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, 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|
Indicate by check mark whether the registrant is 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 October 31, 2003
1,424,078
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Condensed Financial Statements: 3
Condensed Consolidated Balance Sheets - September 30, 2003
(unaudited) and December 31, 2002 4
Condensed Consolidated Statements of Income - three and nine
months ended September 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - nine months
ended September 30, 2003 and 2002 (unaudited) 6
Notes to Consolidated Interim Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
(unaudited)
ASSETS
Cash & due from banks $ 7,824 $ 7,885
Interest bearing demand deposits with other banks 1,361 448
Money market mutual funds 380 537
Federal funds sold 0 1,750
-------- --------
Cash and cash equivalents 9,565 10,620
Investment in available-for-sale securities (at fair value) 137,699 135,169
Investments in held to maturity securities (fair values of $232,000 as
of Sept. 30, 2003 and $326,000 as of December 31, 2002) 232 321
Federal Home Loan Bank stock, at cost 3,771 2,945
Loans, less allowance for loan losses of $1,436,000 and $1,458,000
as of Sept. 30, 2003 and December 31, 2002, respectively 144,728 135,632
Investment in real estate 75 75
Premises and equipment 2,896 2,805
Other real estate owned 86 75
Goodwill 2,358 2,358
Core deposit intangible 749 800
Accrued interest receivable 1,808 1,934
Due from broker 964 0
Cash surrender value of life insurance 3,114 104
Other assets 625 269
-------- --------
Total Assets $308,670 $293,107
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 38,934 $ 38,930
Interest-bearing 172,211 172,107
-------- --------
Total Deposits 211,145 211,037
Federal Home Loan Bank advances 67,460 51,891
Other liabilities 1,873 2,834
-------- --------
Total Liabilities 280,478 265,762
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding shares, 1,424,078 at September 30, 2003 142 142
and 1,423,238 at December 31, 2002
Paid-in capital 2,327 2,304
Retained earnings 25,228 23,165
Accumulated other comprehensive income 495 1,734
-------- --------
Total Shareholders' Equity 28,192 27,345
-------- --------
Total Liabilities and Shareholders' Equity $308,670 $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)
September 30, 2003 and 2002
(unaudited)
Nine Months Ended Three Months Ended
September 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 6,947 $ 7,373 $ 2,315 $ 2,366
Interest and dividends on securities:
Taxable 3,239 3,065 959 1,057
Tax-exempt 1,555 1,488 530 523
Dividends on equity securities 83 144 29 72
Other interest 30 102 16 30
------- ------- ------- -------
Total interest and dividend income 11,854 12,172 3,849 4,048
------- ------- -------
Interest expense:
Interest on deposits 2,211 3,145 684 1,007
Interest on Federal Home Loan Bank advances 2,092 2,143 632 720
------- ------- ------- -------
Total interest expense 4,303 5,288 1,316 1,727
------- ------- ------- -------
Net interest and dividend income 7,551 6,884 2,533 2,321
Provision for loan losses 113 112 38 37
------- ------- ------- -------
Net interest and dividend income after provision
for loan losses 7,438 6,772 2,495 2,284
------- ------- ------- -------
Other income:
Trust department income 862 767 300 256
Service charges on deposit accounts 403 352 134 117
Gain on sales of available-for-sale securities, net 767 465 212 259
Gain on sale of loans held-for-sale 146 174 97 40
Other income 639 490 212 230
------- ------- ------- -------
Total other income 2,817 2,248 955 902
------- ------- ------- -------
Other expense:
Salaries and employee benefits 3,461 3,168 1,196 1,056
Occupancy expense 266 225 84 77
Equipment expense 420 361 179 120
Data processing 419 382 147 129
Insurance 77 82 26 32
Printing and stationery 129 138 40 41
Legal expense 88 42 17 25
Amortization of core deposit intangible 51 51 17 17
Other expense 1,163 1,182 368 383
------- ------- ------- -------
Total other expense 6,074 5,631 2,074 1,880
------- ------- ------- -------
Income before income taxes 4,181 3,389 1,376 1,306
Income taxes 1,136 909 361 328
------- ------- ------- -------
Net income $ 3,045 $ 2,480 $ 1,015 $ 978
======= ======= ======= =======
Earnings per common share $ 2.14 $ 1.74 $ .71 $ 69
======= ======= ======= =======
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)
Nine months ended September 30, 2003 and 2002
(unaudited)
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 3,045 $ 2,480
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 300 380
Gain/loss on sales of available-for-sale securities, net (767) (465)
Provision for loan losses 113 112
Depreciation and amortization 300 232
Amortization of core deposit intangible 51 52
Accretion of fair value adjustment on deposits (11) (90)
(Increase)decrease in interest receivable 126 (170)
Increase in prepaid expenses (202) 46
Increase in cash surrender value of life insurance (9) (16)
(Increase)decrease in other assets (109) 30
Increase in taxes payable 137 153
Decrease in accrued expenses (265) (67)
Decrease in interest payable (92) (28)
Increase in other liabilities 50 10
-------- --------
Net cash provided by operating activities 2,667 2,675
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (826) 0
Purchases of available-for-sale securities (63,840) (88,594)
Proceeds from sales of available-for-sale securities 32,049 37,174
Proceeds from maturities of available-for-sale securities 26,734 22,600
Proceeds from maturities of held-to-maturity securities 89 68
Investment in life insurance policies (3,000) 0
Proceeds from redemption of life insurance policies 0 192
Loan originations and principal collections, net (9,234) 5,657
Other real estate owned expenditures capitalized (11) 0
Recoveries of loans previously charged-off 24 14
Capital expenditures (437) (323)
-------- --------
Net cash used in investing activities (18,452) (23,212)
-------- --------
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)
Nine months ended September 30, 2003 and 2002
(unaudited)
(continued)
2003 2002
---- ----
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 893 8,574
Net decrease in time deposits (774) (7,087)
Advances from Federal Home Loan Bank 26,325 1,005
Principal payments on advances from Federal Home Loan Bank (10,756) (857)
Dividends paid (982) (925)
Net repurchase of common stock 24 22
-------- --------
Net cash provided by financing activities 14,730 732
-------- --------
Net increase in cash and cash equivalents (1,055) (19,805)
Cash and cash equivalents at beginning of year 10,620 26,210
-------- --------
Cash and cash equivalents at end of period $ 9,565 $ 6,405
======== ========
Supplemental disclosures:
Interest paid $ 4,395 $ 5,316
Income taxes paid 999 680
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 consolidated 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 Bank's 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 nine months ended September 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
Nine months ended Three months ended
September 30 September 30
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 3,045 $ 2,480 $ 1,015 $ 978
Net unrealized losses
on securities during period (1,239) 2,059 (1,991) 964
------- ------- ------- -------
Comprehensive income (loss) $ 1,806 $ 4,539 $ 976 $ 1,942
======= ======= ======= =======
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 ceased 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 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
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 nine month period ended September 30, 2003 and 2002
Overview
The Company's net income for the nine months ended September 30, 2003 was
$3,045,000 as compared to $2,480,000 for the same period ended September 30,
2002. This represents an increase of $565,000 or 22.8%. Earnings per share
increased 23.0% for the first nine months of 2003 and amounted to $2.14 earnings
per share as compared to $1.74 earnings per share for the same period a year
ago. The improvement in net income is primarily the result of reductions in
interest expense, as well as an increase in other noninterest income.
The Company's assets at September 30, 2003 totaled $308,670,000 and represents
growth of $15,563,000 or 5.3% 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 $141,702,000 at September 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 third quarter, and net loans totaled $144,728,000
at September 30, 2003. The represents an increase of $9,096,000 or 6.7% 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 nine months of 2003, non-performing loans decreased
$449,000 to $951,000. This compares to total non-performing loans of $1,400,000
at December 31, 2002. The Company has two assets classified as Other Real Estate
Owned. The carrying value of these assets is $161,000. Deposits at September 30,
2003 totaled $211,145,000 which 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 nine months of 2003 and totaled $67,460,000
at September 30, 2003. This compares to total advances of $51,891,000 at
December 31, 2002. This increase of 30.0% is attributed to the strategy
mentioned previously that was implemented to increase interest income.
As a result of the Company's third quarter financial performance, the Board of
Directors declared a third quarter cash dividend of $.23 per common share. This
compares to a cash dividend of $.22 per common share that was paid for the third
quarter of 2002. This dividend was paid October 24, 2003 to shareholders of
record as of September 30, 2003. Year-to-date dividends for the first nine
months of 2003 total $.69 per common share. This compares to total dividends of
$.66 per common share for the same period in 2002. The dividend payout ratio for
the first nine months of 2003 is approximately 32%. The Company's risk-based
capital ratios at September 30, 2003, which include the risk-weighted assets and
capital of the Bank, were 15.31% for tier 1 capital and 16.26% for total
risk-based capital. The Company's leverage ratio was 7.83% at September 30,
2003.
10
NINE MONTHS ENDED SEPTEMBER 30, 2003
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 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. Interest
income is typically 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)
Nine months ended September 30 2003 2002 2001
Interest and Dividend Income $11,854 $12,172 $12,824
(financial statements)
Tax Equivalent Adjustment 801 767 354
------- ------- -------
Total interest and dividend income 12,655 12,939 13,178
(on an FTE basis)
Interest Expense 4,303 5,288 6,334
------- ------- -------
Net Interest and Dividend Income-FTE $ 8,352 $ 7,651 $ 6,844
======= ======= =======
Interest and dividend income on an FTE basis for the nine months ended September
30, 2003 totaled $12,655,000 as compared to $12,939,000 for the same period in
2002. This is a decrease of $284,000 or approximately 2%. 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 which continues 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 $801,000 for the
first nine months of 2003 as compared to $767,000 for the same period in 2002.
This is an increase of $34,000 or 4.4%.
Interest expense on deposits for the first nine months of 2003 totaled
$2,211,000 compared to $3,145,000 for the same period in 2002. This represents a
decrease of $934,000 or 29.7%. This decrease is primarily the result of an
economic environment of lower interest rates. Federal Home Loan Bank advances
have increased. Interest expense on these advances however, decreased $51,000 or
2.4% and totaled $2,092,000 for the nine months ended September 30, 2003.
Interest expense for the corresponding period in 2002 totaled $2,143,000. Total
interest expense for the nine months ending September 30, 2003 was $4,303,000.
This compares to total interest expense for the same period in 2002 of
$5,288,000. The decrease is $985,000 or 18.6%.
Overall, net interest and dividend income (on an FTE basis) increased $701,000
or 9.2% to $8,352,000 for the period ended September 30, 2003. This compares to
net interest and dividend income (on an FTE basis) of $7,651,000 for the
corresponding period in 2002.
Noninterest Income
Noninterest income totaled $2,817,000 for the nine months ended September 30,
2003 as compared to $2,248,000 for the nine months ended September 30, 2002. The
increase of $569,000 or 25.3% is primarily the result of an increase in gains on
sales of available-for-sale securities that totaled $767,000 for the first nine
months of 2003 as compared to $465,000 for the corresponding period in 2002. As
mentioned previously, loan demand increased during the first nine 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 $862,000 for the first nine months of 2003.
This compares to income of $767,000 for the corresponding period in
11
2002 and represents an increase of $95,000 or 12.4%. The increase is primarily
attributable to an increase in new business. Service charges on deposit accounts
have increased $51,000 or 14.5% to $403,000 for the period ended September 30,
2003. This compares to $352,000 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 $146,000 for the first nine
months of 2003 from $174,000 for the same period in 2002. Other income increased
to $639,000 for the nine months ended September 30, 2003, an increase of
$149,000 or 30.4% compared to the same period in 2002 and is primarily
attributable to the increase in fees earned from activity in the secondary
mortgage market.
Noninterest Expense
Noninterest expense totaled $6,074,000 for the first nine months of 2003 as
compared to $5,631,000 for the same period in 2002. This is an increase of
$443,000 or 7.9%. Salaries and employee benefit expenses increased $293,000 or
9.2%. 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 $100,000 or 17.1% to $686,000 when comparing the first nine
months of 2003 to the same nine months expense of $586,000 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 $37,000 or 9.7% to $419,000 for the first nine
months of 2003 as compared to $382,000 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
$88,000 at September 30, 2003 and compare to legal expenses of $42,000 at
September 30, 2002. Other operating expenses decreased $33,000 to $1,420,000 at
September 30, 2003 from $1,453,000 at September 30, 2002. This decrease reflects
management's continuing efforts to control operating expenses.
Income Taxes
The income tax provision for the first nine months of 2003 totaled $1,136,000 in
comparison to $909,000 for the same nine months period in 2002. This increase
reflects an increase in taxable income.
Net Income
Overall, net income totaled $3,045,000 for the nine months ended September 30,
2003. This compares to net income of $2,480,000 for the same period in 2002.
This is an increase of $565,000 or 22.8% and represents earnings of $2.14 per
share. This compares to earnings per share of $1.74 for the same period in 2002.
The improvement in net income is primarily the result of an increase in interest
and dividend income, reflecting reductions in interest expense as well as an
increase in other noninterest income as previously discussed.
THREE MONTHS ENDED SEPTEMBER 30, 2003
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 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 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 September 30
2003 2002
---- ----
Interest and Dividend Income $3,849 $4,048
(financial statements)
Tax Equivalent Adjustment 273 269
------ ------
Total interest and dividend income-FTE 4,122 4,317
Interest Expense 1,316 1,727
------ ------
Net Interest and Dividend Income-FTE $2,806 $2,590
====== ======
12
Total interest and dividend income on an FTE basis equaled $4,122,000 for the
three months ended September 30, 2003 as compared to $4,317,000 for the same
period in 2002. This is a decrease of $195,000 or 4.5%. The tax equivalent
adjustment for 2003 totaled $273,000 and compares to a tax equivalent adjustment
of $269,000 representing an increase of $4,000 or 1.5%. Although there is an
increase in earning assets, the decrease in total interest and dividend income
is primarily the result of an economic environment of lower interest rates.
Interest expense on deposits decreased $323,000 for the quarter to $684,000,
compared to $1,007,000 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 decreased
$88,000 in 2003 to $632,000. This is primarily attributable to lower interest
rates.
As a result, net interest and dividend income (on an FTE basis) for the three
months ended September 30, 2003 totaled $2,806,000 as compared to $2,590,000 for
the same period in 2002. The increase was $216,000 or 8.34%.
Noninterest Income
Noninterest income totaled $955,000 for the quarter ended September 30, 2003.
This compares to $902,000 for the same period in 2002. The increase of $53,000
or 5.9% is attributable to increases in gains on sales of loans, as well as
Trust Department income, which increased $44,000 to $300,000 for the third
quarter of 2003. The increase in trust department income, is primarily a
reflection of new business development. Service charges increased $17,000 to
$134,000 for the quarter. The increase is attributable to an increase in deposit
account transactions. Gains realized on sales of securities totaled $212,000 for
the three months period ended September 30, 2003 as compared to $259,000 for the
same period in 2002. This is a decrease of $47,000 or 18.2%. Movements in the
markets presented fewer opportunities for the Company to enhance the return from
the securities portfolio and at the same time produce increases in gains on sale
of certain available-for-sale securities. Gains on sales of loans held-for-sale
and other income increased $39,000 or 14.4% and totaled $309,000 for the third
quarter of 2003. This compares to other income of $270,000 for the corresponding
quarter in 2002. This increase is primarily the result of refinancing activity
in the secondary mortgage market business.
Noninterest Expenses
Noninterest expenses totaled $2,074,000 for the three months ended September 30,
2003 and compared to noninterest expenses of $1,880,000 for the same three month
period in 2002. This represents an increase of $194,000. Salaries and benefits
increased $140,000 or 13.26% for the quarter. This is primarily attributable to
an increase in staff as well as an increase in the cost of employee benefits.
Occupancy and equipment expenses for the three months ended September 30, 2003
totaled $263,000. This increase of $66,000 or 33.5% is a reflection of necessary
maintenance that was completed on both facilities and equipment during the
quarter. The remaining accounts which comprise other expenses totaled $615,000
for the third quarter of 2003. This decrease of $12,000 reflects management's
continuing efforts to control operating expenses.
Income Taxes
The income tax provision for the three months ended September 30, 2003 totaled
$361,000 in comparison to an income tax provision of $328,000 for the same
period in 2002. The increase is primarily the result of an increase in taxable
income.
Net Income
Overall, net income totaled $1,015,000 for the third quarter of 2003 compared to
$978,000 for the comparable period of 2002. This is an increase of $37,000 or
3.8% and represents earnings per share of $.71 per share. This compares to
earnings per share of $.69 for the same three 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.
13
FINANCIAL CONDITION
Total assets at September 30, 2003 were $308,670,000, compared to $293,107,000
at December 31, 2002. This is an increase of $15,563,000 or 5.3%. 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 nine months ended September 30, 2003, the securities portfolio,
including Federal Home Loan Bank stock increased $3,267,000 or 2.4% to
$141,702,000 from $138,435,000 at December 31, 2002. The increase is a
reflection of the strategy to increase interest income as a portion of the
advances from the Federal Home Loan Bank were used to purchase securities.
The composition 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 September 30,
2003, securities totaling $141,470,000 were classified as available-for-sale,
and securities totaling $232,000 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 gains and losses on securities available for sale 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/loss)
until realized. At September 30, 2003, the unrealized gain net of tax was
$495,000. 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 nine months of 2003 coupled with a
small increase in loan demand resulted in an increase in loans receivable, net
of allowance for loan losses of $9,096,000 or 6.7% to $144,728,000. 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 September 30, 2003 to December 31, 2002:
September 30, 2003 December 31, 2002
------------------ -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 9,983 $ 10,127
Real Estate-construction and land
development 13,135 6,027
Real Estate-residential 96,693 93,636
Real Estate-commercial 19,372 18,002
Consumer 6,863 9,007
Other 118 291
--------- ---------
146,164 137,090
Allowance for loan losses (1,436) (1,458)
--------- ---------
Loans Outstanding $ 144,728 $ 135,632
========= =========
Provisions and Allowance for Loan Losses
Total net loans at September 30, 2003 were $144,728,000, which compares to total
net loans of $135,632,000 at December 31, 2002. This is an increase of
$9,096,000 or 6.7%. At September 30, 2003 approximately 88% of the Bank's loan
portfolio was related to real estate products. Such concentration has remained
fairly 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.
14
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, banks maintain allowances or reserves for
credit losses through charges to earnings. The loan loss provision for the three
month period ended September 30, 2003 was $38,000, and $37,000 for 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 September 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.
An 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. Upon
identification, any specifically identifiable and quantifiable losses are
charged off against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
three months ended September 30, 2003.
At September 30, 2003 the allowance for loan losses totaled $1,436,000,
representing 151.0% of nonperforming loans, which totaled $951,000, and 1.0% of
total loans of $146,164,000. 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
$142,000 loans were charged off by the Bank during the nine months ended
September 30, 2003. These charged off loans consisted primarily of commercial
loans. This compares to total loans charged off of $189,000 for the
corresponding period in 2002, which consisted primarily of loans to individuals.
A total of $24,000 of previously charged off loans was recovered during the nine
month period ended September 30, 2003. Recoveries for the same period in 2002
totaled $14,000. When comparing the two years, loans charged off exceeded
recoveries by $118,000 for the first nine months of 2003 as compared to $175,000
for the same nine month period in 2002. 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.
15
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, 2003 and December 31, 2002:
September 30, 2003 December 31, 2002
------------------ -----------------
(amounts in thousands)
Demand $ 38,934 $ 38,930
NOW 19,842 18,274
Money Market 38,148 42,148
Savings 45,481 42,161
Time 68,740 69,524
-------- --------
Total Deposits $211,145 $211,037
======== ========
Total deposits, which constitute the principal funding source of the Company's
assets, have remained consistent during the first nine 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 September 30, 2003, the Company had $67,460,000 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.
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 September
30, 2003, the Company was slightly liability sensitive (negative gap). The level
of interest rate risk at September 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
16
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, 2003 the Company had approximately $32,891,000 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, 2003, the Company had $28,192,000 in shareholder equity
compared to $27,345,000 at December 31, 2002. This represents an increase of
$847,000 or 3.1%. Several components contributed to the change since December
2002. Earnings for the nine month period ended September 30, 2003 totaled
$3,045,000. Market conditions have resulted in a decrease in unrealized
comprehensive income of $1,239,000. 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 $24,000. The
Company also declared three quarterly dividends resulting in a decrease in
capital of $982,000. 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 adequacy and it
minimizes disincentives to holding liquid, low risk assets. At September 30,
2003, the Company had a risk-based capital ratio of 16.26% 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.
17
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The main components of market risk for the Company are 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
interest 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 as of September 30, 2003, 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. During the quarter
ended September 30, 2003, there were no significant changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.
18
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-Not applicable
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 August 1, 2003 to report that the
Company had issued a press release announcing earnings for the
second quarter of 2003.
2. The Company filed a Form 8-K on September 4, 2003 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.23 per share to be paid on October 24, 2003 to shareholders of
record as of September 30, 2003.
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 12, 2003 by: /s/ John F. Perotti
----------------- ---------------------
John F. Perotti
President/Chief Executive Officer
Date: November 12, 2003 by: /s/ John F. Foley
----------------- -------------------
John F. Foley
Chief Financial Officer
19