SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(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, 2002
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.
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(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
--------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street Lakeville Connecticut 06039
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(Address of principal executive offices) (Zip Code)
Registrant"s Telephone Number, Including Area Code (860) 435-9801
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(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 [ ]
Transitional Small Business Disclosure Format: Yes [ ] No [ X ]
Documents Incorporated by Reference: None
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer"s classes of
common stock, as of August 1, 2002
1,423,238
---------
1
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
----
Item 1. Condensed Financial Statements:
Condensed Consolidated Balance Sheets -June 30, 2002 (unaudited)
and December 31, 2001 4
Condensed Consolidated Statements of Income -three and six months ended
June 30, 2002 and 2001 5
(unaudited)
Condensed Consolidated Statements of Cash Flows -six months ended June 30, 2002 and 2001 6
(unaudited)
Notes to Consolidated Financial Statements 8
Item 2. Management"s Discussion and Analysis 11
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 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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,
2002 2001
---- ----
(unaudited)
ASSETS
Cash & due from banks:
Non-Interest Bearing $ 7,415 $ 7,184
Interest Bearing 244 258
Federal funds sold 8,275 18,150
Money market mutual funds 514 618
--------- ---------
Cash and cash equivalents 16,448 26,210
Investment Securities:
Held to maturity securities at amortized cost 327 400
Available-for-sale securities at market value 120,278 102,248
Federal Home Loan Bank stock, at cost 2,945 2,945
Loans:
Commercial, financial and agricultural 10,068 10,797
Real estate-construction and land development 4,786 3,935
Real estate-residential 97,932 102,201
Real estate-commercial 17,323 17,423
Consumer 8,725 10,030
Other 169 125
Allowance for loan losses (1,473) (1,445)
--------- ---------
Net loans 137,530 143,066
Bank premises & equipment 2,729 2,683
Investment in real estate 75 75
Accrued interest receivable 1,844 1,681
Intangible assets on branch acquisition 3,145 3,227
Other assets 805 1,067
--------- ---------
Total Assets $ 286,126 $ 283,602
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $ 36,441 $ 37,702
Savings & NOW 61,961 48,435
Money Market 43,044 48,897
Time 64,322 66,317
--------- ---------
Total Deposits 205,768 201,351
Federal Home Loan Bank advances 52,397 53,004
Due to broker 653 4,204
Other liabilities 1,982 1,680
--------- ---------
Total Liabilities 260,800 260,239
--------- ---------
Shareholders' equity:
Common stock, par value $.10 per share;
Authorized 3,000,000 shares
Issued and outstanding shares: 1,423,238 at June 30, 2002 142 142
and 1,422,358 at December 31, 2001
Additional paid-in capital 2,304 2,281
Retained earnings 22,064 21,219
Accumulated other comprehensive income (loss) 816 (279)
--------- ---------
Total Shareholders' Equity 25,326 23,363
--------- ---------
Total Liabilities and Shareholders' Equity $ 286,126 $ 283,602
========= =========
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, 2002 and 2001
(unaudited)
Six Months Ended Three Months Ended
June 30 June 30
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $5,007 $5,748 $2,438 $2,862
Interest and dividends on securities:
Taxable 2,008 2,104 1,028 1,001
Tax-exempt 965 433 531 252
Dividends on equity securities 72 114 37 54
Other interest 72 115 29 46
------ ------ ------ ------
Total interest and dividend income 8,124 8,514 4,063 4,215
------ ------ ------ ------
Interest expense:
Interest on deposits 2,138 2,777 1,050 1,327
Interest on Federal Home Loan Bank advances 1,423 1,503 713 749
------ ------ ------ ------
Total interest expense 3,561 4,280 1,763 2,076
------ ------ ------ ------
Net interest and dividend income 4,563 4,234 2,300 2,139
Provision for loan losses 75 75 38 38
------ ------ ------ ------
Net interest and dividend income after provision
for loan losses 4,488 4,159 2,262 2,101
------ ------ ------ ------
Other income:
Trust department income 511 511 258 265
Service charges on deposit accounts 235 245 121 140
Gain on sale of available-for-sale securities 206 43 191 22
Other income 394 336 212 183
------ ------ ------ ------
Total other income 1,346 1,135 782 610
------ ------ ------ ------
Other expense:
Salaries and employee benefits 2,112 1,864 1,060 935
Occupancy expense 148 115 75 52
Equipment expense 241 246 118 122
Data processing 253 253 119 118
Other expense 1,045 756 612 395
------ ------ ------ ------
Total other expense 3,799 3,234 1,984 1,622
------ ------ ------ ------
Income before income taxes 2,035 2,060 1,060 1,089
Income taxes 563 683 310 354
------ ------ ------ ------
Net income $1,472 $1,377 $ 750 $ 735
====== ====== ====== ======
Earnings per common share outstanding $ 1.03 $ .96 $ .53 $ .51
====== ====== ====== ======
Earnings per common share outstanding,
assuming dilution $ 1.03 $ .96 $ .53 $ .51
====== ====== ====== ======
Dividends per share $ .44 $ .42 $ .22 $ .21
====== ====== ====== ======
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, 2002 and 2001
(unaudited)
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 1,472 $ 1,377
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 331 (69)
Gain on sales of available-for-sale securities, net (206) (43)
Provision for loan losses 75 75
Depreciation and amortization 118 152
Amortization of intangible assets from branch acquisition 82 0
Accretion of fair value adjustment on deposits (80) 0
(Increase) decrease in interest receivable (163) 32
Increase in prepaid expenses (63) (41)
Increase in other assets 22 (97)
Increase in taxes payable (45) (201)
Decrease in accrued expenses (115) (20)
Increase (decrease) in interest payable (25) 8
Increase (decrease) in other liabilities 20 (8)
-------- --------
Net cash provided by operating activities 1,423 1,165
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (0) (15)
Purchases of available-for-sale securities (53,960) (55,537)
Proceeds from sales of available-for-sale securities 24,381 38,372
Proceeds from maturities of available-for-sale securities 9,733 11,330
Proceeds from maturities of held-to-maturity securities 65 5
Net (increase) decrease in loans 5,452 (7,579)
Recoveries of loans previously charged-off 8 98
Capital expenditures (164) (173)
-------- --------
Net cash used in investing activities (14,485) (13,499)
-------- --------
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, 2002 and 2001
(unaudited)
(continued)
2002 2001
---- ----
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 6,412 110
Net decrease in time deposits (1,915) (1,516)
Advances from Federal Home Loan Bank 0 10,000
Principal payments on advances from Federal Home Loan Bank (607) (711)
Dividends paid (612) (857)
Net repurchase of common stock 22 (611)
-------- --------
Net cash provided by financing activities 3,300 6,415
-------- --------
Net decrease in cash and cash equivalents (9,762) (5,919)
Cash and cash equivalents at beginning of period 26,210 13,759
-------- --------
Cash and cash equivalents at end of period $ 16,448 $ 7,840
======== ========
Supplemental disclosures:
Interest paid $ 3,586 $ 4,272
Income taxes paid 596 863
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 Bank"s subsidiary, S.B.T. Realty, Inc. The consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to SEC Form 10-QSB.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America (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, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2001 Annual Report on Form 10-KSB.
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
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 750 $ 735 $1,472 $1,377
Net unrealized (losses) gains
on securities during period 1,231 (338) 1,095 306
------ ------ ------ ------
Comprehensive income $1,981 $ 397 $2,567 $1,683
====== ====== ====== ======
8
NOTE 3 - COMPUTATION OF EARNINGS PER SHARE
------------------------------------------
The Company has computed and presented earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128. Reconciliation of the
numerators and the denominators of the basic and diluted per share computation
for net income are as follows:
(amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Six months ended June 30, 2002
Basic EPS
Net income and income available to common stockholders $1,472 1,423 $ 1.03
Effect of dilutive securities, options -- 0
Diluted EPS
Income available to common stockholders and assumed
conversions $1,472 1,423 $ 1.03
Six months ended June 30, 2001
Basic EPS
Net income and income available to common stockholders $1,377 1,441 $ .96
Effect of dilutive securities, options -- 0
Diluted EPS
Income available to common stockholders and assumed
conversions $1,377 1,441 $ .96
(amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Three months ended June 30, 2002
Basic EPS
Net income and income available to common stockholders $ 750 1,423 $ .53
Effect of dilutive securities, options 0
Diluted EPS
Income available to common stockholders and assumed
conversions
$ 750 1,423 $ .53
Three months ended June 30, 2001
Basic EPS
Net income and income available to common stockholders $ 735 1,435 $ .51
Effect of dilutive securities, options -- 0
Diluted EPS
Income available to common stockholders and assumed
conversions $ 735 1,435 $ .51
9
NOTE 4 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
FASB has issued SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and rescinds SFAS Statement No. 127, "Deferral
of the Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No.
140 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. In management's
opinion, the adoption of SFAS No. 140 did not have a material effect on the
Company's consolidated financial statements.
Statement of Financial Accounting Standards 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.
Statement of Financial Accounting Standards 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.
10
Part I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis
11
Overview
--------
Salisbury Bancorp, Inc. (the "Company"), a Connecticut corporation, is the
holding company for Salisbury Bank and Trust Company, (the "Bank") which is
headquartered in Lakeville, Connecticut. The Company's sole subsidiary is the
Bank, which has a full service Trust Department and offers commercial banking
products and services through four full service offices in the towns of Canaan,
Lakeville, Salisbury and Sharon, Connecticut.
The following is Management's discussion of the financial condition and results
of operations on a consolidated basis of Salisbury Bancorp, Inc. which includes
the accounts of Salisbury Bank and Trust Company. Management's discussion should
be read in conjunction with Salisbury Bancorp, Inc.'s Annual Report on Form
10-KSB for the year ended December 31, 2001.
In order to provide a strong foundation for building shareholder value and
serving its customers, the Company remains committed to investing in the
technological and human resources necessary to implement new personalized
financial products and to deliver them with the highest quality of service. The
Bank's internet product called "SBTNET" which is now just over a year old, has
over 1100 customers who utilize this product. As reported in the first quarter,
the Bank's home page of the website was remodeled to accommodate the expansion
of its "free" online services "SBT V-CARD" and "SBT PAL". These additions to our
online services have already proven popular with our customers. The Bank has
plans to continue enhancing its Internet banking products for customers.
The Company's net income for the six months ended June 30, 2002 was $1,472,000
as compared to $1,377,000 for the same period ended June 30, 2001. This
represents an increase of $95,000 or 6.9%. Earnings per diluted share increased
7.29% for the first six months of 2002 and amounted to $1.03 per diluted share
as compared to $.96 earnings per diluted share for the same period a year ago.
The improvement in net income is primarily the result of an increase in net
interest and dividend income, reductions in interest expense, as well as a
reduction in income taxes that resulted from increased income from tax exempt
securities.
The Company's assets at June 30, 2002 totaled $286,126,000 which represents
growth of $2,524,000 since December 31, 2001 when assets totaled $283,602,000.
The moderate growth is primarily the result of continuing efforts to develop new
business. As reported previously, the asset mix continues to change as the cash
received from the acquisition of the Canaan branch, which was invested in
Federal Funds at December 31, 2001, has been invested in the securities
portfolio. The securities portfolio has also increased as a continuing economic
environment of generally lower interest rates that promote refinancing to longer
term fixed rate products and continued aggressive competition in the Bank's
market area have resulted in a decrease in total net loans outstanding to
$137,530,000 at June 30, 2002. This compares to total net loans outstanding of
$143,066,000 at December 31, 2001 and represents a decrease of 3.87%. Overall
however, the increase in the Company's aggregate base of earning assets coupled
with the change in asset mix has resulted in an increase in net interest income.
The Company continues to carefully monitor the quality of its assets. During the
first six months of 2002, nonperforming loans increased to $793,000 from
$587,000 at December 31, 2001. During the second quarter of 2002 however,
nonperforming loans decreased to $793,000 from $1,022,000 at March 31, 2002. The
net increase of $206,000 since December 31, 2001 continues to represent less
than one percent of total loans outstanding and is not considered to be
significant or indicative of any trend. Currently, the Company does not have any
assets classified as Other Real Estate Owned; therefore, total nonperforming
loans represent total nonperfoming assets as well. Traditionally, seasonal cash
flows result in a slight decrease in deposits during this period, however
continuing efforts to develop new business have resulted in an increase in
deposits of $4,417,000 or 2.19% to $205,768,000 at June 30, 2002. This compares
to total deposits of $201,351,000 at December 31, 2001.
As a result of the Company's second quarter financial performance, the Board of
Directors declared a second quarter cash dividend of $.22 per common share. This
compares to a cash dividend of $.21 per common share that was paid for the
second quarter of 2001. This dividend was paid on July 26, 2002 to shareholders
of record as of June 29, 2002. Year-to-date dividends for the first six months
of 2002 total $.44 per common share. This compares to total dividends of $.42
per common share for the same period in 2001.
12
The Company's risk-based capital ratios at June 30, 2002, which included the
risk weighted assets and capital of the Salisbury Bank and Trust Company were
15.38% for tier 1 capital and 16.48% for total capital. The Company's leverage
ratio was 7.68% at June 30, 2002.
SIX MONTHS ENDED JUNE 30,2002
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net Interest Income
-------------------
The Company's earnings are primarily dependent upon net interest income and
noninterest income from its community banking operations with net interest
income being the largest component of the Company's revenues. Net interest and
dividend income is the difference between interest and dividends earned on the
loan and securities portfolios and interest paid on deposits and advances from
the Federal Home Loan Bank. Noninterest income is primarily derived from the
Trust Department and from service charges and other fees related to deposit and
loan accounts. For the following discussion, interest 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)(unaudited)
Six months ended June 30 2002 2001
---- ----
Interest and Dividend Income $8,124 $8,514
(financial statements)
Tax Equivalent Adjustment 497 223
------ ------
Total Interest Income (on an FTE basis) 8,621 8,737
Interest Expense 3,561 4,280
------ ------
Net Interest Income-FTE $5,060 $4,457
====== ======
Interest and dividend income on an FTE basis for the six months ended June 30,
2002 totaled $8,621,000 as compared to $8,737,000 for the same time period in
2001. This is a decrease of $116,000 or 1.33%. 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. A
continuing change in the mix of earning assets which reflects an increase in tax
exempt securities has resulted in a significant increase in the tax equivalent
adjustment to $497,000 for the first six months of 2002 as compared to $223,000
for the same period in 2001. This is an increase of $274,000 or 123%.
Interest expense on deposits for the first six months of 2002 totaled $2,138,000
compared to $2,777,000 for the same period in 2001. This represents a decrease
of $639,000 or 23.01%. Although deposits increased, primarily as the result of
the Canaan Branch acquisition during the fourth quarter of 2001, generally lower
interest rates resulted in the decrease in interest expense. Interest on Federal
Home Loan Bank advances decreased $80,000 or 5.32% for the same six month period
being compared. This is the result of a decrease in funds borrowed to
$52,397,000 in 2002 from $53,004,000 in 2001.
Overall, net interest and dividend income (on an "FTE" basis) increased $603,000
or 13.53% to $5,060,000 for the first six months of 2002. This compares to
$4,457,000 for the same period in 2001.
Noninterest Income
------------------
Noninterest income totaled $1,346,000 for the six months ended June 30, 2002 as
compared to $1,135,000 for the six months ended June 30, 2001. Trust Department
income remained consistent at $511,000 for each year. Service charges decreased
$10,000 or 4.1% to $235,000 at June 30, 2002 compared to $245,000 at June 30,
2001. The first six months of
13
year 2002 produced a gain on the sale of Available-for Sale securities in the
amount of $206,000, as movement in the markets presented opportunities for the
Company to enhance the return from the securities portfolio and at the same time
produce gains on the sale of certain Available-for-Sale securities. Other income
increased $58,000 or 17.26% to $394,000 for the first six months of 2002
compared to $336,000 for the corresponding period in 2001. This increase is
primarily the result of increased fees generated from the increased refinancing
activity in the secondary mortgage market.
Noninterest Expense
-------------------
Noninterest expense totaled $3,799,000 for the first six months of 2002 as
compared to $3,234,000 for the same period in 2001. This is an increase of
$565,000 or 17.47%. Salary and employee benefit expenses increased $248,000 or
13.30%. This is primarily the result of the addition of staff for the Canaan
Branch that was opened in September of 2001. Additional staff was also hired to
service the increase in new business at the Bank's other facilities. Annual pay
raises and the increasing costs of employee benefits have also contributed to
the increased expense. Occupancy and equipment expenses increased $28,000 or
7.76% to $389,000 when comparing the first six months of 2002 to the same six
months expense of $361,000 in 2001. This is primarily the result of some one
time maintenance expenses on the facilities. Data processing costs remained the
same when comparing June 30, 2002 to June 30, 2001. Other operating expenses
totaled $1,045,000 at June 30, 2002 and compares to other operating expenses
that totaled $756,000 at June 30, 2001. This is an increase of $289,000 or
38.23%. This is primarily the result of the amortization of intangible assets
from the Canaan Branch acquisition that occurred during the last quarter of 2001
in addition to other operating costs associated with having the new branch
operational. The balance of the increase represents increases normally
associated with the operations of the Company.
Income Taxes
------------
The income tax provision for the first six months of 2002 totaled $563,000 in
comparison to $683,000 for the first six months of 2001. The decrease is
primarily the result of the impact of an increase in tax exempt interest income
earned from the securities portfolio.
Net Income
----------
Overall, net income totaled $1,472,000 for the six months ended June 30, 2002.
This compares to net income of $1,377,000 for the corresponding period in 2001.
This is an increase of $95,000 or 6.90% and represents earnings of $1.03 per
diluted share. This compares to earnings per diluted share of $.96 for the same
period in 2001. The improvement in net income is primarily a reflection of an
increase in interest earning assets, which has resulted in an increase in total
net interest income.
THREE MONTHS ENDED JUNE 30, 2002
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
For the following discussion, interest 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)(unaudited)
Three months ended June 30, 2002 2001
---- ----
Interest and Dividend Income $4,063 $4,215
(financial statements)
Tax Equivalent Adjustment 274 130
Total interest and dividend income(on an FTE basis) 4,337 4,345
Interest Expense 1,763 2,076
Net Interest and Dividend Income-FTE $2,574 $2,269
14
Net Interest Income
-------------------
Total interest and dividend income on a FTE basis equaled $4,337,000 for the
three months ended June 30, 2002 as compared to $4,345,000 for the same period
in 2001. 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. As mentioned previously, a change in the mix
of earning assets has resulted in an increased portfolio of tax exempt
securities which in turn has resulted in a significant increase in the tax
equivalent adjustment to $274,000 in 2002 from $130,000 in 2001. This is an
increase of $144,000 or 111%.
Interest expense on deposits decreased $277,000 for the quarter to $1,050,000,
compared to $1,327,000 for the same quarter in 2001. Although deposits have
increased, this decrease is primarily the result of generally lower interest
rates. Interest expense on Federal Home Loan Bank advances decreased $36,000 or
4.81% in 2002 to $713,000. This compares to interest expense of $749,000 for the
corresponding period in 2001. The decrease is primarily attributable to the
reduced volume of FHLB borrowings during the first six months of 2002.
As a result, net interest and dividend income on an FTE basis for the three
months ended June 30, 2002 totaled $2,574,000 as compared to $2,269,000 for the
same period in 2001. The increase was $305,000 or 13.44%.
Noninterest Income
------------------
Noninterest income totaled $782,000 for the three months ended June 30, 2002, as
compared to $610,000 for the three months ended June 30, 2001. This increase is
primarily the result of an increase of $169,000 in gains on sales of
Available-For Sale securities during 2002.
Noninterest Expense
-------------------
Noninterest expense totaled $1,984,000 for the three months ended June 30, 2002
as compared to $1,622,000 for the same period in 2001. This represents an
increase of $362,000 or 22.32%. Salaries and benefits increased $125,000 or
13.37% to $1,060,000 for the three months ended June 30, 2002. This compares to
expenditures of $935,000 for the corresponding period in 2001. As mentioned
previously, additional staff was hired for the Canaan Branch which opened during
the fourth quarter of 2001 and the expenses associated with the new branch will
continue to reflect increases for each quarter when comparing the year 2002 to
the year 2001. Additionally, annual salary increases and increased costs of
employee benefits also contribute to the increase in salary and employee benefit
expenses. Occupancy and equipment expenses increased to $193,000 from $174,000.
This is an increase of $19,000 or 10.92%. This is primarily the result of
maintaining the Canaan Branch which opened in the fall of 2001. Other operating
expenses totaled $612,000 for the three months period ended June 30, 2002. This
is an increase of $217,000 or 54.94% when comparing the three months ended June
30, 2001 other operating expenses of $395,000. This increase is primarily the
result of the operating costs of the additional branch, as mentioned previously,
however, the Company incurred additional costs relating to Trust operations that
also influenced the increase. Data processing expenses remained consistent when
comparing the second quarter of 2002 to the second quarter of 2001.
Income Taxes
------------
The income tax provision for the three months ended June 30, 2002 totaled
$310,000 in comparison to an income tax provision of $354,000 for the same
period in 2001. The decrease is primarily the result of the impact of an
increase in tax exempt interest income earned from the securities portfolio.
15
Net Income
----------
Overall, net income totaled $750,000 for the second quarter of 2002 compared to
$735,000 for the comparable period of 2001. This is an increase of $15,000 and
represents earnings per share of $.53 per diluted share. This compares to
earnings per diluted share of $.51 for the same six month period of 2001. The
improvement in net income is primarily a reflection of an increase in interest
earning assets, which has resulted in an increase in total net interest income.
Provisions and Allowances for Loan Losses
-----------------------------------------
Total loans at June 30, 2002 were $139,003,000 which compares to total loans of
$144,511,000 at December 31, 2001. This is a decrease of $5,508,000 or 3.81%. At
June 30, 2002 approximately 86% of the Bank's loan portfolio was related to real
estate loans and although the portfolio decreased during the second quarter of
2002, the concentration remained consistent as approximately 86% of the
portfolio was related to real estate at December 31, 2001. 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 Company
maintains an allowance or reserve for credit losses through charges to earnings.
The loan loss provision for the period ended June 30, 2002 was $75,000 and was
the same as the corresponding period of 2001.
The Bank formally determines 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,
2002. This determination is based on assessment of credit quality or "risk
rating" of loans by senior management, which is 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. 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 each impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is 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
16
the allowance during the period ended June 30, 2002.
At June 30, 2002, the allowance for loan losses totaled $1,473,000 representing
185.75% of nonperforming loans, which totaled $793,000, and 1.06% of total loans
outstanding of $139,003,000. This compared to $1,445,000 representing 246.17% of
nonperforming loans, which totaled $587,000 and 1.00% of total loans of
$144,511,000 at December 31, 2001. Management does not believe that this
increase of $206,000 in nonperforming loans represents any trend towards
increased delinquency of loans, which would be likely to have an effect on the
level of the allowance for loan losses. A total of $55,000 loans were charged
off by the Bank during each of the six month periods ended June 30, 2002 and
June 30, 2001, respectively. These charged off loans consisted primarily of
loans to individuals. A total of $8,000 of previously charged off loans was
recovered during the six month period ended June 30, 2002. Recoveries for the
corresponding period in 2001 totaled $98,000. When comparing the two periods,
and excluding the one large recovery in 2001 of $82,000, net charge-offs were
$47,000 for the period ended June 30, 2002 and $39,000 for the same period in
2001, neither of which significantly impacted the level of the allowance for
loan losses. 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 and other factors, both within and outside of
management's control. Additionally, with expectations of the Bank to grow its
existing portfolio, future additions to the allowance may be necessary to
maintain adequate coverage ratios.
Capital
-------
At June 30, 2002, the Company had $25,326,000 in shareholder equity compared to
$23,363,000 at December 31, 2001. This represents an increase of $1,963,000 or
8.40%. Several components contributed to the change since December 2001. At June
30, 2002, earnings year to date totaled $1,472,000. Market conditions have
resulted in a positive adjustment to unrealized comprehensive income of
$1,095,000. The Company issued 880 new shares of common stock under the terms of
the Director Stock Retainer Plan during the second quarter of 2002, which
resulted in an increase in capital of $23,000. The Company also declared two
quarterly cash dividends in 2002 resulting in a decrease in capital of $626,000.
Under current regulatory definitions, the Bank is "well capitalized", the
highest rating defined under the Federal Deposit Insurance Corporation
Improvement Act. As a result, the Bank pays the lowest 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 June 30, 2002,
the Company had a risk-based capital ratio of 16.32% compared to 16.21% at
December 31, 2001. The leverage ratio at June 30, 2002 was 7.61% which compares
to 7.87% at December 31, 2001. These capital ratios substantially exceed all
applicable requirements for "well capitalized" institutions as established by
Federal Bank supervisory standards.
Maintaining strong capital is essential to bank safety and soundness and to
maintaining the confidence of investors, customers and regulators. 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 maintaining
consistency with prudent industry practices. Management believes that the
capital ratios of the Company and Bank are adequate to continue to meet the
current and foreseeable future capital needs of the institution.
Liquidity
---------
The Bank's Asset/Liability Management Committee which operates in accordance
with policies established and reviewed by the Bank's Board of Directors,
implements and monitors compliance with these policies regarding the Bank's
asset/liability management practices with regard to interest rate risk,
liquidity and capital. Interest rate risk measures the sensitivity of the
Company's income to short and long term changes in interest rates. One of the
primary objectives of the Committee is to manage interest rate risk and control
the sensitivity of earnings to changes in interest
17
rates in order to improve net interest income and interest rate margins and to
manage the maturities and interest rate sensitivities of assets and liabilities.
At June 30, 2002, the Bank's interest rate position was asset sensitive.
However, the level of interest rate risk is within the limits approved by the
Board of Directors. Management of liquidity is designed to provide for the
Bank's cash needs at a reasonable cost. These needs include the withdrawal of
deposits on demand or at maturity, the repayment of borrowings as they mature
and lending opportunities. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank system which provides credit
to its members. This enhances the liquidity position by providing a source of
available borrowings. At June 30, 2002, the Company had approximately
$24,706,000 in loan commitments and unadvanced funds outstanding. The Company
maintains ample liquidity to meet its present and foreseeable needs.
Forward Looking Statements
--------------------------
This Form 10-QSB and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative 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
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 27, 2002. 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
John R. H. Blum Number of Shares: 1,050,301 31,461
(three (3) year term) Percentage of
Shares Voted: 97.1% 2.9%
Percentage of Shares
Entitled to Vote: 73.8% 2.2%
Withholding
For Authority
Louise F. Brown Number of Shares: 1,050,301 31,461
(three (3) year term) Percentage of
Shares Voted: 97.1% 2.9%
Percentage of Shares
Entitled to Vote: 73.8% 2.2%
Withholding
For Authority
Nancy F. Humphreys Number of Shares: 1,050,301 31,461
(three (3) year term) Percentage of
Shares Voted: 97.1% 2.9%
Percentage of Shares
Entitled to Vote: 73.8% 2.2%
19
The three (3) individuals elected at the 2002 Annual Meeting along with the
following individuals whose terms did not expire at such meeting constitute the
Board of Directors of the Company:
Gordon C. Johnson
Holly J. Nelson
Walter C. Shannon, Jr.
John F. Perotti
Craig E. Toensing
Michael A. Varet
20
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, 2002 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, 2002 was as follows:
For Against Abstain
Number of Votes: 1,070,566 5,574 5,622
Percentage of Shares Voted: 98% .5% .5%
Percentage of Shares
Entitled to Vote: 75.3% .4% .9%
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
a. Exhibits - 99.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
b. Reports on Form 8-K:
The Company filed a Form 8-K on May 1, 2002 to report the events and
results of the Company's Annual Meeting of Shareholders that was held
on Saturday, April 27, 2002.
The Company filed a Form 8-K on May 29, 2002 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.22 per share to be paid on July 26, 2002 to shareholders of record
as of June 29, 2002.
21
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 9, 2002 by: /s/ John F. Perotti
---------------------------------
John F. Perotti
President/Chief Executive Officer
Date: August 9, 2002 by: /s/ John F. Foley
--------------------------------
John F. Foley
Chief Financial Officer
22