Add
SAL to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SAL > SEC Filings for SAL > Form 10-K on 30-Mar-2009 | All Recent SEC Filings |
30-Mar-2009
Annual Report
Salisbury Bancorp, Inc. (Company), a Connecticut corporation, formed in 1998, is the holding company for Salisbury Bank and Trust Company, (Bank). The Company's sole subsidiary is the Bank, formed in 1848 which has seven (7) full service offices located in the towns of North Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and Sheffield, Massachusetts, and Dover Plains, New York. A full Trust and Wealth/Advisory Services Division is also located in Lakeville, Connecticut. The Management's Discussion and Analysis of Results of Operations and Financial Condition that follows presents Management's comments on the consolidated operating results of the Company. In order to provide a foundation for building shareholder value and servicing customers, the Company remains committed to investing in the technological and human resources necessary for developing and delivering new personalized financial products and services in order to better serve both current and future customers in the tri-state area. The following discussion should be read in conjunction with the Company's consolidated financial statements and the notes to the consolidated financial statements that are presented as part of this Annual Report on Form 10-K.
Forward Looking Statements
This Annual Report 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 increased revenues and earnings for the Company and Bank through growth resulting from acquisitions, attraction of new deposit and loan customers and the introduction of new products and services.
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.
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 a determination of the probable amount of credit losses in the loan portfolio. Many factors influence the amount of future loan losses, relating to both the specific characteristics of the loan portfolio and general economic conditions nationally and locally. While management carefully considers these factors in determining the amount of the allowance for loan losses, future adjustments may be necessary due to changed conditions, which could have an adverse impact on reported earnings in the future. (See "Provisions and Allowance for Loan Losses".)
RESULTS OF OPERATION
Comparison of the Years Ended December 31, 2008 and 2007
Overview
The Company's assets at December 31, 2008 totaled $495,754,000 compared to total assets of $461,960,000 at December 31, 2007. Net loans outstanding, including loans held-for-sale totaled $299,682,000 at December 31, 2008. This compares to net loans outstanding of $268,311,000 at December 31, 2007, and represents an increase of $31,371,000 or 11.69%. New business development efforts were primarily attributable to the growth. This growth was primarily funded by an increase in deposits. Deposits at December 31, 2008 totaled $344,925,000 and compared to total deposits of $317,741,000 at December 31, 2007. This is an increase of $27,184,000 or 8.56%.
The Company's earnings totaled $1,106,000 or $0.66 per average share outstanding in 2008. This compares to earnings of $3,800,000 or $2.26 per average share outstanding in 2007. Earnings were impacted as a result of the U.S. Government placing FHLMC (Freddie Mac) into conservatorship during the quarter ended September 30, 2008. This necessitated the Company to take a write-down of Freddie Mac preferred stock during that quarter which totaled $2,856,000 and an additional write-down of $99,365 in the quarter ended December 31, 2008 for an overall total of $2,955,365. However, the total tax benefit in the amount of $1,004,824 was recognized as a result of these charges in the quarter ended December 31, 2008, because applicable law at the time forced financial institutions to treat the loss as a capital loss. On October 3, 2008, the EESA 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. The overall tax effected impact for the year ended December 31, 2008 resulted in a charge to earnings of $1,950,541.
The nation's economy is in a recession and the Bank's market area is beginning to feel the effects of economic conditions. The Bank's 2008 loan loss provision expense totaled $1,279,000 compared to $0 in 2007. Non-performing loans at December 31, 2008 totaled $5,175,000 or 1.71% of total loans outstanding which compares to $1,824,000 or 0.67% for the corresponding period in 2007. Net loans charged-off during 2008 totaled $1,030,000 compared to net recoveries of loans of $1 thousand dollars in 2007. At December 31, 2008, the allowance for loan losses totaled $2,724,000 which represented 0.9% of total loans outstanding. Other Real Estate Owned totaled $204,534 at December 31, 2008. The property has since been sold.
During the fourth quarter of 2008, the Bank prepaid a $19 million advance from the Federal Home Loan Bank of Boston at a cost of $674,000 net of tax. The Bank took such action as part of a program to restructure a portion of the Bank's borrowings. The borrowings which were at a rate of 5.97% are being replaced with new Federal Home Loan Bank advances that have lower interest rates and a revised maturity schedule. While the prepayment resulted in a one time after tax expense in the fourth quarter of 2008, overall, the restructuring is expected to result in a decrease in future borrowing expense which is intended to increase earnings per share in 2009 and future years.
The Bank's risk-based capital ratios at December 31, 2008 were 10.53% for Tier 1 risk based capital and 11.34% for total risk based capital. The Bank's leverage ratio was 7.52% at December 31, 2008. This compares to a Tier 1 risk based capital ratio at December 31, 2007 of 13.74%, a total risk based capital ratio of 14.69% and a leverage ratio of 8.06%. Dividends declared on the Company's common stock amounted to $1.12 per share in 2008 compared to $1.08 per share in 2007.
Net Interest and Dividend Income
The Company earns income from two basic sources. The primary source is through the management of its financial assets and liabilities and involves functioning as a financial intermediary. The Company accepts funds from depositors and borrows funds and either lends the funds to borrowers or invests those funds in various types of securities. A second source is fee income, which is discussed in the noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on loans, interest and dividends earned on securities (the Company's earning assets) and the interest expense paid on deposits and borrowed funds, primarily in the form of advances from the Federal Home Loan Bank. The amount by which interest income will exceed interest expense depends on two factors: (1) the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and borrowed funds and (2) the interest rate earned on those interest-earning assets compared with the interest rate paid on those interest-bearing deposits and borrowed funds. For this discussion, net interest income is presented on an FTE basis. FTE interest income restates reported interest income on tax exempt loans and securities as if such interest were taxed at the applicable State and Federal income tax rates for all periods presented.
(dollars in thousands) December 31,
2008 2007
-------------------
Interest and Dividend Income
(financial statements) $ 26,557 $ 26,152
Tax Equivalent Adjustment 1,260 1,202
-------- --------
Total Interest and Dividend
Income (on an FTE basis) 27,817 27,354
Interest Expense (10,825) (12,432)
-------- --------
Net Interest and Dividend Income-FTE $ 16,992 $ 14,922
======== ========
|
The Company's 2008 total interest and dividend income on an FTE basis for the period ended December 31, 2008 increased $463,000 or 1.69% when compared to the same period in 2007. The increase is primarily attributable to an increase in earning assets.
Interest expense on deposits in 2008 decreased $1,567,000 or 19.11% to $6,633,000 compared to $8,200,000 for the corresponding period in 2007. This decrease reflects an economic environment of generally lower interest rates. Interest expense for Federal Home Loan Bank advances decreased $146,000 to $4,086,000 in 2007 compared to $4,232,000 in 2007. The decrease was the result of a decrease in advances during the year. In addition, the Bank recorded interest expense totaling $106,000 for interest on securities sold under agreements to repurchase which was a new product that was introduced during 2008. Competition remains aggressive and interest margins continue to be pressured, however, net interest and dividend income on an FTE basis increased $2,070,000 or 13.87% over 2007 and totaled $16,992,000 for the year ended December 31, 2008 compared to net interest and dividend income on an FTE basis of $14,922,000 for the year ended December 31, 2007.
Net interest margin is net interest and dividend income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest and dividends earned on assets and the average rate of interest that must be paid to support those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid. The Company's 2008 net interest margin on an FTE basis was 3.75%. This compares to a net interest margin of 3.54% for 2007. The following table reflects average balances, interest earned or paid and rates for the two years ended December 31, 2008 and 2007. The average loan balances include non-accrual loans and loans currently past due 90 days and still accruing. Interest earned on loans also includes fees on loans such as late charges that are not deemed to be material. Interest earned on tax exempt securities in the table is presented on an FTE basis. A federal tax rate of 34% was used in performing these calculations. Actual tax exempt income earned in 2008 was $2,446,000 with a yield of 4.32%. Actual tax exempt income in 2007 totaled $2,332,000 with a yield of 4.28%.
YIELD ANALYSIS
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
(dollars in thousands) 2008 2007
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-Earning Assets:
Loans $ 287,924 $ 18,449 6.41% $ 258,714 $ 17,969 6.95%
Taxable Securities 104,070 5,538 5.32% 106,775 5,783 5.42%
Tax-Exempt Securities* 56,647 3,706 6.54% 54,541 3,533 6.48%
Federal Funds 3,758 99 2.63% 643 31 4.82%
Other Interest-Earning 1,332 25 1.88% 1,071 38 3.55%
-------------------- --------------------
Total Interest-Earning Assets 453,731 27,817 6.13% 421,744 27,354 6.49%
-------- --------
Allowance for Loan Losses (2,711) (2,467)
Cash & Due From Banks 6,479 6,554
Premises, Equipment 7,241 6,645
Net unrealized loss on AFS
Securities (7,232) (3,468)
Other Assets 20,555 20,619
--------- ---------
Total Average Assets $ 478,063 $ 449,627
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
NOW/Money Market Deposits $ 88,431 1,270 1.44% $ 80,180 1,854 2.31%
Savings Deposits 63,185 926 1.47% 47,063 814 1.73%
Time Deposits 116,959 4,437 3.79% 119,052 5,532 4.65%
Borrowed Funds 94,698 4,192 4.43% 87,649 4,232 4.83%
-------------------- --------------------
Total Interest-Bearing
Liabilities 363,273 10,825 2.98% 333,944 12,432 3.72%
-------- --------
Demand Deposits 67,681 66,304
Other Liabilities 3,193 4,673
Shareholders' Equity 43,916 44,706
--------- ---------
Total Liabilities and
Shareholders' Equity $ 478,063 $ 449,627
========= =========
Net Interest Income $ 16,992 $ 14,922
======== ========
Net Interest Spread 3.15% 2.77%
Net Interest Margin 3.75% 3.54%
|
* Presented on a fully taxable equivalent ("FTE") basis
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2008 over 2007 2007 over 2006
------------------------------ ---------------------------
Volume Rate Total Volume Rate Total
------------------------------ ---------------------------
Increase (decrease) in:
Interest income on:
Loans $ 2,030 $ (1,550) $ 480 $ 1,981 $ 301 $ 2,282
Taxable investment securities (147) (98) (245) (256) 156 (100)
Tax-exempt investment securities 136 37 173 489 (108) 381
Other interest income 136 (81) 55 (1) (10) (11)
------------------------------ ---------------------------
Total interest income $ 2,155 $ (1,692) $ 463 $ 2,213 $ 339 $ 2,552
Interest expense on:
NOW/Money Market deposits $ 191 $ (775) $ (584) $ 18 $ 24 $ 42
Savings deposits 279 (167) 112 (24) 198 174
Time deposits (97) (998) (1,095) 528 570 1,098
Borrowed funds 340 (380) (40) 808 (149) 659
------------------------------ ---------------------------
Total interest expense $ 713 $ (2,320) $ (1,607) $ 1,330 $ 643 $ 1,973
------------------------------ ---------------------------
Net interest margin $ 1,442 $ 628 $ 2,070 $ 883 $ (304) $ 579
============================== ===========================
|
Noninterest Income
Noninterest income totaled $2,241,000 for the year ended December 31, 2008 compared to $4,465,000 for the year ended December 31, 2007. This is a decrease of $2,224,000 or 49.81%. While gains on sales and calls of available-for-sale securities had a net increase of $305,000 or 104%, US Government actions relating to Freddie Mac necessitated a write-down of Freddie Mac Preferred stock totaling $2,955,000. Trust Wealth Advisory Services income increased $214,000 to $2,264,000, primarily as a result of the efforts of new business development, which has increased assets under management.
Service charges on deposit accounts totaled $830,000 for 2008. This is an increase of $86,000 or 11.57% when compared to total service charges of $744,000 in 2007. The increase can be attributed to an increase in the number of deposit accounts. Mortgage refinancing activity during 2008 generated revenues from gains on sales of loans that totaled $292,000, which compares to revenues totaling $317,000 for the corresponding period in 2007. Competition in the secondary mortgage market continues to be very aggressive. Other income during fiscal 2008 totaled $1,209,000. This compares to other income of $1,037,000 for 2007, representing an increase of $172,000 or 16.59%. This category of income primarily consists of fees associated with the origination and servicing of mortgage loans as well as gains reflecting the sale of mortgage loans.
Noninterest Expense
Overall, noninterest expense increased 18.46% for the year ended December 31, 2008 as compared to 2007. The increases in salaries and employee benefits along with the increases in occupancy and equipment expense are primarily a reflection of additional staffing and operational costs associated with the operation of our Dover Plains, New York branch which opened in August of 2007. The increase in data processing and insurance costs are primarily attributable to increases associated with growth in volumes of business of the Company, especially with the addition of the new branch. Professional fees increased $338,000 or 36.25%. This increase is primarily attributable to an increase in audit expense resulting from additional services required due to compliance requirements such as the Sarbanes-Oxley Act and other regulatory compliance. In addition, Legal and Consultant fees also increased which is the result of various research and marketing initiatives during the year. During the fourth quarter of 2008, the Bank prepaid a $19 million advance from the FHLB of Boston at a cost of $864,000.The Bank took such action as part of a program to restructure a portion of the Bank's borrowings. The borrowings which were at a rate of 5.97% will be replaced with new FHLB advances that have much lower interest rates and a revised maturity schedule. While the prepayment resulted in a one time after tax expense of $674,000 the restructuring is expected to result in a decrease in future borrowing expense which is intended to positively impact earnings per share in 2009 and future years. The increase in other expense is primarily attributable to normal operational expenses associated with growth.
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 $ 8,330 $ 7,724 $ 606 7.85%
Occupancy expense 961 802 159 19.82
Equipment expense 898 819 79 9.64
Data processing 1,339 1,194 145 12.14
Insurance 278 163 115 70.55
Printing and stationery 277 280 (3) (1.07)
Professional fees 1,269 931 338 36.30
Prepayment fee FHLB advance 864 0 864 100.00
Amortization of core deposit intangible 164 164 0 .00
Other expense 1,629 1,437 192 13.36
--------- -------- ------
Total noninterest expense $ 16,009 $ 13,514 $2,495 18.46
======== ======== ======
|
Income Taxes
In 2008, the Company's income tax benefit totaled $421,000 and an effective tax rate of (61.5)%. This compares to an income tax provision of $870,000 and an effective tax rate of 18.63% for the same period in 2007. This decrease is primarily attributable to a decrease in taxable income.
Net Income
Overall, net income totaled $1,106,000 for the year ended December 31, 2008 and represents earnings per average share outstanding of $0.66. This compares to net income of $3,800,000 for the year ended December 31, 2007, which reflects earnings per average share outstanding of $2.26.
FINANCIAL CONDITION
Comparison of December 31, 2008 and 2007
Total assets at December 31, 2008 were $495,754,000 compared to $461,960,000 at December 31, 2007. This represented an increase of 7.32% or $33,794,000. Total loans outstanding including loans held-for-sale increased $31,620,000 or 11.68% to $302,406,000 at year-end 2008 as loan demand remained very active during 2008. Deposits increased 8.6% to $344,925,000 over the prior year, mainly due to new business development initiatives implemented during the year which focused on growing customer relationship deposits.
Securities Portfolio
The Company manages the securities portfolio in accordance with the investment policy adopted by the Board of Directors. The primary objectives are to earn interest and dividend income, provide liquidity to meet cash flow needs and to manage interest rate risk and asset-quality diversifications of the Company's assets. The securities portfolio also acts as collateral for deposits of public agencies. As of December 31, 2008, the securities portfolio, including Federal Home Loan Bank of Boston stock, totaled $155,916,000. This represents a decrease of $3,292,000 or 2.16% over year-end 2007.
Securities are classified in the portfolio as either securities-available-for-sale or securities-held-to-maturity. Securities for which the Company has the ability and positive intent to hold until maturity are reported as held-to-maturity. These securities are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities that are held for indefinite periods of time and which management intends to use as part of its asset/liability management strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, increases in capital requirements or other similar factors, are classified as available-for-sale. These securities are stated at fair value in the financial statements of the Company. Temporary differences between available-for-sale securities' amortized cost and fair market value are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital (accumulated other comprehensive income or loss, net of tax) until realized. The cost basis of individual securities is written down to estimated fair value through a charge to earnings when decreases in value below amortized cost are considered to be other than temporary. At December 31, 2008, the unrealized holding losses on available-for-sale securities, net of taxes was $6,968,000. This compares to an unrealized loss net of taxes of $2,273,000 at December 31, 2007. The Company monitors the market value fluctuations of its securities portfolio on a monthly basis as well as associated credit ratings to determine potential impairment of a security.
Federal Funds Sold
Federal funds sold at December 31, 2008 totaled $200,000. Federal funds sold at December 31, 2007 totaled $300,000. This variance represents a normal operating range of funds for daily cash needs.
Lending
Net loans, not including loans held-for-sale, represents approximately 60% of total assets at December 31, 2008. The Company makes substantially all of its loans to customers located within the Company's service area. New business development during the year coupled with an increase in loan demand resulted in an increase in net loans outstanding to $297,367,000 at December 31, 2008, as compared to $268,191,000 at December 31, 2007. This is an increase of $29,176,000 or 10.88%. Although the largest dollar volumes of loan activity continue to be in the residential mortgage area, the Company offers a wide variety of loan types and terms along with competitive pricing to customers. The Company's credit function is designed to ensure adherence to prudent credit standards despite competition for loans in the Company's market area.
. . .
|
|