SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
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
Incorporation or Organization Identification No.)
5 Bissell Street Lakeville Connecticut 06039
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 30, 1999
1,509,542
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<PAGE>
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets --
June 30, 1999 (unaudited) and December 31, 1998 4
Consolidated Statements of Income --
six months and three months ended June 30, 1999 and 1998
(unaudited) 5
Consolidated Statements of Cash Flows --
six months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated 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 20
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
<PAGE>
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
June 30 December 31
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash & due from banks:
Non-Interest Bearing $ 6,071 $ 5,525
Interest Bearing 602 409
Federal funds sold 9,850 6,200
--------- ---------
Cash and cash equivalents 16,523 12,134
Investment Securities:
Held to maturity securities 569 579
Available-for-sale securities 68,073 78,655
Federal Home Loan Bank stock, at cost 2,056 2,056
Loans:
Commercial, financial and agricultural 9,190 10,692
Real estate-construction and land development 4,984 3,392
Real estate-residential 82,876 80,451
Real estate-commercial 15,901 14,909
Consumer 10,693 10,430
Other 626 535
Allowance for loan losses (1,205) (1,260)
Unearned income (6) (6)
--------- ---------
Net loans 123,059 119,143
Bank premises & equipment 2,327 2,400
Other real estate owned 180 180
Accrued interest receivable 1,115 1,383
Other assets 1,339 696
--------- ---------
Total Assets $ 215,241 $ 217,226
========= =========
LIABILITIES
Deposits:
Demand $ 30,197 $ 27,435
Savings & NOW 32,951 32,519
Money Market 43,788 32,367
Time 56,873 60,830
--------- ---------
Total Deposits 163,809 153,151
Federal Home Loan Bank advances 30,358 41,120
Other liabilities 830 1,400
--------- ---------
Total Liabilities 194,997 195,671
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
Shareholders' equity:
Common stock, par value $.10 per share;
Authorized 3,000,000 shares
Issued and outstanding shares: 1,509,542 at June 30,1999
and 1,556,286 at December 31, 1998 151 156
Authorized not issued shares: 1,490,458 at June 30, 1999
and 1,443,714 at December 31, 1998
Additional paid-in capital 3,886 4,882
Retained earnings 17,057 16,160
Accumulated other comprehensive income (850) 357
--------- ---------
Total Shareholders' Equity 20,244 21,555
--------- ---------
Total Liabilities and Shareholders' Equity $ 215,241 $ 217,226
========= =========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(unaudited)
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $4,731 $4,745 $2,394 $2,374
Interest and dividends on securities:
Taxable 1,807 1,389 867 700
Tax-exempt 257 199 132 100
Dividends on equity securities 56 29 34 14
Other interest 184 161 121 69
------ ------ ------ ------
Total interest and dividend income 7,035 6,523 3,548 3,257
Interest expense:
Interest on deposits 2,426 2,555 1,232 1,262
Interest on Federal Home Loan Bank advances 824 260 386 141
------ ------ ------ ------
Total interest expense 3,250 2,815 1,618 1,403
------ ------ ------ ------
Net interest and dividend income 3,785 3,708 1,930 1,854
Provision for loan losses 60 60 30 30
------ ------ ------ ------
Net interest and dividend income after
provision for loan losses 3,725 3,648 1,900 1,824
------ ------ ------ ------
Other income:
Trust department income 561 517 261 269
Service charges on deposit accounts 165 177 64 68
Other income 225 155 149 109
------ ------ ------ ------
Total other income 951 849 474 446
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits 1,351 1,282 674 634
Occupancy expense 124 107 53 50
Equipment expense 225 210 107 102
Data processing 152 145 76 68
Legal 60 81 24 31
Other expense 711 731 374 408
------ ------ ------ ------
Total other expense 2,623 2,556 1,308 1,293
------ ------ ------ ------
Income before income taxes 2,053 1,941 1,066 977
Income taxes 794 764 444 420
------ ------ ------ ------
Net income $1,259 $1,177 $ 622 $ 557
====== ====== ====== ======
Earnings per common share outstanding $ .83 $ .75 $ .41 $ .36
====== ====== ====== ======
Earnings per common share outstanding,
assuming dilution $ .83 $ .75 $ .41 $ .35
====== ====== ====== ======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Six months ended June 30, 1999 and 1998
(unaudited)
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities: $ 1,259 $ 1,177
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 60
Depreciation and amortization 175 167
(Accretion) amortization of securities, net (20) 23
(Increase) decrease in interest receivable 268 (59)
Decrease in interest payable 0 (33)
Increase in cash surrender value of insurance policies 0 (6)
(Increase) decrease in prepaid expenses 37 (10)
Decrease in accrued expenses (110) (62)
Increase in other assets (35) (28)
Increase (decrease) in other liabilities (221) 188
Change in unearned income 0 (4)
Increase (decrease) in taxes payable 148 (328)
-------- --------
Net cash provided by operating activities 1,561 1,085
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock 0 (22)
Purchases of available-for-sale securities (19,061) (9,515)
Proceeds from sales of available-for-sale securities 11,664 4,202
Proceeds from maturities of available-for-sale securities 16,000 3,583
Proceeds from held-to-maturity securities 10 679
Net increase in loans (3,986) (1,038)
Capital expenditures (103) (44)
Recoveries of loans previously charged-off 10 15
-------- --------
Net cash (used in) provided by investing activities 4,534 (2,140)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Six months ended June 30, 1999 and 1998
(unaudited)
(continued)
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 14,616 (4,561)
Net (increase) decrease in time deposits (3,958) (3,312)
Advances from Federal Home Loan Bank 0 6,000
Principal payments on advances from Federal Home Loan Bank (10,762) (640)
Dividends paid (601) (498)
Issuance of common stock 62
Net repurchase of common stock (1,001) (110)
-------- --------
Net cash (used in) provided by financing activities (1,706) (3,059)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,389 (4,114)
Cash and cash equivalents at beginning of period 12,134 11,673
-------- --------
Cash and cash equivalents at end of period $ 16,523 $ 7,559
======== ========
Supplemental disclosures:
Interest paid $ 3,250 $ 2,848
Income taxes paid 641 705
Transfer of loans to other real estate owned 0 195
</TABLE>
7
<PAGE>
SALISBURY BANCORP, INC.
NOTES TO 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-Q.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles 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, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's 1998 Annual Report on Form 10-K.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income" which
establishes standards for disclosure of comprehensive income. Comprehensive
income represents net income for a period plus the change in equity of a
business during a period from non-shareholder sources. Excluding net income, the
Company's only other source of comprehensive income is its unrealized gain
(loss) on investment securities available for sale, net of tax. SFAS 130
requires the restatement of prior periods for comparative purposes. The Company
adopted SFAS 130 for the fiscal year beginning January 1, 1998. Adoption of this
Statement did not have material impact on the Company's financial position.
8
<PAGE>
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:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Six months ended June 30, 1999
Basic EPS
Net income and income available to common stockholders $1,259 1,510 $ .83
Effect of dilutive securities, options 8
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions $1,259 1,518 $ .83
====== ====== =======
Six months ended June 30, 1998
Basic EPS
Net income and income available to common stockholders $1,177 1,566 $ .75
Effect of dilutive securities, options -- 12
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions $1,177 1,578 $ .75
====== ====== =======
<CAPTION>
(Amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Three months ended June 30, 1999
Basic EPS
Net income and income available to common stockholders $ 622 1,510 $.41
Effect of dilutive securities, options 8
----- ------
Diluted EPS
Income available to common stockholders and assumed
conversions $ 622 1,518 $.41
===== ====== ====
Three months ended June 30, 1998
Basic EPS
Net income and income available to common stockholders $ 557 1,567 $.36
Effect of dilutive securities, options 8
----- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 557 1,575 $.35
===== ===== ====
</TABLE>
9
<PAGE>
Part I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
10
<PAGE>
Overview:
Salisbury Bancorp, Inc. (the "Company"), a Connecticut corporation, is
the holding company for Salisbury Bank and Trust Company (the "Bank") which is
located in Lakeville, Connecticut. The Company's sole business is the Bank which
has three full service offices in the towns of Lakeville, Salisbury and Sharon,
Connecticut. The Mission Statement of Salisbury Bancorp, Inc. and Salisbury Bank
and Trust Company provides a standard against which the Company's performance
should be measured as follows:
o We strive to make Salisbury Bank and Trust Company the leading
community bank in the tri-state area.
o We are committed to providing professional financial services
in a friendly and responsive manner.
o We are dedicated to being an active corporate citizen in the
communities we serve.
o We will inspire our staff to grow personally and
professionally.
o Our achievement of these goals will continue to assure
customer satisfaction, profitability and enhanced shareholder
value.
Management is pleased with the continuing progress made by the Company
during the first half of 1999 towards fulfilling its Mission Statement.
Improvements in earnings and asset quality have resulted in an increase in both
earnings per share and dividends per share. Continued prudent management is
essential to maintaining the quality and sustainability of the Company's
earnings. In order to provide a strong foundation for building shareholder value
and serving our 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 our customers.
The following is Management's discussion of the financial condition and
results of operations on a consolidated basis for the first six months of 1999
and 1998, of Salisbury Bancorp, Inc. which includes the accounts of Salisbury
Bank and Trust Company, its sole subsidiary. Earnings per share and dividends
per share computations for 1998 have been restated to reflect the six for one
stock exchange when the Company acquired all of the capital stock of the Bank on
August 24, 1998. Management's discussion should be read in conjunction with
Salisbury Bancorp, Inc.'s Annual Report on Form 10-K for the year ended December
31, 1998.
The Company's net income for the six months ended June 30, 1999 was
$1,259,000 as compared to $1,177,000 for the same time period ended June 30,
1998. This represents an increase of $82,000 or 6.9%. Earnings per diluted share
increased 10.7% for the first six months of 1999 and amounted to $.83 per share
as compared to $.75 earnings per diluted share for the same period a year ago.
The improvement in earnings per diluted share was even more substantial during
the second calendar quarter of 1999 when compared with the same period of 1998.
Earnings per diluted share for the second quarter of 1999 increased 17.1% from
the comparable quarter of 1998 and amounted to $.41 as compared with $.35 for
the second quarter of 1998. This improvement is substantially attributable to
the growth in the Company's base of earning assets, and to repurchases of common
stock by the Company, which improved the Company's return on equity from 11.4%
for the first six months of 1998 to 12.1% for the first six months of 1999.
<PAGE>
Total assets at June 30, 1999 were $215,241,000 compared to $181,423,000 at June
30, 1998. While the Company has grown from $181,423,000 at June 30, 1998 to
$215,241,000 at June 30, 1999, the Company has carefully monitored the quality
of its assets. During this period, nonperforming loans decreased from $1,664,000
to $1,659,000 and total nonperforming assets similarly decreased from $2,064,000
to $1,839,000. As a result, at June 30, 1999, nonperforming assets represented
.9% of total assets as compared with 1.1% at June 30, 1998. Although lower
interest rates and aggressive competition pressured interest margins for the
first six months of the year, the increase in earning assets resulted in an
increase in net interest income. Other income increased $102,000 or 12.1%. This
additional income in combination with managements continuing efforts to control
operating expenses have resulted in the overall increase in earnings when
comparing the first six months of 1999 to the same period in 1998.
As a result of the Company's financial performance, the Board of
Directors declared a second quarter cash dividend of $.12 per common share which
compares to an $.11 per common share second quarter dividend a year ago. Year to
date cash dividends total $.24 per common share, an increase of 9.1% over the
1998 year to date dividend of $.22 per common share.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Results of Operations
- ---------------------
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 investment 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 income tax rate of 34% for all periods presented.
<TABLE>
<CAPTION>
(amounts in thousands) (unaudited)
Six months ended June 30, 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest Income $ 7,035 $ 6,523 $ 6,200
(financial statements)
Tax Equivalent Adjustment 132 102 60
------- ------- -------
Total interest income(on an FTE basis) 7,167 6,625 6,260
Interest Expense (3,250) (2,815) (2,813)
------- ------- -------
Net Interest Income-FTE $ 3,917 $ 3,810 $ 3,447
======= ======= =======
</TABLE>
Interest and dividend income on an FTE basis for the six months ended
June 30, 1999 totaled $7,167,000 as compared to $6,625,000 for the same time
period in 1998 and $6,260,000 in 1997. This is an increase of $542,000 or 8.2%
and $365,000 or 5.8% respectively. The increase is primarily the result of a
growth in average earning assets of $26,499,000 or 15.1% when June 30, 1999 is
compared to June 30, 1998. The increase from 1997 to 1998 was $9,669,000 or
5.8%. Overall the yield on earning assets was 7.08% compared to 7.54% a year
ago.
Interest expense for the first six months of 1999 totaled $3,250,000
compared to $2,815,000 and $2,813,000 for the same periods in 1998 and 1997.
Increased borrowings from the Federal Home Loan Bank resulted in interest
expense of $824,000 for 1999 compared to $260,000 for the first six months of
1998. This is an increase of $564,000.
Generally, lower rates and a change in deposit mix have resulted in a
decrease in interest expense on deposits of $129,000 or 5.1%. Interest rate paid
for funds was reduced to 4.06% from 4.14% in 1998 and 4.23% in 1997.
<PAGE>
Overall net interest income (on an FTE basis) totaled $3,917,000 for
1999, $3,810,000 for 1998 and $3,447,000 for 1997. Although interest margins
continue to be pressured by an economy driven by lower interest rates and
aggressive competition, increased volumes have resulted in an increase in net
interest income of $107,000 or 2.8% when comparing the June 1999 totals to those
of June 1998 and $363,000 or 10.5% when comparing 1998 totals to those of 1997.
Noninterest Income
- ------------------
Noninterest income totaled $951,000 for the six months ended June 30,
1999 as compared to $849,000 for the six months ended June 30, 1998. This is an
increase of $102,000 or 12.0%. Trust department income increased $44,000 or 8.5%
to $561,000 and other noninterest income increased $58,000 or 17.5% to $390,000.
These increases were primarily due to the continuing growth in the Trust
department, increasing transactions from deposit accounts and income from a new
service offered by the Company- INVEST Financial Services.
12
<PAGE>
Noninterest Expense
- -------------------
Noninterest expense totaled $2,623,000 for the first six months of 1999
as compared to $2,556,000 for the same period in 1998. This is an increase of
$67,000 or 2.6%. Salaries and employee benefits totaled $1,351,000 for the six
month period ended June 30, 1999 compared to $1,282,000 for the corresponding
period in 1998. This increase of $69,000 or 5.4% can be attributed to an
increase in staff and cost of benefits. Occupancy expense totaled $124,000 at
June 30, 1999, an increase of $17,000 or 15.8%. This is attributable to
additional costs of winter maintenance this past winter. Equipment expense and
data processing expenses increased $15,000 or 7.1% and $7,000 or 4.8%
respectively when comparing 1999 to 1998. These increases are the result of
planned technology enhancement which is important to meeting the future needs of
our customers. Legal expense decreased $21,000 or 25.9% while other operating
expenses decreased $20,000 to $711,000. These decreases are primarily the result
of managements continuing efforts to control operating expenses.
Income Taxes
- ------------
The income tax provision for the six months ended June 30, 1999 totaled
$794,000 in comparison to $764,000 a year ago. This increase reflects an
increase in taxable income.
THREE MONTHS ENDED JUNE 30, 1999
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
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 income tax rate of 34% for all periods presented.
<TABLE>
<CAPTION>
(amounts in thousands) (unaudited)
Three months ended June 30, 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest Income $ 3,548 $ 3,257 $ 3,132
(financial statements)
Tax Equivalent Adjustment 68 52 31
------- ------- -------
Total interest income(on an FTE basis) 3,616 3,309 3,163
Interest Expense (1,618) (1,403) (1,444)
------- ------- -------
Net Interest Income-FTE $ 1,998 $ 1,906 $ 1,719
======= ======= =======
</TABLE>
Net Interest Income
- -------------------
Net interest and dividend income on an FTE basis for the three months
ended June 30, 1999 totaled $1,998,000 as compared to $1,906,000 for the same
period in 1998. The increase was $92,000 or 4.8%. Total interest and dividend
income equaled $3,616,000 for the three months ended June 30, 1999 as compared
to $3,309,000 for the same period in 1998, an increase of $307,000 or 9.3%.
<PAGE>
Although the interest rate environment has remained consistent with lower rates,
the loan portfolio increased moderately to $123,059,000 from its June 30, 1998
level of $117,463,000 resulting in a small increase in loan interest income. The
securities portfolio however has experienced growth of $19,425,000 to
$70,698,000 at June 30, 1999 compared to June 30, 1998. This increase has
resulted in an increase in securities income of approximately $235,000 or 27.1%.
Interest expense on deposits remained consistent for the quarter at
$1,232,000 compared to $1,262,000 for the same quarter in 1998. Interest expense
on Federal Home Loan Bank advances however totaled $386,000 in 1999 compared to
$141,000 for the same period in 1998 - the result of increased borrowings.
Overall interest expense increased 15.3% to $1,618,000 in 1999 compared to the
same period in 1998.
13
<PAGE>
Noninterest Income
- ------------------
Noninterest income totaled $474,000 for the three months ended June 30,
1999 as compared to $446,000 for the three months ended June 30, 1998. This is
an increase of $28,000 or 6.3%. This is primarily the result of increased
transaction volume from deposit accounts.
Noninterest Expense
- -------------------
Noninterest expense totaled $1,308,000 for the three months ended June
30, 1999 as compared to $1,293,000 for the same period in 1998. This represents
an increase of $15,000 or 1.2%. Salaries and benefits increased $40,000 to
$674,000 primarily the result of salary increases and increased cost for
employee benefits. Occupancy expense increased $3,000 to $53,000 for the same
three month period of 1999. Equipment and data processing expenses increased
$13,000 to $183,000 and are consistent with planned strategy to enhance product
delivery to customers. Legal and other operating expenses decreased $41,000.
Income Taxes
- ------------
The income tax provision for the three months ended June 30, 1999
totaled $444,000 in comparison to an income tax provision of $420,000 for the
same period in 1998. The increase reflects an increase in taxable income.
Net Income
- ----------
Overall net income (on an FTE basis) totaled $690,000 for the second
quarter of 1999 compared to $609,000 for the comparable period in 1998. This
increase of $81,000 or 13.3% can be attributed to an increase in earning assets,
a modest increase in noninterest income as well as managements continuing
efforts to control operating expenses.
Financial Condition
-------------------
The Company's assets at December 31, 1998 totaled $217,226,000. During
the first quarter of 1999, securities that were part of an interest rate risk
strategy matured, resulting in a decrease in assets and borrowings of
approximately $10,000,000. Deposits increased to $164,000,000 during the first
six months of 1999. Although the mix of liabilities (deposits vs borrowings) has
changed, total footings have changed only $1,985,000 at June 30, 1999 compared
to December 31, 1998 and total $215,241,000. This compares to total assets of
$181,423,000 at June 30, 1998. This growth in assets has enhanced the earnings
opportunities for the Company.
<PAGE>
Securities
- ----------
As of June 30, 1999, the securities portfolio totaled $70,698,000. This
represents a decrease from December 31, 1998 of $10,592,000 when the portfolio
totaled $81,290,000. The decrease is primarily due to maturing securities that
were part of an arbitrage strategy of borrowing funds and investing them at a
higher rate of return than the borrowing cost. Management expects that it will
continue to employ this arbitrage strategy as efforts continue to increase
earning assets. At June 30, 1999, $569,000 of the investment securities
portfolio was classified as held-tomaturity with the balance of the investment
securities portfolio, excluding Federal Home Loan Bank stock, was classified as
available-for-sale. The net unrealized loss on securities available-for-sale,
net of tax effect totaled ($850,000) at June 30, 1999 compared to a gain of
$357,000 at December 31, 1998. The decrease is attributable to a movement in
interest rates, the activity in the stock market and a decrease in the total
portfolio. The following table presents the carrying values of the securities
portfolio at June 30, 1999 and December 31, 1998.
14
<PAGE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(amounts in thousands)
<S> <C> <C>
Available-for-sale securities:
Equity securities $ 144 $ 116
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 27,092 43,578
Debt securities issued by states of the United States
and political subdivisions of the states 11,273 9,553
Mortgage-backed securities 29,564 25,408
Held-to-maturity securities:
Debt securities issued by states of the United States
and political subdivisions of the states 20 25
Mortgage-backed securities 549 554
Federal Home Loan Bank stock 2,056 2,056
------- -------
Total Securities $70,698 $81,290
======= =======
</TABLE>
Loans
- -----
Competition for loans remains very aggressive in the market area of the
Company. The Company's continuing efforts on new business development have
resulted in the introduction of several new mortgage products. Total loans
outstanding have increased to $124,270,000 at June 30, 1999 compared to
$120,409,000 at December 31, 1998. This is an increase of $3,861,000. The
following table represents the various categories of the loan portfolio
comparing June 30, 1999 to December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(amountss in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 9,190 $ 10,692
Real Estate-construction and land development 4,984 3,392
Real Estate-residential 82,876 80,451
Real Estate-commercial 15,901 14,909
Consumer 10,693 10,430
Other 626 535
-------- --------
Loans outstanding $124,270 $120,409
======== ========
</TABLE>
<PAGE>
Provisions and Allowance for Loan Losses
- ----------------------------------------
The Company's allowance for loan losses represents amounts available to
absorb potential losses in the existing portfolio. Management continually
assesses the adequacy of the allowance in response to current and anticipated
economic conditions, specific problem loans, historical net charge offs and the
overall risk profile of the loan portfolio. A $60,000 provision to the allowance
for possible loan losses was made during the first six months of 1999, the same
as the comparable period of 1998. Nonaccrual loans were $794,000 at June 30,
1999 compared to $1,208,000 at December 31, 1998. Accruing loans past due 90
days or more were $74,000 at June 30, 1999 compared to $109,000 at December 31,
1998. Restructured loans were $791,000 at June 30, 1999 compared to $547,000 at
December 31, 1998.
The allowance for loan losses at December 31, 1998 was $1,260,000 or
1.05% of total loans outstanding. At
15
<PAGE>
June 30, 1999, the allowance totaled $1,205,000 or .96% of the total loans
outstanding. In management's judgement, the allowance for loan losses at June
30, 1999 is adequate to absorb probable losses in the existing portfolio.
Deposits
- --------
Deposits at June 30, 1999 totaled $164,000,000, up from the year to
date average of $156,000,000. This is primarily the result of various business
activities in the community which historically increase deposits during this
time of year.
The following table illustrates the composition of the Company's
deposits at June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(amounts in thousands)
<S> <C> <C>
Demand $ 30,197 $ 27,435
NOW 17,240 17,700
Money Market 43,788 32,367
Savings 15,711 14,819
Time 56,873 60,830
-------- --------
Total Deposits $163,809 $153,151
======== ========
</TABLE>
Borrowings
- ----------
The Company uses arbitrage strategy to generate additional interest
income. Funds are borrowed from the Federal Home Loan Bank and then invested at
a rate of return higher than the borrowing cost. At June 30, 1999, total
borrowings had decreased $10,762,000 to $30,358,000 when compared to December
31, 1998 as the result of a matured arbitrage. Management expects that it will
continue to employ this type of arbitrage which is part of an interest rate
strategy.
Asset/Liability Management
- --------------------------
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 implements and monitors compliance with
these policies regarding the Bank's asset and liability management practices
with regard to interest rate risk, liquidity and capital.
<PAGE>
Interest Rate Risk
- ------------------
Interest rate risk is defined as the sensitivity of the Company's
income to short and long term changes in interest rates. One of the primary
financial objectives of the Company is to manage its interest rate risk and
control the sensitivity of the Company's earnings to changes in interest rates
in order to prudently improve net interest income and the Company's interest
rate margins and manage the maturities and interest rate sensitivities of assets
and liabilities. One method of monitoring interest rate risk is a gap analysis
which identifies the differences between the amount of assets and the amount of
liabilities which mature or reprice during specific time frames and the
potential effect on earnings of such maturities or repricing opportunities.
Model simulation is used to evaluate the impact on earnings of potential changes
in interest rates. "Rate shock" is also used to measure earnings volatility due
to immediate increase or decrease in market rates up to 200 basis points. The
Company is slightly asset sensitive. The extent of the Company's asset
sensitivity is consistent with parameters established by the Asset Liability
Management Committee of the Board of Directors and is monitored by Management.
16
<PAGE>
Liquidity Risk
- --------------
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. Asset liquidity is achieved through the management of readily
marketable investment securities as well as managing asset maturities and
pricing of loan and deposit products.
The Company's subsidiary, Salisbury Bank and Trust Company, is a member
of the Federal Home Loan Bank System which provides credit to its member banks.
This enhances the liquidity position by providing a source of available
borrowings. Additionally, federal funds and borrowings on repurchase agreements
are available to fund short term cash needs. At June 30, 1999, the Company had
approximately $23,486,000 in loan commitments and unadvanced funds outstanding.
It is expected that these commitments will be funded primarily by deposits, loan
repayments and maturing investments. The Company has ample liquidity to meet its
present and foreseeable needs.
Capital
- -------
The Company's capital at June 30, 1999 totaled $20,244,000. This
represents a decrease of $1,311,000 from the December 31, 1998 total capital of
$21,555,000. Several items made up the net change since December 1998. Year to
date earnings of $1,259,000 have been added to capital. Market conditions have
resulted in a negative adjustment to unrealized holding gain/losses on
available-for-sale securities of $1,207,000. Two quarterly dividends in 1999
have decreased capital $362,000. Lastly, in November 1998, the Company announced
a stock repurchase program to acquire up to approximately 10% of the outstanding
common stock of the Company. To date, the Company has repurchased 49,644 shares
of stock which has resulted in a decrease in equity of $1,001,000. The capital
ratios of the Company and the Bank exceed all applicable regulatory requirements
and are adequate to continue to meet the foreseeable capital needs of the
institution. Prudent and effective utilization of capital resources is likely to
result in continued growth of the Company's base of earning assets and result in
additional repurchases of common stock designed to improve returns on equity and
per share earnings performance.
The following reflects the Company's capital ratios at June 30, 1999,
1998 and 1997: (unaudited)
<TABLE>
<CAPTION>
Actual Actual Actual
June 1999 June 1998 June 1997
--------- --------- ---------
<S> <C> <C> <C>
Total Risk-Based Capital 21.14% 22.92% 20.81%
Tier 1 Risk-Based Capital 19.95% 21.67% 19.59%
Leverage ratio 9.96% 11.44% 11.13%
</TABLE>
17
<PAGE>
Year 2000
Disclosure relating to "Year 2000"
The "Year 2000 issue" refers to a wide variety of potential computer issues that
may arise from the inability of computer programs to properly process
date-sensitive information relating to the Year 2000, years thereafter and to a
lesser degree the Year 1999.
The State of the Company's Readiness
The Year 2000 issue creates risk for the Company from unforeseen problems in its
computer systems and from Year 2000 issues with the Company's vendors, service
providers and customers. A company-wide Year 2000 ("Y2K") program that includes
a formal Y2K project plan continues to be utilized in addressing Y2K issues. The
Plan is effectively supplemented by a Y2K budget, investment portfolio review,
customer awareness plan, commercial loan plan, test plans and scripts, and Y2K
contingency plans. Ensuring the continuing integrity of all technical systems
and business processes into the Year 2000 is a top priority for the Company.
Upgrades to all of the Company's business-critical systems have been completed
and all business-critical applications have tested satisfactorily.
The Company has substantially completed the remediation of its network hardware,
personal computers and operating systems. The server located in our branch in
Salisbury, Connecticut has been replaced with a "Y2K" compliant server. The
Company continues to upgrade and test application software as vendors provide
new releases.
The Company's mission critical service providers and software vendors have
provided remediated products, allowing the Company to substantially complete the
validation process. The majority of non-mission critical software vendors have
also delivered remediated products, allowing the Company to substantially
complete its testing. The testing results of our mission critical service
providers and software vendors have been validated by an independent party
contracted by the Company.
The Company notes that it is dependent on certain unrelated third parties for
the conduct of its business, such as telecommunications, energy providers, the
Federal Reserve payment system and the automated clearinghouse system. Although
the Company is monitoring these parties' progress and Year 2000 readiness, there
are few, if any, alternatives for obtaining these services.
The Company utilizes several third-party service providers for its core
applications. The service providers continue making adequate progress in meeting
their established goals for Year 2000 qualifications of their system and related
products utilized by the Company.
The Risks of the Company's Year 2000 Issues
The Company recognizes that a failure to resolve a material Year 2000 issue
could result in the interruption in, or a failure of, certain normal business
activities or operations such as servicing depositors, processing transactions
or originating and servicing loans. The Company has determined that a
company-wide business risk-assessment approach is most appropriate for
addressing and remediating Year 2000 problems. This includes an assessment of
<PAGE>
the information technology resources of each of the functional areas of the
Company, as well as separate assessments of information technology vendors and
suppliers, and non-information technology and facilities risks. There can be no
assurance that the computer systems of others on which the Company relies will
be Year 2000 ready on a timely basis. In addition, failure to resolve Year 2000
issues by another party, or remediation or conversion that is incompatible with
the Company's computer system could have a material adverse effect on the
Company.
The Company has reviewed the risks created by potential business interruptions
suffered by the Company's major business counter parties. An adequate process
has been established and implemented to evaluate and assess Year 2000 efforts of
Funds Takers (primarily borrowers), Funds Providers (depositors and other
funding sources), and Capital
18
<PAGE>
Markets Counter parties (trading counter parties and fiduciary relationships).
The Company continues to monitor these risks through the year 1999.
Management recognizes the Company's exposure to the risk of a liquidity crisis
or financial losses stemming from the withdrawal of significant deposits or
other sources of funds as the Year 2000 approaches. The Company has a
Contingency Plan to identify and prioritize sources of liquidity. Based on the
Company's analysis and given the Company's strong earnings record, high
liquidity and strong capital position, management is of the opinion that Y2K
liquidity risk should not have a significant impact on the Company.
The Company and the Bank are subject to examination and supervision by the Board
of Governors of the Federal Reserve System, and both the FDIC and Connecticut
Department of Banking, respectively. These agencies are actively examining the
status of preparation of the institutions which they supervise for compliance
with applicable laws and prudent industry practices, including those associated
with preparation of the Year 2000. As regulated institutions, the Company and
the Bank could be subject to formal and informal supervisory actions if
preparation for the Year 2000 failed to satisfy regulatory requirements or
prudent industry standards. As regulated institutions, banks and holding
companies face greater regulatory and litigation risks for failure to adequately
prepare for the Year 2000 than many companies in other industries. However, such
risks are not considered by Management to be probable based upon the current
level of preparation for the Year 2000 and the Company's plans to prepare for
the Year 2000.
The Costs to Address the Company's Year 2000 Issues
Costs to modify computer systems have been, and will continue to be expended as
incurred and are not expected to have a material impact on the Company's future
financial results or condition. The Company's budget for Y2K related expenses in
1999 is $50,000. As of June 30, 1999 the Bank has expended $29,096.
Although the Company does not specifically monitor the cost of internal
resources diverted to the Year 2000 project, these costs have consumed, and can
be expected to continue to consume, a substantial amount of time of key staff.
Management will fund these Year 2000 costs from normal cash flow.
The Company's Contingency Plans
The Company has a Year 2000 business resumption plan that helps supplement the
Company's comprehensive Disaster Recovery Policy and Program as a part of the
Company's contingency planning. The Company has developed a business resumption
plan, contingency plans and procedures to address foreseeable contingencies
which may result from Year 2000 related risks. The Company has substantially
completed its business resumption contingency planning efforts. The Company
plans on validating its contingency plans throughout the third quarter of 1999
and will update its plans as necessary throughout the remainder of 1999. While
implementation of the business resumption plan is not expected to be necessary,
it will ensure the Company provides a minimum level of acceptable service and
has the ability to process transactions and service its customers, under
circumstances in which a Year 2000 problem actually occurs.
<PAGE>
To strengthen the contingency initiative, the Company has an auxiliary power
generator at our branch office in Sharon, Connecticut. Management anticipates
using this location as a provisional operations center for the duration of Year
2000 failure scenarios, if any. Management plans to re-deploy staff resources,
as necessary during this period, to help assure manual completion of critical
operational activities. There can be no assurance that the Company's remediation
efforts and contingency plans will be sufficient to avoid unforeseen business
disruptions or other problems resulting from the Year 2000 issue.
19
<PAGE>
Forward Looking Statements
--------------------------
Certain statements contained in this quarterly report, including those
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere, are forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and are thus
prospective. Such forward looking statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially from
future results expressed or implied by such statements. Such factors include,
but are not limited to changes in interest rates, regulation, competition and
the local and regional economy.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The main components of market risk for the Company are equity price
risk, interest rate risk and liquidity risk. The Company's stock is traded on
the American Stock Exchange and as a result the value of its common stock may
change with market movements. The Company manages interest rate risk and
liquidity risk through an ALCO Committee comprised of outside Directors and
senior management. The committee monitors compliance with the Bank's
Asset/Liability Policy which provides guidelines to analyze and manage gap which
is the difference between the amount of assets and the amounts of liabilities
which mature or reprice during specific time frames. Model simulation is used to
measure earnings volatility under both rising and falling rate scenarios. The
Company's interest rate risk and liquidity position has not significantly
changed from year end 1998.
20
<PAGE>
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 Holder
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, May 22, 1999. 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 two nominees received in excess of a plurality of the votes
cast at the meeting and were elected to serve a three (3) year term until 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: 1,255,165 14,076
Percentage of
Shares Voted: 98.9% 1.1%
Percentage of Shares
Entitled to Vote: 83.1% 1.0%
Withholding
For Authority
Louise F. Brown Number of Shares: 1,254,397 14,844
Percentage of
Shares Voted: 98.8% 1.2%
Percentage of Shares
Entitled to Vote: 83.1% 1.0%
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The appointment of Shatswell, MacLeod & Company, P.C. as independent
auditors for the Bank for the year ending December 31, 1999 was approved because
the votes for such appointment exceeded the votes against such appointment.
The votes to ratify the appointment by the Board of Directors of
Shatswell,
21
<PAGE>
MacLeod & Company, P.C. as independent auditors for the year
ending December 31, 1999 was a follows:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Number of Votes: 1,253,875 0 15,366
Percentage of Shares Voted: 98.8% 0 1.2%
Percentage of Shares
Entitled to Vote: 83.0% 0 1.0%
</TABLE>
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
A. Exhibits:
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K:
The Company filed a Form 8-K on May 25, 1999 to report the events
and results of the Company's Annual Meeting of Shareholders that was
held on Saturday, May 22, 1999.
The Form 8-K also reported that the Company's Board of Directors
declared a quarterly cash dividend of $.12 per share to be paid on
July 30, 1999 to shareholders of record as of June 30, 1999.
22
<PAGE>
SALISBURY BANCORP, INC.
Pursuant to the requirements of the Securities Exchange Act of l934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salisbury Bancorp, Inc.
Date: August 10, 1999 by /s/ John F. Perotti
--------------- ------------------------
John F. Perotti
President / Chief Executive Officer
Date: August 10, 1999 by: /s/ John F. Foley
--------------- ----------------------
John F. Foley
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,071
<INT-BEARING-DEPOSITS> 602
<FED-FUNDS-SOLD> 9,850
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 70,129
<INVESTMENTS-CARRYING> 569
<INVESTMENTS-MARKET> 547
<LOANS> 124,264
<ALLOWANCE> 1,205
<TOTAL-ASSETS> 215,241
<DEPOSITS> 163,809
<SHORT-TERM> 0
<LIABILITIES-OTHER> 830
<LONG-TERM> 30,358
0
0
<COMMON> 151
<OTHER-SE> 20,093
<TOTAL-LIABILITIES-AND-EQUITY> 215,241
<INTEREST-LOAN> 4,731
<INTEREST-INVEST> 2,120
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 7,035
<INTEREST-DEPOSIT> 2,426
<INTEREST-EXPENSE> 3,250
<INTEREST-INCOME-NET> 3,785
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,623
<INCOME-PRETAX> 2,053
<INCOME-PRE-EXTRAORDINARY> 2,053
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,259
<EPS-BASIC> .83
<EPS-DILUTED> .83
<YIELD-ACTUAL> 6.99
<LOANS-NON> 794
<LOANS-PAST> 74
<LOANS-TROUBLED> 791
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,260
<CHARGE-OFFS> 125
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,205
<ALLOWANCE-DOMESTIC> 1,205
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
