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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
|_| 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 0-24751
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, CT 06039
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock par
value $.10 per share
Name of exchange on which registered: American Stock Exchange
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant"s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer. Yes |_|
No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: June 30, 2003: $38,753,796
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,424,078 shares outstanding as of March 5, 2004.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
Page
----
Part I
Item 1 - Business 3
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 8
Item 2 - Properties 13
Item 3 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 - Market for Registrant"s Common Equity and
Related Stockholder Matters 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
(d) Securities Authorized for Issuance Under Equity Compensation Plans 14
Item 6 - Selected Financial Data 15
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 30
Item 8 - Financial Statements and Supplementary Data 31
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 32
Item 9A - Controls and Procedures 32
Part III
Item 10 - Directors and Executive Officers of the Registrant 32
Item 11 - Executive Compensation 34
Item 12 - Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 37
Item 13 - Certain Relationships and Related Transactions 38
Item 14 - Principal Accounting Fees and Services 38
Part IV
Item 15 - Exhibits, Financial Statements and Reports on Form 8-K 39
Signatures 41
2
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which
accounts for most of the Company's net income. The Bank assumed its present name
in 1925 following the acquisition by the Robbins Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the successor to a private banking firm established in 1874. The
Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of Connecticut and its deposits are
insured by the Federal Deposit Insurance Corporation in accordance with the
Federal Deposit Insurance Act. The Bank's main office is at 5 Bissell Street,
Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. Substantially all of the
Bank's customers reside in or maintain their principal offices in Litchfield
County, Connecticut or in Dutchess County or Columbia County, New York or in
Berkshire County, Massachusetts.
(b) Financial Information about Industry Segments
The Company's products and services are all of a nature of commercial bank and
trust company.
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2003, it totaled $147,021,000 which represents
approximately 47.26% of total assets and it produced interest and dividend
income of $6,423,000 for the year 2003 as compared with $6,480,000 for 2002 and
$5,746,000 for 2001 respectively.
3
Deposits and Borrowings
The Bank's primary sources of funds are deposits, borrowings and principal
payments on loans. Although competition for funds from non-banking institutions
remains aggressive, the Bank continues its efforts to build multiple account
relationships with its customers. As a result, average daily deposits increased
4.03% to $213,392,000 during 2003.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $60,897,000 at December 31, 2003 as compared with
$51,891,000 at December 31, 2002.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis and
the accompanying Consolidated Financial Statements.
Fiduciary
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts and estate planning and estate settlement. Another
service is that of serving as Guardian or Conservator of estates and managing
the financial position of Guardianships or Conservatorships. Self directed IRAs
and Pension plans are also offered.
All Others
The Company also offers safe deposit rentals, foreign exchange, a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Competition
The Company and the Bank encounter competition in all phases of their business.
There are numerous financial institutions that have offices in the areas in
which the Company and Bank compete in Northwestern Connecticut, Western
Massachusetts and proximate areas of New York State.
All of the offices of the Bank are located in the northwest corner of Litchfield
County, designated by the Federal Reserve Banks of Boston and New York to be
within the "Metro Banking Market". The Bank maintains four (4) banking offices
within the Metro Banking Market, which is served by 277 commercial banks and
savings banks. The Bank has less than a 1% market share of deposits in such
Market.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Insurance companies, investment counseling firms and other
businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services. Many non-bank
competitors are not subject to the extensive regulation described below under
"LEGISLATION, REGULATION AND SUPERVISION" and in certain
4
respects may have a competitive advantage over banks in providing certain
services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions and
mergers of Connecticut banks and bank holding companies of or with banks and
bank holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank's future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
5
Under the BHCA and the regulations of the Federal Reserve System promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined therein, without prior approval of the Federal Reserve Board. The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it wishes to acquire voting shares of any other bank, if after such
acquisition it would own or control more than five percent (5%) of the voting
share of such bank. The BHCA imposes limitations upon the Company as to the
types of business in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:
(i) the bank holding company's capital ratios exceed the threshold established
for "well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirements; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
6
o Disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o The presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by Company's auditor. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. On October 26, 2001, President Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001.
Part of the USA Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of the Bank to declare
cash dividends to its shareholders.
7
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank's
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
Employees
The Company's current workforce at February 13, 2004 was 92 employees of whom 83
were full time and 9 were part time. The employees are not represented by a
collective bargaining unit.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.
8
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, are presented on the following pages of this Report
on Form 10-K.
Page(s) of
Item of Guide 3 This Report
- --------------- -----------
I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential 17
II. Investment Portfolio 9
III. Loan Portfolio 10
IV. Summary of Loan Loss Experience 11
V. Deposits 23
VI. Return on Equity and Assets 10
VII. Short-Term Borrowings 12
9
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables sets forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands)
2003 2002 2001
-------- -------- --------
Available-for-sale securities:
(at fair value)
Equity securities $ 136 $ 90 $ 135
U.S. government agencies preferred stock 7,610 4,179 0
U.S. Treasury securities and other
U.S. government corporations and agencies 51,979 41,635 38,701
Obligations of states and political subdivisions 45,988 42,792 30,273
Mortgage-backed securities 37,307 46,473 33,139
-------- -------- --------
$143,020 $135,169 $102,248
======== ======== ========
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ $ $
Obligations of states and political subdivisions 0 0 0
Mortgage-backed securities 229 321 400
-------- -------- --------
$ 229 $ 321 $ 400
======== ======== ========
Federal Home Loan Bank stock $ 3,771 $ 2,945 $ 2,945
======== ======== ========
For the following table, yields are not calculated and presented on a fully
taxable-equivalent ("FTE") basis.
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
2003:
(dollars in thousands)
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
------ ----- ----- ----- ----- ----- ----- ----- -----
Held-to-maturity
securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 0 $ 0 $ 0
Obligations of state and
political subdivisions 0 0 0 0 0
Mortgage-backed
securities 0 0 0 229 4.38% 229
------ ------ ------- -------- --------
$ 0 $ 0 $ 0 $ 229 $ 229
====== ====== ======= ======== ========
Available-for-sale
Securities
(at fair value)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 7,099 6.01% $ 44,880 4.05% $ 51,979
Obligations of state and
political subdivisions $ 0 $ 241 4.70% $ 206 3.60% $ 45,541 4.81% $ 45,988
Mortgage-backed
securities $ 42 7.50% $ 18 7.00% $ 0 $ 37,247 4.68% $ 37,307
------ ------ ------- -------- --------
$ 42 $ 259 $ 7,305 $127,668 $135,274
====== ====== ======= ======== ========
10
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
-----------------------------------------------------------------
Commercial, financial and $ 9,149 $ 10,127 $ 10,797 $ 8,592 $ 9,025
agricultural
Real Estate-construction and 15,307 6,027 3,935 6,275 3,382
land development
Real Estate - residential 90,807 93,636 102,201 98,312 86,680
Real Estate-commercial 19,199 18,002 17,423 15,463 15,324
Consumer 6,692 9,007 10,030 10,673 10,698
Other 73 291 125 247 364
-----------------------------------------------------------------
141,227 137,090 144,511 139,562 125,473
Allowance for possible loan losses (1,664) (1,458) (1,445) (1,292) (1,160)
Unearned income 0 (0) (0) (0) (0)
-----------------------------------------------------------------
Net loans $ 139,563 $ 135,632 $ 143,066 $ 138,270 $ 124,313
=================================================================
There are no industry concentrations in the Bank's loan portfolio.
The following table shows the maturity of commercial, financial and agricultural
loans, real estate commercial loans and real estate-construction loans
outstanding as of December 31, 2002. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due in Due after
one year one year to Due after
or less five years five years
---------------------------------
Commercial, financial,
agricultural and real estate commercial $ 6,070 $ 3,224 $19,053
Real estate-construction and land development 15,307 0 0
--------------------------------
$21,377 $ 3,224 $19,053
================================
Maturities after
One Year with:
Fixed interest rates $ 2,004 $12,423
Variable interest rates 1,220 6,630
-------------------
$ 3,224 $19,053
===================
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
Year ended December 31,
-----------------------
2003 2002 2001
----- ----- -----
Return on average total assets
(net income divided by average total assets) 1.24% 1.13% 1.14%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 13.47% 12.63% 12.25%
Dividend payout ratio
(total declared dividends divided by net income) 34.07% 39.11% 41.34%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.21% 8.92% 9.27%
11
Nonaccrual, Past Due and Restructured Loans
At December 31, 2003, there were two (2) nonaccrual loans in the Bank's
portfolio both of which were secured by real estate. When a mortgage loan
becomes 90 days past due, and there is not sufficient collateral to cover the
principal and accrued interest, the Bank generally stops accruing interest
unless there are unusual circumstances which warrant an exception. Generally the
only loan types that the Bank reclassifies to nonaccrual are those secured by
real estate. Other types of loans are generally charged off if they become 90
days or more delinquent. However, exception is warranted with the $535,000 in
loans that are presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
-------------------------------------------------------
Nonaccrual $ 75 $ 855 $ 372 $ 186 $ 473
90 days or more past due 535 124 215 323 10
Restructured loans 0 271 0 12 12
-------------------------------------------------------
Total nonperforming loans $ 610 $1 250 $ 587 $ 521 $ 495
=======================================================
Total nonperforming loans as per-
centage of the total loan portfolio 0.43% 0.92% 0.41% 0.37% 0.39%
Allowance for loan losses as a per-
centage of nonperforming loans 272.79% 116.64% 246.17% 247.99% 234.34%
Information with respect to non-accrual and
restructured loans at December 31,
2003, 2002 and 2001 is as follows:
(dollars in thousands) Year Ended December 31
2002 2002 2001
------------------------
Interest income that would have been recorded under original terms $ 4 $ 68 $ 38
Gross interest recorded 0 49 28
------------------------
Foregone interest $ 4 $ 19 $ 10
========================
Summary of Loan Loss Experience
(dollars in thousands)
Year Ended December 31
2003 2002 2001 2000 1999
---------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 1,458 $ 1,445 $ 1,292 $ 1,160 $ 1,260
---------------------------------------------------------
Charge-offs:
Commercial, financial and
agricultural 71 60 0 0 1
Real estate mortgage 0 46 13 21 243
Consumer 84 146 88 50 25
---------------------------------------------------------
Total charge-offs 155 252 101 71 269
---------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 24 2 0 0 0
Real estate mortgage 0 1 87 6 19
Consumer 24 26 17 17 30
---------------------------------------------------------
Total recoveries 48 29 104 23 49
---------------------------------------------------------
Net charge-offs 107 223 (3) 48 220
Provisions charged to operations 313 300 150 180 120
Transfer of allowance for loan
losses to other liabilities 0 (64) 0 0 0
---------------------------------------------------------
Balance at end of year $ 1,664 $ 1,458 $ 1,445 $ 1,292 $ 1,160
=========================================================
Ratio of net charge-offs to
average loans outstanding .01% .02% (.002%) .04% .18%
Ratio of allowance for loan losses
to year end loans 1.18% 1.07% 1.01% .93% .93%
12
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2003 2002 2001 2000 1999
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16% $ 160 7.19%
Real estate construction
and land development 112 10.82% 50 4.40% 24 2.72% 0 4.50% 0 2.70%
Real estate mortgage 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51% 941 81.30%
Consumer 357 4.72% 244 6.57% 100 6.94% 65 7.65% 58 8.52%
Other loans 5 .05% 8 .21% 1 .09% 1 .18% 1 .29%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,664 100.00% $1,458 100.00% $1,445 100.00% $1,292 100.00% $1,160 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for possible loan losses are charged to operating
expenses and are based on past experience, current economic conditions and
management's judgement of the amount necessary to cover losses inherent in the
portfolio. The Bank records provisions for estimated loan losses, which are
charged against earnings, in the period they are established.
Short-Term Borrowings
(dollars in thousands) December 31
2003 2002 2001
--------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.06% 5.35% 5.95%
For the year 4.21% 5.45% 5.62%
Average amount outstanding during the year $65,282 $52,438 $53,407
Maximum amount outstanding at any month $74,705 $59,125 $56,766
Amount outstanding at year end $60,897 $51,891 $53,004
ITEM 2. DESCRIPTION OF PROPERTIES
The holding company is not the owner or lessee of any properties. The Bank does
not lease any properties. The properties described below are owned by the Bank.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Bank's trust
department is located in a separate building adjacent to the main office of the
Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Office 94 Main Street Owned
Canaan, Connecticut
13
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, there are no material
legal proceedings pending to which the Company, Bank, or their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2003 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2003 Quarters 2002 Quarters
------------------------------------ ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------ ------------------------------------
Range of Stock prices:
High $38.95 $32.25 $29.50 $30.00 $28.01 $25.25 $26.75 $25.25
Low $29.50 $29.00 $26.00 $26.00 $25.00 $22.51 $24.10 $21.25
(b) Holders
There were approximately 473 holders of record of the common stock of the
Company as of March 5, 2004. This number includes brokerage firms and other
financial institutions which hold stock in their name but which is actually
owned by third parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. During the year 2003, the Company declared
a cash dividend each quarter of $.23 per share. Dividends for the year 2003
totaled $.92 per share which compared to total dividends of $.88 that were
declared in the year 2002. At their February 27, 2004 meeting, the Directors of
the Company declared a cash dividend of $.24 per share for the first quarter of
2004. The dividend will be paid on April 28, 2004 to shareholders of record as
of March 31, 2004. Payment of all dividends are dependent upon the condition and
earnings of the Company. The Company's ability to pay dividends is limited by
the prudent banking principles applicable to all bank holding companies and by
the provisions of Connecticut Corporate law, which provide that no distribution
may be made by a company if, after giving it effect: (1) the company would not
be able to pay its debts as they become due in the usual course of business or
(2) the company's total assets would be less than the sum of its total
liabilities plus amounts needed to satisfy any preferred stock rights. The
following table presents cash dividends declared per share for the last two
years:
2003 Quarters 2002 Quarters
------------------------------------ ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------ ------------------------------------
Cash dividends
declared $0.23 $0.23 $0.23 $0.23 $0.22 $0.22 $0.22 $0.22
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 12 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $139,563 $135,632 $143,066 $138,270 $124,313
Allowance For Loan Losses 1,664 1,458 1,445 1,292 1,160
Investments 147,021 138,435 105,593 91,922 77,745
Total Assets 311,100 293,107 283,602 249,054 215,385
Deposits 218,457 211,037 201,351 166,436 154,358
Borrowings 60,897 51,891 53,004 47,357 39,712
Shareholders' Equity 28,850 27,345 23,363 22,460 19,895
Nonperforming Assets 685 1,400 587 521 495
Statement of Income Data:
Interest and Fees on Loans $ 9,226 $ 9,677 $ 11,344 $ 10,494 $ 9,621
Interest and Dividends on Securities
and Other Interest Income 6,423 6,481 5,746 6,015 4,903
Interest Expense 5,613 6,898 8,301 8,284 6,683
-------- -------- -------- -------- --------
Net Interest Income 10,036 9,260 8,789 8,225 7,841
Provision for Loan Losses 313 300 150 180 120
Trust Department Income 1,252 1,100 1,070 1,108 1,121
Other Income 1,674 1,388 1,187 914 860
Net Gain (Loss) on Sales of Securities 1,058 634 130 (64) (2)
Other Expenses 8,599 7,775 6,755 5,797 5,523
-------- -------- -------- -------- --------
Pre Tax Income 5,108 4,307 4,271 4,206 4,177
Income Taxes 1,268 1,108 1,370 1,357 1,484
-------- -------- -------- -------- --------
Net Income $ 3,840 $ 3,199 $ 2,901 $ 2,849 $ 2,693
======== ======== ======== ======== ========
Per Share Data:
Earnings per common share $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Earnings per common share, assuming dilution $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Cash Dividends Declared per share $ 0.92 $ 0.88 $ 0.84 $ 0.77 $ 0.70
Book Value (at year end) $ 20.26 $ 19.21 $ 16.43 $ 15.40 $ 13.23
Selected Statistical Data:
Return on Average Assets 1.24% 1.13% 1.14% 1.23% 1.25%
Return on Average Shareholders' Equity 13.47% 12.63% 12.25% 13.64% 12.96%
Dividend Payout Ratio 34.07% 39.11% 41.38% 39.72% 39.16%
Average Shareholders' Equity to Average Assets 9.21% 8.92% 9.27% 8.98% 9.67%
Net Interest Spread 3.23% 3.13% 2.91% 2.83% 3.07%
Net Interest Margin 3.65% 3.72% 3.71% 3.79% 3.93%
15
Salisbury Bancorp, Inc.
and Subsidiary
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and the Bank
were formed in 1998 and 1848, respectively. This discussion should be read in
conjunction with the Company's consolidated financial statements and the notes
to the consolidated financial statements that are presented as part of this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2003 and 2002
OVERVIEW
The reported earnings for the Company were $3,840,000 in 2003, an increase of
$641,000 or 20.04% over year 2002 earnings of $3,199,000. As a result, earnings
per share increased $.45 or 20.00% to $2.70 in 2003. This compares to earnings
per share of $2.25 in 2002 and $2.03 in 2001. The improvement in net income is
primarily the result of growth in earning assets that has produced an increase
in total net interest income, a reduction in interest expense and an increase in
other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2003, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 15.35% for Tier 1 capital and 16.44% for
total capital. The Company's leverage ratio was 8.05% at December 31, 2003. This
compares to a Tier 1 capital ratio at December 31, 2002 of 16.05%, a total
capital ratio of 17.21%, and a Company leverage ratio of 7.80%. As a result of
the Company's financial performance, the Board of Directors increased total
dividends declared on the Company's common stock to $.92 per share in 2003. This
compares to an $.88 per share dividend paid in 2002 and a $.84 per share
dividend that was paid in 2001.
CRITICAL ACCOUNTING ESTIMATES
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
changed conditions, which could have an adverse impact on reported earnings in
the future. See "Provisions and Allowance for Loan Losses".
NET INTEREST AND DIVIDEND INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors or
borrows funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the
16
interest rate paid on those interest-bearing deposits and borrowed funds. For
this discussion, net 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 applicable
State and Federal income tax rates for all periods presented.
(dollars in thousands) December 31,
2003 2002 2001
----------------------------------
Interest and Dividend Income
(financial statements) $ 15,650 $ 16,157 $ 17,089
Tax Equivalent Adjustment 1,075 1,028 504
-------- -------- --------
Total Interest Income (on an FTE basis) 16,725 17,185 17,593
Interest Expense (5,613) (6,898) (8,301)
-------- -------- --------
Net Interest Income-FTE $ 11,112 $ 10,287 $ 9,292
======== ======== ========
The Company's 2003 total interest and dividend income on an FTE basis of
$16,725,000 was $460,000 or 2.68% less than the total interest and dividend on
an FTE basis of $17,185,000 in 2002. Although there was an increase in earning
assets, this decrease in interest and dividend income is primarily the result of
an economic environment with lower interest rates. A change in the mix of
earning assets during 2002 and continuing into 2003 has increased tax exempt
securities in the securities portfolio which has resulted in an increase in the
tax equivalent adjustment of $1,075,000 in 2003 and $1,028,000 in 2002 when
compared to the tax equivalent adjustment of $504,000 in 2001.
Interest expense on deposits in 2003 decreased $1,173,000 or 29.05% to
$2,866,000 compared to $4,039,000 for the corresponding period in 2002 and
$5,302,000 in 2001. Although deposits increased, generally lower interest rates
resulted in the decrease. Interest expense for Federal Home Loan Bank advances
decreased $111,000 to $2,747,000 in 2003 compared to $2,858,000 in 2002 and
$2,999,000 in 2001. Lower interest rates resulted in the decrease in interest
expense. Although interest margins continue to be pressured by generally lower
interest rates and by aggressive competition, net interest income on an FTE
basis increased $825,000 or 8.02% over 2002 and totaled $11,112,000 at December
31, 2003 compared to total net interest income on an FTE basis of $10,287,000 at
December 31, 2002 and $9,292,000 in 2001.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship between
interest earned and paid. The Company's 2003 net interest margin on an FTE basis
was 3.65%. This compares to a net interest margin of 3.72% for 2002. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2003, 2002 and 2001. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material. Interest earned on tax exempt securities in the table is presented on
a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing these calculations. Actual tax exempt income earned in 2003 was
$2,086,000 with a yield of 4.83%. Actual tax exempt income in 2002 totaled
$1,995,000 with a yield of 4.88% and in 2001 actual tax exempt income was
$977,000 with a yield of 4.95%.
17
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2003 2002 2001
----------------------------------------------------------------------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest Earning Assets:
Loans $142,752 $ 9,226 6.46% $139,582 $ 9,677 6.93% $145,502 $11,344 7.80%
Taxable Securities $101,931 $ 3,875 3.80% $ 81,715 $ 4,144 5.07% $ 68,921 $ 4,204 6.10%
Tax-Exempt Securities * $ 43,603 $ 3,161 7.25% $ 41,347 $ 3,023 7.31% $ 20,030 $ 1,481 7.39%
Federal Funds $ 3,125 $ 28 0.90% $ 7,214 $ 111 1.54% $ 9,986 $ 324 3.24%
Other Interest Income $ 1,359 $ 10 0.74% $ 549 $ 11 2.00% $ 809 $ 36 4.45%
------------------- ------------------- -------------------
Total Interest Earning $292,770 $16,300 5.57% $270,407 $16,966 6.27% $245,248 $17,389 7.09%
------- ------- -------
Assets
Alowance for Loan
Losses ($ 1,468) ($ 1,403) ($ 1,412)
Cash & due from
Banks $ 6,425 $ 5,923 $ 5,138
Premises,Equipment $ 3,000 $ 2,810 $ 2,676
Net unrealized gain/loss
on AFS Securities $ 2,316 $ 1,083 $ 500
Other Assets $ 6,403 $ 5,263 $ 3,312
-------- -------- --------
Total Average Assets $309,446 $284,083 $255,462
======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $ 59,521 $ 363 0.61% $ 62,756 $ 807 1.29% $ 67,516 $ 1,902 2.82%
Savings Deposits $ 45,975 $ 450 0.98% $ 37,629 $ 743 1.97% $ 16,674 $ 396 2.37%
Time Deposits $ 68,898 $ 2,053 2.98% $ 67,157 $ 2,490 3.71% $ 60,854 $ 3,004 4.94%
Borrowed Funds $ 65,282 $ 2,747 4.21% $ 51,966 $ 2,858 5.50% $ 53,407 $ 2,999 5.62%
------------------- ------------------- -------------------
Total Interest Bearing
Liabilities $239,676 $ 5,613 2.34% $219,508 $ 6,898 3.14% $198,451 $ 8,301 4.18%
------- ------- -------
Demand Deposits $ 38,998 $ 37,578 $ 31,497
Other Liabilities $ 2,130 $ 1,660 $ 1,829
Shareholders' Equity $ 28,642 $ 25,337 $ 23,685
-------- -------- --------
Total Liabilities and
Equity $309,446 $284,083 $255,462
======== ======== ========
Net Interest Income $10,687 $10,068 $ 9,088
======= ======= =======
Net Interest Spread 3.23% 3.13% 2.91%
Net Interest Margin 3.65% 3.72% 3.71%
* Presented on a fully taxable equivalent ("FTE") basis
18
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2003 over 2002 2002 over 2001
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
----------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ 220 $ (671) $ (451) $ (462) $(1,205) $(1,667)
Taxable investment securities 1,025 (1,294) (269) 780 (840) (60)
Tax-exempt investment securities 165 (27) 138 1,575 (33) 1,542
Other interest income (51) (33) (84) (100) (138) (238)
------- ------- ------- ------- ------- -------
Total interest income $ 1,359 $(2,025) $ (666) $ 1,793 $(2,216) $ (423)
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (42) $ (402) $ (444) $ (134) $ (961) $(1,095)
Savings deposits (164) (129) (293) 496 (149) 347
Time deposits 65 (502) (437) 311 (825) (514)
Borrowed funds 732 (843) (111) (81) (60) (141)
------- ------- ------- ------- ------- -------
Total interest expense $ 591 $(1,876) $(1,285) $ 592 $(1,995) $(1,403)
------- ------- ------- ------- ------- -------
Net interest margin $ 768 $ (149) $ 619 $ 1,201 $ (221) $ 980
======= ======= ======= ======= ======= =======
NONINTEREST INCOME
Noninterest income increased $862,000 or 27.61% and totaled $3,984,000 for the
year ended December 31, 2003 as compared to $3,122,000 for the year ended
December 31, 2002. Trust Department income increased $152,000 to $1,252,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $560,000 for 2003. This is an increase of
$88,000 or 18.64% when comparing total service charges of $472,000 in 2002. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales of available-for-sale securities totaled $1,058,000 in 2003
representing an increase of $424,000 or 66.88% compared to $634,000 in 2002.
This increase is primarily attributable movements in the markets which resulted
in opportunities for the Company to enhance the return from the securities
portfolio and at the same time realize gains on sales of available-for-sale
securities. Mortgage refinancing remained very active during 2003 as rates
remained at all time lows. Competition in the secondary mortgage market
continues to be very aggressive. Gains on sale of loans held-for-sale increased
$35,000 or 15.42% to $262,000 in 2003 compared to $227,000 in 2002. Other income
however, increased 16.13% to $799,000 in 2003 compared to other income of
$688,000 in 2002. This increase is primarily attributable to the increase in
fees earned from activity in the secondary mortgage market due to the change of
investors. Historically the Company has had few instances in which it foreclosed
on properties and therefore has a low volume of OREO properties. The Company
acquired one OREO property during the 2002, sold it in 2003 and realized a gain
on the sale of $52,000.
NONINTEREST EXPENSE
Noninterest expense increased 10.61% to $8,600,000 for the year ended December
31, 2003 as compared to $7,775,000 for the corresponding period in 2002.
Salaries and employee benefits totaled $4,834,000 for the twelve months ended
December 31, 2003 compared to $4,235,000 for the same period in 2002. This is an
increase of $599,000 or 14.14% over 2002 and is primarily the result of an
increase in staff along with salary increases and the increase in the costs of
employee benefits. Occupancy and equipment expenses increased $64,000 or 7.31%
to $939,000 compared to $875,000 for 2002. The increase is primarily the result
of expenses associated with routine maintenance and repairs of the Company's
facilities and equipment. Data processing expenses increased $42,000 or 7.88%
for the year ended December 31, 2003 over 2002 and totaled $575,000. This
increase is attributable to normal increasing costs related to enhancing the
delivery channels of products to our customers. Legal expenses totaled $128,000
for 2003. This is an increase of $67,000 or 110% when comparing total legal
expense in 2002 of $61,000. The increase is primarily the result of additional
services required due to compliance requirements of the Sarbanes-Oxley Act.
Amortization expense of the "Core Deposit Intangible" assets associated with the
2001 Branch acquisition totaled $68,000 and did not change from 2002.
19
INCOME TAXES
In 2003, the Company's income tax provision totaled $1,268,000, which reflects
an effective tax rate of 24.82% compared to an income tax provision of
$1,108,000 and an effective tax rate of 25.72% in 2002. Although there was a
decrease in the effective tax rate, the provision increased $160,000 as the
result of an increase in taxable income.
NET INCOME
Overall, net income totaled $3,840,000 for the year ended December 31, 2003
compared to net income of $3,199,000 for the year 2002 representing an increase
of $641,000 or 20.04%. On a per share basis, net income amounted to $2.70 per
share for 2003 as compared to $2.25 for 2002.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2002 and 2001
Net income for the Company was $3,199,000 in 2002, an increase of $298,000 or
10.27% over year 2001 earnings of $2,901,000. As a result, earnings per share
increased $.22 or 10.83% to $2.25 in 2002. This compared to earnings per share
of $2.03 in 2001. The improvement in net income was primarily the result of
growth in earning assets that produced an increase in total net interest income
coupled with an increase in other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2002, which included the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 16.05% for Tier 1 capital and 17.21% for
total capital. The Company's leverage ratio was 7.80% at December 31, 2002. This
compared to a Tier 1 capital ratio at December 31, 2001 of 15.09%, a total
capital ratio of 16.21% The Company's leverage ratio was 7.61%.
As a result of the Company's financial performance, the Board of Directors
increased total dividends declared on the Company's common stock to $.88 per
share in 2002 as compared to $.84 per share in 2001.
NET INTEREST AND DIVIDEND INCOME
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net 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 applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2002 2001 2000
------------------------------
Interest and Dividend Income
(financial statements) $ 16,157 $ 17,089 $ 16,510
Tax Equivalent Adjustment 1,028 504 335
-------- -------- --------
Total Interest Income (on an FTE basis) 17,185 17,593 16,845
Interest Expense (6,898) (8,301) (8,284)
-------- -------- --------
Net Interest Income-FTE $ 10,287 $ 9,292 $ 8,561
======== ======== ========
20
The Company's 2002 total interest and dividend income on an FTE basis of
$17,185,000 was $408,000 or 2.32% less than the total interest and dividend on
an FTE basis of $17,593,000 in 2001. Although there was an increase in earning
assets, this decrease in interest and dividend income was primarily the result
of an economic environment with lower interest rates. A change in the mix of
earning assets which reflects an increase in tax exempt securities resulted in a
significant increase in the tax equivalent adjustment of $1,028,000 for 2002 as
compared to $504,000 for 2001. This was an increase of approximately 104%.
Interest expense on deposits in 2002 decreased $1,262,000 or 23.80% and totaled
$4,040,000. This compared to $5,302,000 for the corresponding period in 2001.
Although deposits increased, primarily as the result of a branch acquisition
which was completed in September 2001, generally lower interest rates resulted
in the decrease in interest expense. Interest expense for Federal Home Loan Bank
advances decreased $141,000 to $2,858,000 in 2002. This compared to interest
expense of $2,999,000 in 2001 and is primarily the result of a decrease in
borrowings. Although interest margins continue to be pressured by generally
lower interest rates and by aggressive competition, net interest income on an
FTE basis increased $995,000 or 10.71% and totaled $10,287,000 at December 31,
2002. This compared to total net interest income on an FTE basis of $9,292,000
at December 31, 2001.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship between
interest earned and paid. The Company's 2002 net interest margin on an FTE basis
was 3.72%. This compares to a net interest margin of 3.71% for the corresponding
period in 2001. The following table reflects average balances, interest earned
or paid and rates for the three years ended December 31, 2002, 2001 and 2000.
The average loan balances include both non-accrual and restructured loans.
Interest earned on loans also includes fees on loans such as late charges
collected that are not deemed to be material. Interest earned on tax exempt
securities in the table is presented on a fully taxable-equivalent basis
("FTE"). A federal tax rate of 34% was used in performing these calculations.
Actual tax exempt income earned in 2002 was $1,995,000 with a yield of 4.83%.
Actual tax exempt income in 2001 totaled $977,000 with a yield of 4.88%.
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2002 over 2001 2001 over 2000
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
----------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ (462) $(1,205) $(1,667) $ 1,253 $ (403) $ 850
Taxable investment securities 780 (840) (60) (327) (61) (388)
Tax-exempt investment securities 1,575 (33) 1,542 515 (21) 494
Other interest income (100) (138) (238) 132 (340) (208)
------- ------- ------- ------- ------- -------
Total interest income $ 1,793 $(2,216) $ (423) $ 1,573 $ (825) $ 748
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (134) $ (961) $(1,095) $ 272 $ (616) $ (344)
Savings deposits 496 (149) 347 24 (10) 14
Time deposits 311 (825) (514) 368 (158) 210
Borrowed funds (81) (60) (141) 239 (103) 136
------- ------- ------- ------- ------- -------
Total interest expense $ 592 $(1,995) $(1,403) $ 903 $ (887) $ 16
------- ------- ------- ------- ------- -------
Net interest margin $ 1,201 $ (221) $ 980 $ 670 $ 62 $ 732
======= ======= ======= ======= ======= =======
21
NONINTEREST INCOME
Noninterest income totaled $3,122,000 for the year ended December 31, 2002
compared to $2,387,000 for the year ended December 31, 2001. Trust Department
income increased slightly to $1,100,000 from $1,070,000. This was primarily the
result of the efforts of new business development. Service charges remained
consistent at $472,000 for 2002 and 2001, respectively. Gains on sales of
available-for-sale securities totaled $634,000 in 2002. This represented an
increase of $504,000 or 388% when comparing total gains on sales of
available-for-sale securities of $130,000 in 2001. Movement in the markets
presented opportunities for the Company to enhance the return from the
securities portfolio which resulted in this increase. Other income, including
gain on sale of loans held-for sale, increased $200,000 or 27.97% to $915,000 in
2002. This compares to total other income, including gain on sale of loans
held-for-sale, of $715,000 in 2001. This increase was primarily the result of
increased fees generated from the refinancing activities in the secondary market
as well as an increase in transaction fees generated from activity of deposit
accounts.
NONINTEREST EXPENSE
Noninterest expense increased 15.10% to $7,775,000 for the year ended December
31, 2002 as compared to $6,755,000 for the corresponding period in 2001.
Salaries and employee benefits totaled $4,235,000 for the twelve months ended
December 31, 2002 compared to $3,834,000 for the same period in 2001. This was
an increase of $401,000 or 10.46% and was primarily the result of the addition
of staff for the branch that was acquired in September 2001 coupled with the
additional staff that was also hired to service the increase in new business at
the Bank's other facilities. Annual pay raises and the increasing costs of
employee benefits also contributed to the increased expense. Occupancy and
equipment expenses increased $142,000 or 19.37% to $875,000. This compared to
total occupancy and equipment expense of $733,000 for the same period in 2001.
The increase was primarily the result of expenses associated with having an
additional office to maintain. The Company incurred some equipment costs
relating to system upgrades. Data processing expenses increased $39,000 or 7.79%
for the year ended December 31, 2002 and totaled $533,000. Data processing
expenses for the same period in 2001 totaled $495,000. Insurance expenses for
the year 2002, which do not include insurance benefits associated with
employees, increased $22,000 or 23.69% and totaled $114,000 as compared to
$92,000 for 2001. Printing and stationery costs and legal expenses remained very
consistent when comparing 2002 to 2001. Amortization expense of the "Core
Deposit Intangible" assets associated with the 2001 branch acquisition totaled
$68,000 for the year ended December 31, 2002. This expense for 2002 represented
a full year of amortization while the total expense of $48,000 represented only
three and one half months of the year 2001 because the acquisition was completed
in September 2001. Other operating expenses totaled $1,701,000 for the year
ended December 31, 2002 compared to other operating expenses totaling $1,318,000
for the corresponding period in 2001. This increase of $383,000 or 29.06% was
primarily the result of additional expenses relating to the operation of the
newly acquired branch coupled with increased expenses relating to Trust
operations as well as normal increases in expenses associated with the operation
of the Company.
INCOME TAXES
In 2002, the Company's income tax provision totaled $1,108,000, an effective tax
rate of 25.72%. This compared to an income tax provision of $1,370,000 in 2001,
reflecting an effective tax rate of 32.08%. This decrease was primarily the
result of the impact of an increase in tax exempt interest earned from the
securities portfolio.
NET INCOME
Overall, net income totaled $3,199,000 for the year ended December 31, 2002,
compared to net income of $2,901,000 for 2001. This was an increase of $298,000
or 10.27% and reflected earnings of $2.25 per share compared to earnings per
share of $2.03 for 2001.
22
FINANCIAL CONDITION
Comparison of December 31, 2003 and 2002
Total assets at December 31, 2003 were $311,100,000 compared to $293,107,000 at
December 31, 2002. This is an increase of $17,993,000 or 6.14%. The increase is
primarily due to additional advances taken from the Federal Home Loan Bank as
part of a strategy to increase interest income.
SECURITIES PORTFOLIO
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2003, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $147,021,000. This represents an
increase of $8,586,000 or 6.20% over year-end 2002. The increase is a reflection
of the strategy to increase interest income as a portion of the advances from
the Federal Home Loan Bank were used to purchase securities at a rate of return
higher than the borrowing cost in order to generate additional interest income
from the securities portfolio.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either Securities-Available-for-
Sale and Securities-Held-to-Maturity. The securities reported as available-for-
sale are stated at fair value in the financial statements of the Company.
Unrealized holding gains and losses (accumulated other comprehensive
income/loss) are not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until realized. At
December 31, 2003, the unrealized gain net of tax was $686,000. This compares to
an unrealized gain net of tax of $1,734,000 at December 31, 2002. The securities
reported as securities-held-to-maturity are stated at amortized cost.
FEDERAL FUNDS SOLD
The balance of federal funds sold totaled $2,272,000 at December 31, 2003. This
compares to $1,750,000 at December 31, 2002. This represents a normal operating
range of funds for daily cash needs and is considered to be adequate by
Management.
LENDING
New business development during the year coupled with a small increase in loan
demand resulted in an increase in loans receivable, net of allowance for loan
losses of $3,931,000 or 2.90% to $139,563,000 at December 31, 2003, as compared
to $135,632,000 at December 31, 2002. Competition for loans remains very
aggressive in the market area of the Company. Although the largest dollar
volumes of loan activity continues to be in the residential mortgage area, the
Company offers a wide variety of loan types and terms along with competitive
pricing to customers. The Company's credit function is designed to ensure
adherence to prudent credit standards despite competition for loans in the
Company's market area.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
Total gross loans at December 31, 2003 were $141,228,000, as compared to
$137,090,000 at December 31, 2002. This is an increase of $4,138,000 or 3.02%.
At December 31, 2003 approximately 89% of the Bank's loan portfolio was related
to real estate products and although the portfolio increased during the year
2003, the concentration remained consistent as approximately 86% of the
portfolio was related to real estate at December 31, 2002. The increase in total
gross loans was primarily the result of an increase in construction mortgages.
Otherwise there were no material changes in the composition of the loan
portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Company's objectives. Because of the risk
23
associated with extending loans the Company maintains an allowance or reserve
for credit losses through charges to earnings. The loan loss provision for the
year 2003 was $313,000 as compared to $300,000 for the year ended December 31,
2002. The level of nonperfoming loans remains low as a percentage of total
loans. Nonperforming loans totaled $610,000 or .43 % of total loans at December
31, 2003 as compared to $1,250,000 or .91% of total assets at December 31, 2002.
Nonperforming loans are closely monitored by management.
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
used in making this determination during the year ended December 31, 2003. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which is submitted to the Board of Directors for
approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
residential real estate mortgages with balances of $300,000 or more and
commercial loans of $100,000 or more. Such loans are considered impaired when it
is probable that the Bank will not be able to collect all principal and interest
due according to the terms of the note. Any such commercial loans and
residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
years ended December 31, 2003 and 2002.
At December 31, 2003 the allowance for loan losses totaled $1,664,000,
representing 272.79% of nonperforming loans, which totaled $610,000, and 1.18%
of total loans of $141,228,000. This compares to $1,458,000, representing
116.64% of nonperforming loans, which totaled $1,250,000 and .91% of total loans
of $137,090,000 at December 31, 2002. A total of $155,000 in loans were charged
off during the year 2003, as compared to $251,000 during 2002. A total of
$48,000 of previously charged off loans was recovered during the year ended
December 31, 2003. Recoveries for the year 2002 totaled $29,000. When comparing
the two years, net charge-offs were $107,000 for the year 2003 and during the
year 2002 net charge-offs totaled $222,000. Management believes that the
allowance for loan losses is adequate. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans or other factors.
Additionally, despite the overall good quality of the loan portfolio generally,
with expectations of the Company to continue to grow its existing portfolio,
future additions to the allowance may be necessary to maintain adequate reserve
coverage.
24
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2003 totaled $218,457,000 compared to
$211,037,000 at year-end 2002. This increase of $7,420,000 or 3.52% can be
primarily attributed to the ongoing efforts of the Company to competitively
price products and develop and maintain relationship banking with its customers.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and the aggressive
competition from nonbanking entities. During the year, there was an increase in
demand, NOW and savings accounts which are lower cost core deposits.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
(dollars in thousands)
Year ended December 31
2003 2002 2001
-------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------
Demand $ 38,998 $ 37,578 $ 31,497
NOW 20,030 .31% 19,833 .82% 17,185 1.07%
Money Market 39,491 .76% 42,923 1.50% 50,331 3.41%
Savings 45,975 .98% 37,629 1.98% 16,674 2.37%
Time 68,898 2.98% 67,157 3.71% 60,854 4.94%
-------- -------- --------
$213,392 1.34% $205,120 1.97% $176,541 3.00%
======== ======== ========
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 are summarized as follows:
(dollars in thousands)
Year Ended December 31
2003 2002 2001
-----------------------------
Three months or less $ 5,575 $ 3,454 $ 3,895
Over three months through six months 1,343 3,630 4,161
Over six months through one year 5,591 7,913 4,398
Over one year 11,080 8,050 5,708
------- ------- -------
Total $23,589 $23,047 $18,162
======= ======= =======
BORROWINGS
As part of its operating strategy, the Company utilizes advances from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At December 31, 2003, the Company had $60,897,000 in
outstanding advances from the Federal Home Loan Bank compared to $51,891,000 at
December 31, 2002. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
25
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 monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At December
31, 2003, the Company was slightly asset sensitive (positive gap). This would
suggest that the during a period of rising interest rates the Company would be
in a better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at December 31, 2003 is within the limits approved by the
Board of Directors.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston which provides a
source of available borrowings for liquidity.
At December 31, 2003, the Company had approximately $29,003,000 in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the Company's needs for both the present and foreseeable
future.
CAPITAL
At December 31, 2003, the Company had $28,850,000 in shareholder equity compared
to $27,345,000 at December 31, 2002. This represents an increase of $1,505,000
or 5.50%. Several components contributed to the change since December 2002.
Earnings for the year totaled $3,840,000. Market conditions have reduced
unrealized securities gains and resulted in a negative adjustment to
comprehensive income of $1,049,000. The Company declared dividends in 2003
resulting in a decrease in capital of $1,310,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan
during the second quarter of 2002 which resulted in an increase in capital of
$24,000. Under current regulatory definitions, the Company and the Bank are
considered to be "well capitalized" for capital adequacy purposes. As a result,
the Bank pays the lowest federal deposit insurance deposit premiums possible.
One primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk weighted assets. This method of measuring
capital adequacy helps to establish capital requirements that are sensitive to
the differences in risk associated with various assets. It takes in account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low risk assets. At year-end 2003, the Company
had a risk-based capital ratio of 16.44% compared to 17.21% at December 31,
2002. The primary difference results from the negative effect of market
movements on unrealized gains and therefore a decrease in comprehensive income.
Maintaining strong capital is essential to bank safety and soundness. However,
the effective management of capital resources requires generating attractive
returns on equity to build value for shareholders while maintaining appropriate
levels of capital to fund growth, meet regulatory requirements and be consistent
with prudent industry practices. Management believes that the capital ratios of
the Company and Bank are adequate to continue to meet the foreseeable capital
needs of the institution.
26
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money, over time, due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result, interest rates tend to have a greater impact on the Company's
performance than do the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services, inflation could impact earnings
in future periods.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. Paragraph 5 of SFAS No. 147, which relates to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition was on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in paragraphs 8-14 were effective on October 1, 2002, with
earlier application permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 it's recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of December
31, 2003. The Company determined that its reclassified goodwill as of those
dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
27
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003. There was
no substantial impact on the Company's consolidated financial statements on
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity.
In December 2003, the FASB revised Interpretation No. 46, also referred to as
Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not
to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company only if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The Company is
required to apply FIN 46, as revised, to all entities subject to it no later
than the end of the first reporting period ending after March 15, 2004. However,
prior to the required application of FIN 46, as revised, the Company shall apply
FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose
entities as of the end of the first fiscal year or interim period ending after
December 15, 2003. The adoption of this interpretation has not and is not
expected to have a material effect on the Company's consolidated financial
statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans
28
and other defined benefit postretirement plans. This Statement is effective for
financial statements with fiscal years ending after December 15, 2003 and
interim periods beginning after December 15, 2003. Adoption of this Statement
did not have a material impact on the Company's consolidated financial
statements.
RECENT DEVELOPMENTS
On November 18, 2003, the Company announced the execution of a definitive
agreement (the "Agreement") to acquire Canaan National Bancorp, Inc. ("Canaan"),
parent of The Canaan National Bank. Canaan is headquartered in Canaan,
Connecticut and has a branch in Berkshire County, Massachusetts. On that date,
it had assets of approximately $108 million.
Under the terms of the Agreement, which was unanimously approved by the board of
directors, the shareholders of Canaan will be entitled to receive merger
considerations consisting of $31.20 in cash and 1.3371 shares of Salisbury
common stock for every share of Canaan Stock. The purchase price represented
174.5% of Canaan's fully diluted tangible book value and 21.4 times Canaan's
last twelve months earnings.
The merger is subject to approval by state and federal bank supervisory agencies
and the shareholders of Canaan. Salisbury anticipates that the transaction will
close in the third quarter of 2004.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. In the
opinion of management, these off-balance sheet arrangements are not likely to
have a material effect on the Company's financial condition, results of
operations, or liquidity. (See Note 11 to the Financial Statements).
FORWARD LOOKING STATEMENTS
This Annual Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and the Bank, may include forward-looking
statements relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
29
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization structure
providing for delegation of authority and establishment or responsibilities;
communication of requirements for compliance with approved accounting, control
and business practices throughout the organization; business planning and
review; and a program of internal audit. Management believes the internal
accounting controls in use provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and that financial records are reliable for the purpose of
preparing financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk. The Company's stock is traded on
the American Stock Exchange under the symbol "SAL". As a result, the value of
its common stock may fluctuate or respond to price movements relating to the
banking industry or other indicia of investment. 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
interest rate scenarios. The Company's interest rate risk and liquidity position
has not significantly changed from year end 2003. A discussion of credit risk
can be found in Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-K.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors' January 20, 2004.......................... F-1
Consolidated Balance Sheets at December 31, 2003 and 2002 ................ F-2
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001 ........................................ F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001 .................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 ........................................ F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2003, 2002 and 2001 ............................ F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet for the Years Ended December 31, 2003 and 2002 ............ F-23
Statement of Income for the Years Ended
December 31, 2003, 2002 and 2001 ........................................ F-24
Statement of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 ........................................ F-25
Quarterly Results of Operations (unaudited) .............................. F-26
31
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 20, 2004
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
ASSETS 2003 2002
------------ ------------
Cash and due from banks $ 7,687,979 $ 7,548,911
Interest bearing demand deposits with other banks 1,668,310 784,035
Money market mutual funds 500,512 536,982
Federal funds sold 2,272,000 1,750,000
------------ ------------
Cash and cash equivalents 12,128,801 10,619,928
Investments in available-for-sale securities (at fair value) 143,020,363 135,168,536
Investments in held-to-maturity securities (fair values of $234,394 as of
December 31, 2003 and $331,544 as of December 31, 2002) 229,425 321,287
Federal Home Loan Bank stock, at cost 3,771,000 2,945,200
Loans, less allowance for loan losses of $1,664,274 and $1,458,359 as of
December 31, 2003 and 2002, respectively 139,563,318 135,631,604
Loans held-for-sale 275,000
Investment in real estate 75,000 75,000
Premises and equipment 2,892,162 2,805,477
Other real estate owned 75,000
Goodwill 2,357,884 2,357,884
Core deposit intangible 731,961 800,316
Accrued interest receivable 1,875,948 1,933,616
Cash surrender value of life insurance policies 3,153,941 104,356
Other assets 1,025,466 268,578
------------ ------------
Total assets $311,100,269 $293,106,782
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 45,201,440 $ 38,929,897
Interest-bearing 173,256,010 172,107,507
------------ ------------
Total deposits 218,457,450 211,037,404
Federal Home Loan Bank advances 60,897,311 51,890,607
Other liabilities 2,895,296 2,833,825
------------ ------------
Total liabilities 282,250,057 265,761,836
------------ ------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,424,078 shares in 2003 and 1,423,238 shares in 2002 142,408 142,324
Paid-in capital 2,327,151 2,303,547
Retained earnings 25,694,836 23,164,693
Accumulated other comprehensive income 685,817 1,734,382
------------ ------------
Total stockholders' equity 28,850,212 27,344,946
------------ ------------
Total liabilities and stockholders' equity $311,100,269 $293,106,782
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 9,226,484 $ 9,677,332 $11,343,508
Interest on debt securities:
Taxable 3,874,819 4,143,851 4,204,364
Tax-exempt 2,086,134 1,995,114 977,487
Dividends on equity securities 423,889 219,245 203,806
Other interest 38,496 121,891 360,226
----------- ----------- -----------
Total interest and dividend income 15,649,822 16,157,433 17,089,391
----------- ----------- -----------
Interest expense:
Interest on deposits 2,866,495 4,039,427 5,301,623
Interest on Federal Home Loan Bank advances 2,746,975 2,858,310 2,999,174
----------- ----------- -----------
Total interest expense 5,613,470 6,897,737 8,300,797
----------- ----------- -----------
Net interest and dividend income 10,036,352 9,259,696 8,788,594
Provision for loan losses 312,500 300,000 150,000
----------- ----------- -----------
Net interest and dividend income after provision for
loan losses 9,723,852 8,959,696 8,638,594
----------- ----------- -----------
Other income:
Trust department income 1,252,000 1,100,160 1,070,017
Service charges on deposit accounts 560,291 472,201 472,120
Gain on sales of available-for-sale securities, net 1,058,140 634,080 130,117
Gain on sales of loans held-for-sale 262,088 227,244 183,618
Gain on sales of other real estate owned 52,151
Other income 799,429 688,128 531,265
----------- ----------- -----------
Total other income 3,984,099 3,121,813 2,387,137
----------- ----------- -----------
Other expense:
Salaries and employee benefits 4,833,913 4,235,122 3,833,838
Occupancy expense 359,458 306,486 246,549
Equipment expense 579,395 568,422 486,393
Data processing 575,441 533,405 494,856
Insurance 114,806 114,184 92,323
Printing and stationery 183,970 187,021 178,624
Legal expense 127,772 60,561 56,286
Amortization of core deposit intangible 68,355 68,354 19,936
Amortization of unidentifiable intangible assets from branch
acquisition 27,831
Other expense 1,756,789 1,701,389 1,318,218
----------- ----------- -----------
Total other expense 8,599,899 7,774,944 6,754,854
----------- ----------- -----------
Income before income taxes 5,108,052 4,306,565 4,270,877
Income taxes 1,267,950 1,107,770 1,369,674
----------- ----------- -----------
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
=========== =========== ===========
Earnings per common share $ 2.70 $ 2.25 $ 2.03
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Number
of
Shares Common Paid-in Retained
Issued Stock Capital Earnings
------------ ------------ ------------ ------------
Balance, December 31, 2000 1,458,366 $ 145,837 $ 2,968,894 $ 19,516,414
Comprehensive income:
Net income 2,901,203
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Repurchase of common stock, 36,008 shares
Transfer treasury stock to reduce shares
issued (36,008) (3,601) (687,479)
Dividends declared ($.84 per share) (1,199,462)
------------ ------------ ------------ ------------
Balance, December 31, 2001 1,422,358 142,236 2,281,415 21,218,155
Comprehensive income:
Net income 3,198,795
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Issuance of 880 shares for Directors' fees 880 88 22,132
Dividends declared ($.88 per share) (1,252,257)
------------ ------------ ------------ ------------
Balance, December 31, 2002 1,423,238 142,324 2,303,547 23,164,693
Comprehensive income:
Net income 3,840,102
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect
Comprehensive income
Issuance of 840 shares for Directors' fees 840 84 23,604
Dividends declared ($.92 per share) (1,309,959)
------------ ------------ ------------ ------------
Balance, December 31, 2003 1,424,078 $ 142,408 $ 2,327,151 $ 25,694,836
============ ============ ============ ============
Accumulated
Other
Treasury Comprehensive
Stock Income (Loss) Total
------------ ------------ ------------
Balance, December 31, 2000 $ $ (170,889) $ 22,460,256
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect (107,771)
Comprehensive income 2,793,432
Repurchase of common stock, 36,008 shares (691,080) (691,080)
Transfer treasury stock to reduce shares
issued 691,080
Dividends declared ($.84 per share) (1,199,462)
------------ ------------ ------------
Balance, December 31, 2001 (278,660) 23,363,146
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect 2,013,042
Comprehensive income 5,211,837
Issuance of 880 shares for Directors' fees 22,220
Dividends declared ($.88 per share) (1,252,257)
------------ ------------ ------------
Balance, December 31, 2002 1,734,382 27,344,946
Comprehensive income:
Net income
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect (1,048,565)
Comprehensive income 2,791,537
Issuance of 840 shares for Directors' fees 23,688
Dividends declared ($.92 per share) (1,309,959)
------------ ------------ ------------
Balance, December 31, 2003 $ $ 685,817 $ 28,850,212
============ ============ ============
Reclassification disclosure for the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Net unrealized (losses) gains on available-for-sale securities $ (370,016) $ 3,931,446 $ (46,411)
Reclassification adjustment for net realized gains in net income (1,058,140) (634,080) (130,117)
----------- ----------- -----------
Other comprehensive (loss) income before income tax effect (1,428,156) 3,297,366 (176,528)
Income tax benefit (expense) 556,267 (1,284,324) 68,757
----------- ----------- -----------
(871,889) 2,013,042 (107,771)
----------- ----------- -----------
Minimum pension liability adjustment (289,396)
Income tax benefit 112,720
----------- ----------- -----------
(176,676)
----------- ----------- -----------
Other comprehensive (loss) income, net of tax $(1,048,565) $ 2,013,042 $ (107,771)
=========== =========== ===========
Accumulated other comprehensive income (loss) consists of the following as of
December 31:
2003 2002 2001
---------- ---------- ----------
Net unrealized holding gains (losses) on available-for-sale securities, net of taxes $ 862,493 $1,734,382 $ (278,660)
Minimum pension liability adjustment, net of taxes (176,676)
---------- ---------- ----------
Accumulated other comprehensive income (loss) $ 685,817 $1,734,382 $ (278,660)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) of securities, net 395,030 454,034 (49,133)
Gain on sales of available-for-sale securities, net (1,058,140) (634,080) (130,117)
Gain on sales of other real estate owned (52,151)
Provision for loan losses 312,500 300,000 150,000
Change in loans held-for-sale (275,000)
Net increase in mortgage servicing rights (67,250)
Depreciation and amortization 335,672 378,204 345,544
Amortization of intangible assets from branch acquisition 27,831
Amortization of core deposit intangible 68,355 68,354 19,936
Accretion of fair value adjustment on deposits (11,450) (100,484) (136,287)
(Increase) decrease in interest receivable 57,668 (252,348) 108,960
Deferred tax expense (benefit) 137,341 14,647 (24,072)
(Increase) decrease in prepaid expenses (124,330) 94,379 (84,167)
Increase in cash surrender value of insurance
policies (49,585) (13,342) (16,811)
Increase in income tax receivable (154,792) (20,977) (43,254)
(Increase) decrease in other assets (205,831) (11,058) 2,717
Increase in accrued expenses 197,428 166,703 176,341
Decrease in interest payable (80,151) (30,825) (39,979)
Increase (decrease) in other liabilities 20,000 (1,026) (7,275)
Issuance of shares for Directors fees 23,688 22,220
------------- ------------- -------------
Net cash provided by operating activities 3,309,104 3,633,196 3,201,437
------------- ------------- -------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (825,800) (14,900)
Purchases of available-for-sale securities (89,014,647) (104,324,117) (88,096,807)
Proceeds from sales of available-for-sale securities 49,353,780 41,970,330 19,419,941
Proceeds from maturities of available-for-sale securities 31,044,359 28,715,141 48,212,964
Proceeds from maturities of held-to-maturity securities 91,497 70,445 10,032
Loan purchases (1,017,677) (2,800,000)
Loan originations and principal collections, net (4,157,060) 8,112,107 (2,128,114)
Recoveries of loans previously charged off 48,508 29,148 103,658
Other real estate owned - expenditures capitalized (8,511)
Capital expenditures (475,024) (393,809) (329,877)
Premiums paid on insurance policies (12,381) (12,381)
Purchase of life insurance policies (3,000,000)
Life insurance policy proceeds 192,443
------------- ------------- -------------
Net cash used in investing activities (16,942,898) (26,658,370) (25,635,484)
------------- ------------- -------------
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
(continued)
2003 2002 2001
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 9,642,776 6,479,009 18,060,288
Net (decrease) increase in time deposits (2,211,280) 3,307,391 (9,573,854)
Assumption of net deposits on branch acquisitions 22,897,443
Long term advances from Federal Home Loan Bank 20,000,000
Principal payments on advances from Federal Home Loan Bank (10,993,296) (1,113,139) (14,353,547)
Net changes in short term advances 20,000,000
Dividends paid (1,295,533) (1,237,840) (1,454,946)
Net repurchase of common stock (691,080)
------------ ------------ ------------
Net cash provided by financing activities 15,142,667 7,435,421 34,884,304
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,508,873 (15,589,753) 12,450,257
Cash and cash equivalents at beginning of year 10,619,928 26,209,681 13,759,424
------------ ------------ ------------
Cash and cash equivalents at end of year $ 12,128,801 $ 10,619,928 $ 26,209,681
============ ============ ============
Supplemental disclosures:
Interest paid $ 5,693,621 $ 7,029,046 $ 8,477,063
Income taxes paid 1,285,401 1,114,100 1,437,000
Transfer of allowance for loan losses to other liabilities 64,073
Loan granted to finance sale of other real estate owned 135,662
Loan transferred to other real estate owned 75,000
Branch office acquisition:
Deposits assumed $ 26,565,337
Loans acquired (121,423)
Fixed assets acquired (272,150)
------------
Net liabilities assumed 26,171,764
Cash received (22,897,443)
------------
Intangible assets $ 3,274,321
============
The accompanying notes are an integral part of these consolidated financial
statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
NOTE 1 - NATURE OF OPERATIONS
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank & Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp
and the Bank are referred to together as the (Company).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in residential and commercial real estate, consumer and small business
loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to accounting principles generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated financial
statements were prepared using the accrual basis of accounting. The significant
accounting policies are summarized below to assist the reader in better
understanding the consolidated financial statements and other data contained
herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiary, SBT Realty, Inc. SBT Realty, Inc. holds and manages bank owned
real estate situated in New York state. All significant intercompany
accounts and transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand deposits
with other banks, money market mutual funds and federal funds sold.
Cash and due from banks as of December 31, 2003 and December 31, 2002
includes $906,000 and $1,781,000, respectively, which is subject to
withdrawals and usage restrictions to satisfy the reserve requirements of
the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts so as to approximate the interest method. Gains
or losses on sales of investment securities are computed on a specific
identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This security
classification may be modified after acquisition only under certain
specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings or in a separate component
of capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings but are reported as a net
amount (less expected tax) in a separate component of capital
until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs are
deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line in the process
of foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 3 to 40 years for buildings and 2 to 25
years for furniture and equipment.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets and subsequent writedowns are included in
other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair value for its financial
instruments. Fair value methods and assumptions used by the Company in
estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are based
on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
STOCK BASED COMPENSATION:
The Company has a stock-based plan to compensate non-employee directors
for their services. This plan is more fully described in Note 14.
Compensation cost for these services is reflected in net income in an
amount equal to the fair value of the shares of company common stock
payable to the directors.
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. This
Statement did not have a material impact on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and
144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and FASB Interpretation
No. 9 "Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method" provided interpretive guidance on
the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions
from the scope of both Statement 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147
amends SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used. Paragraph 5 of SFAS No. 147, which relates
to the application of the purchase method of accounting, was effective for
acquisitions for which the date of acquisition was on or after October 1,
2002. The provisions in paragraph 6 related to accounting for the
impairment or disposal of certain long-term customer-relationship
intangible assets were effective on October 1, 2002. Transition provisions
for previously recognized unidentifiable intangible assets in paragraphs
8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has
reclassified, as of September 30, 2002 its recognized unidentifiable
intangible asset related to branch acquisition(s). This asset was
reclassified as goodwill (reclassified goodwill). The amount reclassified
was $2,357,884, the carrying amount as of January 1, 2002. The
reclassified goodwill is being accounted for and reported prospectively as
goodwill under SFAS No. 142, with no amortization expense. Accordingly,
the consolidated financial statements for the year ended December 31, 2002
do not reflect amortization in the amount of $95,429 that would have been
recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of
December 31, 2003. The Company determined that its reclassified goodwill
as of those dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30,
2002, the Company reclassified its core deposit intangible asset and
accounted for it as an asset apart from the unidentifiable intangible
asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 clarifies that a
guarantor is required to disclose (a) the nature of the guarantee; (b) the
maximum potential amount of future payments under the guarantee; (c) the
carrying amount of the liability; (d) the nature and extent of any
recourse provisions or available collateral that would enable the
guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December
15, 2002. The Company adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and
adopted the disclosure requirements effective as of December 31, 2002. The
adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"),
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement (a) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (b)
clarifies when a derivative contains a financing component, (c) amends the
definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
and (d) amends certain other existing pronouncements. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after
June 30, 2003. There was no substantial impact on the Company's
consolidated financial statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that
certain financial instruments that were previously classified as equity
must be classified as a liability. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This Statement did not have any
material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. In
December 2003, the FASB revised Interpretation No. 46, also referred to as
Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation
is not to restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest entities.
Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a
variable interest entity to be consolidated by a company only if that
company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The Company is required to apply FIN
46, as revised, to all entities subject to it no later than the end of the
first reporting period ending after March 15, 2004. However, prior to the
required application of FIN 46, as revised, the Company shall apply FIN 46
or FIN 46 (R) to those entities that are considered to be special-purpose
entities as of the end of the first fiscal year or interim period ending
after December 15, 2003. The adoption of this interpretation has not and
is not expected to have a material effect on the Company's consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132
(revised 2003)"). This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans required by SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which it replaces. It
requires additional disclosures to those in the original Statement 132
about assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal
years ending after December 15, 2003 and interim periods beginning after
December 15, 2003. Adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
NOTE 3 - INVESTMENTS IN SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2003:
Equity securities $ 3,031 $ 132,552 $ $ 135,583
U.S. government agencies preferred stock 8,074,043 (463,628) 7,610,415
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 51,886,017 329,421 (235,866) 51,979,572
Debt securities issued by states of the
United States and political subdivisions
of the states 44,609,900 1,521,298 (143,363) 45,987,835
Money market mutual funds 500,512 500,512
Mortgage-backed securities 37,034,607 372,971 (100,620) 37,306,958
------------- ------------- ------------- -------------
142,108,110 2,356,242 (943,477) 143,520,875
Money market mutual funds included in
cash and cash equivalents (500,512) (500,512)
------------- ------------- ------------- -------------
$ 141,607,598 $ 2,356,242 $ (943,477) $ 143,020,363
============= ============= ============= =============
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
December 31, 2002:
Equity securities $ 3,031 $ 86,154 $ $ 89,185
U.S. government agencies preferred stock 4,047,250 131,930 4,179,180
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 41,294,731 383,557 (43,163) 41,635,125
Debt securities issued by states of the
United States and political subdivisions
of the states 41,564,707 1,234,464 (6,855) 42,792,316
Money market mutual funds 536,982 536,982
Mortgage-backed securities 45,417,896 1,091,525 (36,691) 46,472,730
------------- ------------- ------------- -------------
132,864,597 2,927,630 (86,709) 135,705,518
Money market mutual funds included in
cash and cash equivalents (536,982) (536,982)
------------- ------------- ------------- -------------
$ 132,327,615 $ 2,927,630 $ (86,709) $ 135,168,536
============= ============= ============= =============
Gross Gross
Amortized Unrecognized Unrecognized
Cost Holding Holding Fair
Basis Gains Loss Value
--------- ------------ ------------ --------
Held-to-maturity securities:
December 31, 2003:
Mortgage-backed securities $229,425 $ 4,969 $ $234,394
======== ======== ======== ========
December 31, 2002:
Mortgage-backed securities $321,287 $ 10,257 $ $331,544
======== ======== ======== ========
The scheduled maturities of debt securities were as follows as of December 31,
2003:
Available-For-Sale Held-To-Maturity
------------------ --------------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ --------- ---------
Due after one year through five years $ 240,648 $ $
Due after five years through ten years 7,305,085
Due after ten years 98,032,089
Mortgage-backed securities 37,306,958 229,425 234,394
------------ --------- ---------
$142,884,780 $ 229,425 $ 234,394
============ ========= =========
During 2003, proceeds from sales of available-for-sale securities amounted to
$49,353,780. Gross realized gains and gross realized losses on those sales
amounted to $1,136,732 and $78,592, respectively. During 2002, proceeds from
sales of available-for-sale securities amounted to $41,970,330. Gross realized
gains and gross realized losses on those sales amounted to $634,705 and $625,
respectively. During 2001, proceeds from sales of available-for-sale securities
amounted to $19,419,941. Gross realized gains on those sales amounted to
$130,117. The tax provision applicable to these net realized gains amounted to
$412,146, $246,974 and $50,681, respectively.
The amortized cost basis and fair market value of securities of issuers which
exceeded 10% of equity were as follows as of December 31, 2003:
Amortized
Cost Fair
Basis Value
---------- ----------
Federal Home Loan Mortgage Corporation Preferred Stock $6,074,043 $5,772,347
========== ==========
Total carrying amounts of $2,586,127 and $4,629,082 of debt securities were
pledged to secure public deposits, treasury tax and loan and for other purposes
as required by law as of December 31, 2003 and 2002, respectively.
Debt and equity securities as of December 31, 2003 where the fair value is below
the book value are as follows:
Less than 12 Months 12 Months or Longer Total
-------------------------- ------------------------ --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ---------- ---------- ----------- -----------
Description of securities:
U.S. government agencies preferred
stock $ 7,610,415 $ 463,628 $ $ $ 7,610,415 $ 463,628
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 11,153,693 235,866 11,153,693 235,866
Debt securities issued by states of the
United States and political
subdivisions of the states 7,127,832 143,363 7,127,832 143,363
Mortgage-backed securities 12,208,853 87,493 875,856 13,127 13,084,709 100,620
----------- ----------- ---------- ---------- ----------- -----------
Total temporarily impaired
securities $38,100,793 $ 930,350 $ 875,856 $ 13,127 $38,976,649 $ 943,477
=========== =========== ========== ========== =========== ===========
The securities that have been in an unrealized loss position for over twelve
consecutive months are adjustable rate mortgage securities guaranteed by the
Government National Mortgage Association and the Federal Home Loan Mortgage
Corporation. The decline is due to rapid prepayments on the underlying
collateral and a low interest rate environment. Since there has been no credit
deterioration and the market price decline is due to the current interest rate
environment, management deems the securities are not other than temporarily
impaired. The securities that have been in an unrealized loss position for less
than twelve months consist of debt and equity securities issued by the U.S.
treasury, U.S. government corporations and agencies, and states of the United
States and political subdivisions of the states. The unrealized losses in these
securities are attributable to changes in market interest rates. Company
management does not intend to sell any of the securities in the near term, and
due to the relative short duration of the securities, anticipates that the
unrealized losses that currently exist will be dramatically reduced going
forward.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
2003 2002
------------- -------------
Commercial, financial and agricultural $ 9,148,870 $ 10,126,812
Real estate - construction and land development 15,306,946 6,027,041
Real estate - residential 90,806,942 93,635,616
Real estate - commercial 19,199,687 18,002,442
Consumer 6,691,762 9,007,417
Other 73,385 290,635
------------- -------------
141,227,592 137,089,963
Allowance for loan losses (1,664,274) (1,458,359)
------------- -------------
Net loans $ 139,563,318 $ 135,631,604
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2003.
Total loans to such persons and their companies amounted to $852,341 as of
December 31, 2003. During 2003 advances of $168,303 were made and repayments
totaled $350,318.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2003 2002 2001
----------- ----------- -----------
Balance at beginning of period $ 1,458,359 $ 1,444,504 $ 1,291,502
Provision for loan losses 312,500 300,000 150,000
Recoveries of loans previously charged off 48,508 29,148 103,658
Loans charged off (155,093) (251,220) (100,656)
Transfer to liability account for estimated losses
on loan commitments (64,073)
----------- ----------- -----------
Balance at end of period $ 1,664,274 $ 1,458,359 $ 1,444,504
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2003 2002
---- ----
(in thousands)
Total nonaccrual loans $ 75 $855
==== ====
Accruing loans which are 90 days or more overdue $535 $124
==== ====
Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:
2003 2002
------------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
Loans for which there is a related allowance for credit losses $ 0 $ 0 $511,063 $81,899
Loans for which there is no related allowance for credit losses
-------- ------- -------- -------
Totals $ 0 $ 0 $511,063 $81,899
======== ======= ======== =======
Average recorded investment in impaired loans during the
year ended December 31 $353,758 $397,162
======== ========
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 43,762 $ 18,156
======== ========
Amount recognized using a cash-basis method of
accounting $ 43,762 $ 930
======== ========
In 2003 the Company capitalized mortgage servicing rights totaling $69,844 and
amortized $1,924. The balance of capitalized mortgage servicing rights included
in other assets at December 31, 2003 was $67,250. Prior to 2003, the Company did
not sell loans with servicing retained and, therefore, did not record any
mortgage servicing rights.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the year ended December 31, 2003.
Balance, beginning of year $ 0
Additions 670
Reductions 0
Direct write-downs 0
----
Balance, end of year $670
====
The fair value of the mortgage servicing rights was $74,512 as of December 31,
2003.
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage and other loans
serviced for others was $6,753,826 and $0 at December 31, 2003 and 2002,
respectively.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2003 2002
----------- -----------
Land $ 350,644 $ 350,644
Buildings 2,766,168 2,681,394
Furniture and equipment 1,888,716 1,781,712
----------- -----------
5,005,528 4,813,750
Accumulated depreciation and amortization (2,113,366) (2,008,273)
----------- -----------
$ 2,892,162 $ 2,805,477
=========== ===========
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2003 and 2002 was $23,588,591 and $23,047,271,
respectively.
For time deposits as of December 31, 2003, the scheduled maturities for years
ended December 31 are:
2004 $40,657,829
2005 11,127,709
2006 7,988,668
2007 3,748,711
2008 3,779,089
---------
$67,302,006
===========
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2003. Total deposits to such persons and their companies amounted to $610,337 as
of December 31, 2003 and $745,840 as of December 31, 2002.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2003 and thereafter are summarized as follows:
AMOUNT
-----------
2004 $20,766,823
2005 263,339
2006 188,605
2007 200,582
2008 99,200
Thereafter 39,378,762
-----------
$60,897,311
===========
An advance of $19,000,000 is redeemable on January 26, 2004 and quarterly
thereafter, an advance of $10,000,000 is redeemable on February 26, 2004 and
quarterly thereafter and an advance of $10,000,000 is redeemable on March 15,
2004 and quarterly thereafter.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2003, the interest rates on FHLB advances ranged from 1.15
percent to 6.45 percent. At December 31, 2003, the weighted average interest
rate on FHLB advances was 4.06 percent.
NOTE 8 - EMPLOYEE BENEFITS
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
The following tables set forth information about the plan as of December 31 and
the years then ended:
2003 2002
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,019,027 $ 2,345,618
Actuarial loss 489,531 67,008
Service cost 188,104 124,322
Interest cost 148,033 189,459
Benefits paid (82,680) (707,380)
----------- -----------
Benefit obligation at end of year 2,762,015 2,019,027
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,396,711 2,171,193
Actual return on plan assets 205,463 (244,376)
Contributions 268,069 177,274
Benefits paid (82,680) (707,380)
----------- -----------
Fair value of plan assets at end of year 1,787,563 1,396,711
----------- -----------
Funded status (974,452) (622,316)
Unrecognized net loss from actuarial experience 560,356 177,951
Unrecognized prior service cost 93,653 94,544
Unamortized net asset existing at date of adoption of
SFAS No. 87 58,364 58,364
----------- -----------
Accrued benefit cost included in other liabilities $ (262,079) $ (291,457)
=========== ===========
Amounts recognized in the balance sheet as of December 31, 2003 consist of:
Accrued benefit cost $ (262,079)
Accrued benefit liability (441,413)
Intangible asset 152,017
Accumulated other comprehensive loss 289,396
-----------
Net amount recognized $ (262,079)
===========
The accumulated benefit obligation for the Company's defined benefit pension
plan was $2,491,054 and $1,590,800 at December 31, 2003 and 2002, respectively.
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.0% and 6.0% and 8.0% and 6.0% for 2003 and 2002, respectively. The expected
long-term rate of return on assets was 7.25% and 8.0% for 2003 and 2002.
The overall expected long-term rate of return on assets is primarily determined
by historical performance and evaluation of current economic and market
conditions.
Components of net periodic cost:
2003 2002 2001
--------- --------- ---------
Service cost $ 188,104 $ 124,322 $ 141,721
Interest cost on benefit obligation 148,033 189,459 168,343
Expected return on assets (107,010) (176,526) (180,290)
Amortization of prior service cost 9,564 9,564 9,564
--------- --------- ---------
Net periodic cost $ 238,691 $ 146,819 $ 139,338
========= ========= =========
Plan Assets
The Company's pension plan asset allocations by asset category are as follows:
December 31 2003 December 31, 2002
----------------------- -----------------------
Fair Value Percent Fair Value Percent
---------- ------- ---------- -------
Asset Category
- ----------------------------------------------
Equity securities $1,082,595 60.6% $ 777,979 55.7%
U.S. Government treasury and agency securities 596,662 33.4 503,845 36.1
Corporate bonds 24,015 1.3
Money market mutual funds 84,291 4.7 114,887 8.2
---------- ----- ---------- -----
Total $1,787,563 100.0% $1,396,711 100.0%
========== ===== ========== =====
The pension plan investments are managed by the Trust Department of the Bank.
The investments in the plan are reviewed and approved by the Trust Committee.
The asset allocation of the plan is a balanced allocation. Debt securities are
timed to mature when employees are due to retire. Debt securities are laddered
for coupon and maturity. Equities are put in the plan to achieve the balanced
allocation and to provide growth of the principal portion of the plan and to
provide diversification. The Trust Committee reviews the policies of the plan.
The prudent investor rule and applicable ERISA regulations are applied to the
management of the funds and investment selections.
The Company adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute up to fifteen percent of their pay. The Company may
make discretionary contributions to the Plan. The Company's contribution in the
years ended December 31, 2003, 2002 and 2001 amounted to approximately $46,000,
$53,000 and $48,000, respectively. Discretionary contributions vest in full
after five years.
Eleven of the Company's executives have a change in control agreement
("agreement") with the Company. The agreements provide that if following a
"change-in-control" of the Company or Bank, an Executive Officer is terminated
under certain defined circumstances, or is reassigned, within a period of twelve
(12) months following the change in control, such Executive Officer will be
entitled to a lump sum payment equal to six or 12 months of his or her
compensation based upon the most recent aggregate base salary paid to the
Executive Officer in the twelve (12) month period immediately preceding the date
of change in control.
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
2003 2002 2001
----------- ----------- -----------
Current:
Federal $ 708,089 $ 790,590 $ 1,073,942
State 422,520 302,533 319,804
----------- ----------- -----------
1,130,609 1,093,123 1,393,746
----------- ----------- -----------
Deferred:
Federal 126,996 4,143 (19,437)
State 10,345 10,504 (4,635)
----------- ----------- -----------
137,341 14,647 (24,072)
----------- ----------- -----------
Total income tax expense $ 1,267,950 $ 1,107,770 $ 1,369,674
=========== =========== ===========
The reasons for the difference between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
2003 2002 2001
---- ---- ----
% of % of % of
Income Income Income
------ ------ ------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (15.8) (16.8) (7.8)
Other items 1.0 3.5 1.0
State tax, net of federal tax benefit 5.6 5.0 4.9
---- ---- ----
Effective tax rates 24.8% 25.7% 32.1%
==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2003 2002
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 482,312 $ 396,543
Interest on non-performing loans 2,426 20,197
Accrued deferred compensation 18,724 18,721
Post retirement benefits 31,939 24,149
Other real estate owned property writedown 25,317 25,317
Deferred organization costs 1,000
Accrued pensions 102,080 113,523
Minimum pension liability 112,720
Alternative minimum tax 65,433
----------- -----------
Gross deferred tax assets 775,518 664,883
----------- -----------
Deferred tax liabilities:
Core deposit intangible asset (208,252) (151,839)
Accelerated depreciation (400,660) (337,585)
Discount accretion (9,383) (19,809)
Mortgage servicing rights (26,194)
Net unrealized holding gain on available-for-sale securities (550,272) (1,106,539)
----------- -----------
Gross deferred tax liabilities (1,194,761) (1,615,772)
----------- -----------
Net deferred tax liabilities $ (419,243) $ (950,889)
=========== ===========
Deferred tax assets as of December 31, 2003 and 2002 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 2003, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company entered into an agreement with a third party in which the third
party is to provide the Company with account processing services and other
miscellaneous services. Under the agreement, the Company is obligated to pay
monthly processing fees through January 31, 2006 and the Company may cancel the
agreement at any time, provided the Company pays a termination fee based on the
remaining unused term of the agreement. The amount of the termination fee is to
be determined by multiplying the average monthly invoice during the prior twelve
months by 65% times the remaining months under the agreement.
NOTE 11 - FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2003 and 2002, the
maximum potential amount of the Company's obligation was $20,000 and $20,000,
respectively, for financial and standby letters of credit. The Company's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Company may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Company may take possession of the collateral, if any, securing
the line of credit.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
2003 2002
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 12,128,801 $ 12,128,801 $ 10,619,928 $ 10,619,928
Available-for-sale securities 143,020,363 143,020,363 135,168,536 135,168,536
Held-to-maturity securities 229,425 234,394 321,287 331,544
Federal Home Loan Bank stock 3,771,000 3,771,000 2,945,200 2,945,200
Loans, net 139,563,318 140,419,000 135,631,604 137,453,000
Loans held-for-sale 275,000 278,719
Accrued interest receivable 1,875,948 1,875,948 1,933,616 1,933,616
Financial liabilities:
Deposits 218,457,450 219,891,000 211,037,404 212,283,000
FHLB advances 60,897,311 61,245,695 51,890,607 53,173,000
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2003 2002
----------- -----------
Commitments to originate loans $ 2,337,315 $10,421,946
Standby letters of credit 20,000 20,000
Unadvanced portions of loans:
Home equity 10,374,759 8,893,908
Commercial lines of credit 6,935,664 6,383,820
Construction 3,349,345 1,754,774
Consumer 5,986,321 5,737,646
----------- -----------
$29,003,404 $33,212,094
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in northwestern
Connecticut and bordering New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are also presented
in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------------------ -------------------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(Dollar amounts in thousands)
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $26,308 16.44% $12,803 >/= 8.0% N/A
Salisbury Bank & Trust Company 25,882 16.19 12,788 >/= 8.0 $15,986 >/= 0.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 24,566 15.35 6,402 >/= 4.0 N/A
Salisbury Bank & Trust Company 24,140 15.10 6,394 >/= 4.0 9,591 >/= 6.0
Tier 1 Capital (to Average Assets)
Consolidated 24,566 8.05 12,203 >/= 4.0 N/A
Salisbury Bank & Trust Company 24,140 7.92 12,188 >/= 4.0 15,235 >/= 5.0
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated 24,073 17.21 11,199 >/= 8.0 N/A
Salisbury Bank & Trust Company 23,838 17.06 11,194 >/= 8.0 13,992 >/= 0.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 22,453 16.05 5,600 >/= 4.0 N/A
Salisbury Bank & Trust Company 22,218 15.90 5,597 >/= 4.0 8,395 >/= 6.0
Tier 1 Capital (to Average Assets)
Consolidated 22,453 7.80 11,513 >/= 4.0 N/A
Salisbury Bank & Trust Company 22,218 7.73 11,497 >/= 4.0 14,371 >/= 5.0
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 2003 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $11,952,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
At the 2001 annual meeting the stockholders of the Company voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan
provides non-employee directors of the Company with shares of restricted stock
of the Company as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the plan is
15,000. The first grant date under this plan preceded the 2002 annual meeting of
stockholders. Each director whose term of office begins with or continues after
the date the Plan was approved by the stockholders is issued an "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock of
the Company. In 2003 and 2002, 840 and 880 shares, respectively, were issued
under the Plan and the related compensation expense amounted to $23,688 and
$22,220, respectively.
NOTE 15 - ACQUISITION
On November 17, 2003, the Company executed a definitive agreement (the
"Agreement") to acquire Canaan National Bancorp, Inc., with the Company being
the surviving corporation.
Under the terms of the Agreement, which was unanimously approved by the Board of
Directors, the shareholders of the Canaan National Bancorp, Inc. will be
entitled to receive merger consideration consisting of $31.20 in cash and 1.3371
shares of Company common stock for every share of Canaan National Bancorp, Inc.
stock, subject to possible adjustment.
The merger is subject to approval by state and federal bank supervisory agencies
and the Canaan National Bancorp, Inc.'s shareholders.
NOTE 16 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
SALISBURY BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 2003 and 2002
ASSETS 2003 2002
----------- -----------
Checking account in Salisbury Bank & Trust Company $ 391 $ 185
Money market mutual funds 500,512 536,982
Investment in subsidiary 28,424,203 27,110,438
Due from subsidiary 33,000 9,453
Other assets 219,644 1,000
----------- -----------
Total assets $29,177,750 $27,658,058
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 327,538 $ 313,112
----------- -----------
Total liabilities 327,538 313,112
Total stockholders' equity 28,850,212 27,344,946
----------- -----------
Total liabilities and stockholders' equity $29,177,750 $27,658,058
=========== ===========
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Dividend income from subsidiary $ 1,540,000 $ 1,300,000 $ 1,740,000
Taxable interest on securities 2,873 5,616 14,442
----------- ----------- -----------
1,542,873 1,305,616 1,754,442
----------- ----------- -----------
Legal expense 26,823 6,909 8,596
Supplies and printing 6,873 4,407 6,211
Other expense 63,405 18,591 13,297
----------- ----------- -----------
97,101 29,907 28,104
----------- ----------- -----------
Income before income tax (benefit) expense
and equity in undistributed net income of subsidiary 1,445,772 1,275,709 1,726,338
Income tax (benefit) expense (32,000) (8,260) (4,645)
----------- ----------- -----------
Income before equity in undistributed net income of subsidiary 1,477,772 1,283,969 1,730,983
Equity in undistributed net income of subsidiary 2,362,330 1,914,826 1,170,220
----------- ----------- -----------
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
=========== =========== ===========
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary (2,362,330) (1,914,826) (1,170,220)
Deferred tax expense 1,000 1,193 1,193
Increase in due from subsidiary (23,547) (3,615) (6,222)
Increase in other assets (219,644)
Issuance of shares for Director's fees 23,688 22,220
----------- ----------- -----------
Net cash provided by operating activities 1,259,269 1,303,767 1,725,954
----------- ----------- -----------
Cash flows from investing activities:
Maturities of available-for-sale securities 230,000
----------- ----------- -----------
Net cash provided by investing activities 230,000
----------- ----------- -----------
Cash flows from financing activities:
Net repurchase of common stock (691,080)
Dividends paid (1,295,533) (1,237,840) (1,454,946)
----------- ----------- -----------
Net cash used in financing activities (1,295,533) (1,237,840) (2,146,026)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (36,264) 65,927 (190,072)
Cash and cash equivalents at beginning of year 537,167 471,240 661,312
----------- ----------- -----------
Cash and cash equivalents at end of year $ 500,903 $ 537,167 $ 471,240
=========== =========== ===========
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2003 and 2002 follows:
(In thousands, except earnings per share)
2003 Quarters Ended
-------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $4,050 $3,955 $3,849 $3,796
Interest expense 1,526 1,461 1,316 1,310
------ ------ ------ ------
Net interest and dividend income 2,524 2,494 2,533 2,486
Provision for loan losses 37 38 38 200
Other income 982 880 955 1,167
Other expense 2,042 1,958 2,074 2,526
------ ------ ------ ------
Income before income taxes 1,427 1,378 1,376 927
Income tax expense 398 377 361 132
------ ------ ------ ------
Net income $1,029 $1,001 $1,015 $ 795
====== ====== ====== ======
Basic earnings per common share $ .72 $ .70 $ .71 $ .57
====== ====== ====== ======
(In thousands, except earnings per share)
2002 Quarters Ended
-------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $4,061 $4,063 $4,048 $3,985
Interest expense 1,798 1,763 1,727 1,609
------ ------ ------ ------
Net interest and dividend income 2,263 2,300 2,321 2,376
Provision for loan losses 37 38 37 188
Other income 564 782 902 874
Other expense 1,815 1,984 1,880 2,096
------ ------ ------ ------
Income before income taxes 975 1,060 1,306 966
Income tax expense 253 310 328 217
------ ------ ------ ------
Net income $ 722 $ 750 $ 978 $ 749
====== ====== ====== ======
Basic earnings per common share $ .51 $ .53 $ .69 $ .52
====== ====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two (2) most recent fiscal years, the Company and the Bank have had
no changes in or disagreements with its independent accountants on accounting
and financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES
Based upon an evaluation as of December 31, 2003, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. During the year
ended December 31, 2003, there were no significant changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
The following table sets forth the name and age of each Executive Officer, his
principal occupation for the last five (5) years and the year in which he was
first appointed an Executive Officer of the Company.
Executive Officer
Name Age Position of the Company since:
---- --- -------- ---------------------
John F. Perotti 57 President and 1998 (1)
Chief Executive Officer
Richard J. Cantele, Jr. 44 Secretary 2001 (2)
John F. Foley 53 Chief Financial Officer 1998 (3)
(1) Mr. Perotti is also the President and Chief Executive Officer of the Bank
and has been an Executive Officer of the Bank since 1982.
(2) Mr. Cantele is also the Executive Vice President, Treasurer and Chief
Operating Officer of the Bank and has been an Executive Officer of the
Bank since 1989.
(3) Mr. Foley is also the Senior Vice President, Comptroller and Principal
Financial Officer of the Bank and has been an Executive Officer of the
Bank since 1986.
Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide for a Board
of Directors of not less than seven (7) members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors has set the
number of directorships at eight (8). The Board of Directors of the Company is
divided into three (3) classes as nearly equal in number as possible. Classes of
directors serve for staggered three (3) year terms. A successor class is to be
elected at each annual meeting of shareholders when the terms of office of the
members of one class expire. Vacant directorships may be filled, until the
expiration of the term of the vacated directorship, by the vote of a majority of
the directors then in office.
32
The following table sets forth certain information, as of March 5, 2004, with
respect to the directors of the Company.
NOMINEES FOR ELECTION AT THE 2004 ANNUAL MEETING TO BE HELD ON APRIL 28, 2004
Positions Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- ----- --------
John F. Perotti 57 President, 1998 2004
Chief Executive Officer
and Director
Michael A. Varet 61 Director 1998 2004
CONTINUING DIRECTORS
John R. H. Blum 74 Chairman 1998 2005
Louise F. Brown 60 Director 1998 2005
Nancy F. Humphreys 62 Director 2001 2005
Gordon C. Johnson, DVM 69 Director 1998 2006
Holly J. Nelson 50 Director 1998 2006
Walter C. Shannon, Jr. 68 Director 1998 2006
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the position described
for at least five (5) years.
John R. H. Blum is an attorney in private practice and former Commissioner of
Agriculture for the State of Connecticut. He has been a director of the Bank
since 1995 and was elected Chairman of the Board of Directors of the Company and
the Bank in 1998.
Louise F. Brown has been a director of the Bank since 1992 and is a partner in
the law firm of Ackerly Brown, LLP.
Nancy F. Humphreys has been a director of the Bank since 2001. She retired from
Citigroup New York, Citibank in February of 2000, as Managing Director and
Treasurer of Global Corporate Investment Bank North America.
Gordon C. Johnson has been a director of the Bank since 1994 and is a Doctor of
Veterinary Medicine.
Holly J. Nelson has been a director of the Bank since 1995. She is a member of
Horses North, LLC, a tour operator, and is a member in Oblong Property
Management, LLC.
John F. Perotti is President and Chief Executive Officer of the Company and the
Bank. Prior to that he served as Executive Vice President and Chief Operating
Officer of the Bank and prior to that, he was Vice President and Treasurer of
the Bank. He has been a director of the Bank since 1985.
Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and
President of William J. Cole Agency, Inc. He has been a director of the Bank
since 1993.
Michael A. Varet is a partner in the law firm of Piper Rudnick LLP. Mr. Varet
has been a director of the Bank since 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent (10%) of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of ownership and changes in ownership of
the Company's Common Stock. Executive officers, directors and any shareholders
owning greater than ten percent (10%) of the Company's Common Stock are required
by the SEC's regulations to furnish the Company with copies of all such reports
that they file.
33
Based solely on a review of copies of reports filed with the SEC since January
1, 2003 and of written representations by certain executive officers and
directors, all persons subject to the reporting requirements of Section 16(a)
are believed by management to have filed the required reports on a timely basis.
Code of Ethics
The Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer and Chief Financial Officer. A copy of such Code of Ethics is
available upon request to any person, without charge, by writing to John F.
Foley, Chief Financial Officer, Salisbury Bancorp, Inc., 5 Bissell Street, P. O.
Box 1868, Lakeville, CT 06039.
The Company has a separately standing Audit Committee which is comprised of the
following independent Directors: Louise F. Brown, Nancy F. Humphreys, Gordon C.
Johnson, DVM, Holly J. Nelson and Michael A. Varet. While no member of the Audit
Committee qualifies as an "audit committee financial expert" as such term is
defined by federal securities laws and regulations, the Board of Directors
believes the members of the Audit Committee bring a range of education, business
and professional experience that is beneficial to the Audit Committee function
of the Company and the Bank and is sufficient to enable the Audit Committee to
fulfill its responsibility.
ITEM 11. EXECUTIVE COMPENSATION
Fees
During 2003, each director received an annual retainer of $3,000. In addition,
directors received $500 for each Board of Directors meeting attended and $250
for each committee meeting attended. Director Perotti received no additional
compensation for his service as director or member of any board committee during
2003. During 2001, the Board of Directors and Shareholders approved a Directors
Stock Retainer Plan which, beginning in 2002, provides each non-employee
director with up to 120 shares of restricted common stock as a component of
their compensation. The Plan is described in more detail on page 13 of the
Proxy.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company and the Bank for services rendered
in all capacities during the fiscal years ended December 31, 2003, 2002, and
2001. No other current executive officer of the Company or the Bank received
cash compensation in excess of $100,000 during the year ended December 31, 2003.
All compensation expense was paid by the Bank.
Summary Compensation Table
Annual Compensation
Name and Principal All Other
Position Year Salary($) Bonus($) Compensation($)
John F. Perotti 2003 $195,178 $28,101 $4,000(4)
President and Chief Executive 2002 187,816 32,092 4,000(3)
Officer of the Company 2001 179,920 25,949 3,400(2)
and the Bank
Richard J. Cantele, Jr 2003 $124,237 $18,857 $2,862(4)
Secretary of the Company 2002 109,434 18,332 2,553(3)
Executive Vice President, Treasurer 2001 93,652 17,063 2,145(2)
and Chief Operating Officer of the Bank
Todd M. Clinton 2003 $ 89,604 $14,601 $2,084(4)
Sr. Vice President, Compliance 2002 84,762 17,392 2,041(3)
& Operations Officer of the Bank 2001 73,150 12,379 1,713(2)
Diane E. R. Johnstone 2003 $119,734 $16,412 $2,723(4)
Sr. Vice President & Trust Officer 2002 109,321 16,690 2,522(3)
of the Bank 2001 81,530 9,900 1,832(2)
William C. Lambert (5) 2003 $115,333 $14,521 $2,597(4)
Vice President & Trust Officer 2002 110,522 2,200(3)
of the Bank 2001 29,159
(1) Compensation above does not include accrual of benefits under the Bank"s
defined pension plan or supplemental retirement
34
arrangements described below.
(2) The Bank's matching contribution to the 401(k) plan for 2001.
(3) The Bank's matching contribution to the 401(k) plan for 2002.
(4) The Bank's matching contribution to the 401(k) plan for 2003.
(5) William C. Lambert was hired on September 17, 2001.
Insurance
In addition to the cash compensation paid to the executive officers of the
Company and the Bank, the executive officers receive group life, health,
hospitalization and medical insurance coverage. However, these plans do not
discriminate in scope, term, or operation, in favor of officers or directors of
the Company and the Bank and are available generally to all full-time employees.
Pension Plan
The Bank maintains a non-contributory defined pension plan for officers and
other salaried employees of the Bank who become participants after attaining age
21 and completing one (1) year of service.
PENSION PLAN TABLE
================================================================================
ESTIMATED ANNUAL RETIREMENT BENEFIT WITH
YEARS OF SERVICE AT RETIREMENT
================================================================================
Average Base
Salary at
Retirement 15 20 25 30 35
- --------------------------------------------------------------------------------
$ 75,000 $18,654 $24,871 $31,089 $32,964 $ 34,839
- --------------------------------------------------------------------------------
$100,000 $26,154 $34,871 $43,589 $46,089 $ 48,589
- --------------------------------------------------------------------------------
$125,000 $33,654 $44,871 $56,089 $59,214 $ 62,339
- --------------------------------------------------------------------------------
$150,000 $41,154 $54,871 $68,589 $72,339 $ 76,089
- --------------------------------------------------------------------------------
$175,000 $48,654 $64,871 $81,089 $85,464 $ 89,839
- --------------------------------------------------------------------------------
$200,000 $56,154 $74,871 $93,589 $98,589 $103,589
- --------------------------------------------------------------------------------
Pension benefits are based upon average salary (determined as of each January
1st) during the highest five (5) consecutive years of services prior to
attaining normal retirement age. The amount of the annual benefit is 2% of
Average Salary offset by .65% of Social Security wage base as provided under the
1994 Act per year of service (to a maximum of 25 years) plus one-half of 1% of
Average Salary for each year of service over 25 years (to a maximum of ten
years). This benefit formula may be modified to conform with changes in the
pension laws.
The present average salary (using last five years of salary only) and years of
service to date of Messrs. Perotti, Cantele, Clinton and Ms. Johnstone are: Mr.
Perotti: $198,564 with; 31 years of service; Mr. Cantele: $114,308 with; 22
years of service; Mr. Clinton: $90,366 with; 17 years of service; and Ms.
Johnstone: $101,191 with; 16 years of service. The above table shows estimated
annual retirement benefits payable at normal retirement date as a straight life
annuity for various average salary and service categories. The offset of social
security was included in the table based on a participant being 65 years of age
in 2003.
Supplemental Retirement Arrangement
In 1994, the Bank entered into a supplemental retirement arrangement (the
"Supplemental Retirement Agreement") with John F. Perotti. Following disability
or retirement at the earlier of the age of 65, or after thirty (30) years of
service to the Bank, Mr. Perotti will receive monthly payments of $1,250
(adjusted annually to reflect the lesser of a five percent (5%) increase or "The
Monthly Consumer Price Index for All Urban Consumers, United States City
Average, All Items" published by the Bureau of Labor Statistics) for a period of
ten (10) years. These payments are in addition to any payments under the Bank's
retirement plan. The Supplemental Retirement Agreement includes provisions which
would prevent Mr. Perotti from working for a competitor in the proximity of the
Bank.
35
Directors Stock Retainer Plan
The shareholders of the Company voted to approve the "Directors Stock Retainer
Plan of Salisbury Bancorp, Inc." (the "Plan") at the 2001 Annual Meeting of
Shareholders. The Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their compensation
for services as non-employee directors. The maximum number of shares of stock
that may be issued pursuant to the Plan shall not exceed 15,000. The first grant
date under the plan was April 26, 2002. The "annual stock retainer" consisted of
120 shares of restricted common stock for each non-employee director who served
for twelve months and a prorated number of shares to reflect the number of
months served for any new non-employee director. The total number of restricted
shares issued was 840. The next grant date under this plan will immediately
precede the 2004 Annual Meeting of Shareholders.
Change in Control Agreements
The Bank entered into change in control agreements in 2003 with the
following Officers of the Bank: John F. Perotti, Richard J. Cantele, Jr., John
F. Foley, Todd M. Clinton, Diane E. R. Johnstone, Joseph C. Law, Lana M. Hobby,
William C. Lambert, Sharon A. Pilz and Geoffrey A. Talcott. The agreements
provide that if following a "change-in-control" of the Company or Bank, an
Officer is terminated under certain defined circumstances, or is reassigned,
within a period of twelve (12) months following the change in control, such
Officer will be entitled to a lump sum payment equal to his or her twelve (12)
month compensation based upon the most recent aggregate base salary paid to the
Officer in the twelve (12) month period immediately preceding the date of change
in control. In addition, the Bank entered into a change in control agreement in
2003 with Elizabeth Summerville, who recently joined the Bank, which provides
that if following a "change in control" of the Company or Bank, the Officer is
terminated under certain defined circumstances, or is reassigned, within a
period of twelve (12) months following the change in control, such Officer will
be entitled to a lump sum payment equal to her six (6) month compensation based
upon the most recent aggregate base salary paid to the Officer in the twelve
(12) month period immediately preceding the date of the change in control. In no
event shall such payments be made in an amount which would cause them to be
deemed non-deductible to the Bank by reason of the operation of Section 280G of
the Internal Revenue Code.
401(k) Plan
The Bank offers a 401(k) profit sharing plan. This plan began in the year 2000.
Each Plan Year, the Bank will announce the amount of the matching contributions,
if any. The amount of the matching contributions is directly related to the
employees' 401(k) salary deferral contribution. For the Plan Year that began
January 1, 2002, all eligible participants received a matching contribution
equal to fifty percent (50%) of their 401(k) salary deferral contribution to the
Plan; however, it is limited to two percent (2%) of the plan compensation not to
exceed $4,000. The Plan expense was $49,484 for 2003.
- --------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
exercise of outstanding options, equity compensation plans (excluding
outstanding options, warrants and rights securities reflected in column (a) )
warrants and rights
(a) (b) (c)
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans None None 13,280(1)
approved by security holders
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans not
approved by security holders None None None
- --------------------------------------------------------------------------------------------------------------------
Total None None 13,280
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
36
(1) At the 2001 annual meeting the shareholders of the Company voted to
approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the
"Plan"). This Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their
compensation for services as directors. The maximum number of shares of
stock that may be issued pursuant to the Plan is 15,000. The first grant
date under this Plan preceded the 2002 annual meeting of shareholders.
Each director whose term of office begins with or continues after the date
the Plan was approved by the shareholders is issued a "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock
of the Company. In 2003, 840 shares were issued under the Plan and the
related compensation expense amounted to $23,688.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth certain information as of March 5, 2004 regarding
the number of shares of Common Stock beneficially owned by each director and
executive officer of the Company and by all directors and executive officers of
the Company as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,576(3) 1.09%
Louise F. Brown 3,396(4) .24%
Richard J. Cantele, Jr. 2,883(5) .20%
John F. Foley 3,696(6) .26%
Nancy F. Humphreys 1,240(7) .09%
Gordon C. Johnson, DVM 1,742(8) .12%
Holly J. Nelson 1,288(9) .09%
John F. Perotti 10,839(10) .76%
Walter C. Shannon, Jr. 3,844(11) .27%
Michael A. Varet 65,886(12) 4.63%
-------- -----
(All Directors and Executive 110,390 7.75%
Officers of the Company
as a group of (10) persons)
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director's spouse and/or children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 1,424,078 shares of the Company's Common
Stock outstanding and entitled to vote on March 5, 2004. The definition of
beneficial owner includes any person who, directly or indirectly, through
any contract, agreement or understanding, relationship or otherwise has or
shares voting power or investment power with respect to such security.
(3) Includes 2,100 shares owned by John R. H. Blum's wife.
(4) Includes 1,068 shares owned by Louise F. Brown's daughter.
(5) Includes 1,197 shares owned jointly by Richard J. Cantele, Jr. and his
wife and 6 shares owned by Richard J. Cantele, Jr. as custodian for his
daughter.
(6) Includes 1,518 shares owned jointly by John F. Foley and his wife and 66
shares owned by John F. Foley as custodian for his children.
(7) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her husband.
(8) Includes 660 shares which are owned by Gordon C. Johnson's wife and for
which Dr. Johnson has disclaimed beneficial ownership.
(9) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(10) Includes 9,514 shares owned jointly by John F. Perotti and his wife, 761
shares owned by his wife and 564 shares in trust for his son.
(11) All shares are owned individually by Walter C. Shannon, Jr.
37
(12) Includes 18,540 shares which are owned by Michael A. Varet's wife, 18,546
shares which are owned by his children. Michael A. Varet has disclaimed
beneficial ownership for all of these shares.
Principal Shareholders of the Company
Management is not aware of any person (including any "group" as that term is
used in Section 13 (d)(3) of the Exchange Act) who owns beneficially more than
5% of the Company's Common Stock as of the Record Date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with directors, officers,
principal shareholders and their associates on substantially the same terms as
those available for comparable transactions with others.
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law. The Company has engaged Mr. Blum in past years and
even though his services were not used in 2003, the Company may engage his
services in 2004 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Ackerly Brown, LLP. The Company has engaged Ms. Brown in past years but her
services were not used in 2003.
Walter C. Shannon, Jr. is a director of the Company and President Emeritus of
Wagner McNeil, Inc. which serves as the insurance agent for many of the
Company's insurance needs.
Some of the directors and executive officers of the Company and the Bank, as
well as firms and companies with which they are associated, are or have been
customers of the Bank and as such have had banking transactions with the Bank.
As a matter of policy, loans to directors and executive officers are made in the
ordinary course of business on substantially the same terms, including interest
rates, collateral and repayment terms, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features.
Since January 1, 2003, the highest aggregate outstanding principal amount of all
loans extended by the Bank to its directors, executive officers and all
associates of such persons as a group was $1,032,500 representing an aggregate
principal amount equal to 3.66% of the equity capital accounts of the Bank.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
1. Audit Fees
The aggregate fees billed for professional services rendered for the audit
of the Company's annual financial statements for the last two (2) fiscal years
and the reviews of the financial statements included in the Company's Form 10-Q
for the quarters of the fiscal years ended December 31, 2003 and December 31,
2002 were $76,625 and $75,860, respectively.
2. Audit-Related Fees
The aggregate fees billed for services rendered in each of the last two
(2) years for assurance and related services by Shatswell, MacLeod & Company,
P.C. that are reasonably related to performance of the auditor review of the
Company's financial statements were $12,117 for the fiscal year ended December
31, 2003 and $10,672 for the fiscal year ended December 31, 2002.
3. Tax Fees
The aggregate fees billed in each of the last two (2) years for
professional services rendered by Shatswell, MacLeod & Company, P.C. for tax
compliance, tax advice and tax planning for the fiscal years ended December 31,
2003 and December 31, 2002 were $8,100 each year.
38
4. All Other Fees
There were no aggregate fees billed for services rendered by Shatswell,
MacLeod & Company, P.C., other than the services covered above, for the fiscal
year ended December 31, 2003 and December 31, 2002.
Independence
The Audit Committee of the Board of Directors of the Company has
considered and determined that the provision of services rendered by Shatswell,
MacLeod & Company, P.C. relating to matters 2 through 4 above, is compatible
with maintaining the independence of such accountants.
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent auditors, other than those listed under the
de minimus exception. These services may include audit services, audit-related
services, tax services and other services. Pre-approval is detailed as to a
particular service or category of services, and is generally subject to a
specific budget. The Audit Committee has delegated pre-approval authority to its
Chairman when expeditious delivery of services is necessary. The independent
auditors and management are required to report to the full Audit Committee
regarding the extent of services provided by independent auditors in accordance
with this pre-approval, and the fees for the services performed to date. None of
the audited-related fees, tax fees or other fees paid in 2003 and 2002 were
approved per the Audit Committee's pre-approval policies.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form
l0-K.
1. Financial Statements:
The financial statements filed as part of this report are listed in
the index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or the
information is included in the consolidated financial statements or
notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Salisbury Bancorp,
Inc. (1)
3.2 Bylaws of Salisbury Bancorp, Inc., as amended (2)
10. Pension Supplement Agreement with John F. Perotti
(3)
10.2 Form of Change in Control Agreement with Executive
Officers (4)
10.3 Director Stock Retainer Plan (5)
11 Computation of Earnings per Share
21. Subsidiaries of the Company (6)
23.1 Consent of Independent Certified Public
Accountants
31.1 Rule 13a-15(e) Certification
31.2 Rule 13a-15(e) Certification
32 Section 1350 Certifications
39
(1) Exhibit was filed on April 23, 1998 as Exhibit 3.1 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(2) Exhibit was filed on March 30, 2001 as Exhibit 3.2 to Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001 and is
incorporated herein by reference.
(3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2002
and is incorporated herein by reference.
(5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the Company's
Annual Report on Form 10KSB for the fiscal year ended December 31, 2002
and is incorporated herein by reference.
(6) Exhibit was filed on April 23, 1998 as Exhibit 21 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(b) CURRENT REPORTS: The following reports on Form 8-K were filed during
the fourth quarter of the 2003 fiscal year:
1. The Company filed a Form 8-K on October 24, 2003 to report that the
Company had issued a press release announcing earnings for the third
quarter of 2003.
2. The Company filed a Form 8-K on November 18, 2003 to report that the
Company had issued a press release disclosing the proposed merger
with Canaan National Bancorp, Inc.
3. The Company filed a Form 8-K on November 25, 2003 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.23 per share to be paid on January 30, 2004 to shareholders of
record as of December 31, 2003.
40
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Lakeville, Connecticut
on March 26, 2004.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
-------------------
John F. Perotti
President and
Chief Executive Officer
By: /s/ John F. Foley
-----------------
John F. Foley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John F. Perotti President, March 26, 2004
- -------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ John R. H. Blum Director March 26, 2004
- --------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 26, 2004
- --------------------------
(Louise F. Brown)
/s/ Nancy F. Humphreys Director March 26, 2004
- --------------------------
(Nancy F. Humphreys)
/s/ Gordon C. Johnson Director March 26, 2004
- --------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 26, 2004
- --------------------------
(Holly J. Nelson)
/s/ Walter C. Shannon, Jr. Director March 26, 2004
- --------------------------
(Walter C. Shannon, Jr.)
/s/ Michael A. Varet Director March 26, 2004
- --------------------------
(Michael A. Varet)
41