SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 22, 1999. 1,505,731
<PAGE>
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets -- September 30, 1999 and
December 31, 1998 (unaudited) 4
Consolidated Statements of Income -- nine months and three
months ended September 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows -- nine months ended
September 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 19
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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)
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1999 1998
<S> <C> <C>
ASSETS
Cash & due from banks:
Non-interest bearing $ 5,563 $ 5,525
Interest bearing 1,665 409
Federal funds sold 0 6,200
-------- --------
Cash and cash equivalents 7,228 12,134
Investment securities:
Held to maturity securities 512 579
Available-for-sale securities 79,713 78,655
Federal Home Loan Bank stock, at cost 2,056 2,056
Loans:
Commercial, financial and agricultural 8,717 10,692
Real estate-construction and land development 4,035 3,392
Real estate-residential 84,905 80,451
Real estate-commercial 15,586 14,909
Consumer 10,947 10,430
Other 575 535
Allowance for loan losses (1,109) (1,260)
Unearned income (5) (6)
-------- --------
Net loans 123,651 119,143
Bank premises & equipment 2,291 2,400
Other real estate owned 180 180
Accrued interest receivable 1,424 1,383
Other assets 1,403 696
Total Assets $218,458 $217,226
======== ========
LIABILITIES
Deposits:
Demand $ 30,971 $ 27,435
Savings & NOW 29,402 32,519
Money Market 36,914 32,367
Time 57,843 60,830
-------- --------
Total deposits 155,130 153,151
Federal Home Loan Bank advances 42,038 41,120
Other liabilities 1,083 1,400
-------- --------
Total liabilities 198,251 195,671
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' equity:
Common stock, par value $.10 per share;
Authorized 3,000,000 shares
Issued and outstanding shares: 1,506,131 at September 30, 1999
and 1,556,286 at December 31, 1998 151 156
Authorized not issued shares: 1,493,869 at September 30,1999
and 1,443,714 at December 31, 1998
Additional paid-in capital 3,819 4,882
Retained earnings 17,555 16,160
Accumulated other comprehensive income (1,318) 357
-------- --------
Total shareholders' equity 20,207 21,555
-------- --------
Total liabilities and shareholders' equity $218,458 $217,226
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
September 30, 1999 and 1998
(unaudited)
Nine Months Ended Three Months Ended
September 30 September 30
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,164 $ 7,112 $ 2,433 $ 2,367
Interest and dividends on securities:
Taxable 2,808 2,133 1,001 744
Tax-exempt 409 296 152 97
Dividends on equity securities 90 44 34 15
Other interest 290 306 106 145
------- ------- ------- -------
Total interest and dividend income 10,761 9,891 3,726 3,368
Interest expense:
Interest on deposits 3,636 3,863 1,210 1,308
Interest on Federal Home Loan Bank advances 1,314 426 490 166
------- ------- ------- -------
Total interest expense 4,950 4,289 1,700 1,474
------- ------- ------- -------
Net interest and dividend income 5,811 5,602 2,026 1,894
Provision for loan losses 90 90 30 30
------- ------- ------- -------
Net interest and dividend income after provision
for loan losses 5,721 5,512 1,996 1,864
------- ------- ------- -------
Other income:
Trust department income 803 763 242 246
Service charges on deposit accounts 242 262 77 85
Other income 365 234 140 79
------- ------- ------- -------
Total other income 1,410 1,259 459 410
------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits 2,047 1,938 696 656
Occupancy expense 184 163 60 56
Equipment expense 334 310 109 100
Data processing 224 261 72 116
Legal 71 89 11 8
Formation expense 0 134 0 67
Other expense 1,073 959 362 295
------- ------- ------- -------
Total other expense 3,933 3,854 1,310 1,298
------- ------- ------- -------
Income before income taxes 3,198 2,917 1,145 976
Income taxes 1,260 1,139 466 375
------- ------- ------- -------
Net income $ 1,938 $ 1,778 $ 679 $ 601
======= ======= ======= =======
Earnings per common share outstanding $ 1.28 $ 1.14 $ .45 $ .39
======= ======= ======= =======
Earnings per common share outstanding,
assuming dilution $ 1.28 $ 1.13 $ .45 $ .38
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended September 30, 1999 and 1998
(unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,938 $ 1,778
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 90 90
Depreciation and amortization 264 229
Amortization, net of accretion of securities (35) 19
Decrease in interest receivable (41) (19)
Increase (decrease) in interest payable 34 (5)
(Increase) decrease in cash surrender value of insurance policies 0 (9)
(Increase) decrease in prepaid expenses 42 (21)
Decrease )in accrued expenses (26) (52)
(Increase) decrease in other assets 3 (304)
Increase (decrease) in other liabilities (325) 191
Change in unearned income 0 (5)
Increase (decrease) in taxes payable 113 186
-------- --------
Net cash provided by operating activities 2,057 2,078
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock 0 (342)
Purchase of available-for-sale securities (48,567) (27,121)
Proceeds from sales of available-for-sale securities 13,656 11,745
Proceeds from maturities of available-for-sale securities 31,348 3,583
Proceeds from maturities of held-to-maturity securities 67 1,076
Net decrease ( increase) in loans (4,619) (1,173)
Proceeds from sales of other real estate owned 0 100
Capital expenditures (155) (70)
Recoveries of loans previously charged-off 21 22
-------- --------
Net cash used in investing activities (8,249) (12,180)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended September 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 4,966 (4,508)
Net (decrease) increase in time deposits (2,987) (1,686)
Advances from Federal Home Loan Bank 12,000 24,000
Principal payments on advances from Federal Home Loan Bank (11,082) (6,005)
Dividends paid (543) (510)
Issuance of common stock 0 68
Net repurchase of common stock (1,068) (416)
-------- --------
Net cash provided by (used in) financing activities 1,286 10,943
-------- --------
Net (decrease) increase in cash and cash equivalents (4,906) 841
Cash and cash equivalents at beginning of period 12,134 11,673
-------- --------
Cash and cash equivalents at end of period $ 7,228 $ 12,514
======== ========
Supplemental disclosures:
Interest paid $ 4,984 $ 4,294
Income taxes paid 929 999
Transfer of loans to other real estate owned 0 195
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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 nine months ended September 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 -COMPREHENSIVE INCOME
- ----------------------------
Effective January 1, 1998, the Company adopted the provision of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 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
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $679 $601 $1,938 $1,778
Net unrealized (losses) gains
on securities during period (468) 239 (1,675) 178
----- ----- ------- ------
Comprehensive income $211 $840 $ 263 $1,956
==== ==== ======= ======
</TABLE>
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>
Nine months ended September 30, 1999
Basic EPS
Net income and income available to common stockholders $1,938 1,515 $ 1.28
Effect of dilutive securities, options 0
------ -----
Diluted EPS
Income available to common stockholders and assumed
conversions $1,938 1,515 $ 1.28
====== ====== =========
Nine months ended September 30, 1998
Basic EPS
Net income and income available to common stockholders $1,778 1,561 $ 1.14
Effect of dilutive securities, options 11
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions $1,778 1,572 $ 1.13
====== ====== =========
<CAPTION>
(Amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Three months ended September 30, 1999
Basic EPS
Net income and income available to common stockholders $ 679 1,508 $.45
Effect of dilutive securities, options 0
------- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 679 1,508 $ .45
======= ===== =====
Three months ended September 30, 1998
Basic EPS
Net income and income available to common stockholders $ 601 1,555 $ .39
Effect of dilutive securities, options 11
------- ------
Diluted EPS
Income available to common stockholders and assumed
conversions $ 601 1,566 $ .38
======= ===== =====
</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 including a Trust department in
the towns of 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-K for the year ended December 31, 1998.
Net income for the nine months ended September 30, 1999 increased
9.0% to $1,938,000 or $1.28 per diluted share as compared to net income of
$1,778,000 or $1.13 per diluted share for the nine months ended September 30,
1998. This 13.3% increase in earnings per diluted share is substantially
attributable to the growth in the Company's base of earning assets and, to
repurchases of common stock by the Company. The annualized return on equity for
the nine month period ended September 30, 1999 increased to 12.5% as compared to
11.3% for the same nine month period in 1998.
Total assets at September 30, 1999 were $218,458,000 compared to
$196,466,000 at September 30, 1998. Although the Company's asset size has grown,
asset quality is monitored on a regular basis. During this period, nonperforming
loans decreased to $1,090,000 from $1,848,000. This is a 41.0% decrease.
Nonperforming assets similarly were reduced $878,000 or 40.9% to $1,270,000 from
the previous year total of $2,148,000. As a result, at September 30, 1999
nonperforming assets represented 0.6% of total assets as compared with 1.1% at
September 30, 1998. This additional income in combination with management's
continuing efforts to control operating expenses have resulted in the overall
increase in earnings when comparing the first nine months of 1999 to the same
period in 1998.
As a result of the Company's financial performance, the Board of
Directors declared a third quarter cash dividend of $.12 per common share. This
compares to an $.11 per common share third quarter dividend a year ago. Year to
date cash dividends total $.36 per common share, an increase of 9.1% over the
1998 year to date dividend of $.33 per common share at September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Results of Operations
- ---------------------
Net Interest Income
- -------------------
For the following discussion, interest income is presented on a
fully taxable-equivalent ("FTE") basis. FTE interest income restates reported
11
<PAGE>
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)
Nine months ended September 30, 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest Income $10,761 $ 9,891 $ 9,396
(financial statements)
Tax Equivalent Adjustment 211 152 99
------- ------- -------
Total interest income (on an FTE basis) 10,972 10,043 9,495
Interest Expense (4,950) (4,289) (4,220)
------- ------- -------
Net Interest Income-FTE $ 6,022 $ 5,754 $ 5,275
======= ======= =======
</TABLE>
Net interest and dividend income (interest and dividend income less interest
expense) on an FTE basis before the provision for loan losses for the nine
months ended September 30, 1999 increased by $268,000 to $6,022,000, an increase
of 4.7% when comparing the same period in 1998, and an increase of $479,000 or
9.1% when comparing 1998 to 1997. The increase is partially the result of an
increase in earning assets, primarily in loans outstanding as well as an
improved net interest margin which had decreased earlier in the year before
interest rates began moving upward.
Interest expense for the first nine months of 1999 totaled
$4,950,000 compared to $4,289,000 and $4,220,000 respectively for the comparable
periods in 1998 and 1997.
Generally, lower rates and a change in deposit mix have resulted
in a decrease in interest expense on deposits of $227,000 to $3,636,000 at
September 30, 1999. This compares to $3,863,000 and $3,972,000 for the same
periods in 1998 and 1997.
Interest expense on borrowed funds however has increased $888,000
to $1,314,000 for 1999 compared to $426,000 in 1998 and $248,000 in 1997. This
is the result of increased Federal Home Loan Bank borrowings to $42,038,000 from
a September 30, 1998 total of $23,492,000. These increased borrowings are the
results of an interest rate strategy designed to increase interest income and a
strategy directed at providing the Company with competitive fixed rate mortgage
products. The interest rate paid for funds for the first nine months of 1999 was
4.07% compared to $4.14% in 1998.
Overall net interest income (on an FTE basis) increased $268,000
to $6,022,000 at September 30, 1999 compared to $5,754,000 and $5,275,000 for
the same comparable periods of 1998 and 1997.
Noninterest Income
- ------------------
Noninterest income increased from $1,259,000 for the first nine
months in 1998 to $1,410,000 for the first nine month period in 1999. This is an
increase of 12.0%. Trust Department income increased 5.2% to $803,000. This
<PAGE>
reflects the continued growth in the Trust Department. Service charges and other
income increased $111,000 or 22.4% to $607,000 at September 30, 1999. This is
primarily the result of a higher volume of transactions from deposit accounts
and from our newest service-INVEST Financial Services. INVEST assists
individuals and business entities in achieving their financial objectives
through a no-cost financial planning process that analyses their circumstances,
identifies their goals and makes specific suggestions to accomplish their goals.
These suggestions may be implemented if clients so choose, through a
comprehensive range of carefully selected mutual funds, stocks, bonds,
annuities, life insurance and other investment products offered by INVEST.
12
<PAGE>
Noninterest Expense
- -------------------
Noninterest expense increased 2.1% to $3,933,000 for the nine
months ended September 30, 1999 compared to $3,854,000 for the corresponding
period in 1998. Salaries and employee benefits totaled $2,047,000 for the nine
month period ended September 30, 1999 compared to $1,938,000 for the same period
in 1998. This increase of 5.6% can be attributed to changes in staff and
increased cost of benefits. Occupancy expense increased $21,000 to $184,000.
This is primarily the result of winter maintenance costs incurred last winter.
Equipment expense increased $24,000 or 7.7% to $334,000 when comparing 1999 to
1998. Legal expense decreased 20.2% to $71,000. These reflect management's
continuing efforts to control operating expenses. Other expenses increased
$114,000 or 11.9% to $1,073,000 from $959,000. This increase resulted from
normal operating activities.
Income Taxes
- ------------
The income tax provision for the nine months ended September 30,
1999 totaled $1,260,000 in comparison to $1,139,000 in 1998. This increase
reflects an increase in taxable income.
THREE MONTHS ENDED SEPTEMBER 30, 1999
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
Net Interest Income
- -------------------
Net interest and dividend income increased 7.0% to $2,026,000
compared to $1,894,000 for the corresponding three month period in 1998. While a
rising rate environment and an increase in the size of the loan portfolio were
contributing factors, the increase in net interest income was primarily the
result of an increase of 16.4% in the size of the investment portfolio.
Interest expense on deposits decreased $98,000 when comparing the
third quarter of 1999 to that of 1998. This is primarily the result of changes
in deposits. Deposits increased during the third quarter of 1998 and decreased
during the third quarter of 1999 and the mix of deposits changed as well.
Interest expense on Federal Home Loan Bank advances increased to
$490,000 from $166,000. This increase of $324,000 is the result of an increase
in borrowings. The market condition presented an opportunity to replace an
investment arbitrage strategy that had matured earlier in the year.
Loan Loss Provisions
- --------------------
The provision for loan losses for the third quarter of 1999 and
1998 was $30,000 each quarter. A total of $137,000 of loans were charged off
during the quarter and a total of $11,000 was recovered on previously charged
off loans. During the same period in 1998, a total of $37,000 of loans were
charged off and recoveries totaled $7,000. The charge offs of both periods
consisted of residential and consumer loans. Management does not view this
increase in charged off loans as a trend.
Noninterest Income
- ------------------
Noninterest income increased 12.0% or $49,000 to $459,000 for the
quarter ended September 30, 1999 as compared to $410,000 for the same quarter in
1998. This is primarily the result of increased transaction volume from deposit
accounts and from our newest service-INVEST Financial Services.
13
<PAGE>
Noninterest Expense
- -------------------
Noninterest expense increased $12,000 to $1,310,000 for the
period ended September 30, 1999 compared to $1,298,000 for the corresponding
period in 1998. Changes in staff and increased benefit costs attributed to an
increase in salaries and benefits of $40,000 or 6.1%. Occupancy expense
increased $4,000 to $60,000 and legal expense increased $3,000 to $11,000 for
the quarters being compared. Equipment and data processing expenses decreased
16.2% to $181,000 in 1999 compared to an expense of $216,000 in 1998. The
increase in other expenses reflect normal operating activities.
Income Taxes
- ------------
The income tax provision for the three months ended September 30,
1999 totaled $466,000 in comparison to an income tax provision of $375,000 for
the same period in 1998. This increase reflects an increase in taxable income.
Net Income
- ----------
Net income for the three months ended September 30, 1999 totaled
$679,000 compared to $601,000 for the same three month period in 1998. This
increase of $78,000 or 13.0% can be attributed to an increase in earning assets
as well as management's continuing efforts to control operating expenses.
Financial Condition
-------------------
Total assets increased from $217,226,000 at December 31, 1998 to
$218,458,000 at September 30, 1999. Increases in investments for sale and the
loan portfolio were primarily funded by the growth experienced by an increase in
deposits as well as a small increase in Federal Home Loan Bank advances during
the first nine months of 1999. This compares to total assets of $196,466,000 at
September 30, 1998. This growth in assets has enhanced the earnings
opportunities for the Company.
Securities
- ----------
As of September 30, 1999, the Company's total securities
portfolio amounted to $82,281,000 for an increase of $991,000 from December 31,
1998. The increase is primarily due to continued purchases of securities
available-for- sale that are offsets to principal repayments in the
mortgage-backed portfolio, maturing securities and a lower Federal Funds sold
position. The net unrealized loss on securities available-for-sale, net of tax
effect totaled ($1,318,000) at September 30, 1999 compared to a gain of $357,000
at December 31, 1998. The decrease is attributable to a movement in interest
rates and the activity in the stock market. The following table presents the
carrying value of the portfolio available-for-sale and held to maturity
securities at September 30, 1999 and December 31, 1998.
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(amounts in thousands)
<S> <C> <C>
Available-for-sale securities:
Equity securities $ 124 $ 116
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 36,375 43,578
Debt securities issued by states of the United States
and political subdivisions of the states 12,591 9,553
Mortgage-backed securities 30,623 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 492 554
Federal Home Loan Bank stock 2,056 2,056
------- -------
Total Securities $82,281 $81,290
======= =======
</TABLE>
<PAGE>
Loans
- -----
The following table shows the composition of the Company's loan
portfolio at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(amounts in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 8,717 $ 10,692
Real Estate-construction and land development 4,035 3,392
Real Estate-residential 84,905 80,451
Real Estate-commercial 15,586 14,909
Consumer 10,947 10,430
Other 575 535
-------- --------
Loans outstanding $124,765 $120,409
======== ========
</TABLE>
14
<PAGE>
Competition for loans remains very aggressive in the market area
of the Company. The Company's continuing efforts to enhance loan opportunities
has resulted in the introduction of several new mortgage products. Total loans
have increased $4,356,000 to $124,765,000 at September 30, 1999 compared to
$120,409,000 at December 31, 1998.
Provisions and Allowance for Loan Losses
- ----------------------------------------
The provision for loan losses for the nine months ended September
30, 1999 was $90,000, which is the same as the comparable period in 1998. At
September 30, 1999, the allowance for loan losses was $1,109,000 representing
.9% of total loans as compared to $1,260,000 or 1.0% at December 31, 1998.
Nonperforming loans have decreased 41.5% to $1,090,000 from their year end total
of $1,864,000. The ratio of allowance for loan losses to nonperforming loans
equaled 100.1% at September 30, 1999 compared to 67.6% at December 31, 1998, the
result of a decrease in nonperforming loans.
During the first nine months of 1999, a total of $262,000 of
loans were charged off compared to $79,000 charged off during the corresponding
period in 1998. Management does not consider this indicative of any trend.
Recoveries of previously charged off loans totaled $21,000 for the first nine
months of 1999 compared to $22,000 for the same period in 1998.
The allowance for loan losses is reviewed monthly to assess 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. In management's judgement, the allowance is
adequate to absorb probable losses in the existing portfolio.
Deposits and Borrowed Funds
- ---------------------------
Total deposits increased $1,979,000 to $155,130,000 at September
30, 1999 from $153,151,000 at December 31, 1998. This increase was most
pronounced in demand deposit accounts which increased $3,536,000. The mix of
interest bearing deposits has changed during the first nine months and
experienced a decline in overall balances of $1,557,000. This reflects a shift
from maturity term deposits into core deposits without fixed maturities.
15
<PAGE>
The following table shows the composition of the Company's
deposits at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(amounts in thousands)
<S> <C> <C>
Demand deposit accounts $ 30,971 $ 27,435
NOW accounts 14,021 17,700
Money market deposit accounts 36,914 32,367
Savings accounts 15,381 14,819
Certificates of deposit 57,843 60,830
-------- --------
Total deposits $155,130 $153,151
======== ========
</TABLE>
At June 30, 1999, Federal Home Loan Bank borrowings were at
$30,358,000. In order to enhance earnings opportunities, the Company funded a
growth in total assets by increasing Federal Home Loan Bank borrowings to
$42,038,000 which is a slight increase over December 31, 1998 borrowings of
$41,120,000. This is the result of a strategy designed to increase interest
income.
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.
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 increases or decreases in market rates up to 200 basis points.
At September 30, 1999, the Company was slightly liability
sensitive. The extent of the position is consistent with parameters established
by the Asset Liability Policy and is monitored by Management.
<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 September 30, 1999, the Company
had approximately $24,857,000 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.
16
<PAGE>
Capital
- -------
At September 30, 1999, the Company had $20,207,000 in shareholder
equity compared to $21,555,000 at December 31, 1998. This represents a decrease
of $1,348,000. Several items made up the net change since December 1998. Year to
date earnings of $1,938,000 have increased capital. Market conditions have
resulted in a negative adjustment to unrealized holding losses/gains on
available-for-sale securities of $1,675,000. Three quarterly dividends in 1999
have decreased capital $543,000 and the stock repurchase plan that began in
November 1998 to acquire up to approximately 10% of the outstanding common stock
of the Company has resulted in a decrease in capital of $1,068,000. Overall, the
Company's has repurchased 53,055 shares of stock. The capital ratios of the
Company and Bank 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: (unaudited)
<TABLE>
<CAPTION>
Actual Actual Actual
September 1999 September 1998 September 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Total Risk-Based Capital 21.38% 20.13% 22.14%
Tier 1 Risk-Based Capital 20.28% 18.85% 20.89%
Leverage ratio 9.80% 9.91% 11.24%
</TABLE>
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.
<PAGE>
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.
17
<PAGE>
The Company notes that it is critically 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
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 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.
<PAGE>
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 September 30, 1999 the Bank has expended $38,880.
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.
18
<PAGE>
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 and will be
refining these until year-end. The Company has successfully validated its
contingency plans. Contingency plans will be updated 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.
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.
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.
19
<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 Holders - Not applicable
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 September 2, 1999 to report that
the Company's Board of Directors declared a quarterly cash
dividend of $.12 per share to be paid on October 29, 1999 to
shareholders of record as of September 30, 1999.
20
<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: November 12, 1999 By /s/ John F. Perotti
-------------------- -------------------
John F. Perotti
President / Chief Executive Officer
Date: November 12, 1999 By: /s/ John F. Foley
-------------------- -----------------
John F. Foley
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,563
<INT-BEARING-DEPOSITS> 1,665
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,769
<INVESTMENTS-CARRYING> 512
<INVESTMENTS-MARKET> 501
<LOANS> 124,760
<ALLOWANCE> 1,109
<TOTAL-ASSETS> 218,458
<DEPOSITS> 155,130
<SHORT-TERM> 12,000
<LIABILITIES-OTHER> 1,083
<LONG-TERM> 30,038
0
0
<COMMON> 151
<OTHER-SE> 20,056
<TOTAL-LIABILITIES-AND-EQUITY> 218,458
<INTEREST-LOAN> 7,164
<INTEREST-INVEST> 3,307
<INTEREST-OTHER> 290
<INTEREST-TOTAL> 10,761
<INTEREST-DEPOSIT> 3,636
<INTEREST-EXPENSE> 4,950
<INTEREST-INCOME-NET> 5,811
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,933
<INCOME-PRETAX> 3,198
<INCOME-PRE-EXTRAORDINARY> 3,198
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,938
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 7.07
<LOANS-NON> 406
<LOANS-PAST> 244
<LOANS-TROUBLED> 440
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,260
<CHARGE-OFFS> 262
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 1,109
<ALLOWANCE-DOMESTIC> 1,109
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
