share, which was paid on April 28, 2006 to shareholders of
record as of March 31, 2006. This compared to a cash dividend of $.25 per common
share that was paid for the first quarter of 2005.
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
-9-
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."
THREE MONTHS ENDED MARCH 31, 2006
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2005
Net Interest and Dividend 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 Department, 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, 2006 2005
------ ------
Total interest and dividend income $5,460 $5,034
(financial statements)
Tax equivalent adjustment 255 338
------ ------
Total interest and dividend income
(on an FTE basis) 5,715 5,372
Total interest expense 2,167 1,645
------ ------
Net interest and dividend income-FTE $3,548 $3,727
====== ======
Total interest and dividend income on an FTE basis for the three months ended
March 31, 2006, when compared to the same period in 2005, increased $343,000 or
approximately 6.4%. The increase was primarily attributable to an increase in
earning assets as well as an economic environment of increased interest rates.
Interest expense on deposits for the first three months of 2006 totaled
$1,338,000, an increase of $430,000 or 47.4% which compared to $908,000 for the
same period in 2005. 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, 2006,
interest expense on these advances increased 12.5% to $829,000. This increase in
interest expense is also attributable to an economic environment of increased
interest rates. Total interest expense for the three months ended March 31, 2006
was $2,167,000, an increase of $522,000 or 31.7% when compared to the same
period in 2005.
Overall, net interest and dividend income (on an FTE basis) decreased $179,000
or 4.8% to $3,548,000 for the period ended March 31, 2006 when compared to the
same period in 2005.
Noninterest Income
------------------
Noninterest income totaled $1,026,000 for the three months ended March 31, 2006,
a decrease of $363,000 or 26.1% compared to noninterest income of $1,389,000 for
the three months ended March 31, 2005. Continuing growth of the Trust Department
has resulted in an increase in trust income of $97,000 or 25.0% to $485,000 for
the first three months of 2006. Gains on sales of available-for-sale securities
decreased 84.8% to $74,000 for the first three months of 2006 compared to the
corresponding period in 2005. This decrease is primarily the result of the
active movement of market rates during the quarter. The yield curve continued to
flatten and was inverted at times during the first quarter which made it
difficult to take advantage of opportunities presented by the positive slope of
yields during that time. Other income consists primarily of fees associated with
transactions 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 2006 totaled $214,000 and compares to
$205,000 for the same period in 2005.
-10-
Noninterest Expense
-------------------
Noninterest expense decreased 6.2% for the first three months of 2006 as
compared to the same period in 2005. The decreases in the noninterest expenses
listed in the table below are all primarily attributable to management's
continuing efforts to control operating expenses. The components of noninterest
expense and the changes in the period were as follows (amounts in thousands):
2006 2005 Change % Change
--------------------------------------------------------------------------------
Salaries and employee benefits $1,703 $1,808 $ (105) (5.81)
Occupancy expense 176 186 (10) (5.38)
Equipment expense 187 187 0 0
Data processing 283 197 86 43.7
Insurance 31 40 (9) (22.5)
Printing and stationery 53 59 (6) (10.2)
Professional fees 90 74 16 21.6
Legal expense 25 26 (1) 3.9
Amortization of core deposit intangible 41 41 0 0
Other expense 248 408 (160) (39.2)
------ ------ ------ ------
Total noninterest expense $2,837 $3,026 $ (189) (6.2)
====== ====== ======
Income Taxes
------------
The income tax provision for the first three months of 2006 totaled $335,000 in
comparison to $333,000 for the same three month period in 2005. Pretax income in
2006 was $1,482,000 and included tax exempt income totaling $495,000. Pretax
income in 2005 was $1,662,000 and included tax exempt income totaling $656,000.
Taxable income for both periods being compared was approximately the same
resulting in a tax provision that also was approximately the same.
Net Income
----------
Overall, net income totaled $1,147,000 for the three months ended March 31, 2006
and represents earnings of $.68 per share. This compares to net income of
$1,329,000 or $.79 per share for the same period in 2005.
FINANCIAL CONDITION
-------------------
Total assets at March 31, 2006 were $405,233,000, compared to $402,922,000 at
December 31, 2005, an increase of approximately 1%. The increase is primarily
the result of an increase in earning assets during the quarter made possible by
an increase in deposits.
Securities
----------
During the three months ended March 31, 2006, the securities portfolio,
including Federal Home Loan Bank stock, decreased $3,277,000 or 2.17% to
$147,891,000 from $151,168,000 at December 31, 2005. The decrease is primarily a
reflection of portfolio securities being sold and called during the period with
the proceeds being used primarily to fund loan growth.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage-backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities are
classified as available-for-sale. The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company. Unrealized
holding gains and losses on available-for-sale securities (accumulated other
comprehensive income/loss) are not included in earnings, but are reported as a
net amount (less expected tax) in a separate component of capital until
realized. At March 31, 2006, the unrealized loss net of tax was $2,582,000. This
compares to an unrealized loss net of tax of $2,895,000 at December 31, 2005.
The unrealized losses in these securities are attributable to changes in market
interest rates. Management deems the securities that are currently in an
unrealized loss position as not other than temporarily impaired. The securities
reported as securities held-to-maturity are stated at amortized cost.
-11-
Lending
-------
New business development during the first three months of 2006 coupled with a
small increase in loan demand resulted in an increase in total loans outstanding
to $220,664,000 at March 31, 2006. This compares to total loans outstanding of
$218,623,000 at December 31, 2005. This is an increase of $2,041,000 or 1.0%.
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, 2006 and December 31, 2005:
March 31, 2006 December 31, 2005
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 15,657 $ 15,354
Real Estate-construction and land
development 20,348 18,814
Real Estate-residential 135,342 135,619
Real Estate-commercial 41,989 40,889
Consumer 7,267 7,900
Other 61 47
--------- ---------
220,664 218,623
Unearned income (7) (8)
Allowance for loan losses (2,592) (2,626)
--------- ---------
Net Loans $ 218,065 $ 215,989
========= =========
Net loans at March 31, 2006 increased 1.0% to $218,065,000 when compared to net
loans of $215,989,000 at December 31, 2005. At March 31, 2006 and December 31,
2005 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 or reserve for loan and
lease losses through charges to earnings. The Bank evaluates the adequacy of the
allowance on a monthly basis. No material changes have been made in the
estimation methods or assumptions that the Bank uses in making this
determination during the period ended March 31, 2006. Such evaluations are based
on assessments of credit quality and "risk rating" of loans by senior
management, which is reviewed by the Bank's Loan Committee on a regular basis.
Loans are initially risk rated when originated. If there is deterioration in the
credit, the risk rating is adjusted accordingly. There was no provision expense
for allowances for loan losses for the first three months period of 2006. This
compares to a loan loss provision of $90,000 that was made during the
corresponding period in 2005.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
commercial loans with balances outstanding of $100,000 or more and residential
real estate mortgages with balances of $300,000 or more. Such loans are
considered impaired when it is probable that the Bank will not be able to
collect all principal and interest due according to the terms of the note.
Any such commercial loan and/or residential mortgage will be considered impaired
under any of the following circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994;
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable
and improbable.
-12-
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor.
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, 2006, nonperforming loans totaled
$832,000 or 0.38% of total loans outstanding of $220,664,000. The allowance for
loan losses totaled $2,592,000, representing 311.54% of nonperforming loans and
1.18% of total loans outstanding at March 31, 2006. Nonperforming loans totaled
$773,000 or .35% of total loans outstanding of $218,623,000 at December 31,
2005. The allowance for loan losses totaled $2,626,000 at December 31, 2005 and
represented 339.72% of nonperforming loans and 1.2% of total loans outstanding.
A total of $41,000 of loans was charged off by the Bank during the three months
ended March 31, 2006. These charged-off loans consisted primarily of commercial
loans. This compares to loans charged off during the three months period ended
March 31, 2005 which totaled $15,000. A total of $7,000 of previously
charged-off loans was recovered during the three month period ended March 31,
2006. Recoveries for the same period in 2005 totaled $5,000. 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, 2006 and December 31, 2005:
March 31, 2006 December 31, 2005
-------------- -----------------
(amounts in thousands)
Demand $ 63,066 $ 63,996
NOW 24,758 25,900
Money Market 52,200 57,401
Savings 49,958 51,567
Time 99,700 88,407
-------- --------
Total Deposits $289,682 $287,271
======== ========
Deposits constitute the principal funding source of the Company's assets.
Borrowings
----------
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At March 31, 2006, the Company had $70,854,000 in
outstanding advances from the Federal Home Loan Bank compared to $71,016,000 at
December 31, 2005. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
Interest Rate Risk
------------------
-13-
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 and developments and trends in interest rates,
liquidity and capital. One of the primary financial objectives is to manage
interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At March 31,
2006, 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, 2006 is within the limits approved by the
Board of Directors.
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At March 31, 2006 the Company had
approximately $53,332,000 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, 2006, the Company had $42,902,000 in stockholders' equity, an
increase of 3.5 % when compared to December 31, 2005 stockholders' equity
totaling $41,442,000. Net income for the three-month period ended March 31, 2006
totaled $1,147,000. Market conditions resulted in a decrease in accumulated
other comprehensive loss to $2,582,000 from $2,895,000 at December 31, 2005.
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, 2006, the Company had a total consolidated risk based
capital ratio of 16.15%, a tier 1 risk based capital ratio of 14.92% and a
leverage ratio of 8.68%. This compares to a total consolidated risk based
capital ratio of 15.76%, a tier 1 risk based capital ratio of 14.58% and a
leverage ratio of 8.27% at December 31, 2005. Maintaining strong capital is
essential to bank safety and soundness. However, the effective management of
capital resources requires generating attractive returns on equity to build
value for
-14-
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's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking
industry generally and in the specific markets in which the Bank
operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial
institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The main components of market risk for the Company are interest rate risk and
liquidity risk. The Company manages interest rate risk and liquidity risk
through an ALCO Committee comprised of outside Directors and senior management.
The Committee monitors compliance with the Bank's Asset/Liability Policy which
provides guidelines to analyze and manage the interest rate sensitivity gap,
which is the difference between the amount of assets and the amounts of
liabilities which mature or reprice during specific time frames. Model
simulation is used
-15-
to measure earnings volatility under both rising and falling rate scenarios.
Please refer to Interest Rate Risk and Liquidity under Item 2. The Company's
interest rate risk and liquidity position has not significantly changed from
year end 2005.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of March 31, 2006, the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. During the three
month period ended March 31, 2006, there were no changes in the Company's
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings. Not applicable
Item 1A. - Risk Factors. Not applicable
Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. - Other Information. Not applicable
Item 6. - Exhibits.
11 Computation of Earnings per Share.
31.1-Rule 13a-14(a)/15d-14(a) Certification.
31.2-Rule 13a-14(a)/15d-14(a) Certification.
32- Section 1350 Certifications.
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, 2006 by: /s/ John F. Perotti
------------- -------------------
John F. Perotti
Chief Executive Officer
Date: May 10, 2006 by: /s/ John F. Foley
------------- -----------------
John F. Foley
Chief Financial Officer
-16-