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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 June 30, 2003
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 1-14854
Salisbury Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5 Bissell Street Lakeville Connecticut 06039
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer. 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 July 20, 2003
1,424,078
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets -June 30, 2003 (unaudited)
and December 31, 2002 4
Condensed Consolidated Statements of Income -three and six months
ended June 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows -six months ended
June 30, 2003 and 2002 (unaudited) 6
Notes to Consolidated Interim Financial Statements 8
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
Part I--FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
JUNE 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
Cash & due from banks $ 7,604 $ 7,885
Interest bearing demand deposits with other banks 1,030 448
Money market mutual funds 507 537
Federal funds sold 0 1,750
-------- --------
Cash and cash equivalents 9,141 10,620
Investment in available-for-sale securities (at fair value) 141,592 135,169
Investments in held to maturity securities (fair values of $326,000
as of June 30, 2003 and $326,000 as of December 31, 2002) 315 321
Federal Home Loan Bank stock, at cost 3,753 2,945
Loans, less allowance for loan losses of $1,516,000 and $1,458,000
as of June 30, 2003 and December 31, 2002, respectively 141,732 135,632
Investment in real estate 75 75
Premises and equipment 2,838 2,805
Other real estate owned 75 75
Goodwill 2,358 2,358
Core deposit intangible 766 800
Accrued interest receivable 1,861 1,934
Other assets 604 373
-------- --------
Total Assets $305,110 $293,107
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 40,055 $ 38,930
Interest-bearing 171,143 172,107
-------- --------
Total Deposits 211,198 211,037
Federal Home Loan Bank advances 61,368 51,891
Other liabilities 3,049 2,834
-------- --------
Total Liabilities 275,615 265,762
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized
3,000,000 shares; issued and outstanding shares,
1,424,078 at June 30, 2003 and 1,423,238 at December 31, 2002 142 142
Paid-in capital 2,327 2,304
Retained earnings 24,540 23,165
Accumulated other comprehensive income 2,486 1,734
-------- --------
Total Shareholders' Equity 29,495 27,345
-------- --------
Total Liabilities and Shareholders' Equity $305,110 $293,107
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
June 30, 2003 and 2002
(unaudited)
Six Months Ended Three Months Ended
June 30 June 30
2003 2002 2003 2002
------ ------ ------ ------
Interest and dividend income:
Interest and fees on loans $4,632 $5,007 $2,345 $2,438
Interest and dividends on securities:
Taxable 2,280 2,008 1,056 1,028
Tax-exempt 1,025 965 519 531
Dividends on equity securities 54 72 28 37
Other interest 14 72 7 29
------ ------ ------ ------
Total interest and dividend income 8,005 8,124 3,955 4,063
------ ------ ------ ------
Interest expense:
Interest on deposits 1,527 2,138 740 1,050
Interest on Federal Home Loan Bank advances 1,460 1,423 721 713
------ ------ ------ ------
Total interest expense 2,987 3,561 1,461 1,763
------ ------ ------ ------
Net interest and dividend income 5,018 4,563 2,494 2,300
Provision for loan losses 75 75 38 38
------ ------ ------ ------
Net interest and dividend income after provision
for loan losses 4,943 4,488 2,456 2,262
------ ------ ------ ------
Other income:
Trust department income 562 511 272 258
Service charges on deposit accounts 269 235 136 121
Gain on sales of available-for-sale securities, net 555 206 218 191
Gain on sale of loans held-for-sale 49 134 27 78
Other income 427 260 227 134
------ ------ ------ ------
Total other income 1,862 1,346 880 782
------ ------ ------ ------
Other expense:
Salaries and employee benefits 2,265 2,112 1,092 1,060
Occupancy expense 182 148 87 75
Equipment expense 241 241 125 117
Data processing 272 253 119 120
Insurance 51 50 24 25
Printing and stationery 89 99 55 58
Legal expense 71 24 34 17
Amortization of core deposit intangible 34 34 16 17
Other expense 795 791 406 472
------ ------ ------ ------
Total other expense 4,000 3,752 1,958 1,961
------ ------ ------ ------
Income before income taxes 2,805 2,082 1,378 1,083
Income taxes 775 581 377 319
------ ------ ------ ------
Net income $2,030 $1,501 $1,001 $ 764
====== ====== ====== ======
Earnings per common share $ 1.43 $ 1.05 $ .70 $ .54
====== ====== ====== ======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Six months ended June 30, 2003 and 2002
(unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 2,030 $ 1,472
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 188 331
Gain/loss on sales of available-for-sale securities, net 555 (206)
Provision for loan losses 75 75
Depreciation and amortization 158 118
Amortization of core deposit intangible 34 82
Accretion of fair value adjustment on deposits (11) (80)
Increase/decrease in interest receivable 73 (163)
Deferred tax benefit (32)
Increase in prepaid expenses (150) (63)
(Increase)decrease in other assets (86) 22
Increase(decrease) in taxes payable 164 (45)
Decrease in accrued expenses (306) (115)
Decrease in interest payable (72) (25)
Increase in other liabilities 29 20
-------- --------
Net cash provided by operating activities 2,649 1,423
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (808) 0
Purchases of available-for-sale securities (41,693) (53,960)
Proceeds from sales of available-for-sale securities 19,359 24,381
Proceeds from maturities of available-for-sale securities 16,399 9,733
Proceeds from maturities of held-to-maturity securities 6 65
Net increase decrease in loans (6,191) 5,452
Recoveries of loans previously charged-off 15 8
Capital expenditures (248) (164)
-------- --------
Net cash used in investing activities (13,161) (14,485)
-------- --------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Six months ended June 30, 2003 and 2002
(unaudited)
(continued)
2003 2002
---- ----
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 2,450 6,412
Net decrease in time deposits (2,279) (1,915)
Advances from Federal Home Loan Bank 20,000 0
Principal payments on advances from Federal Home Loan Bank (10,522) (607)
Dividends paid (616) (612)
Net repurchase of common stock 0 22
-------- --------
Net cash provided by financing activities 9,033 3,300
-------- --------
Net increase in cash and cash equivalents (1,479) (9,762)
Cash and cash equivalents at beginning of year 10,620 26,210
-------- --------
Cash and cash equivalents at end of period $ 9,141 $ 16,448
======== ========
Supplemental disclosures:
Interest paid $ 3,059 $ 3,586
Income taxes paid 643 596
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
SALISBURY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed interim financial statements are unaudited and
include the accounts of Salisbury Bancorp, Inc. (the "Company"), those of
Salisbury Bank and Trust Company (the "Bank"), its wholly-owned subsidiary and
the Banks subsidiary, S.B.T. Realty, Inc. 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 six months ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2003. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2002 Annual
Report on Form 10-K.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 -COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" establishes standards for disclosure of comprehensive income, which
includes net income and any changes in equity from non-owner sources that are
not recorded in the income statement (such as changes in the net unrealized
gains (losses) on securities). The purpose of reporting comprehensive income is
to report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company's one source of other
comprehensive income is the net unrealized gain (loss) on securities.
Comprehensive Income
Six months ended Three months ended
June 30 June 30
2003 2002 2003 2002
---- ---- ---- ----
Net income $2,030 $1,501 $1,001 $ 764
Net unrealized losses
on securities during period 752 1,095 849 1,231
------ ------ ------ ------
Comprehensive income $2,782 $2,596 $1,850 $1,995
====== ====== ====== ======
8
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 141 improves the
consistency of the accounting and reporting for business combinations by
requiring that all business combinations be accounted for under a single method
- - the purchase method. Use of the pooling-of-interests method is no longer
permitted. Statement No. 141 requires that the purchase method be used for
business combinations initiated after June 30, 2001. The impact of adopting this
Statement on the consolidated financial statements was not material.
SFAS No. 142 requires that goodwill no longer be amortized to earnings, but
instead be reviewed for impairment. The amortization of goodwill ceases upon
adoption of the Statement, which for most companies, was January 1, 2002. The
impact of adopting this Statement on the consolidated financial statements was
not material.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No.
9. SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" and FASB Interpretation No. 9 "Applying APB Opinions No. 16 and 17
When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method" provided interpretive
guidance on the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual enterprises,
SFAS No. 147 removes acquisitions of financial institutions from the scope of
both Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with SFAS No. 141 "Business Combinations" and SFAS
No. 142 "Goodwill and Other Intangible Assets". Thus, the requirement in
paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess
of the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset no
longer applies to acquisitions within the scope of SFAS No. 147. In addition,
SFAS No. 147 amends SFAS Statement No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the purchase
method of accounting, was effective for acquisitions for which the date of
acquisition was on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer -relationship intangible assets were effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 its recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
June 30, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147, the Company tested its reclassified goodwill for impairments as of December
31, 2002. The Company determined that its reclassified goodwill as of that date
was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
The effect of the Company's adoption of SFAS No. 147 was reflected in the
financial statements beginning June 30, 2002.
9
Item 2. Management's Discussion and Analysis
Business
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which is a Connecticut
chartered commercial bank with a trust department, operating four (4) full
service offices located in the towns of North Canaan, Lakeville, Salisbury and
Sharon, Connecticut. The Company and Bank serve customers and communities in
northwestern Connecticut and proximate areas in New York State and
Massachusetts. The Company and Bank were formed in 1998 and 1848, respectively.
In order to provide a strong foundation for building shareholder value and
servicing customers, the Company remains committed to investing in the
technological and human resources necessary to developing new personalized
financial products and services to meet the needs of customers. This discussion
should be read in conjunction with Salisbury Bancorp, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 2002.
RESULTS OF OPERATIONS
For the six month period ended June 30, 2003 and 2002
Overview
The Company's net income for the six months ended June 30, 2003 was $2,030,000
as compared to $1,501,000 for the same period ended June 30, 2002. This
represents an increase of $529,000 or 35.24%. Earnings per share increased 36.2%
for the first six months of 2003 and amounted to $1.43 per share as compared to
$1.05 earnings per share for the same period a year ago. The improvement in net
income is the result of an increase in net interest and dividend income,
reductions in interest expense as well as an increase in other noninterest
income.
The Company's total assets at June 30, 2003 totaled $305,110,000 and represents
growth of $12,003,000 or 4.1% since December 31, 2002 when assets totaled
$293,107,000. This increase is primarily the result of a strategy to increase
interest income. This strategy involved funding advances from the Federal Home
Loan Bank of Boston. These funds were invested in securities yielding a rate
greater than the borrowing rate, resulting in an increase in net interest
income. The securities portfolio including Federal Home Loan Bank stock totaled
$145,660,000 at June 30, 2003 and compares to a total portfolio of $138,435,000
at December 31, 2002. This increase is a reflection of the above mentioned
strategy to increase interest income. Loan demand continued to increase slightly
during the second quarter and net loans totaled $141,732,000 at June 30, 2003.
The represents an increase of $6,100,000 or 4.5% when comparing total net loans
of $135,632,000 at December 31, 2002. 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. During the first six
months of 2003, non-performing loans increased $19,000 to $1,419,000. This
compares to total non-performing loans of $1,400,000 at December 31, 2002. The
Company has one asset classified as Other Real Estate Owned. The carrying value
of that asset is $75,000. Deposits at June 30, 2003 totaled $211,198,000 and
represents a slight increase when comparing total deposits of $211,037,000 at
December 31, 2002. Federal Home Loan Bank advances increased during the first
six months of 2003 and totaled $61,368,000 at June 30, 2003. This compares to
total advances of $51,891,000 at December 31,2002. This increase of 18.3% is
attributed to the strategy mentioned previously that was implemented to increase
interest income.
As a result of the Company's second quarter financial performance, the Board of
Directors declared a second quarter cash dividend of $.23 per common share. This
compares to a cash dividend of $.22 per common share that was paid for the
second quarter of 2002. This dividend was paid July 25, 2003 to shareholders of
record as of June 30, 2003. Year-to-date dividends for the first six months of
2003 total $.46 per common share. This compares to total dividends of $.44 per
common share for the same period in 2002. The dividend payout ratio for the
first six months of 2003 is approximately 32%. The Company's risk based capital
ratios at June 30, 2003, which include the risk weighted assets and capital of
the Bank were 15.81% for tier 1 capital and 16.91% for total risk based capital.
The Company's leverage ratio was 7.79% at June 30, 2003.
10
SIX MONTHS ENDED JUNE 30,2003
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net Interest Income
The Company's earnings are primarily dependent upon net interest and dividend
income and non interest income from its community banking operations with net
interest income being the largest component of the Company's revenue. Net
interest and dividend income is the difference between interest and dividends
earned on the loan and securities portfolio and interest paid on deposits and
advances from the Federal Home Loan Bank. Noninterest income is primarily
derived from the Trust Department, service charges and other fees related to
deposit and loan accounts and from gains taken on the sale of available-for-sale
securities. For the following discussion, net interest and dividend income is
presented on a fully taxable-equivalent ("FTE") basis. FTE interest income
restates reported interest income on tax exempt 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)
Six months ended June 30 2003 2002 2001
Interest and Dividend Income $8,005 $8,124 $8,514
(financial statements)
Tax Equivalent Adjustment 528 497 223
------ ------ ------
Total interest income (on an FTE basis) 8,533 8,621 8,737
Interest Expense 2,987 3,561 4,280
------ ------ ------
Net Interest and Dividend Income-FTE $5,546 $5,060 $4,457
====== ====== ======
Interest and dividend income on an FTE basis for the six months ended June 30,
2003 totaled $8,533,000 as compared to $8,621,000 for the same period in 2002.
This is a decrease of $88,000 or approximately 1%. Although there is an increase
in earning assets, this decrease in interest and dividend income is primarily
the result of an economic environment of generally lower interest rates that
continue to pressure interest margins. A continuing change in the mix of earning
assets which reflects an increase in tax exempt securities has resulted in an
increase in the tax equivalent adjustment to $528,000 for the first six months
of 2003 as compared to $497,000 for the same period in 2002. This is an increase
of $31,000 or 6.2%.
Interest expense on deposits for the first six months of 2003 totaled $1,527,000
compared to $2,138,000 for the same period in 2002. This represents a decrease
of $611,000 or 28.6%. This decrease is primarily the result of an economic
environment of lower interest rates. Federal Home Loan Bank advances have
increased resulting in an increase in interest expense of $37,000 or 2.6% to
$1,460,000 for the first six months of 2003. Interest expense for the
corresponding period in 2002 totaled $1,423,000. Total interest expense for the
six months ending June 30, 2003 was $2,987,000. This compares to total interest
expense for the same period in 2002 of $3,561,000. The decrease is $574,000 or
16.1%.
Overall, net interest and dividend income (on an FTE basis) increased $486,000
or 9.6% to $5,546,000 for the first six months of 2003. This compares to net
interest and dividend income (on an FTE basis) of $5,060,000 for the six months
ending June 30, 2002.
Noninterest Income
Noninterest income totaled $1,862,000 for the six months ended June 30, 2003 as
compared to $1,346,000 for the six months ended June 30, 2002. The increase of
$516,000 or 38.3% is primarily the result of an increase in gains on sales of
available-for-sale securities that totaled $555,000 for the first six months of
2003 as compared to $206,000 for the corresponding period in 2002. As mentioned
previously, loan demand increased during the first six months of 2003 and
movements in the markets presented opportunities to realize gains on sales of
securities in order to provide funding for the increased loan demand. Trust
Department income increased to $562,000 for the first six months of 2003. This
11
compares to income of $511,000 for the corresponding period in 2002 and
represents an increase of $51,000 or 9.9%. The increase is primarily
attributable to an increase in new business. Service charges on deposit accounts
have increased $34,000 or 14.5% to $269,000 for the period ended June 30, 2003.
This compares to $235,000 for the same period in 2002 and is primarily the
result of an increase in deposit account transactions. Mortgage refinancing
continues to be very active as rates remain at all time lows. Competition in the
secondary mortgage market remains very aggressive. A change in investors for
placing secondary market mortgages has changed how fees are earned. As a result,
income from gains on sales of loans decreased to $49,000 for the first six
months of 2002 from $134,000 for the same period in 2002, however, other income
has increased to $427,000 for the six months ended June 30, 2003 as compared to
$260,000 for the same six month period in 2002. This increase of $167,000 or
64.2% is primarily attributable to the increase in fees earned from activity in
the secondary mortgage market.
Noninterest Expense
Noninterest expense totaled $4,000,000 for the first six months of 2003 as
compared to $3,752,000 for the same period in 2002. This is an increase of
$248,000 or 6.6%. Salary and employee benefit expenses increased $153,000 or
7.2%. This is primarily due to an increase in staff along with salary increases
and the increase in the cost of employee benefits. Occupancy and equipment
expenses increased $34,000 or 8.7% to $423,000 when comparing the first six
months of 2003 to the same six months expense of $389,000 in 2002. This is
primarily the result of expenses related to additional costs of winter
maintenance as well as some one time maintenance expenses on the facilities.
Data processing costs increased $19,000 or 7.5% to $272,000 for the first six
months of 2003 as compared to $253,000 for the corresponding period in 2002.
This is attributable to normal increasing costs related to enhancing the
delivery channels of products to our customers. Legal expenses increased to
$71,000 at June 30, 2003 and compare to legal expenses of $24,000 at June 30,
2002. Other operating expenses decreased $5,000 to $969,000 at June 30, 2003
from $974,000 at June 30, 2002. This decrease reflects management's continuing
efforts to control operating expenses.
Income Taxes
The income tax provision for the first six months of 2003 totaled $775,000 in
comparison to $581,000 for the first six months of 2002. The increase reflects
an increase in taxable income.
Net Income
Overall, net income totaled $2,030,000 for the six months ended June 30, 2003.
This compares to net income of $1,501,000 for the corresponding period in 2002.
This is an increase of $529,000 or 35.2% and represents earnings per share of
$1.43 per share. This compares to earnings per share of $1.05 for the same
period in 2002. The improvement in net income is primarily the result of an
increase in net interest and dividend income, reflecting reductions in interest
expense as well as an increase in other noninterest income reflecting gains on
sales of securities and trust department income.
12
THREE MONTHS ENDED JUNE 30, 2003
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net Interest Income
For the following discussion, interest and dividend income is presented on a
fully taxable equivalent ("FTE") basis. FTE interest restates reported interest
income on tax-exempt loans and securities as if such interest were taxed at the
Company's federal income tax rate of 34% for all periods presented.
(amounts in thousands)
Three months ended June 30 2003 2002
------ ------
Interest and Dividend Income $3,955 $4,063
(financial statements)
Tax Equivalent Adjustment 267 274
------ ------
Total interest income (on an FTE basis) 4,222 4,337
Interest Expense 1,461 1,763
------ ------
Net Interest and Dividend Income-FTE $2,761 $2,574
====== ======
Total interest and dividend income on an FTE basis equaled $4,222,000 for the
three months ended June 30, 2003 as compared to $4,337,000 for the same period
in 2002. This is a decrease of $115,000 or 2.7%. The tax equivalent adjustment
for 2003 totaled $267,000 and compares to a tax equivalent adjustment of
$274,000 representing a decrease of $7,000 or 2.6%. Although there is an
increase in earning assets, these decreases are primarily the result of an
economic environment of lower interest rates.
Interest expense on deposits decreased $310,000 for the quarter to $740,000,
compared to $1,050,000 for the same quarter in 2002. Although deposits have
increased slightly, this decrease again is the result of an economy of lower
interest rates. Interest expense on Federal Home Loan Bank advances increased
$8,000 in 2003 to $721,000. This is primarily attributable to an increase in
advances taken during the first quarter of 2003.
As a result, net interest and dividend income (on an FTE basis) for the three
months ended June 30, 2003 totaled $2,761,000 as compared to $2,574,000 for the
same period in 2002. The increase was $175,000 or 6.8%.
Noninterest Income
Noninterest income totaled $880,000 for the quarter ended June 30, 2003. This
compares to $782,000 for the same period in 2002. The increase of $98,000 or
12.5% is primarily the result of an increase in fees resulting from mortgage
refinancing activity. Trust Department income increased $14,000 to $272,000 for
the second quarter of 2003. This compares to income of $258,000 for the
corresponding period in 2002. The increase is a reflection of new business
development. Service charges increased $15,000 to $136,000 for the quarter. This
compares to service charge income of $121,000 for the second quarter of 2002.
The increase is attributable to an increase in deposit account transactions.
Gains realized on sales of securities totaled $218,000 for the three months
period ended June 30, 2003 as compared to $191,000 for the same period in 2002.
This is an increase of $27,000 or 14.1%. Loan demand continued into the second
quarter and movements in the markets presented opportunities to realize gains on
sales of securities in order to fund the new loans. Other income increased
$93,000 or 69.4% and totaled $227,000 for the second quarter of 2003. This
compares to other income of $134,000 for the corresponding quarter in 2002. As
mentioned previously, mortgage refinancing activity continued to be very active
during the quarter which is reflected in this increase. Also mentioned
previously, there was a change in secondary mortgage market investors that
resulted in a decrease of $51,000 in gains on sales of loan held for sale to
$27,000 for the quarter as compared to $78,000 for the period ended June 30,
2002.
13
Noninterest Expenses
Noninterest expenses totaled $1,958,000 for the three months ended June 30, 2003
and compared to noninterest expenses of $1,961,000 for the same six months
period in 2002. This represents a decrease of $3,000. Salaries and benefits
increased $32,000 or 3% for the quarter. This is primarily attributable to an
increase in the cost of employee benefits. The net decrease in the remaining
categories of other expenses reflect management's continuing efforts to control
operating expenses.
Income Taxes
The income tax provision for the three months ended June 30, 2003 totaled
$377,000 in comparison to an income tax provision of $319,000 for the same
period in 2002. The increase is primarily the result of an increase in taxable
income.
Net Income
Overall, net income totaled $1,001,000 for the second quarter of 2003 compared
to $764,000 for the comparable period of 2002. This is an increase of $237,000
or 31.0% and represents earnings per share of $.70 per share. This compares to
earnings per share of $.54 for the same six month period of 2002. This
improvement in net income is primarily attributable to an increase in interest
earning assets, a reduction in interest expense as well as an increase in other
non interest income.
FINANCIAL CONDITION
Total assets at June 30, 2003 were $305,110,000, compared to $293,107,000 at
December 31, 2002. This is an increase of $12,003,000 or 4.1%. The increase was
primarily due to additional advances taken from the Federal Home Loan Bank as
part of a strategy to increase interest income.
Securities
During the six months ended June 30, 2003, the securities portfolio, including
Federal Home Loan Bank stock increased $7,225,000 or 5.2% to $145,660,000 from
$138,435,000 at December 31, 2002. The increase is a reflection of the strategy
to increase interest income as the advances from the Federal Home Loan Bank were
used to purchase securities.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states. At June 30, 2003,
securities totaling $145,345,000 were classified as available-for-sale and
securities totaling $315,000 were classified as held-to-maturity.
Securities are classified in the portfolio as either Securities-Available-for
Sale or Securities-Held-to-Maturity. The securities reported as
available-for-sale are stated at fair value in the financial statements of the
Company. Unrealized holding gains and losses (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 June
30, 2003, the unrealized gain net of tax was $2,486,000. This compares to an
unrealized gain net of tax of $1,734,000 at December 31, 2002. The securities
reported as securities-held-to-maturity are stated at amortized cost.
Lending
New business development during the first quarter of 2003 coupled with a small
increase in loan demand resulted in an increase in loans receivable, net of
allowance for loan losses of $6,100,000 or 4.5% to $141,732,000. Competition for
loans, especially residential mortgage loans, remains very aggressive in the
market area of the Company. The following table represents the composition of
the loan portfolio comparing June 30, 2003 to December 31, 2002:
14
June 30, 2003 December 31, 2002
------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 9,950 $ 10,127
Real Estate-construction and land
development 10,127 6,027
Real Estate-residential 95,804 93,636
Real Estate-commercial 19,327 18,002
Consumer 7,888 9,007
Other 152 291
--------- ---------
143,248 137,090
Allowance for loan losses (1,516) (1,458)
--------- ---------
Loans Outstanding $ 141,732 $ 135,632
========= =========
Provisions and Allowance for Loan Losses
Total loans at June 30, 2003 were $141,732,000, which compares to total loans of
$135,632,000 at December 31, 2002. This is an increase of $6,100,000 or 4.5%. At
June 30, 2003 approximately 88% of the Bank's loan portfolio was related to real
estate products and although the portfolio increased during the first quarter of
2003, the concentration remained consistent as approximately 86% of the
portfolio was related to real estate at December 31, 2002. There were no
material changes in the composition of the loan portfolio during this period.
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 Company's objectives. Because of this
risk associated with extending loans the Company maintains an allowance or
reserve for credit losses through charges to earnings. The loan loss provision
for the three months period ended June 30, 2003 was $38,000, the same as the
corresponding period in 2002.
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
uses in making this determination during the period ended June 30, 2003. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which are submitted to the Board of Directors for
approval. 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 ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Impaired loans are defined in the Bank's Loan Policy as residential real estate
mortgages with balances of $300,000 or more and commercial loans of $100,000 or
more 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 loans
and residential mortgages 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; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
15
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
three months ended June 30, 2003.
At June 30, 2003 the allowance for loan losses totaled $1,516,000, representing
106.84% of nonperforming loans, which totaled $1,419,000, and 1.06% of total
loans of $143,248,000. This compares to an allowance for loan losses of
$1,458,000 representing 104.14% of nonperforming loans, which totaled $1,400,000
and 1.06% of total loans of $137,090,000 at December 31, 2002. A total of
$22,000 loans were charged off by the Bank during the six months ended June 30,
2003. These charged off loans consisted primarily of loans to individuals. This
compares to total loans charged of $55,000 for the corresponding period in 2002,
which also consisted primarily of loans to individuals. A total of $15,000 of
previously charged off loans was recovered during the six month period ended
June 30, 2003. Recoveries for the same period in 2002 totaled $8,000. When
comparing the two years, loans charged off exceeded recoveries by $7,000 for the
first six months of 2003 as compared to $47,000 for the same six month period in
2002. Management believes that the allowance for loan losses is adequate. 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, with expectations of
the Company to grow its existing portfolio, future additions to the allowance
may be necessary to maintain adequate coverage ratios.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at June 30, 2003 and December 31, 2002:
June 30, 2003 December 31, 2002
------------- -----------------
(amounts in thousands)
Demand $ 40,055 $ 38,930
NOW 17,236 18,274
Money Market 37,639 42,148
Savings 49,033 42,161
Time 67,235 69,524
-------- --------
Total Deposits $211,198 $211,037
======== ========
Total deposits, which constitute the principal funding source of the Company's
assets, have remained consistent during the first six months of 2003 when
compared to year end 2002.
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 June 30, 2003, the Company had $61,368,000 in
outstanding advances from the Federal Home Loan Bank compared to $51,891,000 at
December 31, 2002. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
16
Interest Rate Risk
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
2003, the Company was slightly asset sensitive (positive gap). This would
suggest that during a period of rising interest rates the Company would be in a
better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at June 30, 2003 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
fluctuation 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 June 30, 2003 the Company had approximately $30,082,000 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 June 30, 2003, the Company had $29,495,000 in shareholder equity compared to
$27,345,000 at December 31, 2002. This represents an increase of $2,150,000 or
7.9%. Several components contributed to the change since December 2002. Earnings
for the six month period ended June 30, 2003 totaled $2,030,000. Market
conditions have resulted in an increase in unrealized comprehensive income of
$752,000. The Company issued 840 new shares of common stock under the terms of
the Director Stock Retainer Plan during the second quarter of 2003, which
resulted in an increase in capital of $22,000. The Company also declared two
quarterly dividends resulting in a decrease in capital of $670,000. 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 the
lowest federal deposit insurance deposit premiums possible. One primary measure
of capital adequacy for regulatory purposes is based on the ratio of risk-based
capital to risk weighted assets. This method of measuring capital adequacy helps
to establish capital requirements that are more sensitive to the differences in
risk associated with various assets. It takes into account off-balance sheet
exposure in assessing capital
17
adequacy and it minimizes disincentives to holding liquid, low risk assets. At
June 30, 2003, the Company had a risk-based capital ratio of 16.82% compared to
17.21% at December 31, 2002. Maintaining strong capital is essential to bank
safety and soundness. However, the effective management of capital resources
requires generating attractive returns on equity to build value for shareholders
while maintaining appropriate levels of capital to fund growth, meet regulatory
requirements and be consistent with prudent industry practices. Management
believes that the capital ratios of the Company and Bank are adequate to
continue to meet the foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation; although they do not necessarily move in the same direction
or with the same magnitude as the prices of goods and services. Although not an
influence in recent years, inflation could impact earnings in future periods.
Forward Looking Statements
This Form 10-Q and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business; and
(b) expectations for revenues and earnings for the Company and Bank.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative an 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.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The main components of market risk for the Company are equity price risk,
interest rate risk and liquidity risk. The Company's stock is traded on the
American Stock Exchange and as a result, the value of its common stock may
change with market movements. The Company manages interest rate risk and
liquidity risk through an ALCO Committee comprised of outside Directors and
senior management. The committee monitors compliance with the Bank's
Asset/Liability Policy which provides guidelines to analyze and manage gap,
which is the difference between the amount of assets and the amounts of
liabilities which mature or reprice during specific time frames. Model
simulation is used to measure earnings volatility under both rising and falling
rate scenarios. The Company's interest rate risk and liquidity position has not
significantly changed from year end 2002.
Item 4. Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that 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. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect the
Company's internal controls subsequent to the date of the evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
19
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings-Not applicable
Item 2. - Changes in 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
The Annual Meeting of Shareholders of Salisbury Bancorp, Inc. (the
"Company"), the holding company for Salisbury Bank and Trust Company (the
"Bank") was held on Saturday, April 26, 2003. Shareholders voted on the election
of directors and the ratification of the appointment of independent auditors.
The results of the votes of shareholders regarding each proposal are set
forth below:
PROPOSAL 1
ELECTION OF DIRECTORS
Each of the three nominees received in excess of a plurality of the votes
cast at the meeting and were elected to serve until their term expires or their
successors are elected and qualified.
The vote for electing nominees as directors was as follows:
Withholding
For Authority
Gordon C. Johnson, DVM Number of Shares: 1,016,169 17,613
(three (3) year term) Percentage of
Shares Voted: 98.3% 1.7%
Percentage of Shares
Entitled to Vote: 71.4% 1.2%
Withholding
For Authority
Holly J. Nelson Number of Shares: 1,029,870 3,912
(three (3) year term) Percentage of
Shares Voted: 99.6% .4%
Percentage of Shares
Entitled to Vote: 72.4% .2%
Withholding
For Authority
Walter C. Shannon, Jr. Number of Shares: 1,029,480 4,302
(three (3) year term) Percentage of
Shares Voted: 99.6% .4%
Percentage of Shares
Entitled to Vote: 72.3% .3%
20
The three (3) individuals elected at the 2003 Annual Meeting along with the
following individuals whose terms did not expire at such meeting constitute the
Board of Directors of the Company:
John R. H. Blum
Louise F. Brown
Nancy F. Humphreys
John F. Perotti
Michael A. Varet
21
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The appointment of Shatswell, MacLeod & Company, P.C. as independent
auditors for the Company for the year ending December 31, 2003 was approved
because the votes for such appointment exceeded the votes against such
appointment.
The vote to ratify the appointment by the Board of Directors of
Shatswell, MacLeod & Company, P.C. as independent auditors for the
year ending December 31, 2003 was as follows:
For Against Abstain
Number of Votes: 1,030,444 3,096 242
Percentage of Shares Voted: 99.7% .3% .0%
Percentage of Shares
Entitled to Vote: 72.4% .2% .0%
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
a. 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.
b. Reports on Form 8-K:
1. The Company filed a Form 8-K on April 25, 2003 to report that the
Company had issued a press release announcing earnings for the first
quarter of 2003.
2. The Company filed a Form 8-K on April 29, 2003 to report the events
and results of the Company's Annual Meeting of Shareholders that was
held on Saturday, April 26, 2003.
3. The Company filed a Form 8-K on May 23, 2003 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.23 per share to be paid on July 25, 2003 to shareholders of record
as of June 30, 2003.
22
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: August 8, 2003 by: /s/ John F. Perotti
-------------------
John F. Perotti
President/Chief Executive Officer
Date: August 8, 2003 by: /s/ John F. Foley
-----------------
John F. Foley
Chief Financial Officer
23