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 March 31, 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 [ ]
<PAGE>
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 April 30, 1999 1,509,542
<PAGE>
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets --March 31, 1999
(unaudited) and December 31, 1998 4
Consolidated Statements of Income -- three months
ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows -- three months
ended March 31, 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 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
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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)
MARCH 31 DECEMBER 31
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Cash & due from banks:
Non-Interest Bearing $ 4,128 $ 5,525
Interest Bearing 950 409
Federal funds sold 6,100 6,200
--------- ---------
Cash and cash equivalents 11,178 12,134
Investment Securities:
Held to maturity securities 576 579
Available-for-sale securities 66,352 78,655
Federal Home Loan Bank stock, at cost 2,056 2,056
Loans:
Commercial, financial and agricultural 10,977 10,692
Real estate-construction and land development 3,780 3,392
Real estate-residential 80,181 80,451
Real estate-commercial 16,341 14,909
Consumer 10,023 10,430
Other 476 535
Allowance for loan losses (1,258) (1,260)
Unearned income (6) (6)
--------- ---------
Net loans 120,514 119,143
Bank premises & equipment 2,388 2,400
Other real estate owned 180 180
Accrued interest receivable 1,300 1,383
Other assets 547 696
--------- ---------
Total Assets $ 205,091 $ 217,226
========= =========
LIABILITIES
Deposits:
Demand $ 26,762 $ 27,435
Savings & NOW 30,165 32,519
Money Market 35,043 32,367
Time 60,483 60,830
--------- ---------
Total Deposits 152,453 153,151
Federal Home Loan Bank advances 30,741 41,120
Other liabilities 1,204 1,400
--------- ---------
Total Liabilities $ 184,398 $ 195,671
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(amount in thousands, except per share data)
MARCH 31 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: 1,509,792 151
Authorized not issued shares: 1,490,208
Common stock, par value $.10 per share;
Issued and outstanding shares: 1,556,286 156
Authorized not issued shares: 1,443,714
Additional paid-in capital 3,891 4,882
Retained earnings 16,616 16,160
Accumulated other comprehensive income 35 357
--------- ---------
Total Shareholders' Equity 20,693 21,555
--------- ---------
Total Liabilities and Shareholders' Equity $ 205,091 $ 217,226
========= =========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amount in thousands, except per share data)
March 31, 1999 and 1998
(unaudited)
Three Months Ended
March 31
--------------------
1999 1998
------- -------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 2,337 $ 2,371
Interest and dividends on securities:
Taxable 940 689
Tax-exempt 125 99
Dividends on equity securities 22 15
Other interest 63 92
------- -------
Total interest and dividend income 3,487 3,266
Interest expense:
Interest on deposits 1,194 1,293
Interest on Federal Home Loan Bank advances 438 119
------- -------
Total interest expense 1,632 1,412
------- -------
Net interest and dividend income 1,855 1,854
Provision for loan losses 30 30
------- -------
Net interest and dividend income after provision
for loan losses 1,825 1,824
------- -------
Other income:
Trust department income 300 248
Service charges on deposit accounts 101 109
Other income 76 46
------- -------
Total other income 477 403
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(amount in thousands, except per share data)
March 31, 1999 and 1998
(unaudited)
(continued)
Three Months Ended
March 31
--------------------
1999 1998
------- -------
<S> <C> <C>
Other expense:
Salaries and employee benefits 677 648
Occupancy expense 71 57
Equipment expense 118 108
Data processing 76 77
Legal 36 50
Net cost of operation of other real estate owned (1) 2
Other expense 338 321
------- -------
Total other expense 1,315 1,263
------- -------
Income before income taxes 987 964
Income taxes 350 344
------- -------
Net income $ 637 $ 620
======= =======
Earnings per common share outstanding $ .42 $ .40
======= =======
Earnings per common share outstanding,
assuming dilution $ .42 $ .39
======= =======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended March 31, 1999 and 1998
(unaudited)
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 637 $ 620
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 30 30
Depreciation and amortization 38 132
(Accretion) amortization of securities, net (37) 7
(Increase) decrease in interest receivable 83 (31)
Increase (decrease) in interest payable 108 (9)
Increase in cash surrender value of insurance policie 0 (3)
Increase in prepaid expenses (12) (52)
Increase in accrued expenses 93 110
Decrease in other assets 161 2
Increase in other liabilities 53 4
Change in unearned income (2)
Increase in taxes payable 0 310
-------- --------
Net cash provided by operating activities 1,154 1,118
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock 0 (21)
Purchase of available-for-sale securities (8,336) (4,493)
Proceeds from sales of available-for-sale securities 4,795
Proceeds from maturities of available-for-sale securities 15,348 2,818
Proceeds from held-to-maturity securities 2 419
Net (increase) decrease in loans (1,406) 144
Capital expenditures (26) (96)
Recoveries of loans previously charged-off 5 10
-------- --------
Net cash (used in) provided by investing activities 10,382 (1,219)
-------- --------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SALISBURY BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended March 31, 1999 and 1998
(unaudited)
(continued)
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net decrease in demand deposits, NOW and
savings accounts (349) (7,242)
Net (increase) decrease in time deposits (348) 575
Advances from Federal Home Loan Bank 0 4,000
Principal payments on advances from Federal Home Loan Bank (10,379) (261)
Dividends paid (420) (329)
Issuance of common stock 0 13
Net repurchase of common stock (996) (108)
-------- --------
Net cash provided by financing activities (12,492) (3,352)
-------- --------
Net decrease in cash and cash equivalents (956) (3,453)
Cash and cash equivalents at beginning of period 12,134 11,673
-------- --------
Cash and cash equivalents at end of period $ 11,178 $ 8,220
======== ========
Supplemental disclosures:
Interest paid $ 1,524 $ 1,422
Income taxes paid 190 34
Transfer of loans to other real estate owned 0 100
</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 principals
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 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 three months ended March 31, 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.
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:
8
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Three months ended March 31, 1999
Basic EPS
Net income and income available to common stockholders $ 637 1,510 $ .42
Effect of dilutive securities, options -- 16
----- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 637 1,526 $ .42
===== ===== =======
Three months ended March 31, 1998
Basic EPS
Net income and income available to common stockholders $ 620 1,563 $ .40
Effect of dilutive securities, options -- 14
----- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 620 1,577 $ .39
===== ===== =======
</TABLE>
9
<PAGE>
Part I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 quarter 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 quarter 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.
During the first quarter of 1999, the Company reported net income of
$637,000 or $.42 per diluted share. This represents an increase of 2.74% when
comparing first quarter 1998 earnings of $620,000 or $.39 per diluted share.
Total assets at the end of the first quarter of 1999 reflect an increase of
approximately $24,020,000 to $205,091,000 when comparing the same quarter in
1998. Although lower interest rates and competition continue to pressure
interest margins, the increase in earnings assets resulted in net interest
income consistent with that of the first quarter of 1998. The increase in
11
<PAGE>
earnings is primarily the result of an increase in other income coupled with
management's continuing efforts to control operating expenses. A major component
of other income is Trust Department income which as a result of increased
business increased 20.97% to $300,000 for the first quarter of 1999 compared to
$248,000 for the same period in 1998.
The Company's risk-based capital ratios, which include the
risk-weighted assets and capital of Salisbury Bank and Trust Company were 20.27%
for Tier 1 capital and 21.56% for total capital at March 31, 1999. These ratios
substantially exceeded the regulatory minimums for bank holding companies of 4%
for Tier 1 capital and 8% for total capital.
As a result of the Company's financial performance, the Board of
Directors declared a cash dividend of $.12 per common share. This compares to an
$.11 per share cash dividend from a year ago, an increase of 9.09%.
THREE MONTHS ENDED MARCH 31, 1999
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 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 portfolio 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)
Three months ended March 31, 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest Income $ 3,487 $ 3,266 $ 3,068
(financial statements)
Tax Equivalent Adjustment 64 51 29
------- ------- -------
Total interest income(on an FTE basis) 3,551 3,317 3,097
Interest Expense (1,632) (1,412) (1,369)
------- ------- -------
Net Interest Income-FTE $ 1,919 $ 1,905 $ 1,728
======= ======= =======
</TABLE>
12
<PAGE>
Competition and a decline in market interest rates over the past year
continue to pressure interest margins. At March 31, 1999, net interest income on
a FTE basis was $1,919,000 compared to $1,905,000 for the same period in 1998
and $1,728,000 in 1997. A 14.29% increase in average earning assets at March 31,
1999 when compared to the same period in 1998 helped offset an overall decrease
in the net interest margin to 3.83% from 4.22%. The yield on earning assets was
reduced by approximately 63 basis points to 7.08%. Generally lower interest
rates coupled with a decrease in deposits resulted in a 7.66% or $99,000
decrease in interest expense paid on deposits. An increase in Federal Home Loan
Bank borrowings has resulted in an increase in interest expense on Federal Home
Loan Bank advances of $319,000 or 268.07% to $438,000. The overall result is a
decrease in interest expense yield to 4.07% from 4.10% when comparing the first
quarter of 1999 to the corresponding period in 1998.
Noninterest Income
- ------------------
For the quarter ended March 31, 1999, noninterest income increased
$74,000 or 18.36% from 1998 and totaled $477,000. The increase is primarily the
result of increased business in the Trust Department which resulted in increased
income of 20.97% to $300,000 compared to $248,000 for the same period in 1998. A
new addition to services offered, INVEST Financial Services resulted in $20,000
additional noninterest income during the first quarter of 1999. Another
contribution to the increase in noninterest income is VISA and MasterMoney
interchange fees which have increased 68.75% to $27,000 in 1999 compared to
$16,000 in 1998.
Noninterest Expense
- -------------------
Noninterest expenses amounted to $1,315,000 for the first quarter of
1999. This is a $52,000 increase or 4.12% over the $1,263,000 reported for the
same period of 1998. Salaries and employee benefits increased 4.48% or $29,000.
This is primarily due to salary increases and increased cost in employee
benefits. Occupancy expense increased 24.56% to $71,000 during the first quarter
of 1999 compared to the corresponding period in 1998. This is primarily the
result of additional costs of winter maintenance. Equipment expense increased
9.26% to $118,000 in 1999. This increase is largely due to the Company's
commitment to continuing enhancement of technology that is needed to meet the
financial needs of customers. The increase in other operating expenses resulted
from normal operating activities.
Income Taxes
- ------------
The first quarter 1999 income tax provision was $350,000 compared to
$344,000 for the same quarter of 1998. This increase reflects an increase in
taxable income.
Financial Condition
-------------------
Total assets at March 31, 1999 were $205,091,000, a decrease of
$12,135,000 from $217,226,000 at December 31, 1998. This is primarily from
maturities of borrowings that were part of an interest rate risk strategy
implemented during 1998 that was designed to prevent loss of income primarily in
a falling rate environment. When comparing total assets at March 31, 1999 to
total assets at March 31, 1998, there is an increase of $24,020,000 which
reflects the strategy which resulted in an increase in interest income.
13
<PAGE>
Loans
- -----
Although loan demand was not strong during the first quarter,
competition for loans, especially residential mortgage loans, remains very
aggressive in the market area of the Company. New business development and new
home construction loans have contributed to the growth of commercial and real
estate construction loans. Total loans outstanding have increased to
$121,778,000 at March 31, 1999 compared to $120,409,000 at December 31, 1998.
The following table represents the composition of the loan portfolio comparing
March 31, 1999 to December 31, 1998:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 10,977 $ 10,692
Real Estate-construction and land development 3,780 3,392
Real Estate-residential 80,181 80,451
Real Estate-commercial 16,341 14,909
Consumer 10,023 10,430
Other 476 535
-------- --------
Loans outstanding $121,778 $120,409
======== ========
</TABLE>
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 $30,000 provision to the allowance
for possible loan losses was made during the first quarter of 1999, the same as
the first quarter of 1998. Nonaccrual loans were $814,000 at March 31, 1999
compared to $1,208,000 at December 31, 1998. Accruing loans past due 90 days or
more were $22,000 at March 31, 1999 compared to $109,000 at December 31, 1998.
Restructured loans were $899,000 at March 31, 1999 compared to $547,000 at
December 31, 1998. The allowance for loan losses was $1,258,000 or 1.03% of
total loans at March 31, 1999 compared to $1,260,000 or 1.05% of total loans at
December 31, 1998.
A total of $37,000 in loans was charged off during the quarter ended
March 31, 1999 compared to $14,000 charged off during the corresponding period
in 1998. A total of $5,000 of previously charged off loans was recovered during
the quarter ended March 31, 1999 compared to $10,000 for the corresponding
period in 1998.
14
<PAGE>
Determining the proper level of allowance requires management to 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 portfolio.
Securities
- ----------
As of March 31, 1999, the securities portfolio totaled $68,984,000.
This represents a decrease from December 31, 1998 of $12,306,000 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. Presently, $576,000 of the investment
securities portfolio is classified as held-to-maturity with the balance of the
investment securities portfolio being classified as available-for-sale. The net
unrealized gain on securities available-for-sale, net of tax effect totaled
$35,000 at March 31, 1999 compared to $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 March 31, 1999 and December
31, 1998.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(dollars in thousands)
<S> <C> <C>
Available-for-sale securities:
Equity securities $ 136 $ 116
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 30,195 43,578
Debt securities issued by states of the United States
and political subdivisions of the states 10,565 9,553
Mortgage-backed securities 25,456 25,408
Held-to-maturity securities:
Debt securities issued by states of the United States
and political subdivisions of the states 24 25
Mortgage-backed securities 552 554
Federal Home Loan Bank Stock 2,056 2,056
------- -------
Total Securities $68,984 $81,290
======= =======
</TABLE>
15
<PAGE>
Deposits
- --------
The following table illustrates the composition of the Company's
deposits at March 31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(dollars in thousands)
<S> <C> <C>
Demand $ 26,762 $ 27,435
NOW 15,432 17,700
Money Market 35,043 32,367
Savings 14,733 14,819
Time 60,483 60,830
-------- --------
Total Deposits $152,453 $153,151
======== ========
</TABLE>
Total deposits, which constitute the principal funding source of the
Company's assets have remained consistent during the first quarter of 1999 when
compared to year end 1998. The slight decrease represents the traditional
seasonal cash flows of the Company's deposit customers.
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 March 31, 1999, total
borrowings had decreased $10,379,000 to $30,741,000-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 risk strategy designed to provide
funds to grow interest earning assets.
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
16
<PAGE>
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.
To this end, because the Company is asset sensitive, strategy is being
developed to protect against negative earnings should interest rates decline any
further. Conversely, current structure would result in increased earnings should
interest rates rise.
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 March 31, 1999, the Company had
approximately $24,380,000 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
- -------
At March 31, 1999, the Company had $20,693,000 in shareholder equity
compared with $20,816,000 at March 31, 1998 and $19,022,000 at March 31, 1997.
The change in accounts resulted from first quarter earnings of $637,000, a
decrease of $322,000 in the adjustment for net unrealized holding gains on
securities and a quarterly dividend declared of $181,000. In November of 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 49,394 shares of stock. Since December 31, 1998, the buy back
program has resulted in a decrease in equity of $996,000.
The various capital ratios of the Company at March 31, 1999, 1998 and
1997 were: (unaudited)
<TABLE>
<CAPTION>
Actual Actual Actual
March 1999 March 1998 March 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total Risk-Based Capital 21.56% 21.81% 21.74%
Tier 1 Risk-Based Capital 20.27% 20.56% 20.49%
Leverage ratio 9.86% 11.11% 11.03%
</TABLE>
17
<PAGE>
From a regulatory standpoint, the Company has capital ratios which
place it in the "well-capitalized" category.
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 Company continues to use a multi-phase approach to
the Year 2000, which includes awareness, inventory, assessment, renovation,
validation, implementation and post-implementation. The program as it relates to
awareness, inventory and assessment is completed. 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.
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 is scheduled to be upgraded during the second
quarter of 1999. The Bank's two ATM's have been upgraded and are Y2K compliant.
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 are currently being validated by an
independent party contracted by the Company.
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.
17
<PAGE>
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 counterparties. 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 Counterparties
(trading counter parties and fiduciary relationships). The Company will continue
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 March 31, 1999 the Bank has expended
$7,162.
18
<PAGE>
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 business resumption plan
addresses how the Company will continue operations in the event a Year 2000
related interruption occurs. The Organizational Planning and Business Impact
Analysis phases of the business resumption contingency plan has been completed.
Development of the detailed resumption contingency plans is ongoing. 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.
The Company has an auxiliary power generator in one of its branch
locations. If necessary, Management would use this location as a provisional
operations center during the duration of any Year 2000 failure scenarios.
Management plans to re-deploy staff resources, as necessary during this period,
to help assure manual completion of critical operational activities. The Company
is in the process of testing the business resumption plan and expects to
complete testing prior to June 30, 1999. 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 March 5, 1999 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.12 per share to be paid on April 30, 1999 to shareholders of
record as of March 31, 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: May 11, 1999 by /s/ John F. Perotti
------------ -------------------
John F. Perotti
President / Chief Executive Officer
Date: May 11, 1999 by: /s/ John F. Foley
------------ ----------------------
John F. Foley
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,128
<INT-BEARING-DEPOSITS> 950
<FED-FUNDS-SOLD> 6,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,218
<INVESTMENTS-CARRYING> 577
<INVESTMENTS-MARKET> 577
<LOANS> 121,778
<ALLOWANCE> 1,258
<TOTAL-ASSETS> 205,091
<DEPOSITS> 152,453
<SHORT-TERM> 68
<LIABILITIES-OTHER> 1,204
<LONG-TERM> 30,673
0
0
<COMMON> 151
<OTHER-SE> 20,542
<TOTAL-LIABILITIES-AND-EQUITY> 205,091
<INTEREST-LOAN> 2,337
<INTEREST-INVEST> 1,087
<INTEREST-OTHER> 63
<INTEREST-TOTAL> 3,487
<INTEREST-DEPOSIT> 1,194
<INTEREST-EXPENSE> 1,632
<INTEREST-INCOME-NET> 1,855
<LOAN-LOSSES> 30
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,315
<INCOME-PRETAX> 987
<INCOME-PRE-EXTRAORDINARY> 987
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 637
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<YIELD-ACTUAL> 6.97
<LOANS-NON> 814
<LOANS-PAST> 22
<LOANS-TROUBLED> 899
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,260
<CHARGE-OFFS> 37
<RECOVERIES> 5
<ALLOWANCE-CLOSE> 1,258
<ALLOWANCE-DOMESTIC> 1,258
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
