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 September 30, 2008
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________to_______________
Commission file number 0-24751
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Salisbury Bancorp, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
-------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
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(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
--------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer or a smaller reporting company.
(See the definitions of large accelerated filer, accelerated Filer and smaller
reporting company in Rule 12b-2 of the Exchange Act). (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
As of November 13, 2008, there were 1,685,861 shares outstanding.
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -September 30, 2008 (unaudited)
and December 31, 2007 4
Condensed Consolidated Statements of Income -nine and three months ended
September 30, 2008 and 2007 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -nine months ended
September 30, 2008 and 2007 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Controls and Procedures 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
Signatures 23
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)
September 30, 2008 and December 31, 2007
----------------------------------------
September 30, December 31,
2008 2007
------------- ------------
(unaudited)
ASSETS
------
Cash and due from banks $ 6,915 $ 12,811
Interest bearing demand deposits with other banks 1,445 726
Money market mutual funds 1,422 1,341
Federal funds sold 2,958 300
-------- --------
Cash and cash equivalents 12,740 15,178
Investments in available-for-sale securities (at fair value) 144,482 147,377
Investments in held-to-maturity securities (fair values of $67 as of
September 30, 2008 and $71 as of December 31, 2007) 68 71
Federal Home Loan Bank stock, at cost 5,323 5,176
Loans held-for-sale 122 120
Loans, less allowance for loan losses of $3,105 as of September 30, 2008
and $2,475 as of December 31, 2007 293,740 268,191
Investment in real estate 75 75
Other real estate owned 205 0
Premises and equipment 7,269 6,803
Goodwill 9,829 9,829
Core deposit intangible 1,206 1,329
Accrued interest receivable 2,395 2,539
Cash surrender value of life insurance policies 3,780 3,688
Other assets 4,416 1,584
-------- --------
Total assets $485,650 $461,960
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 69,198 $ 69,215
Interest-bearing 275,411 248,526
-------- --------
Total deposits 344,609 317,741
Securities sold under agreements to repurchase 12,370 0
Federal Home Loan Bank advances 86,490 95,011
Other liabilities 3,461 3,645
-------- --------
Total liabilities 446,930 416,397
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,685,861 shares at September 30, 2008 and 1,685,021
shares at December 31, 2007 169 169
Paid-in capital 13,158 13,130
Retained earnings 34,037 35,583
Accumulated other comprehensive loss (8,644) (3,319)
-------- --------
Total shareholders' equity 38,720 45,563
-------- --------
Total liabilities and shareholders' equity $485,650 $461,960
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(amounts in thousands, except per share data)
(unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $ 13,918 $ 13,273 $ 4,686 $ 4,537
Interest on debt securities:
Taxable 3,988 4,094 1,358 1,337
Tax-exempt 1,775 1,745 622 634
Dividends on equity securities 169 241 39 82
Other interest 121 46 7 12
-------- -------- -------- --------
Total interest and dividend income 19,971 19,399 6,712 6,602
-------- -------- -------- --------
Interest expense:
Interest on deposits 5,124 6,109 1,485 2,087
Interest on securities sold under agreements to repurchase 46 0 46 0
Interest on Federal Home Loan Bank advances 3,135 3,126 1,056 1,080
-------- -------- -------- --------
Total interest expense 8,305 9,235 2,587 3,167
-------- -------- -------- --------
Net interest and dividend income 11,666 10,164 4,125 3,435
Provision for loan losses 690 0 520 0
-------- -------- -------- --------
Net interest and dividend income after provision for
loan losses 10,976 10,164 3,605 3,435
-------- -------- -------- --------
Noninterest income (charge):
Trust department income 1,684 1,508 543 475
Loan commissions 2 22 0 9
Service charges on deposit accounts 610 544 209 183
(Write downs) gains on available-for-sale securities, net (2,317) 222 (2,671) 42
Gain on sales of loans held-for-sale 236 246 77 79
Other income 1,026 757 497 272
-------- -------- -------- --------
Total noninterest income (charge) 1,241 3,299 (1,345) 1,060
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 6,225 5,763 2,148 1,931
Occupancy expense 721 586 258 206
Equipment expense 650 584 219 214
Data processing 1,005 939 310 301
Insurance 148 121 58 47
Printing and stationery 201 216 66 72
Professional fees 651 500 218 161
Legal expense 282 167 116 41
Amortization of core deposit intangible 123 123 41 41
Other expense 1,176 1,026 401 387
-------- -------- -------- --------
Total noninterest expense 11,182 10,025 3,835 3,401
-------- -------- -------- --------
Income (loss) before income taxes 1,035 3,438 (1,575) 1,094
Income taxes 883 638 337 177
-------- -------- -------- --------
Net income (loss) $ 152 $ 2,800 $ (1,912) $ 917
======== ======== ======== ========
Earnings (loss) per common share $ .09 $ 1.66 $ (1.13) $ .54
-------- -------- -------- --------
Dividends per common share $ .84 $ .81 $ .28 $ .27
-------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
5
SALISBURY BANCORP INC. AND SUBSIDIARY
-------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Nine months ended September 30, 2008 and 2007
(unaudited)
2008 2007
--------- ---------
Cash flows from operating activities:
Net income $ 152 $ 2,800
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net 57 70
Gain on sales of available-for-sale securities, net (539) (222)
Write-downs of available-for-sale securities 2,856 0
Provision for loan losses 690 0
Change in loans held-for-sale (2) 189
Change in deferred loan costs, net (2) (101)
Net (increase) decrease in mortgage servicing rights (1) 89
Depreciation and amortization 519 403
Amortization of core deposit intangible 123 123
Accretion of fair value adjustment on deposits & borrowings (98) (98)
Amortization of fair value adjustment on loans 36 59
Decrease (increase) in interest receivable 144 (112)
Deferred tax benefit (138) (1,085)
(Increase) decrease in taxes receivable (13) 317
(Increase) decrease in prepaid expenses (30) 978
Increase in cash surrender value of insurance policies (92) (91)
Increase in income tax payable 0 254
(Increase) decrease in other assets (159) 87
Increase in accrued expenses 213 95
Decrease in interest payable (164) (60)
Decrease in other liabilities (8) (130)
Issuance of shares for Directors' fees 28 30
(Decrease) increase in unearned income on loans (1) 4
Cash and cash equivalents acquired from New York Community Bank
net of expenses paid of $115 0 181
--------- ---------
Net cash provided by operating activities 3,571 3,780
--------- ---------
Cash flows from investing activities
Purchase of Federal Home Loan Bank stock (147) (495)
Purchases of available-for-sale securities (102,304) (52,271)
Proceeds from sales of available-for-sale securities 94,723 51,371
Proceeds from maturities of held-to-maturity securities 3 3
Loan originations and principal collections, net (24,372) (6,013)
Purchase of loans (1,935) (3,733)
Recoveries of loans previously charged-off 36 53
Other real estate owned - expenditures capitalized (204) 0
Capital expenditures (941) (1,318)
--------- ---------
Net cash used in investing activities (35,141) (12,403)
--------- ---------
6
SALISBURY BANCORP INC. AND SUBSIDIARY
-------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Nine months ended September 30, 2008 and 2007
(unaudited)
(continued)
2008 2007
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and savings accounts 24,927 (2,312)
Net increase in time deposits 1,940 1,319
Federal Home Loan Bank advances 17,000 21,000
Principal payments on advances from Federal Home Loan Bank (16,786) (16,404)
Net change in short term advances from Federal Home Loan Bank (8,637) 3,551
Net increase in securities sold under agreements to repurchase 12,370 0
Dividends paid (1,682) (1,348)
--------- ---------
Net cash provided by financing activities 29,132 5,806
--------- ---------
Net decrease in cash and cash equivalents (2,438) (2,817)
Cash and cash equivalents at beginning of period 15,178 11,757
--------- ---------
Cash and cash equivalents at end of period $ 12,740 $ 8,940
========= =========
Supplemental disclosures:
Interest paid $ 8,567 $ 9,393
Income taxes paid 1,034 1,152
New York Community Bank Branch Acquisition:
Cash and cash equivalents acquired $ 296,060
Deposits assumed 496,060
---------
Net liabilities assumed (200,000)
Acquisition costs 115,207
---------
Goodwill $ 315,207
=========
The accompanying notes are an integral part of these consolidated financial
statements.
7
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Salisbury Bancorp, Inc. (the "Company"),
its wholly owned subsidiary Salisbury Bank and Trust Company (the "Bank"), and
the Bank's subsidiaries, S.B.T. Realty, Inc. and SBT Mortgage Service
Corporation (the "PIC") formed in April 2004. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the nine months ended September 30,
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2007 Annual Report on Form 10-K.
The year-end condensed balance sheet data derived from audited financial
statements does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE (LOSS) 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 (loss) 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
sources of other comprehensive (loss) income are the net changes in unrealized
holding (losses) or gains on securities and the net change in unrecognized
pension plan expense.
Comprehensive (Loss) Income
Nine months ended Three months ended
September 30, September 30,
2008 2007 2008 2007
-------- ------- ------- ----------
(amounts in thousands) (amounts in thousands)
Net income $ 152 $ 2,800 $(1,912) $ 917
Net change in unrealized holding (losses) or
gains on securities and net change in
unrecognized pension plan expense,
net of tax during period (5,325) (1,775) (2,403) 967
------- ------- ------- ----------
Comprehensive (loss) income $(5,173) $ 1,025 $(4,315) $ 1,884
======= ======= ======= ==========
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which permits,
but does not require, fair value accounting for any hybrid financial instrument
that contains an embedded derivative that would otherwise require bifurcation in
accordance with SFAS 133. The statement also subjects beneficial interests
issued by securitization vehicles to the requirements of SFAS No. 133. The
statement is effective as of January 1, 2007. The adoption of SFAS 155 did not
have an impact on the Company's financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140 ("SFAS No. 156"). SFAS
156 requires any entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however,
an entity may elect the "amortization method" or "fair value method" for
subsequent balance
8
sheet reporting periods. The adoption of this statement did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement 109" (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return and provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS 157 retains the exchange price
notion and clarifies that the exchange price is the price that would be received
for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is
effective for the Company's consolidated financial statements for the year
beginning on January 1, 2008, with earlier adoption permitted. The adoption of
this statement did not have a material impact on its financial condition and
results of operations. See Note 5.
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements," (EITF Issue 06-4). EITF 06-4 requires companies with an
endorsement split-dollar life insurance arrangement to recognize a liability for
future postretirement benefits. The effective date is for fiscal years beginning
after December 15, 2007, with earlier application permitted. Companies should
recognize the effects of applying this issue through either (a) a change in
accounting principle through a cumulative effect adjustment to retained earnings
or (b) a change in accounting principle through retrospective application to all
periods. The adoption of EITF Issue 06-4 did not have a material impact on the
Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
The new standard is effective at the beginning of the Company's fiscal year
beginning January 1, 2008, and early application may be elected in certain
circumstances. The adoption of this statement did not have a material impact on
its financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2008), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS 141(R) applies
prospectively to business combinations for which acquisition date is on or after
January 1, 2009. The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedge items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
9
NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------
The following summarizes the net periodic benefit cost for the nine months and
three months ended September 30:
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
--------------------- ---------------------
Components of net periodic benefit cost:
Service cost $ 302,856 $ 328,305 $ 100,952 $ 109,435
Interest cost 275,213 256,517 91,738 85,506
Expected return on plan assets (320,244) (276,707) (106,748) (92,236)
Amortization of:
Prior service cost 669 670 223 223
Actuarial loss 33,646 51,177 11,215 17,059
--------- --------- --------- ---------
Net periodic benefit cost $ 292,140 $ 359,962 $ 97,380 $ 119,987
========= ========= ========= =========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.00% 6.00% 6.00%
Average wage increase Graded table* Graded table* Graded table* Graded table*
Expected return on plan assets 7.50% 7.25% 7.50% 7.25%
*5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
NOTE 5 - ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
-----------------------------------------------------------
The fair value hierarchy established by SFAS No. 157 is based on observable and
unobservable inputs participants use to price an asset or liability. SFAS No.
157 has prioritized these inputs into the following value hierarchy:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical
assets or liabilities that are available at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (such as
interest rates, volatilities, prepayment speeds, credit risks, etc.) or
inputs that are derived principally from a corroborated by market data by
correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of the
asset or liability and are based on the entity's own assumption about the
assumptions that market participants would use to price the asset or
liability.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general clarification of such instruments pursuant to
the valuation hierarchy is set forth below. These valuation methodologies were
applied to all of the Company's financial assets and liabilities carried at fair
value effective January 1, 2008.
10
($ in 000s) Fair Value Measurements at Reporting using
Quoted Prices
in Active
Markets for Significant Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description 9/30/08 (Level 1) (Level 2) (Level 3)
--------- ------------- ----------------- ------------
AFS securities $ 144,482 $0 $144,482 $0
--------- -- -------- --
Total $ 144,482 $0 $144,482 $0
========= == ======== ==
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Business
--------
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation that is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has seven (7)
full service offices including a Trust/Wealth Services Division. Such offices
are located in the towns of North Canaan, Lakeville, Salisbury and Sharon,
Connecticut, Sheffield and South Egremont, Massachusetts, and Dover Plains, New
York. In addition, the bank has received regulatory approvals to open a
full-service branch in Millerton, New York. 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, 2007.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's assets at September 30, 2008 totaled $485,650,000 compared to
total assets of $461,960,000 at December 31, 2007. During the first nine months
of 2008, net loans outstanding, not including loans held-for-sale, increased
$25,549,000 or 9.53% to $293,740,000. This compares to total net loans
outstanding, not including loans held-for-sale, of $268,191,000 at December 31,
2007. This increase is primarily attributable to increased loan demand during
the period that was generated as the result of new business development efforts.
The growth was funded by an increase in deposits. Non-performing assets totaled
$1,796,000 at September 30, 2008. Non-performing loans totaled $1,591,000 at
September 30, 2008 or 0.54% of total loans outstanding and Other Real Estate
Owned totaled $205,000. This compares to non-performing loans totaling
$1,824,000 at December 31, 2007 or 0.68% of total loans outstanding. There were
no other non-performing assets at December 31, 2007. 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 September 30, 2008 totaled $344,609,000 as compared to total
deposits of $317,741,000 at December 31, 2007. This increase is primarily the
result of new business development efforts.
The Company's earnings for the nine months ended September 30, 2008 was $152,000
or $.09 per average share outstanding. This compares to earnings of $2,800,000
or $1.66 per share for the same period in 2007. The Company reported a third
quarter loss of $1,912,000 or $1.13 per average share outstanding compared to
earnings of $917,000 or $.54 per average share outstanding, in the third quarter
11
of 2007. Earnings for the respective periods were impacted by a pre-tax charge
of $2,856,000 as a result of the U.S. Government placing FHLMC (Freddie Mac)
into conservatorship, which necessitated the Company to take a write-down of
Freddie Mac preferred stock during the quarter ended September 30, 2008. No tax
benefit was recognized as a result of this charge for the quarter ended
September 30, 2008, because applicable law at the time forced financial
institutions to treat the loss as a capital loss. On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 was enacted, which includes a
provision permitting banks to recognize losses relating to the Freddie Mac
preferred stock as an ordinary loss, thereby allowing a tax benefit for both tax
and financial reporting purposes. If the legislation permitting this action had
been effective in the third quarter rather than the fourth quarter, the positive
impact of the tax charge that would have been recorded would have resulted in
September 30, 2008 year-to-date earnings of $1,123,000 or $.67 per average share
outstanding. The Company will recognize the additional tax benefit totaling
approximately $971,000 or $.58 per average share outstanding relating to the
write-down of the Freddie Mac preferred stock in the quarter ending December 31,
2008. Earnings, not including the Freddie Mac preferred stock write-down, for
the first nine months of 2008 would have totaled $3,008,000 or $1.78 per average
share outstanding.
The Bank remains "well capitalized" pursuant to the standards of the Federal
Deposit Insurance Corporation. The Bank's total risk based capital ratio was
13.15%; the Tier 1 capital ratio was 12.08% and the leverage ratio was 7.54%. As
previously disclosed, on September 2, 2008 the Board of Directors declared a
third quarter cash dividend of $.28 per common share, which was paid on October
31, 2008 to shareholders of record as of September 30, 2008. This compared to a
cash dividend of $.27 per common share that was paid for the third quarter of
2007. Year-to-date dividends total $.84 per common share outstanding for this
year. This compares to total year-to-date dividends of $.81 per common share one
year ago.
Critical Accounting Estimates
-----------------------------
In preparing the Company's financial statements, Management selects and applies
numerous accounting policies. In applying these policies, Management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on an estimation of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of estimated 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."
NINE MONTHS ENDED SEPTEMBER 30, 2008
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007
Net Interest and Dividend Income
--------------------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent noninterest income. Net interest and dividend
income is the difference between interest and dividends earned primarily on the
loan and securities portfolios and interest paid on deposits, securities sold
under agreements to repurchase and advances from the Federal Home Loan Bank.
Noninterest income is primarily derived from the Trust/Wealth Advisory Services
division, service charges and other fees related to deposit and loan accounts
and income from gains in securities transactions. For the following discussion,
net interest and dividend income is presented on a fully taxable-equivalent
("FTE") basis. FTE interest income restates reported interest income on tax
exempt securities as if such interest were taxed at the Company's federal tax
rate of 34% for all periods presented.
12
(amounts in thousands)
Nine Months Ended September 30, 2008 2007
------ ----
Total Interest and Dividend Income
(financial statements) $ 19,971 $ 19,399
Tax Equivalent Adjustment 914 898
-------- --------
Total Interest and Dividend Income (on a FTE basis) 20,885 20,297
Total Interest Expense 8,305 9,235
-------- --------
Net Interest and Dividend Income-FTE $ 12,580 $ 11,062
======== ========
Total interest and dividend income on a FTE basis for the nine months ended
September 30, 2008, when compared to the same period in 2007, increased $588,000
or 2.90%. The increase was primarily attributable to an increase in earning
assets.
Interest expense on deposits for the first nine months of 2008 totaled
$5,124,000, a decrease of $985,000 or 16.12% when compared to $6,109,000 for the
same period in 2007. This decrease reflects an economic environment of generally
lower interest rates. The Bank's volume of Federal Home Loan Bank advances
outstanding at September 30, 2008 decreased 9.00% when compared to total
advances outstanding at December 31, 2007, however overnight borrowings through
out the year resulted in an increase of interest expense totaling $9,000. Total
interest expense for the nine months ended September 30, 2008 was $8,305,000, a
decrease of $930,000 or 10.07% when compared to the same period in 2007.
Overall, net interest and dividend income (on a FTE basis) increased $1,518,000
or 13.72% to $12,580,000 for the period ended September 30, 2008 when compared
to the same period in 2007.
Noninterest Income
------------------
Noninterest income, not including the write-downs and net gains on sales of
available-for-sale securities, totaled $3,558,000 for the nine months ended
September 30, 2008. This is an increase of $481,000 or 15.63% compared to
noninterest income, not including gains on available-for-sale securities
transactions, of $3,077,000 for the nine months ended September 30, 2007.
Continuing growth of the Trust/Wealth Advisory Services Division has resulted in
increased income of $176,000 or 11.67% to $1,684,000 for the period ended
September 30, 2008 compared to income totaling $1,508,000 for the corresponding
period in 2007. Write-downs on available-for-sale securities totaled $2,856,000
for the period ended September 30, 2008. As described previously, this is
primarily the result of the U.S. Governments actions relating to Freddie Mac.
Other income, which primarily consists of fees associated with transaction
accounts, fees related to the origination and servicing of mortgage loans and
gains related to the sale of mortgage loans, increased $305,000 or 19.44% to
$1,874,000 for the nine months ended September 30, 2008 compared to $1,569,000
for the nine months ended September 30, 2007.
Noninterest Expense
-------------------
Noninterest expense increased $1,157,000 or 11.54% for the first nine months of
2008 as compared to the same period in 2007. Although some increases in the
described noninterest expenses in the table below are attributable to normal
volumes of business, the increase also reflects additional staffing and the
additional costs associated with the daily operation of our new Dover Plains,
New York branch, which opened in August of 2007. The increase in professional
fees is primarily attributable to the Trust and Wealth Advisory Services
Division working with Bradley Foster and Sargent, Inc., an independent
investment advisory firm that assists in providing a broader scope of highly
personalized professional investment services to clients. In addition, internal
audit expense increased which is the result of additional services required due
to compliance requirements of the Sarbanes-Oxley Act. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
13
2008 2007 Change % Change
----------------------------------------------------------------------------------
Salaries and employee benefits $ 6,225 $ 5,763 $ 462 8.01%
Occupancy expense 721 586 135 23.03
Equipment expense 650 584 66 11.30
Data processing 1,005 939 66 7.02
Insurance 148 121 27 22.31
Printing and stationery 201 216 (15) (6.94)
Professional fees 651 500 151 30.20
Legal expense 282 167 115 68.86
Amortization of core deposit intangible 123 123 0 0
Other expense 1,176 1,026 150 14.61
-------- -------- -------
Total noninterest expense $ 11,182 $ 10,025 $ 1,157 11.54
======== ======== =======
Income Taxes
------------
The income tax provision for the first nine months of 2008 totaled $883,000 in
comparison to $638,000 for the same nine-month period in 2007. As mentioned
previously, the Emergency Economic Stabilization Act (EESA) enacted in October
2008 will permit a fourth quarter tax benefit of $971,000 for the
other-than-temporary impairment recorded in the quarter ended September 30,
2008.
Net Income
----------
The Company's pre tax income, not including write-downs and gains on securities
transactions, for the nine month period ended September 30, 2008 would have
totaled $3,352,000. This is an increase of $136,000 or approximately 4.23% when
compared to pre tax income, not including gains on securities transactions, for
the period ended September 30, 2007 that totaled $3,216,000. Net income was
$152,000 or $.09 per average share outstanding for the nine months ended
September 30, 2008. Net income for the corresponding period in 2007 totaled
$2,800,000 or $1.66 per average share outstanding.
THREE MONTHS ENDED SEPTEMBER 30, 2008
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007
Net Interest and Dividend Income
--------------------------------
For the following discussion, net interest and dividend income is presented on a
fully taxable-equivalent ("FTE") basis. FTE interest income restates reported
interest income on tax exempt loans and securities as if such interest were
taxed at the Company's federal tax rate of 34% for all periods presented.
(amounts in thousands)
Three Months Ended September 30 2008 2007
------- --------
Total Interest and Dividend Income
(financial statements) $ 6,712 $ 6,602
Tax Equivalent Adjustment 320 327
------- --------
Total Interest and Dividend Income (on a FTE basis) 7,032 6,929
Total Interest (Expense) (2,587) (3,167)
------- --------
Net Interest and Dividend Income-FTE $ 4,445 $ 3,762
======= ========
Total interest and dividend income on a FTE basis for the three months ended
September 30, 2008 increased $103,000 or 1.49% compared to the same period in
2007. The increase was primarily attributable to an increase in earning assets.
Interest expense on deposits decreased $602,000 or 28.85% for the quarter to
$1,485,000 compared to $2,087,000 for the same quarter in 2007. This decrease is
primarily the result of an economic environment of generally lower interest
rates. The Bank's volume of Federal Home Loan Bank advances decreased during the
three month period ended September 30, 2008 when compared to the corresponding
period in 2007. Interest expense on these advances decreased $24,000 or 2.22%
and totaled $1,056,000 for the three months ended September 30, 2008 compared to
$1,080,000 for the corresponding period in 2007. Total interest expense for the
three months ending
14
September 30, 2008 was $2,587,000 compared to total interest expense for the
same period in 2007 of $3,167,000, a decrease of $580,000 or 18.31%. This
decrease is a reflection of an economic environment of generally lower interest
rates and a reduction of FHLB borrowings. Overall, net interest and dividend
income (on a FTE basis) increased $683,000 or 18.16% to $4,445,000 for the
three-month period ended September 30, 2008 when compared to the corresponding
period in 2007.
Noninterest Income
------------------
Noninterest income not including write-downs on and net gains on sales of
available-for-sale securities totaled $1,326,000 for the three months ended
September 30, 2008 as compared to $1,018,000 for the three months ended
September 30, 2007. This represents an increase of $308,000 or 30.26%. Income
from the Trust/Wealth Advisory Services Division increased $68,000 or 14.32% to
$543,000 for the third quarter of 2008. This is primarily the result of
continued growth in assets under management. Other income which consists
primarily of fees associated with transaction accounts, fees related to the
origination and servicing of loans and a non recurring premium on the sale of
the Bank's credit card portfolio of $183,000 totaled $783,000 for the third
quarter of 2008. As previously mentioned, the write-down of Freddie Mac
preferred stock following it being put into conservatorship by the U.S.
Government, for the quarter ended September 30, 2008 was $2,856,000. Overall, a
charge of $1,345,000 was recorded for noninterest income for the three month
period ended September 30, 2008. This compares to noninterest income of
$1,060,000 for the corresponding period in 2007.
Noninterest Expense
-------------------
Noninterest expense totaled $3,835,000 for the three month period ended
September 30, 2008 as compared to $3,401,000 for the same period in 2007, an
increase of $434,000 or 12.76%. Although some increases in noninterest expense
are attributable to normal volumes of business, much of the overall increase in
the noninterest expense listed in the table below is primarily attributable to
additional staffing, and expenses related to the establishment of a new branch
in New York State, which commenced operations in August 2007. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
2008 2007 Change % Change
--------------------------------------------------------------------------------
Salaries and employee benefits $ 2,148 $ 1,931 $ 217 11.24%
Occupancy expense 258 206 52 25.24
Equipment expense 219 214 5 2.34
Data processing 310 301 9 2.99
Insurance 58 47 11 23.40
Printing and stationery 66 72 (6) (8.33)
Professional fees 218 161 57 35.40
Legal expense 116 41 75 182.93
Amortization of core deposit intangible 41 41 0 0
Other expense 401 387 14 3.62
------- ------- -----
Total non-interest expense $ 3,835 $ 3,401 $ 434 12.76
======= ======= =====
Income Taxes
------------
The income tax provision for the three-month period ended September 30, 2008
totaled $337,000 in comparison to $177,000 for the same three month period in
2007. As mentioned previously, the EESA enactment in October 2008 will permit
the Company to record a fourth quarter tax benefit of approximately $971,000 for
the other-than-temporary impairment recorded in the quarter ended September 30,
2008.
Net Income
----------
The Company's pre tax income, not including write-downs and gains on sales of
securities, for the three month period ended September 30, 2008 would have
totaled $1,096,000. This is an increase of $44,000 when compared to pre tax
income, not including gains on securities transactions for the corresponding
three month period ended September 30, 2007, that totaled $1,052,000. Overall,
the Company reported a net loss totaling $1,912,000 or $1.13 per average share
outstanding for the three months ended September
15
30, 2008. Net income for the corresponding period in 2007 totaled $917,000 or
$0.54 per average share outstanding.
FINANCIAL CONDITION
-------------------
Total assets at September 30, 2008 were $485,650,000, compared to $461,960,000
at December 31, 2007, an increase of 5.13%. The increase is primarily the result
of an increase in earning assets during the period that were funded by growth in
deposits.
Investment Securities
---------------------
The make up of the investment 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. The portfolio
does not include securities collateralized by pools of sub-prime mortgages.
During the nine months ended September 30, 2008, the investment portfolio,
including Federal Home Loan Bank stock, decreased $2,751,000 or 1.80% to
$149,873,000 from $152,624,000 at December 31, 2007.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities in the
portfolio 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 September 30, 2008, the unrealized loss net of tax
was $7,620,000. This compares to an unrealized loss net of tax of $2,273,000 at
December 31, 2007. As previously discussed, the U.S. Government placing Freddie
Mac into conservatorship necessitated the write-down of Freddie Mac preferred
stock during the quarter. The amortized cost basis of the investment which was
made in 2003 was $2,975,000. This represented approximately 1.8% of the total
investment securities portfolio. Management deems the remaining securities in
the portfolio that are currently in an unrealized loss position as not other
than temporarily impaired. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
-------
Net loans outstanding (not including loans held for sale) totaled $293,740,000
at September 30, 2008 compared to net loans outstanding (not including loans
held for sale) of $268,191,000 at December 31, 2007. This is an increase in net
loans of $25,549,000 or 9.53%. Competition for loans remains aggressive in the
Bank's market area, however, new business development coupled with an increase
in loan demand resulted in the increase.
16
The following table represents the composition of the loan portfolio comparing
September 30, 2008 to December 31, 2007:
September 30, 2008 December 31, 2007
------------------ -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 19,239 $ 20,629
Real estate-construction and land
development 35,690 28,928
Real estate-residential 174,250 158,600
Real estate-commercial 60,966 53,823
Consumer 5,935 8,005
Other 457 376
--------- ---------
296,537 270,361
Deferred costs, net 308 306
Unearned income 0 (1)
Allowance for loan losses (3,105) (2,475)
--------- ---------
Net Loans $ 293,740 $ 268,191
========= =========
Provision and Allowance for Loan Losses
---------------------------------------
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Bank's objectives. Because of this risk
associated with extending loans, the Bank maintains an allowance or reserve for
loan and lease losses through charges to earnings. For the first nine-month
period of 2008, the provision for loan losses was $690,000. There was no
provision for loan losses in the comparable period in 2007.
The Bank evaluates the adequacy of the allowance no less frequently than on a
quarterly basis. No material changes have been made in the estimation methods or
assumptions that the Bank uses in making this determination during the period
ended September 30, 2008. Such evaluations are based on assessments of credit
quality and "risk rating" of loans by senior management, which is reviewed by
the Bank's Loan Committee on a regular basis. Loans are initially risk rated
when originated. If there is deterioration in the credit, the risk rating is
adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
commercial loans with balances outstanding of $100,000 or more and residential
real estate mortgages with balances of $300,000 or more. Such loans are
considered impaired when it is probable that the Bank will not be able to
collect all principal and interest due according to the terms of the note.
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, 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
17
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.
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 nonaccrual status
along with loans that are 90 days or more past due and still accruing, are
closely monitored by management. At September 30, 2008, nonperforming loans
totaled $1,591,000 or 0.54% of total loans outstanding of $296,537,000, which
does not include loans held for sale. In addition, while currently performing
and secured, the Company has concerns relating to the timely repayment of a loan
in the amount of $3,400,000 which is the subject of litigation. (See Legal
Proceedings.) The allowance for loan losses totaled $3,105,000 representing
195.16% of nonperforming loans. Nonperforming loans totaled $1,824,000 or 0.67%
of total loans outstanding, (which does not include loans held for sale) of
$270,361,000 at December 31, 2007. The allowance for loan losses totaled
$2,475,000 at December 31, 2007 and represented 135.69% of nonperforming loans.
A total of $95,000 of loans were charged off by the Bank during the nine months
ended September 30, 2008. These charged-off loans consisted primarily of
consumer loans. This compares to loans charged off during the nine-month period
ended September 30, 2007 that totaled $72,000. A total of $36,000 of previously
charged-off loans was recovered during the nine month period ended September 30,
2008. Recoveries for the same period in 2007 totaled $53,000. 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. At September 30, 2008, the Bank had other
real estate owned ("OREO") in the amount of $205,000.
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 September 30, 2008 and December 31, 2007:
September 30, 2008 December 31, 2007
(amounts in thousands)
Demand $ 69,198 $ 69,215
NOW 27,121 23,652
Money Market 60,578 56,210
Savings 69,724 52,616
Time 117,988 116,048
-------- --------
Total Deposits $344,609 $317,741
======== ========
Deposits constitute the principal funding source of the Company's assets.
18
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 September 30, 2008, the Company had $86,490,000 in
outstanding advances from the Federal Home Loan Bank compared to $95,011,000 at
December 31, 2007. In addition, the Company began offering securities sold under
agreements to repurchase as part of its operating strategy. At September 30,
2008 they totaled $12,370,000. Management expects that it will continue these
strategies of supplementing deposit growth.
Off-Balance Sheet Arrangements
------------------------------
In the normal course of business, the Company enters into certain relationships
characterized as lending related off-balance sheet arrangements. These lending
commitments have various terms and are designed to accommodate the financial
needs of consumers, businesses and other entities. Many of these loan
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of these commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
Loan commitments have credit risk essentially the same as that involved in
extending loans to customers. They are subject to normal credit approval
procedures and policies. Collateral is obtained based on management's assessment
of the customer's credit. The accompanying table summarizes the Company's off
balance sheet lending-related financial instruments by remaining maturity at
September 30, 2008:
(amounts in thousands)
By remaining maturity Less than 1 year 1-3 years 4-5 years After 5 years Total
Off balance sheet lending-related
Financial Instruments
Residential real estate related $ 2,196 $ $ 3 $ 28,059 $ 30,258
Commercial related 3,650 5,502 77 14,973 24,202
Consumer related 1,302 1,302
Standby letters of credit 29 29
--------------------------------------------------------------
Total $ 5,875 $ 5,502 $ 80 $ 44,334 $ 55,791
==============================================================
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,
19
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 September 30, 2008, the
Company maintains a liability sensitive (negative gap) position. This would
suggest that during a period of declining interest rates, the Company would be
in a better position to increase net interest income. To the contrary, during a
period of rising interest rates, a negative gap would result in a decrease in
interest income. The level of interest rate risk at September 30, 2008 is within
the limits approved by the Board of Directors.
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At September 30, 2008, the Company
had approximately $55,791,000 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 September 30, 2008, the Company had $38,720,000 in shareholders' equity, a
decrease of 15.02% when compared to December 31, 2007 shareholders' equity
totaling $45,563,000. Several components contributed to the change since
December 31, 2007. Earnings for the nine-month period ended September 30, 2008
totaled $152,000. Securities in the investment portfolio that are classified as
available-for-sale are adjusted to fair value monthly and the unrealized losses
or gains are not included in earnings, but are reported as a net amount (less
expected tax) as a separate component of capital until realized. Market
fluctuations of fair value of the securities portfolio for the period ending
September 30, 2008 resulted in accumulated other comprehensive loss net of tax
totaling $7,620,000. Changes in unrecognized pension plan expense per SFAS No.
158, resulted in accumulated other comprehensive loss net of tax of $1,024,000
for the nine month period ended September 30, 2008.
A review and analysis of securities determined that, as a result of the U.S.
Government placing FHLMC (Freddie Mac) into conservatorship, the Company needed
to take a write-down of Freddie Mac preferred stock during the quarter ended
September 30, 2008. Earnings for the period were impacted by pre-tax charges of
$2,856,000. No other credit deterioration was revealed and the unrealized loss
on securities available-for-sale is due to the current interest rate
environment, and management deems the remaining securities to be not other than
temporarily impaired. The Company has declared three quarterly dividends
resulting in a decrease in capital of $1,890,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan that
resulted in an increase in capital of $28,000. Under current regulatory
definitions, the Company and the Bank are considered to be "well capitalized"
for capital adequacy purposes. As a result, the Bank pays lower federal deposit
insurance premiums than those banks that are not "well capitalized." One primary
measure of capital adequacy for regulatory
20
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 September 30, 2008, the Company had a total risk based capital ratio
of 13.15% compared to 15.00% at December 31, 2007. Maintaining strong capital is
essential to Bank safety and soundness. However, the effective management of
capital resources requires generating attractive returns on equity to build
value for shareholders while maintaining appropriate levels of capital to fund
growth, meet regulatory requirements and be consistent with prudent industry
practices.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles that require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation, although interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Although not a material factor in recent years, inflation could impact earnings
in future periods.
Forward Looking Statements
--------------------------
This Form 10-Q and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business; and
(b) expectations for revenues and earnings for the Company and Bank.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impacts 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.
21
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 3. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of September 30, 2008, 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 quarter ended September 30, 2008 there were no changes in the Company's
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings.
The Bank is a party defendant, both in its capacity as Salisbury Bank &
Trust Company and in its capacity as the Trustee of the Erling C.
Christophersen Revocable Trust, in litigation currently pending in the
Connecticut Superior Court within the Judicial District of Bridgeport,
John R. Christophersen v Erling C Christophersen et. al. commenced May 29,
2008. The other parties to the litigation are the Plaintiff, John R.
Christophersen of Norwalk, Connecticut and the Defendants, Erling C.
Christophersen, of Westport, Connecticut; Bonnie Christophersen of
Westport, Connecticut, Elena Dreiske of Wanetka, Illinois, and People's
United Bank with its principal place of business in Bridgeport,
Connecticut.
The litigation involves the ownership of certain real property located
within Westport, Connecticut, which was conveyed by the Defendant, Erling
Christophersen, to the Erling Christophersen Trust, of which the Bank is a
co-Trustee. Subsequent to this conveyance, the Bank loaned $3,386,609, to
the Erling Christophersen Trust which was secured by an open-end
commercial mortgage in favor of the Bank on the Westport real estate
referenced above.
The claim of the Plaintiff John R. Christophersen is that he had an
interest in the real property of which he was wrongfully divested. He has
brought this action seeking restoration of his allegedly divested interest
as well as money damages.
In addition to his efforts to restore his alleged interest in the real
property, the Plaintiff has made two additional claims directed at the
Bank. The Plaintiff has alleged that Salisbury failed to utilize
reasonable diligence in extending financing to the Co-Defendant, Erling,
and that had it engaged in reasonable diligence it would've discovered
that the Plaintiff had an interest in the above referenced property. He
has also alleged an implied trust against the Bank alleging that it
acquired title to the property adverse to the Plaintiff's interest and in
contravention of the Plaintiffs entitlements, and therefore holds the
property in trust for Plaintiff.
The Bank disputes the claims made by the Plaintiff and is vigorously
defending the case. At the inception of this loan, the Bank obtained a
Lender's Title Insurance policy from the Chicago Title and Insurance
Company. Additionally, at the time of this financing, the appraised value
of the aforementioned real estate was significantly in excess of the loan
amount. Given current economic conditions, the Bank continues to monitor
the value of its collateral position which remains well in excess of the
outstanding loan balance. While the underlying loan is currently
performing, until the litigation is resolved, the liquidity of the real
estate collateral which secures the loan is diminished.
22
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
SALISBURY BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salisbury Bancorp, Inc.
Date: November 13, 2008 by: /s/ John F. Perotti
----------------- --------------------
John F. Perotti
Chief Executive Officer
Date: November 13, 2008 by: /s/ John F. Foley
----------------- --------------------
John F. Foley
Chief Financial Officer
23