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, 1998
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 5, 1998. 1,554,635
<PAGE>
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets --September 30, 1998 (unaudited)
and December 31, 1997 4
Consolidated Statements of Income --nine months and three
months ended September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows --nine months ended
September 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(amount in thousands, except per share data)
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS Cash & due from banks:
Non-interest bearing .............................. $ 3,823 $ 7,181
Interest bearing .................................. 66 167
Federal funds sold ................................ 8,625 4,325
--------- ---------
Cash and cash equivalents ......................... 12,514 11,673
Investment securities:
Held to maturity securities .............. 696 1,772
Available-for-sale securities ............ 59,579 47,511
Federal Home Loan Bank stock, at cost ............. 1,175 833
Loans:
Commercial, financial and agricultural ......... 10,981 11,575
Real estate-construction and land development .. 3,248 4,203
Real estate-residential ........................ 78,834 77,336
Real estate-commercial ......................... 14,665 13,355
Consumer ....................................... 10,539 10,805
Other .......................................... 562 655
Allowance for loan losses ..................... (1,259) (1,226)
Unearned income ................................ (8) (12)
--------- ---------
Net loans .................................. 117,562 116,691
Bank premises & equipment ......................... 2,548 2,707
Other real estate owned ........................... 300 205
Accrued interest receivable ....................... 1,318 1,299
Other assets ...................................... 774 742
--------- ---------
Total Assets ............................. $ 196,466 $ 183,433
========= =========
LIABILITIES
Deposits:
Demand ............................................ $ 27,429 $ 26,497
Savings & NOW ..................................... 62,006 67,446
Time .............................................. 60,544 62,230
--------- ---------
Total deposits .................................... 149,979 156,173
Federal Home Loan Bank advances ................... 23,492 5,497
Other liabilities ................................. 1,414 1,280
--------- ---------
Total liabilities ........................ 174,885 162,950
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholders' equity:
Common stock, par value $.10 per share;
Authorized 3,000,000 shares
Issued: 1,554,635 shares ..................... 155
Outstanding: 1,554,635 shares
Common stock, par value $3.33 per share;
Issued:263,956 shares ........................ 879
Outstanding: 261,398 shares
Additional paid-in capital ........................ 4,910 4,701
Net unrealized holding gain on AFS securities ..... 475 297
Retained earnings ................................. 16,041 14,773
Treasury stock: 2,558 shares ...................... (167)
--------- ---------
Total shareholders' equity ............... 21,581 20,483
--------- ---------
Total liabilities and shareholders' equity $ 196,466 $ 183,433
========= =========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
September 30, 1998 and 1997
(unaudited)
Nine Months Ended Three Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans .............................. $7,112 $7,076 $2,367 $2,379
Interest and dividends on securities:
Taxable .............................................. 2,133 1,791 744 597
Tax-exempt ........................................... 296 192 97 75
Dividends on equity securities ............................ 44 41 15 15
Other interest ............................................. 306 296 145 130
------ ------ ------ ------
Total interest and dividend income ............. 9,891 9,396 3,368 3,196
------ ------ ------ ------
Interest expense:
Interest on deposits .................................... 3,863 3,972 1,308 1,333
Interest on Federal Home Loan Bank advances ............. 426 248 166 74
------ ------ ------ ------
Total interest expense ......................... 4,289 4,220 1,474 1,407
------ ------ ------ ------
Net interest and dividend income ............... 5,602 5,176 1,894 1,789
Provision for loan losses .................................. 90 20 30 20
------ ------ ------ ------
Net interest and dividend income after provision
for loan losses ............................. 5,512 5,156 1,864 1,769
------ ------ ------ ------
Other income:
Trust department income ................................. 763 667 246 255
Service charges on deposit accounts ..................... 338 234 110 79
Other income ............................................ 158 131 54 42
------ ------ ------ ------
Total other income ............................. 1,259 1,032 410 376
------ ------ ------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits .......................... 1,938 1,797 656 597
Occupancy expense ....................................... 163 151 56 54
Equipment expense ....................................... 310 268 100 94
Data processing ......................................... 261 234 116 73
Legal ................................................... 89 96 8 36
Formation expense ....................................... 133 -- 133 --
Net cost of operation of other real estate owned ........ 1 23 1 1
Other expense ........................................... 959 924 228 327
------ ------ ------ ------
Total other expense ............................ 3,854 3,493 1,298 1,182
------ ------ ------ ------
Income before income taxes ..................... 2,917 2,695 976 963
Income taxes ............................................... 1,139 1,068 375 373
------ ------ ------ ------
Net income ..................................... $1,778 $1,627 $ 601 $ 590
====== ====== ====== ======
Earnings per common share outstanding ...................... $ 1.14 $ 1.05 $ .39 $ .38
Earnings per common share outstanding,
assuming dilution ......................................... $ 1.13 $ 1.04 $ .38 $ .38
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended September 30, 1998 and 1997
(unaudited)
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 1,778 $ 1,627
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ....................................... 90 20
Depreciation and amortization ................................... 229 152
Amortization, net of accretion of securities .................... 19 11
Securities gains, net ........................................... 0 (1)
Increase in interest receivable ................................. (19) (206)
Decrease in interest payable .................................... (5) (17)
(Increase) decrease in cash surrender value of insurance policies (9) 61
(Increase) decrease in prepaid expenses ......................... (21) 40
Increase (decrease)in accrued expenses .......................... (52) 549
(Increase) decrease in other assets ............................. (304) 5
Increase (decrease) in other liabilities ........................ 191 (669)
Change in unearned income ........................................ (5) (18)
Increase (decrease) in taxes payable ............................ 186 (242)
-------- --------
Net cash provided by operating activities .............................. 2,078 1,312
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock ............................... (342) (62)
Purchase of available-for-sale securities .............................. (27,121) (35,533)
Proceeds from sales of available-for-sale securities ................... 11,745 19,575
Proceeds from maturities of available-for-sale securities .............. 3,583 5,597
Proceeds from maturities of held-to-maturity securities ................ 1,076 2,602
Net decrease ( increase) in loans ...................................... (1,173) 491
Proceeds from sales of other real estate owned ......................... 100 196
Capital expenditures ................................................... (70) (319)
Recoveries of loans previously charged-off ............................. 22 29
-------- --------
Net cash used in investing activities ................................... (12,180) (7,424)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Nine months ended September 30, 1998 and 1997
(unaudited)
(continued)
1998 1997
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net decrease in demand deposits, NOW and savings accounts (4,508) (1,381)
Net increase(decrease) in time deposits ................. (1,686) 1,639
Advances from Federal Home Loan Bank ..................... 24,000 3,000
Principal payments on advances from Federal Home Loan Bank (6,005) (3,012)
Dividends paid ........................................... (510) (408)
Issuance of common stock ................................. 68 144
Net change in treasury stock ............................. (398) (125)
Retirement of common stock ............................... (18) (1)
-------- --------
Net cash provided by (used in) financing activities ...... 10,943 (144)
-------- --------
Net increase (decrease) in cash and cash equivalents ........ 841 (6,256)
Cash and cash equivalents at beginning of period ............ 11,673 14,985
-------- --------
Cash and cash equivalents at end of period .................. $ 12,514 $ 8,729
======== ========
Supplemental disclosures:
Interest paid ............................................ $ 4,294 $ 4,237
Income taxes paid ........................................ 999 654
Transfer of loans to other real estate owned ............. 195 100
</TABLE>
7
<PAGE>
SALISBURY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
On June 27, 1998, the shareholders of Salisbury Bank and Trust Company (the
"Bank") approved the formation of a holding company, Salisbury Bancorp, Inc.
(the "Company"). The holding company structure became effective August 24, 1998,
(the "Effective Time") as approved by the appropriate regulatory agencies. At
the Effective Time, each share of the Bank's common stock issued and outstanding
immediately prior to the Effective Time was converted into the right to receive
six (6) shares of the Company's common stock in exchange for each share of the
Bank's common stock.
The accompanying unaudited condensed interim consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiary, the Bank, and
the Bank's subsidiary, S.B.T. Realty, Inc.
The accompanying unaudited condensed interim consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principals for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all the information
and footnotes required by generally accepted accounting principals 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,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Bank's 1997 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
Bank'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 Bank adopted SFAS 130
for the fiscal year beginning January 1, 1998. Adoption of this Statement did
not have material impact on the Bank's financial position. Total comprehensive
income for the nine months ended September 30, 1998 and 1997 was $2,253,000 and
$1,843,000, respectively.
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, 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
====== ====== ======
Nine months ended September 30, 1997
Basic EPS
Net income and income available to common stockholders $1,627 1,554 $ 1.05
Effect of dilutive securities, options ............... 12
------ -------
Diluted EPS
Income available to common stockholders and assumed
conversions ....................................... $1,627 1,566 $ 1.04
====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<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, 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
====== ====== ======
Three months ended September 30, 1997
Basic EPS
Net income and income available to common stockholders $ 590 1,556 $ .38
Effect of dilutive securities, options ............... 16
------ ------
Diluted EPS
Income available to common stockholders and assumed
conversions ....................................... $ 590 1,572 $ .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: New Holding Company
We are pleased to report to you under our new holding company,
Salisbury Bancorp, Inc. (the "Company"). The reorganization was completed on
August 24, 1998 and Salisbury Bank and Trust Company (the "Bank") began
operating through a holding company structure as the subsidiary of the Company,
a stock corporation organized under the laws of the State of Connecticut. We
will continue to remain committed to providing professional financial services
in a friendly and responsive manner. We remain dedicated to being an active
corporate citizen in the communities we serve and we will continue to inspire
our staff to grow personally and professionally. The holding company structure
also provides us with additional flexibility with respect to capitalization and
financing which will allow us to pursue additional banking and other permissible
non banking opportunities. Our achievement of these goals will continue to
assure customer satisfaction, profitability, and enhanced shareholder value.
The Company acquired in a single transaction all of the outstanding
shares of the Bank. As a result, each share of the Bank's common stock was
converted to six shares of common stock of the Company. The common stock of the
Company also began trading on the American Stock Exchange on August 24, 1998.
The trading symbol for the stock is "SAL".
Net income for the nine months ended September 30, 1998 increased
9.3% to $1,778,000 or $1.13 diluted earnings per share as compared to net income
of $1,627,000 or $1.04 diluted earnings per share for the nine months ended
September 30, 1997. As a result of the Company's financial performance, the
Board of Directors declared a dividend of $.11 per share which compares to a
$.10 per share dividend a year ago.
NINE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997
Net Interest Income
Net interest and dividend income (interest and dividend income less
interest expense) before the provision for loan losses for the nine months ended
September 30, 1998 increased by $426,000 to $5,602,000, an increase of 8.2% when
comparing the same period of 1997. Interest expense on deposits was $3,863,000
for the nine months ended September 30, 1998 as compared to $3,972,000 for the
same time period in 1997. This is a decrease of $109,000 or 2.7%. Federal Home
Loan Bank advances increased to $23,492,000 at September 30, 1998 which resulted
in a 71.8% increase in interest expense to $426,000 compared to $248,000 of a
year ago. These increased borrowings are the results of an interest rate risk
strategy designed to prevent loss of income primarily in a falling rate
environment and a strategy directed at providing the Company with competitive
fixed rate mortgage products. Total interest expense for the nine months ended
September 30, 1998 increased 1.6% or $69,000 when comparing the same period in
1997.
The pressure of loan rates and customer demand for fixed rate loans
continues to create aggressive competition for loans in the Banks market area.
Interest and fees on loans have increased $36,000 when comparing the nine months
ended September 30 of 1998 to 1997. Interest and dividends on securities and
other interest has increased 19.8% or $459,000 to $2,779,000 when comparing the
same nine month periods. This increase is a reflection of growth in the
securities portfolio of 22.6% to $61,450,000 from $50,116,000 at December 31,
1997.
<PAGE>
Loan Loss Provision
The provision for loan losses for the nine months ended September
30, 1998 was $90,000 compared to $20,000 for the same period in 1997. At
September 30, 1998, the allowance for loan losses was $1,259,000, representing
1.1% of total loans as compared to $1,226,000 or 1.0% of total loans at December
31, 1997. Nonperforming loans have decreased 22.1% to $1,848,000 from their year
end 1997 total of $2,371,000. The ratio of allowance for loan losses to
nonperforming loans equaled 68.1% at September 30, 1998 compared to 51.7% at
December 31, 1997, the result of a decrease in nonperforming loans.
11
<PAGE>
During the first nine months of 1998, a total of $79,000 of loans
were charged off compared to $89,000 charged off during the corresponding period
in 1997. The charge offs of both periods consisted primarily of consumer loans.
Recoveries of previously charged off loans totaled $22,000 for the first nine
months of 1998 compared to $29,000 for the same period in 1997.
The allowance for loan losses is reviewed monthly. Determining the
proper level of allowance is difficult as management must make estimates using
assumptions and information which is often subjective and changing. In
management's judgement, the allowance for loan losses is adequate to absorb
probable losses in the existing portfolios.
Noninterest Income
Noninterest income increased from $1,032,000 for the first nine
months in 1997 to $1,259,000 for the first nine month period in 1998. This is an
increase of 22.0%. Trust department income increased 14.4% to $763,000 which is
the result of new accounts and an increase in account values. Service charges on
deposit accounts increased $104,000 or 44.4% which is primarily the result of a
higher volume of ATM and MasterMoney debit card transactions and an increase in
insufficient funds charges.
Noninterest Expense
Noninterest expense increased 10.3% to $3,854,000 for the nine
months ended September 30, 1998 compared to $3,493,000 for the corresponding
period in 1997. The increase is primarily the result of the formation expenses
of the holding company. Salaries and employee benefits increased $141,000 or
7.8%. This is due to an increase in staff and cost of benefits. Equipment and
data processing expenses have increased 13.7% to $571,000 from $502,000. This
increase is the result of a continuing plan to enhance technology which is
important to meeting the needs of our customers. The increase in other operating
expenses resulted from normal operating activities.
Income Taxes
The income tax provision for the nine months ended September 30,
1998 totaled $1,139,000 in comparison to $1,068,000 in 1997. The increase
reflects an increase in taxable income.
THREE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Net Interest Income
Net interest and dividend income increased 5.9% or $105,000 to
$1,894,000 compared to $1,789,000 for the corresponding three month period in
1997. This increase is primarily the result of the growth of the securities
portfolio to $61,450,000 which has increased interest and dividends on
securities and other income 22.5% to $1,001,000 for the quarter ended September
30, 1998 compared to $817,000 for the same period in 1997.
Interest expense on deposits remained consistent for the quarter at
$1,308,000.
Interest expense on Federal Home Loan Bank advances increased to
$166,000 from $74,000. Borrowings increased $12,635,000 during the quarter to
$23,492,000 at September 30, 1998. These increased borrowings are the results of
an interest rate risk strategy designed to prevent loss of income primarily in a
falling rate environment and a strategy directed at providing the Company with
competitive fixed rate mortgage products.
12
<PAGE>
Loan Loss Provision
The provision for loan losses for the third quarter of 1998 was
$30,000 compared to $20,000 for the same period in 1997. A total of $37,000 of
loans were charged off during the quarter and a total of $7,000 was recovered on
previously charged off loans. During the same period in 1997, a total of $41,000
of loans were charged off and recoveries totaled $13,000. The charge offs of
both periods consisted primarily of consumer loans.
Noninterest Income and Expense
Noninterest income increased 9.0% or $34,000 to $410,000 for the
quarter ended September 30, 1998 as compared to $376,000 for the same quarter in
1997. Trust fees decreased to $246,000 or 3.5%. This is primarily the result of
the downward trend of the market during the period. Service charges on deposit
accounts have increased 39.2% to $110,000. This increase is the result of
increased transaction volume from deposit accounts.
Noninterest expense increased $116,000 to $1,298,000 for the period
ended September 30, 1998 compared to $1,182,000 for the corresponding period in
1997. The increase is the result of the formation expenses of the holding
company.
Net Income
Net income for the three months ended September 30, 1998 totaled
$601,000 compared to $590,000 for the same three month period in 1997. This
increase of $11,000 can be attributed to an increase in earning assets as well
as management continuing efforts to control operating expenses.
Capital Resources
Shareholders' equity increased 5.36% or $1,098,000 to $21,581,000
for the nine months of 1998 ended at September 30. Book value per share
increased $.82 to $13.88 when comparing December 31, 1997 book value per share
of $13.06 (adjusted to reflect 6 for 1 stock exchange). The increase in equity
resulted from earnings of $1,778,000, an increase of $178,000 in the adjustment
for net unrealized holdings gains on securities, a decrease of $348,000 from the
retirement of shares of treasury stock and other transactions and dividends
declared of $510,000.
The following reflects the Company's capital ratios: (unaudited)
<TABLE>
<CAPTION>
Actual Actual Actual
September 1998 September 1997 September 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Total Risk-Based Capital 20.13% 22.14% 21.13%
Tier 1 Risk Based Capital 18.85% 20.89% 19.88%
Leverage ratio 9.91% 11.24% 10.77%
</TABLE>
At September 30, 1998, the Company had capital ratios which place it
in the "well capitalized" category.
<PAGE>
Liquidity
The Company's liquidity is dependent on dividends provided by the
Bank. Connecticut Banking Laws limit the amount of annual dividends that the
Bank may pay to an amount which approximates the Bank's net profits for the then
current year, plus the Bank's net profits for the prior two years. The Bank is
also prohibited from paying a cash dividend or repurchasing any of its common
stock if the effect thereof would reduce its capital accounts below minimum
regulatory requirements.
13
<PAGE>
The primary function of asset/liability management is to ensure
adequate liquidity and maintain an appropriate balance between interest earning
assets and interest-bearing liabilities. The Bank manages its liquidity position
to ensure that there is sufficient funds available for deposit withdrawals, loan
commitments, securities purchases and other operating cash outflows. Interest
rate risk management seeks to avoid significant fluctuations in the Bank's net
interest margin and to enhance growth of net interest income during periods of
changing interest rates. The principal sources of liquidity are principal
payments on loans, maturities and sales of securities, net deposit growth and
Federal Home Loan Bank advances. As of September 30, 1998, the Bank had unused
loan commitments of $26,051,000 and a liquidity ratio of 36.13%. The Bank
believes that its liquidity sources will continue to meet its present and
foreseeable needs.
Year 2000
Year 2000 Issue
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
A company-wide Year 2000 ("Y2K") compliance program has been
implemented to determine Y2K issues and define a strategy to assure Y2K
compliance. The compliance program is segmented by phases; awareness, inventory,
assessment, renovation, validation, implementation and post-implementation. In
1997, a Y2K committee was formed. The committee briefs senior management of the
Company and the Company's board of directors on the progress of the Year 2000
effort. The compliance program as it relates to awareness, inventory and
assessment are essentially complete with limited activities relating to borrower
assessment scheduled to be completed by year-end. The remainder of the Y2K
compliance program is scheduled to be completed by June 30, 1999, barring any
unforeseen problems.
Specifically, the awareness phase, which is essentially complete,
involved the dissemination of Year 2000 information throughout the Company and
the education of all levels of management about Year 2000 issues and their
potential impact on the Company's operation. The inventory phase, which is
essentially complete, involved a detailed inventory of hardware, software, core
systems (internal and external), and other microchip-embedded products. The
assessment phase, which is also essentially complete, involved assessing the
information prepared in the inventory phase as it related to the determination
of the requirements for fixes, upgrades and replacements for all hardware,
application software, embedded systems and desktop applications. The renovation
phase is more than halfway complete. The Company's mission critical systems are
either in remediation (the Year 2000 project phase where hardware, systems and
applications are fixed, upgraded or replaced to be Year 2000 ready) or testing
(the phase in which Year 2000 remediation is validated). The Company utilizes a
third-party service provider for its' core applications. In May of 1998 the
service provider conducted testing. The Company has been advised that the
service provider is making adequate progress in meeting their established goals
for Year 2000 qualifications of their system and the related products utilized
by the Company. Assuming that preparation for the Year 2000 continues to be a
top priority for this service provider (as it is required to be) the Company
does not, at the present time, foresee or anticipate problems.
<PAGE>
The Company has assessed the risks which are presented by its
reliance upon computer based products outside of information technology
processing and does not believe that these areas pose any significant risks
which are not being addressed in the Company's Y2K preparation.
The Risks of the Company's Year 2000 Issues
Failure to resolve a material Year 2000 issue could result in the
interruption in, or a failure of, certain normal
14
<PAGE>
business activities or operations such as servicing depositors, processing
transactions or servicing loans. The Company plans to continue to work with
third party service providers and business partners to ascertain their Year 2000
compliance status and to coordinate testing efforts. 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, or that a failure to resolve Year 2000 issues by
another party, or remediation or conversion that is incompatible with the
Company's computer systems, will not have a material adverse effect on the
Company.
The Company recognizes that from a customer standpoint, a Year 2000
problem could affect a borrower's ability to service debts if their direct
operations, vendors or customers are impacted. To raise the customers' level of
awareness, the Company has sponsored a Y2K seminar for borrowers. The Company
identified borrowers that may be affected by Y2K and is presently conducting an
analysis to evaluate the risk.
Management has assessed 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
developed Contingency Plans 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 for the Year 2000. As regulated institutions, the
Company and the Bank could become subject to formal or informal supervisory
actions if preparation for the Year 2000 failed to satisfy regulatory
requirements or prudent industry standards. As regulated institutions, banks and
bank 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
expensed as incurred and are not expected to have a material impact on the
Company's future financial results or condition. The Company had budgeted
$20,000 for 1998 for Y2K related expense and year-to-date expenses incurred by
the Company is $18,622. It is estimated that the Company could incur expenses of
approximately $28,000 by the end of 1998. The Company's preliminary budget for
1999 is $33,000 noting that costs associated with the Year 2000 preparedness
plan are difficult to quantify.
<PAGE>
The Company's Contingency Plans
The Company has developed 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. To further the
Company's Disaster Recovery initiative, the Company has an auxiliary power
generator in one of its branch locations. Management anticipates using this
location as a provisional operations center during 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. The Company plans on testing portions of the business
resumption plan by March 31, 1999.
The Company has developed contingency plans for its mission critical systems and
will refine these plans in 1999. However, 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.
15
<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.
16
<PAGE>
Part II--OTHER INFORMATION
Item 1. - Legal Proceedings
With the exception of the matters discussed below, there are no
other material pending legal proceedings to which the Company, the Bank, its
subsidiary or any of its properties is a party, other than ordinary litigation
arising in the normal course of business. None of such proceedings is material
to the Company, the Bank or its subsidiary.
A former employee of the Bank who resigned from the Bank's
employment alleged that her transfer in 1995 from one department of the Bank to
another was based upon gender rather than job performance. Subsequently, she
filed charges with the United States Equal Opportunity Commission (the "EEOC").
After concluding its investigation, the EEOC took no action against the Bank
because it was unable to conclude, based upon its investigation, that any
statutes were violated. Notwithstanding the conclusion of the EEOC, the employee
filed a lawsuit on April 28, 1997 entitled Deborah Rost v. Salisbury Bank and
Trust Company, John F. Perotti and Craig E. Toensing, in the United States
District Court, Southern District of New York. In that suit, the plaintiff
claimed that she was subjected to unwanted sexual harassment which she rejected
and, as a result, was transferred from her position. The plaintiff claimed
damages of Sixty Million Dollars plus costs and attorneys' fees. On March 12,
1998, the United States District Court dismissed the plaintiff's complaint
without prejudice to her right to sue the Bank within a thirty day period in
another forum. On April 3, 1998, the plaintiff filed her lawsuit entitled
Deborah Rost v. Salisbury Bank and Trust Company, John F. Perotti and Craig E.
Toensing, in the United States District Court, Connecticut.
The Bank refutes these allegations of discrimination and sexual
harassment and intends to vigorously defend this case. The Bank does not believe
that these claims will result in any material adverse effect on the Bank's
financial condition.
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: The following Exhibit is included herein: Exhibit
27-Financial Data Schedule
B. Reports on Form 8-K:
The Company filed a Form 8-K on August 25, 1998 to disclose
that the reorganization between the Bank and the Company had
become effective on August 24, 1998 and that the Company's
common stock began trading on the American Stock Exchange
under the symbol "SAL".
The Company filed a Form 8-K on September 1, 1998 to report
that the Company's Board of Directors declared a quarterly
cash dividend of $.11 per share to be paid on October 16, 1998
to shareholders of record as of September 30, 1998.
17
<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 10, 1998 By /s/ John F. Perotti
------------------ ------------------------
John F. Perotti
President / Chief Executive Officer
Date: November 10, 1998 By: /s/ John F. Foley
----------------- ----------------------
John F. Foley
Chief Financial Officer
18
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