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, 2004
| | 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
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SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
5 Bissell Street, Lakeville, CT 06039
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(Address of Principal Executive Offices) (Zip Code)
Registrant"s telephone number, including area code: 860-435-9801
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: Common stock par value $.10 per share
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Name of exchange on which registered: American Stock Exchange
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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. | |
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, 2004: $47,651,640
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 1,682,401 shares outstanding as of March 4, 2005.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
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Page
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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 Related Stockholder
Matters and Issuer Purchases of Equity Securities 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
Item 9B- Other Information 32
Part III
Item 10 -Directors and Executive Officers of the Registrant 32
Item 11 -Executive Compensation 34
Item 12 -Security Ownership of Directors and Management
and Related Stockholder Matters 37
Item 13-Certain Relationships and Related Transactions 38
Item 14-Principal Accounting Fees and Services 39
Part IV
Item 15 - Exhibits and Financial Statement Schedules 40
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.
On September 10, 2004 the Company completed the acquisition of Canaan National
Bancorp, Inc. and the merger of The Canaan National Bank with and into Salisbury
Bank and Trust Company. Following of the merger, the Bank operated five (5) full
service offices which are located in Canaan, Lakeville, Salisbury and Sharon,
Connecticut and South Egremont, Massachusetts. In addition, a branch in
Sheffield, Massachusetts opened in March 2005. Most of the Bank's business is
derived from customers located 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 a 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, 2004, it totaled $184,286,000 which represents
approximately 43.56% of total assets and it produced interest and dividend
income of $6,905,000 for the year 2004 as compared with $6,385,000 for 2003 and
$6,358,000 for 2002 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
14.42% to $244,167,000 during 2004.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $79,213,000 at December 31, 2004 as compared with
$60,897,000 at December 31, 2003.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operation 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 two subsidiaries, SBT Realty, Inc. which is incorporated under the laws
of the State of New York and SBT Mortgage Corp. which is incorporated under the
laws of the State of Connecticut. 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, Connecticut and South Berkshire County, Massachusetts. The Bank
maintains six (6) banking offices within these two counties and also attracts
customers from nearby Columbia County and Dutchess County, New York. The bank's
market area within the four counties is served by 47 commercial banks and
savings banks. The Bank has a 2.75% 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
4
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 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.
5
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.
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.
6
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
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 200 (the "USA Patriot Act").
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 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
7
Bank to declare cash dividends to its shareholders.
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 March 14, 2005 consists of 130 employees of
whom 111 were full time and 19 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, 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 18
II. Investment Portfolio 10
III. Loan Portfolio 11
IV. Summary of Loan Loss Experience 12 V. Deposits 25
VI. Return on Equity and Assets 11
VII. Short-Term Borrowings 13
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 set forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands)
2004 2003 2002
------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 146 $ 136 $ 90
U.S. government agencies preferred stock 12,209 7,610 4,179
U.S. Treasury securities and other
U.S. government corporations and agencies 53,416 51,979 41,635
Obligations of states and political subdivisions 58,452 45,988 42,792
Mortgage-backed securities 54,432 37,307 46,473
------------------------------
$178,655 $143,020 $135,169
==============================
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 0
Obligations of states and political subdivisions 0 0 0
Mortgage-backed securities 218 229 321
------------------------------
$ 218 $ 229 $ 321
==============================
Federal Home Loan Bank stock $ 5,413 $ 3,771 $ 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,
2004:
(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 0 218 3.38% 218
-------- -------- -------- -------- --------
$ 0 $ 0 $ 0 $ 218 $ 218
======== ======== ======== ======== ========
Available-for-sale
- ------------------
Securities
- ----------
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 23,692 4.81% $ 29,724 4.19% $ 53,416
Obligations of state and
political subdivisions $ 240 4.70% $ 0 $ 591 4.04% $ 57,621 4.75% $ 58,452
Mortgage-backed
securities $ 0 $ 1,289 5.10% $ 1,439 5.35% $ 51,704 4.40% $ 54,432
-------- -------- -------- -------- --------
$ 240 $ 1,289 $ 25,722 $139,049 $166,300
======== ======== ======== ======== ========
10
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2004 2003 2002 2001 2000
-------------------------------------------------------------
Commercial, financial and $ 15,127 $ 9,149 $ 10,127 $ 10,797 $ 8,592
agricultural
Real Estate-construction and 14,290 15,307 6,027 3,935 6,275
land development
Real Estate - residential 130,414 90,807 93,636 102,201 98,312
Real Estate-commercial 35,487 19,199 18,002 17,423 15,463
Consumer 9,122 6,692 9,007 10,030 10,673
Other 69 73 291 125 247
-------------------------------------------------------------
204,509 141,227 137,090 144,511 139,562
Allowance for possible loan losses (2,512) (1,664) (1,458) (1,445) (1,292)
Unearned income (19) (0) (0) (0) (0)
-------------------------------------------------------------
Net loans $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270
=============================================================
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, 2004. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
year or less five years five years
--------------------------------------------
Commercial, financial,
agricultural and real estate commercial $ 4,385 $8,628 $ 37,601
Real estate-construction and land development 14,290 0 0
-----------------------------------------
$ 18,675 $8,628 $ 37,601
=========================================
Maturities after
One Year with:
Fixed interest rates $6,169 $ 8,629
Variable interest rates 2,459 28,972
-----------------------
$8,628 $ 37,601
=======================
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,
-----------------------
2004 2003 2002
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.14% 1.24% 1.13%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 12.34% 13.41% 12.63%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 35.96% 34.07% 39.11%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.20% 9.26% 8.92%
11
Non-accrual, Past Due and Restructured Loans
At December 31, 2004, there were eleven (11) non-accrual loans in the Bank's
portfolio all of which were secured by real estate. In the month following the
month in which a mortgage loan becomes 90 days past due, 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 or large commercial loans on which
substantial collateral exists. Other types of loans are generally charged off
when they become 120 days or more delinquent. However, exceptions may be made as
warranted.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2004 2003 2002 2001 2000
----------------------------------------------
Non-accrual $1,739 $ 75 $ 855 $ 372 $ 186
90 days or more past due 528 535 124 215 323
Restructured loans 0 0 271 0 12
----------------------------------------------
Total nonperforming loans $2,267 $ 610 $1,250 $ 587 $ 521
==============================================
Total nonperforming loans as per-
centage of the total loan portfolio 1.12% 0.43% 0.92% 0.41% 0.37%
Allowance for loan losses as a per-
centage of nonperforming loans 110.76% 272.79% 116.64% 246.17% 247.99%
Information with respect to non-accrual and restructured loans
at December 31, 2004, 2003 and 2002 is as follows:
(dollars in thousands) Year Ended December 31
2004 2003 2002
------------------------------
Interest income that would have been recorded under original terms $ 100 $ 4 $ 68
Gross interest recorded 72 0 49
------------------------------
Foregone interest $ 28 $ 4 $ 19
==============================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2004 2003 2002 2001 2000
--------------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $1,664 $1,458 $ 1,445 $ 1,292 $1,160
Charge-offs:
Commercial, financial and
agricultural 0 71 60 0 0
Real estate mortgage 0 0 46 13 21
Consumer 70 84 146 88 50
--------------------------------------------------------------
Total charge-offs 70 155 252 101 71
--------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 0 25 2 0 0
Real estate mortgage 0 0 1 87 6
Consumer 28 24 26 17 17
--------------------------------------------------------------
Total recoveries 28 49 29 104 23
--------------------------------------------------------------
Net charge-offs 42 106 223 (3) 48
Provisions charged to operations 250 312 300 150 180
Balance acquired from CNB 640
Transfer of allowance for loan
losses to other liabilities 0 0 (64) 0 0
--------------------------------------------------------------
Balance at end of year $2,512 $1,664 $ 1,458 $ 1,445 $1,292
==============================================================
Ratio of net charge-offs to
average loans outstanding .02% .01% .02% (.002%) .04%
Ratio of allowance for loan losses
to year end loans 1.23% 1.18% 1.07% 1.01% .93%
12
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2004 2003 2002 2001 2000
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 613 7.40% $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16%
Real estate construction
and land development 83 6.99% 112 10.82% 50 4.40% 24 2.72% 0 4.50%
Real estate mortgage 1,614 81.12% 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51%
Consumer 198 4.46% 357 4.72% 244 6.57% 100 6.94% 65 7.65%
Other loans 4 .03% 5 .05% 8 .21% 1 .09% 1 .18%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,512 100.00% $1,664 100.00% $1,458 100.00% $1,445 100.00% $1,292 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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
2004 2003 2002
------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.29% 4.06% 5.35%
For the year 3.90% 4.21% 5.45%
Average amount outstanding during the year $ 74,954 $65,282 $53,438
Maximum amount outstanding at any month $100,680 $74,705 $59,125
Amount outstanding at year end $ 79,213 $60,897 $51,891
ITEM 2. DESCRIPTION OF PROPERTIES
The Company is not the owner or lessee of any properties. The Bank leases two
(2) properties; a branch office at 51 Main Street, South Egremont, Massachusetts
and a branch at 73 Main Street, Sheffield, Massachusetts which opened in March
2005.
The Bank serves its customers from its six (6) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield and South
Egremont, Massachusetts. 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 Operations 94 Main Street Owned
Canaan, Connecticut
Canaan Office 100 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 2004 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(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.
2004 Quarters 2003 Quarters
--------------------------------- ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------- ---------------------------------
Range of Stock prices:
High $45.55 $43.05 $38.80 $41.55 $38.95 $32.25 $29.50 $30.00
Low $43.00 $36.00 $36.25 $38.50 $29.50 $29.00 $26.00 $26.00
(b) Holders
There were approximately 742 holders of record of the common stock of the
Company as of March 4, 2005. 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 2004, the Company declared
a cash dividend each quarter of $.24 per share. Dividends for the year 2004
totaled $.96 per share which compared to total dividends of $.92 that were
declared in the year 2003. At their February 25, 2005 meeting, the Directors of
the Company declared a cash dividend of $.25 per share for the first quarter of
2005. The dividend will be paid on April 27, 2005 to shareholders of record as
of March 31, 2005. Payments 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:
2004 Quarters 2003 Quarters
----------------------------------------- -----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------------------------------------- -----------------------------------------
Cash dividends
declared $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.23 $ 0.23 $ 0.23 $ 0.23
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 13 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
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270
Allowance For Loan Losses 2,512 1,664 1,458 1,445 1,292
Investments 184,286 147,021 138,435 105,593 91,922
Total Assets 423,101 311,100 293,107 283,602 249,054
Deposits 298,842 218,457 211,037 201,351 166,436
Borrowings 79,213 60,897 51,891 53,004 47,357
Shareholders' Equity 40,700 28,850 27,345 23,363 22,460
Nonperforming Assets 2,267 685 1,400 587 521
Statement of Income Data:
Interest and Fees on Loans $ 9,592 $ 9,226 $ 9,677 $ 11,344 $ 10,494
Interest and Dividends on Securities
and Other Interest Income 6,959 6,423 6,481 5,746 6,015
Interest Expense 5,659 5,613 6,898 8,301 8,284
--------- --------- --------- --------- ---------
Net Interest Income 10,892 10,036 9,260 8,789 8,225
Provision for Loan Losses 250 313 300 150 180
Trust Department Income 1,411 1,252 1,100 1,070 1,108
Other Income 1,854 1,674 1,388 1,187 914
Net Gain (Loss) on Sales of Securities 1,490 1,058 634 130 (64)
Other Expenses 10,603 8,599 7,775 6,755 5,797
--------- --------- --------- --------- ---------
Pre Tax Income 4,794 5,108 4,307 4,271 4,206
Income Taxes 775 1,268 1,108 1,370 1,357
--------- --------- --------- --------- ---------
Net Income $ 4,019 $ 3,840 $ 3,199 $ 2,901 $ 2,849
========= ========= ========= ========= =========
Per Share Data:
Earnings per common share $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92
Earnings per common share, assuming dilution $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92
Cash Dividends Declared per share $ 0.96 $ 0.92 $ 0.88 $ 0.84 $ 0.77
Book Value (at year end) $ 24.19 $ 20.26 $ 19.21 $ 16.43 $ 15.40
Selected Statistical Data:
Return on Average Assets 1.14% 1.24% 1.13% 1.14% 1.23%
Return on Average Shareholders' Equity 12.34% 13.47% 12.63% 12.25% 13.64%
Dividend Payout Ratio 35.96% 34.07% 39.11% 41.38% 39.72%
Average Shareholders' Equity to Average Assets 9.20% 9.21% 8.92% 9.27% 8.98%
Net Interest Spread 3.22% 3.23% 3.13% 2.91% 2.83%
Net Interest Margin 3.63% 3.65% 3.72% 3.71% 3.79%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiary
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 and the Bank were formed in 1998 and 1848,
respectively, and the Company's sole subsidiary is the Bank. On September 10,
2004, the Company acquired Canaan National Bancorp, Inc. and merged its
subsidiary, The Canaan National Bank into the Bank. The Bank currently operates
six (6) full service offices including a Trust Department located in the towns
of Canaan, Lakeville, Salisbury and Sharon, Connecticut as well as South
Egremont, Massachusetts. Our sixth branch in Sheffield, Massachusetts opened
March 14, 2005. In order to provide a foundation for building shareholder value
and servicing customers, the Company remains committed to investing in the
technological and human resources necessary to developing new personalized
financial products and services to meet the needs of customers. 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.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------
Overview
- --------
The earnings for the Company totaled $4,019,000 in 2004, an increase of $179,000
or 4.66% over year 2003 earnings of $3,840,000. Earnings per average share
outstanding totaled $2.67 in 2004. This compares to earnings per average share
outstanding of $2.70 in 2003 and $2.25 in 2002. The decrease in earnings per
average share for 2004 is primarily the result of issuing 257,483 new shares of
Company stock, in connection with the acquisition of Canaan National Bancorp,
Inc.
The Company's assets at December 31, 2004 totaled $423,101,000 which represents
growth of $112,001,000 or 36.00% since December 31, 2003. This increase is
primarily attributable to the Bank's acquisition of Canaan National Bancorp,
Inc., which was completed during September 2004. In connection with this
transaction, the Bank received approximately $54,000,000 in loans, a securities
portfolio totaling approximately $44,000,000 and recorded goodwill of
approximately $7.1 million. Canaan National Bancorp, Inc.'s fixed assets and
bank premises were also included in the merger. Non-performing loans totaled $
2,267,000 at December 31, 2004. This compares to non-performing loans totaling
$610,000 for the corresponding period in 2003. Deposits at December 31, 2004
totaled $298,842,000 as compared to total deposits of $218,457,000 at December
31, 2003. This increase is primarily attributable to the approximately
$76,000,000 in deposits that were assumed in the merger with Canaan National
Bancorp, Inc.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2004, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 11.12% for Tier 1 capital and 12.13% for
total capital. The Company's leverage ratio was 7.22% at December 31, 2004. This
compares to a Tier 1 capital ratio at December 31, 2003 of 15.35%, a total
capital ratio of 16.44%, and a Company leverage ratio of 8.05%.
The Board of Directors increased total dividends declared on the Company's
common stock to $.96 per share in 2004. This compares to a $.92 per share
dividend paid in 2003 and a $.88 per share dividend that was paid in 2002.
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".
16
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 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,
2004 2003 2002
--------------------------------
Interest and Dividend Income
(financial statements) $ 16,551 $ 15,650 $ 16,157
Tax Equivalent Adjustment 1,182 1,075 1,028
-------- -------- --------
Total Interest Income (on an FTE basis) 17,733 16,725 17,185
Interest Expense (5,659) (5,613) (6,898)
-------- -------- --------
Net Interest Income-FTE $ 12,074 $ 11,112 $ 10,287
======== ======== ========
The Company's 2004 total interest and dividend income on an FTE basis of
$17,733,000 was $1,008,000 or 6.03% more than the total interest and dividend on
an FTE basis of $16,725,000 in 2003. The increase is primarily attributable to
an increase in earning assets as well as an economic environment experiencing an
increase in interest rates. A change in the mix of earning assets during 2004
has increased tax exempt securities in the securities portfolio which has
resulted in an increase in the tax equivalent adjustment of $1,182,000 in 2004
and $1,075,000 in 2003 when compared to the tax equivalent adjustment of
$1,028,000 in 2002.
Interest expense on deposits in 2004 decreased $127,000 or 4.43% to $2,739,000
compared to $2,866,000 for the corresponding period in 2003 and $4,039,000 in
2002. Interest expense for Federal Home Loan Bank advances increased $173,000 to
$2,920,000 in 2004 compared to $2,747,000 in 2003 and $2,858,000 in 2002. The
increase was primarily the result of an increase in advances during the year.
Although competition remains aggressive and interest margins continue to be
pressured, net interest income on an FTE basis increased $962,000 or 8.66% over
2003 and totaled $12,074,000 at December 31, 2004, compared to total net
interest income on an FTE basis of $11,112,000 at December 31, 2003 and
$10,287,000 in 2002.
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 2004 net interest margin on an FTE basis
was 3.63%. This compares to a net interest margin of 3.65% for 2003. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2004, 2003 and 2002. 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 2004 was
$2,294,000 with a yield of 4.68%. Actual tax exempt income in 2003 totaled
$2,086,000 with a yield of 4.78% and in 2002 actual tax exempt income was
$1,995,000 with a yield of 4.83%.
17
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2004 over 2003 2003 over 2002
---------------------------- -----------------------------
Volume Rate Total Volume Rate Total
---------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ 1,139 $ (773) $ 366 $ 220 $ (671) $ (451)
Taxable investment securities 593 143 736 1,025 (1,294) (269)
Tax-exempt investment securities 393 (79) 314 165 (27) 138
Other interest income 6 8 14 (51) (33) (84)
------- ------- ------- ------- ------- -------
Total interest income $ 2,131 $ (701) $ 1,430 $ 1,359 $(2,025) $ (666)
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 19 $ 10 $ 29 $ (42) $ (402) $ (444)
Savings deposits 84 (7) 77 (164) (129) (293)
Time deposits 189 (261) (72) 65 (502) (437)
Borrowed funds 407 (234) 173 732 (843) (111)
------- ------- ------- ------- ------- -------
Total interest expense $ 699 $ (492) $ 207 $ 591 $(1,876) $(1,285)
------- ------- ------- ------- ------- -------
Net interest margin $ 1,432 $ (209) $ 1,223 $ 768 $ (149) $ 619
======= ======= ======= ======= ======= =======
18
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2004 2003 2002
----------------------------------------------------------------------------------------------------------
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 $160,382 $9,592 5.98% $142,752 $9,226 6.46% $139,582 $9,677 6.93%
Taxable Securities $117,535 $4,613 3.92% $101,931 $4,299 4.22% $81,715 $4,341 5.31%
Tax-Exempt Securities * $49,017 $3,475 7.09% $43,603 $3,161 7.25% $41,347 $3,045 7.36%
Federal Funds $3,455 $39 1.13% $3,125 $29 0.93% $7,214 $111 1.54%
Other Interest Income $1,809 $14 0.77% $1,359 $10 0.74% $549 $11 2.00%
----------------------- ------------------------ -------------------------
Total Interest Earning $332,198 $17,733 5.34% $292,770 $16,725 5.71% $270,407 $17,185 6.36%
------------ ------------ -------------
Assets
Alowance for Loan
Losses ($1,952) ($1,468) ($1,403)
Cash & due from
Banks $7,987 $6,425 $5,923
Premises,Equipment $3,865 $3,000 $2,810
Net unrealized gain/loss
on AFS Securities ($412) $2,316 $1,083
Other Assets $12,330 $6,403 $5,263
----------- ------------ ------------
Total Average Assets $354,016 $309,446 $284,083
=========== ============ ============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $62,681 $382 0.61% $59,521 $363 0.61% $62,756 $807 1.29%
Savings Deposits $54,596 $373 0.68% $45,975 $450 0.98% $37,629 $743 1.97%
Time Deposits $75,241 $1,984 2.64% $68,898 $2,054 2.98% $67,157 $2,490 3.71%
Borrowed Funds $74,954 $2,920 3.90% $65,282 $2,746 4.21% $51,966 $2,858 5.50%
----------------------- ------------------------ -------------------------
Total Interest Bearing
Liabilities $267,472 $5,659 2.12% $239,676 $5,613 2.34% $219,508 $6,898 3.14%
------------ ------------ -------------
Demand Deposits $51,649 $38,998 $37,578
Other Liabilities $2,329 $2,130 $1,660
Shareholders' Equity $32,566 $28,642 $25,337
----------- ------------ ------------
Total Liabilities and
Equity $354,016 $309,446 $284,083
=========== ============ ============
Net Interest Income $12,074 $11,112 $10,287
============ ============ =============
Net Interest Spread 3.22% 3.37% 3.21%
Net Interest Margin 3.63% 3.80% 3.80%
* Presented on a fully taxable equivalent ("FTE") basis
19
Noninterest Income
- ------------------
Noninterest income increased $771,000 or 19.35% and totaled $4,755,000 for the
year ended December 31, 2004 as compared to $3,984,000 for the year ended
December 31, 2003. Trust Department income increased $159,000 to $1,411,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $621,000 for 2004. This is an increase of
$61,000 or 10.89% when comparing total service charges of $560,000 in 2003. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales of available-for-sale securities totaled $1,490,000 in 2004
representing an increase of $432,000 or 40.83% compared to $1,058,000 in 2003.
This increase is primarily attributable to 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
2004 as rates remained attractive to consumers. Competition in the secondary
mortgage market continues to be very aggressive. Gains on sale of loans
held-for-sale increased $43,000 or 16.48% to $304,000 in 2004 compared to
$261,000 in 2003. Other income increased 16.13% to $929,000 in 2004 compared to
other income of $800,000 in 2003. 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 sold one OREO property during 2003. There were no OREO property
sales in 2004.
Noninterest Expense
- -------------------
Noninterest expense increased 23.29% for the year ended December 31, 2004 as
compared to the corresponding period in 2003. The components of noninterest
expense and the changes in the period were as follows (amounts in thousands):
2004 2003 Change %Change
--------------------------------------
Salaries and employee benefits $ 5,971 $ 4,834 $ 1,137 23.52
Occupancy expense 436 359 77 21.45
Trust department expense 339 409 (70) (17.11)
Equipment expense 600 579 21 3.63
Data processing 711 576 135 23.44
Conversion expense 464 1 463 463.00
Insurance 122 115 7 6.09
Printing and stationery 254 184 70 38.04
Professional fees 272 300 (28) (9.33)
Legal expense 106 128 (22) (17.19)
Amortization of core deposit intangible 101 68 33 48.53
Other expense 1,227 1,047 180 17.19
------- ------- -------
Total other expense $10,603 $ 8,600 $ 2,003 23.29
======= ======= =======
The increase in salary and employee benefits is primarily due to an increase in
staff attributable to the merger with Canaan National Bancorp, Inc. and the
required employee time needed to make the system changes relating to the
conversion of the core processing system, along with salary increases and the
increase in the cost of employee benefits. The increase in occupancy expense is
also directly related to the merger. The decrease in Trust department expenses
is the result of management's efforts to control operating expenses. The
increase in data processing costs are attributable to the changes made in the
core processing system during the third quarter coupled with additional costs
related to the merger. Conversion expenses are various nonrecurring expenses
related to the conversion and the enhancement of the core account processing
system. The increase in the core deposit intangible amortization is primarily
the result of the fair market adjustment of the assets and liabilities acquired
from Canaan National Bancorp, Inc. at merger. Other expense increases are
primarily attributable to costs associated with the merger as previously
mentioned.
Income Taxes
- ------------
In 2004, the Company's income tax provision totaled $775,000 which reflects an
effective tax rate of 16.16%. This compares to an income tax provision of
$1,268,000 and an effective tax rate of 24.82% for the same period in 2003. This
decrease is primarily attributable to a decrease in taxable income. In addition,
the Company formed a passive investment
20
company to operate a significant component of the Bank's residential mortgage
lending activity. A passive investment company's structure is such that income
earned results in a reduction of tax liability for the Company.
Net Income
- ----------
Overall, net income totaled $4,019,000 for the year ended December 31, 2004.
This compares to net income of $3,840,000 for the year ended December 31, 2003.
This is an increase of $179,000 or 4.66% and represents earnings per average
share outstanding of $2.67. Earnings per average share outstanding for the year
ended December 31, 2003 was $2.70. The decrease in the earnings per average
share outstanding is primarily the result of issuing an additional 257,483
shares in connection with the acquisition of Canaan National Bancorp, Inc.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Years Ended December 31, 2003 and 2002
- --------------------------------------------------------
Overview
- --------
The earnings for the Company was $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 average
share outstanding increased $.45 or 20.00% to $2.70 in 2003. This compares to
earnings per average share outstanding of $2.25 in 2002 and $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, a reduction in interest
expense and an increase in other noninterest income.
The Company was "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
compared 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%.
The Board of Directors increased total dividends declared on the Company's
common stock to $.92 per share in 2003. This compared to an $.88 per share
dividend paid in 2002 and an $.84 per share dividend that was paid in 2001.
Net Interest and Dividend Income
- --------------------------------
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 was 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 created an increase in tax
exempt securities in the securities portfolio which 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.
21
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.
The Company's 2003 net interest margin on an FTE basis was 3.80%. This compares
to a net interest margin of 3.80% 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%.
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 to 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 $34,000 or 14.98% to $261,000 in 2003 compared to $227,000 in 2002.
Other income increased 16.28% to $800,000 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 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
22
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 People's Branch
acquisition totaled $68,000 and did not change from 2002.
Income Taxes
- ------------
In 2003, the Company's income tax provision totaled $1,268,000, which reflected
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, 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 an average per share outstanding basis, net income
amounted to $2.70 per share for 2003 as compared to $2.25 for 2002.
FINANCIAL CONDITION
- -------------------
Comparison of the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------
Total assets at December 31, 2004 were $423,101,000 compared to $311,100,000 at
December 31, 2003. This is an increase of $112,001,000 or 36.00%. The increase
primarily reflects the assets acquired from the merger with Canaan National
Bancorp, Inc.
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, 2004, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $184,286,000. This represents an
increase of $37,265,000 or 25.35% over year-end 2003. The increase is
attributable to the assets acquired as part of the merger previously mentioned.
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 or 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, 2004, the unrealized loss net of tax was $723,000.
This compares to an unrealized gain net of tax of $686,000 at December 31, 2003.
The securities reported as securities-held-to-maturity are stated at amortized
cost.
Federal Funds Sold
- ------------------
The balance of federal funds sold totaled $2,271,000 at December 31, 2004. This
compares to $2,272,000 at December 31, 2003. This represents a normal operating
range of funds for daily cash needs and is considered to be adequate by
Management.
23
Lending
- -------
New business development during the year coupled with the loans acquired as part
of the previously described merger resulted in an increase in total loans
outstanding to $201,979,000 at December 31, 2004, as compared to $139,563,000 at
December 31, 2003. This is an increase of $62,416,000 or 44.72%. 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.
The following table represents the composition of the loan portfolio comparing
December 31, 2004 to December 31, 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 15,127 $ 9,149
Real Estate-construction and land development 14,290 15,307
Real Estate-residential 130,414 90,807
Real Estate-commercial 35,487 19,199
Consumer 9,122 6,692
Other 69 73
--------- ---------
$ 204,509 $ 141,227
Unearned Income (19)
Allowance for loan losses (2,512) (1,664)
--------- ---------
Loans, net $ 201,978 $ 139,563
========= =========
Provisions and Allowance for Loan Losses
- ----------------------------------------
Total gross loans at December 31, 2004 were $204,509,000, when compared to total
gross loans of $141,228,000 at December 31, 2003. This is an increase of
$63,281,000 or 44.81% and reflects the merger with Canaan National Bancorp, Inc.
as well as growth within the loan portfolio resulting from new business
development. At December 31, 2004 approximately 88% of the Bank's loan portfolio
was related to real estate products and although the portfolio increased during
the year 2004, the concentration remained consistent as approximately 89% of the
portfolio was related to real estate at December 31, 2003. 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
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 2004 was $250,000 as compared to $312,500 for the year ended December 31,
2003. The level of nonperfoming loans remains low as a percentage of total
loans. Nonperforming loans totaled $2,267,000 or 1.11 % of total loans at
December 31, 2004 as compared to $610,000 or .43% of total loans at December 31,
2003. 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, 2004. 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.
24
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, 2004 and 2003.
At December 31, 2004 the allowance for loan losses totaled $2,512,000,
representing 110.81% of nonperforming loans, which totaled $2,267,000, and 1.11%
of total loans of $204,509,000. This compares to $1,664,000, representing
272.79% of nonperforming loans, which totaled $610,000 and 1.18% of total loans
of $141,228,000 at December 31, 2003. A total of $70,000 in loans was charged
off during the year 2004, as compared to $155,000 during 2003. A total of
$28,000 of previously charged off loans was recovered during the year ended
December 31, 2004. Recoveries for the year 2003 totaled $49,000. When comparing
the two years, net charge-offs were $42,000 for the year 2004 and during the
year 2003 net charge-offs totaled $106,000. 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.
Deposits
- --------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2004 totaled $298,842,000 compared to
$218,457,000 at year-end 2003. This increase of $80,384,000 or 36.80% can be
primarily attributed to the deposits acquired with the merger of the Canaan
National Bancorp, Inc. merger. The Company continues its efforts 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
2004 2003 2002
----------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------
Demand $ 51,649 $ 38,998 $ 37,578
NOW 23,797 .01% 20,030 .31% 19,833 .82%
Money Market 38,884 .83% 39,491 .76% 42,923 1.50%
Savings 54,596 .68% 45,975 .98% 37,629 1.98%
Time 75,241 1.65% 68,898 2.98% 67,157 3.71%
---------- ---------- ----------
$ 244,167 1.12% $ 213,392 1.34% $ 205,120 1.97%
========== ========== ==========
25
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 is summarized as follows:
(dollars in thousands)
Year Ended December 31
2004 2003 2002
---------------------------
Three months or less $ 9,540 $ 5,575 $ 3,454
Over three months through six months 1,011 1,343 3,630
Over six months through one year 7,517 5,591 7,913
Over one year 14,887 11,080 8,050
------- ------- -------
Total $32,955 $23,589 $23,047
======= ======= =======
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, 2004, the Company had $79,213,000 in
outstanding advances from the Federal Home Loan Bank compared to $60,897,000 at
December 31, 2003. 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.
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 asset 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, 2004, 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
26
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, 2004 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, 2004, the Company had approximately $48,157,000 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, 2004, the Company had $40,700,000 in shareholder equity compared
to $28,850,000 at December 31, 2003. This represents an increase of $11,850,000
or 41.08%. Several components contributed to the change since December 2003.
Earnings for the year totaled $4,019,000. Market conditions have reduced
unrealized securities gains and resulted in a negative adjustment to
comprehensive income of $723,000. The Company declared dividends in 2004
resulting in a decrease in capital of $1,491,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan
during the second quarter of 2004 which resulted in an increase in capital of
$32,000. 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 2004, the Company
had a risk-based capital ratio of 12.13% compared to 16.44% at December 31,
2003. 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. As a result of the merger, each shareholder of Canaan
National Bancorp, Inc. received 1.3371 shares of the Company, in addition to
$31.20 in cash for each share of Canaan National Bancorp Inc. stock. As of
September 10, 2004, a total of 257,483 shares of the Company were issued to
shareholders of Canaan National Bancorp, Inc. This resulted in an increase in
capital of $10,698,000. The value of these additional shares was determined
based on the September 10, 2004 closing market price of $41.55 of Salisbury
Bancorp Inc.'s common stock. Fractional shares of the Company were not issued as
a result of the merger, but were paid at a price of $41.06 per share. At
December 31, 2004, a total of 1,682,401 shares of the Company common stock were
issued and outstanding.
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.
Recent Accounting Pronouncements
- --------------------------------
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No.
149, "Amendment of Statement No. 133
27
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 impact 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 did
not have an impact 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.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans
acquired through a transfer, such as a business combination, where there are
differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the Company's
financial position or results of operations.
28
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payments" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. It
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
This Statement is effective for the Company as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The Company
does not believe the adoption of this Statement will have a material impact on
the Company's financial position or results of operations.
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 $107 million. Under the terms of the Agreement,
the shareholders of Canaan received 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 transaction
was consummated on September 10, 2004. On March 14, 2005, the Company opened a
new full-service branch office in Sheffield, Massachusetts. The branch is the
Bank's second branch office in Berkshire County, Massachusetts along with the
four branches in Northwestern Connecticut.
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 affect 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
29
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.
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 of 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. Shatswell, MacLeod & Company, P.C. has been
engaged to provide an independent opinion on the fairness of the consolidated
financial statements. Their report appears in this Form 10-K.
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 establishes guidelines to meet various
applicable regulatory rules and statutes, measures the various risks facing the
bank on a consistent basis and coordinates the management of the bank's
financial position. 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
2004.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
- ------------------------------------------
Report of Independent Auditors' January 27, 2005 ............. F-1
Consolidated Balance Sheets at December 31, 2004 and 2003 .... F-2
Consolidated Statements of Income for the Years Ended
December 31, 2004, 2003 and 2002 ........................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2004, 2003 and 2002 ....... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 ........................... F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2004, 2003 and 2002 ............... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet for the Years Ended December 31, 2004 and 2003 F-28
Statement of Income for the Years Ended
December 31, 2004, 2003 and 2002 ........................... F-29
Statement of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002 ........................... F-30
Quarterly Results of Operations (unaudited) .................. F-31
31
[LETTERHEAD SHATSWELL, MacLEOD & COMPANY, P.C.]
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2004 and 2003 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, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2004, 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 27, 2005
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2004 and 2003
--------------------------
ASSETS 2004 2003
- ------ ------------- ------------
Cash and due from banks $ 7,283,667 $ 7,687,979
Interest bearing demand deposits with other banks 1,180,937 1,668,310
Money market mutual funds 941,890 500,512
Federal funds sold 2,271,000 2,272,000
------------- ------------
Cash and cash equivalents 11,677,494 12,128,801
Investments in available-for-sale securities (at fair value) 178,654,748 143,020,363
Investments in held-to-maturity securities (fair values of $219,623 as of
December 31, 2004 and $234,394 as of December 31, 2003) 218,374 229,425
Federal Home Loan Bank stock, at cost 5,413,200 3,771,000
Loans held-for-sale 375,000 275,000
Loans, less allowance for loan losses of $2,511,546 and $1,664,274 as of
December 31, 2004 and 2003, respectively 201,978,499 139,563,318
Investment in real estate 75,000 75,000
Premises and equipment 5,933,978 2,892,162
Goodwill 9,509,305 2,357,884
Core deposit intangible 1,822,131 731,961
Accrued interest receivable 2,256,499 1,875,948
Cash surrender value of life insurance policies 3,293,548 3,153,941
Other assets 1,893,029 1,025,466
------------- ------------
Total assets $ 423,100,805 $311,100,269
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 65,017,207 $ 43,631,778
Interest-bearing 233,824,639 174,825,672
------------- ------------
Total deposits 298,841,846 218,457,450
Federal Home Loan Bank advances 79,213,283 60,897,311
Due to broker 1,083,331
Other liabilities 3,262,745 2,895,296
------------- ------------
Total liabilities 382,401,205 282,250,057
------------- ------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,682,401 shares in 2004 and 1,424,078 shares in 2003 168,240 142,408
Paid-in capital 13,031,573 2,327,151
Retained earnings 28,222,466 25,694,836
Accumulated other comprehensive (loss) income (722,679) 685,817
------------- ------------
Total stockholders' equity 40,699,600 28,850,212
------------- ------------
Total liabilities and stockholders' equity $ 423,100,805 $311,100,269
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
2004 2003 2002
----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $ 9,592,478 $ 9,226,484 $ 9,677,332
Interest on debt securities:
Taxable 4,499,725 4,186,368 4,143,851
Tax-exempt 2,293,706 2,086,134 1,995,114
Dividends on equity securities 112,008 112,340 219,245
Other interest 53,101 38,496 121,891
----------- ----------- -----------
Total interest and dividend income 16,551,018 15,649,822 16,157,433
----------- ----------- -----------
Interest expense:
Interest on deposits 2,738,680 2,866,495 4,039,427
Interest on Federal Home Loan Bank advances 2,920,316 2,746,975 2,858,310
----------- ----------- -----------
Total interest expense 5,658,996 5,613,470 6,897,737
----------- ----------- -----------
Net interest and dividend income 10,892,022 10,036,352 9,259,696
Provision for loan losses 250,000 312,500 300,000
----------- ----------- -----------
Net interest and dividend income after provision for
loan losses 10,642,022 9,723,852 8,959,696
----------- ----------- -----------
Noninterest income:
Trust department income 1,410,814 1,252,000 1,100,160
Service charges on deposit accounts 620,771 560,291 472,201
Gain on sales of available-for-sale securities, net 1,489,905 1,058,140 634,080
Gain on sales of loans held-for-sale 304,354 261,418 227,244
Gain on sales of other real estate owned 52,151
Other income 929,337 800,099 688,128
----------- ----------- -----------
Total noninterest income 4,755,181 3,984,099 3,121,813
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 5,970,639 4,833,913 4,235,122
Occupancy expense 435,983 359,458 306,486
Equipment expense 600,127 579,395 568,422
Trust department expense 339,069 408,433 463,537
Data processing 710,950 575,441 533,405
Conversion expense 464,484 1,139 93,250
Insurance 121,959 114,806 114,184
Printing and stationery 253,725 183,970 187,021
Professional fees 272,426 300,209 224,564
Legal expense 106,134 127,772 60,561
Amortization of core deposit intangible 101,109 68,355 68,354
Other expense 1,226,708 1,047,008 920,038
----------- ----------- -----------
Total noninterest expense 10,603,313 8,599,899 7,774,944
----------- ----------- -----------
Income before income taxes 4,793,890 5,108,052 4,306,565
Income taxes 774,948 1,267,950 1,107,770
----------- ----------- -----------
Net income $ 4,018,942 $ 3,840,102 $ 3,198,795
=========== =========== ===========
Earnings per common share $ 2.67 $ 2.70 $ 2.25
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings (Loss) Income Total
--------- --------- ------------ ------------ -------------- ------------
Balance, December 31, 2001 1,422,358 $ 142,236 $ 2,281,415 $ 21,218,155 $ (278,660) $ 23,363,146
Comprehensive income:
Net income 3,198,795
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 880 88 22,132 22,220
Dividends declared ($.88 per share) (1,252,257) (1,252,257)
--------- --------- ------------ ------------ -------------- ------------
Balance, December 31, 2002 1,423,238 142,324 2,303,547 23,164,693 1,734,382 27,344,946
Comprehensive income:
Net income 3,840,102
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect (1,048,565)
Comprehensive income 2,791,537
Issuance of 840 shares for Directors' fees 840 84 23,604 23,688
Dividends declared ($.92 per share) (1,309,959) (1,309,959)
--------- --------- ------------ ------------ -------------- ------------
Balance, December 31, 2003 1,424,078 142,408 2,327,151 25,694,836 685,817 28,850,212
Comprehensive income:
Net income 4,018,942
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect (1,408,496)
Comprehensive income 2,610,446
Shares issued for merger 257,483 25,748 10,672,670 10,698,418
Issuance of 840 shares for Directors' fees 840 84 31,752 31,836
Dividends declared ($.96 per share) (1,491,312) (1,491,312)
--------- --------- ------------ ------------ -------------- ------------
Balance, December 31, 2004 1,682,401 $ 168,240 $ 13,031,573 $ 28,222,466 $ (722,679) $ 40,699,600
========= ========= ============ ============ ============== ============
Reclassification disclosure for the years ended December 31:
2004 2003 2002
----------- ----------- -----------
Net unrealized (losses) gains on available-for-sale securities $(1,106,610) $ (370,016) $ 3,931,446
Reclassification adjustment for net realized gains in net income (1,489,905) (1,058,140) (634,080)
----------- ----------- -----------
Other comprehensive (loss) income before income tax effect (2,596,515) (1,428,156) 3,297,366
Income tax benefit (expense) 1,011,343 556,267 (1,284,324)
----------- ----------- -----------
(1,585,172) (871,889) 2,013,042
----------- ----------- -----------
Minimum pension liability adjustment 289,396 (289,396)
Income tax (expense) benefit (112,720) 112,720
----------- ----------- -----------
176,676 (176,676)
----------- ----------- -----------
Other comprehensive (loss) income, net of tax $(1,408,496) $(1,048,565) $ 2,013,042
=========== =========== ===========
Accumulated other comprehensive (loss) income consists of the following as of
December 31:
2004 2003 2002
----------- ----------- -----------
Net unrealized holding (losses) gains on available-for-sale securities, net of taxes $ (722,679) $ 862,493 $ 1,734,382
Minimum pension liability adjustment, net of taxes (176,676)
----------- ----------- -----------
Accumulated other comprehensive (loss) income $ (722,679) $ 685,817 $ 1,734,382
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
2004 2003 2002
------------- ------------ -------------
Cash flows from operating activities:
Net income $ 4,018,942 $ 3,840,102 $ 3,198,795
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 289,214 395,030 454,034
Gain on sales of available-for-sale securities, net (1,489,905) (1,058,140) (634,080)
Gain on sales of other real estate owned (52,151)
Provision for loan losses 250,000 312,500 300,000
Change in loans held-for-sale (100,000) (275,000)
Net increase in mortgage servicing rights (41,253) (67,250)
Write-off of equipment 9,399
Depreciation and amortization 357,645 335,672 378,204
Amortization of core deposit intangible 101,109 68,355 68,354
Amortization (accretion) of fair value adjustments, net 215,557 (11,450) (100,484)
Decrease (increase) in interest receivable 84,056 57,668 (252,348)
Deferred tax expense 143,691 137,341 14,647
Decrease (increase) in prepaid expenses 270,965 (124,330) 94,379
Increase in cash surrender value of insurance policies (139,607) (49,585) (13,342)
Increase in income tax receivable (53,889) (154,792) (20,977)
Increase in other assets (71,917) (205,831) (11,058)
(Decrease) increase in accrued expenses (750,246) 197,428 166,703
Increase (decrease) in interest payable 57,465 (80,151) (30,825)
Increase (decrease) in other liabilities 367,956 20,000 (1,026)
Issuance of shares for Directors' fees 31,836 23,688 22,220
Increase in unearned income on loans 18,529
------------- ------------ -------------
Net cash provided by operating activities 3,569,547 3,309,104 3,633,196
------------- ------------ -------------
Cash flows from investing activities:
Redemption of Federal Reserve Bank stock 56,300
Purchases of Federal Home Loan Bank stock (351,000) (825,800)
Purchases of available-for-sale securities (124,520,785) (89,014,647) (104,324,117)
Proceeds from sales of available-for-sale securities 98,347,353 49,353,780 41,970,330
Proceeds from maturities of available-for-sale securities 32,998,864 31,044,359 28,715,141
Proceeds from maturities of held-to-maturity securities 10,968 91,497 70,445
Loan purchases (1,017,677)
Loan originations and principal collections, net (8,191,577) (4,157,060) 8,112,107
Recoveries of loans previously charged off 28,302 48,508 29,148
Other real estate owned - expenditures capitalized (8,511)
Capital expenditures (1,003,263) (475,024) (393,809)
Proceeds from sale of equipment 436
Premiums paid on insurance policies (12,381)
Purchase of life insurance policies (3,000,000)
Life insurance policy proceeds 192,443
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc. net of expenses paid of $309,419 2,487,705
Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163)
------------- ------------ -------------
Net cash used in investing activities (6,156,860) (16,942,898) (26,658,370)
------------- ------------ -------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
(continued)
2004 2003 2002
------------- ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 6,920,818 9,642,776 6,479,009
Net (decrease) increase in time deposits (2,141,902) (2,211,280) 3,307,391
Federal Home Loan Bank advances 5,000,000
Principal payments on advances from Federal Home Loan Bank (6,140,973) (10,993,296) (1,113,139)
Net changes in short term advances 20,000,000
Decrease in other borrowed funds (86,863)
Dividends paid (1,415,074) (1,295,533) (1,237,840)
------------- ------------ ------------
Net cash provided by financing activities 2,136,006 15,142,667 7,435,421
------------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (451,307) 1,508,873 (15,589,753)
Cash and cash equivalents at beginning of year 12,128,801 10,619,928 26,209,681
------------- ------------ ------------
Cash and cash equivalents at end of year $ 11,677,494 $ 12,128,801 $ 10,619,928
============= ============ ============
Supplemental disclosures:
Interest paid $ 5,601,531 $ 5,693,621 $ 7,029,046
Income taxes paid 685,000 1,285,401 1,114,100
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
Transfer from equipment to other assets 2,815
Canaan National Bancorp, Inc. merger:
Cash and cash equivalents acquired $ 2,797,124
Available-for-sale securities 42,776,284
Federal Home Loan Bank stock 1,291,200
Federal Reserve Bank stock 56,300
Net loans acquired 54,787,421
Fixed assets acquired 2,355,970
Accrued interest receivable 460,550
Other assets acquired 1,173,549
Core deposit intangible 1,191,279
-------------
106,889,677
-------------
Deposits assumed 75,613,508
Federal Home Loan Bank borrowings assumed 19,500,346
Other borrowings assumed 86,863
Other liabilities assumed 1,812,381
-------------
97,013,098
-------------
Net assets acquired 9,876,579
Merger costs 17,028,000
-------------
Goodwill $ 7,151,421
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
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 and 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 and one banking office located in
Massachusetts. 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. The Bank also offers
a full complement of trust and investment services.
As described in Note 15, on September 10, 2004 Canaan National Bancorp, Inc.
merged with and into the Company.
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 Bancorp and
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiaries, SBT Realty, Inc., SBT Mortgage Service Corporation (the
"PIC"), and CNB Insurance Agency, Inc. SBT Realty, Inc. holds and manages
bank owned real estate situated in New York state. The PIC operates as a
passive investment company and services residential mortgages. CNB
Insurance Agency, Inc. was formed to sell insurance. 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, 2004 and December 31, 2003
includes $649,000 and $906,000, respectively, which is subject to
withdrawals and usage restrictions to satisfy the reserve requirements of
the Federal Reserve Bank.
F-7
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. These
security classifications 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 carried 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. During
the three years ended December 31, 2004 the Company did not
classify any securities as trading.
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.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. Any equity line 90
days past due or in the process of foreclosure is 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.
F-8
Cash receipts of interest income on impaired loans are 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, the 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 Bank 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 Bank 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 1 to 25
years for furniture and equipment.
F-9
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 Bank classifies loans as in-substance repossessed or
foreclosed if the Bank or its subsidiaries receives physical possession of
the debtor's assets regardless of whether formal foreclosure proceedings
take place.
ADVERTISING:
The Bank 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.
F-10
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:
Bancorp 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 Bancorp 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. Weighted average common shares outstanding
were 1,503,373 in 2004, 1,423,815 in 2003 and 1,422,959 in 2002. 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. Diluted EPS is not presented because there
were no common stock equivalents in the three year period ended December
31, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2003, the Financial Accounting Standards Board (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
impact on the Company's consolidated financial statements.
F-11
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 did not have an impact 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.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3
requires loans acquired through a transfer, such as a business
combination, where there are differences in expected cash flows and
contractual cash flows due in part to credit quality be recognized at
their fair value. The excess of contractual cash flows over expected cash
flows is not to be recognized as an adjustment of yield, loss accrual, or
valuation allowance. Valuation allowances cannot be created nor "carried
over" in the initial accounting for loans acquired in a transfer on loans
subject to SFAS 114, "Accounting by Creditors for Impairment of a Loan."
This SOP is effective for loans acquired in fiscal years beginning after
December 15, 2004, with early adoption encouraged. The Company does not
believe the adoption of SOP 03-3 will have a material impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payments" ("SFAS 123R"). This Statement revises FASB
Statement No. 123, "Accounting for Stock Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and its related implementation guidance. SFAS 123R requires that the cost
resulting from all share-based payment transactions be recognized in the
consolidated financial statements. It establishes fair value as the
measurement objective in accounting for share-based payment arrangements
and requires all entities to apply a fair-value based measurement method
in accounting for share-based payment transactions with employees except
for equity instruments held by employee share ownership plans. This
Statement is effective for the Company as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The
Company does not believe the adoption of this Statement will have a
material impact on the Company's financial position or results of
operations.
F-12
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:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------ ------------ ------------- -------------
Available-for-sale securities:
December 31, 2004:
Equity securities $ 3,031 $ 142,727 $ $ 145,758
U.S. government agencies preferred stock 13,488,364 1,490 1,280,752 12,209,102
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 53,771,554 53,170 408,766 53,415,958
Debt securities issued by states of the
United States and political subdivisions
of the states 58,052,206 630,317 230,178 58,452,345
Money market mutual funds 941,890 941,890
Mortgage-backed securities 54,523,343 209,599 301,357 54,431,585
------------ ------------ ------------- -------------
180,780,388 1,037,303 2,221,053 179,596,638
Money market mutual funds included in
cash and cash equivalents (941,890) (941,890)
------------ ------------ ------------- -------------
$179,838,498 $ 1,037,303 $ 2,221,053 $ 178,654,748
============ ============ ============= =============
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
============ ============ ============= =============
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------ ------------ ------------- -------------
Held-to-maturity securities:
December 31, 2004:
Mortgage-backed securities $ 218,374 $ 1,249 $ $ 219,623
============ ============ ============= =============
December 31, 2003:
Mortgage-backed securities $ 229,425 $ 4,969 $ $ 234,394
============ ============ ============= =============
F-13
The scheduled maturities of debt securities were as follows as of December 31,
2004:
Available-For-Sale Held-To-Maturity
------------------ --------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ --------- ---------
Due after one year through five years $ 240,497 $ $
Due after five years through ten years 18,293,190
Due after ten years 93,334,616
Mortgage-backed securities 54,431,585 218,374 219,623
------------ --------- ---------
$166,299,888 $ 218,374 $ 219,623
============ ========= =========
During 2004, proceeds from sales of available-for-sale securities amounted to
$98,347,353. Gross realized gains and gross realized losses on those sales
amounted to $1,577,110 and $87,205, respectively. 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. The tax
provision applicable to these net realized gains amounted to $580,318, $412,146
and $246,974, respectively.
The amortized cost basis and fair value of securities of issuers which exceeded
10% of stockholders' equity were as follows as of December 31, 2004:
Amortized
Cost Fair
Basis Value
---------- ----------
Harris County, Texas $4,601,649 $4,617,662
Federal National Mortgage Association Preferred Stock 5,867,839 5,451,808
Federal Home Loan Mortgage Corporation Preferred Stock 7,620,525 6,757,294
Total carrying amounts of $4,712,905 and $2,586,127 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, 2004 and 2003, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are temporarily impaired, are as follows as of December 31,
2004:
Less than 12 Months 12 Months or Longer Total
------------------------ ------------------------ ------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
U.S. government agencies preferred
stock $ 5,361,376 $ 357,227 $ 6,077,948 $ 923,525 $11,439,324 $ 1,280,752
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 29,234,293 361,483 2,045,291 47,283 31,279,584 408,766
Debt securities issued by states of the
United States and political
subdivisions of the states 17,253,451 158,929 3,157,198 71,249 20,410,649 230,178
Mortgage-backed securities 27,778,940 266,316 3,121,519 35,041 30,900,459 301,357
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired securities $79,628,060 $ 1,143,955 $14,401,956 $ 1,077,098 $94,030,016 $ 2,221,053
=========== =========== =========== =========== =========== ===========
F-14
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 and equity securities issued by U.S. government corporations and
agencies. 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 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. As management has the
ability to hold securities until maturity, or for the foreseeable future, no
declines are deemed to be other than temporary.
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of December 31:
2004 2003
------------- -------------
Commercial, financial and agricultural $ 15,126,711 $ 9,148,870
Real estate - construction and land development 14,289,715 15,306,946
Real estate - residential 130,414,119 90,806,942
Real estate - commercial 35,486,897 19,199,687
Consumer 9,121,747 6,691,762
Other 69,385 73,385
------------- -------------
204,508,574 141,227,592
Unearned income (18,529)
Allowance for loan losses (2,511,546) (1,664,274)
------------- -------------
Net loans $ 201,978,499 $ 139,563,318
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2004.
Total loans to such persons and their companies amounted to $864,438 as of
December 31, 2004. During 2004, principal advances of $624,908 were made and
repayments totaled $895,615.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2004 2003 2002
----------- ----------- -----------
Balance at beginning of period $ 1,664,274 $ 1,458,359 $ 1,444,504
Provision for loan losses 250,000 312,500 300,000
Recoveries of loans previously charged off 28,302 48,508 29,148
Loans charged off (69,742) (155,093) (251,220)
Allowance related to business combination 638,712
Transfer to allowance for commitments (64,073)
----------- ----------- -----------
Balance at end of period $ 2,511,546 $ 1,664,274 $ 1,458,359
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2004 2003
------ ----
(in thousands)
Total nonaccrual loans $1,739 $ 75
====== ====
Accruing loans which are 90 days or more overdue $ 528 $535
====== ====
F-15
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
2004 2003
--------------------------- -------------------------
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 $ 183,317 $ 0 $ 0 $ 0
Loans for which there is no related allowance for credit losses
------------ ---------- ---------- ----------
Totals $ 183,317 $ 0 $ 0 $ 0
============ ========== ========== ==========
Average recorded investment in impaired loans during the
year ended December 31 $ 73,327 $ 353,758
============ ==========
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 5,843 $ 43,762
============ ==========
Amount recognized using a cash-basis method of
accounting $ 5,843 $ 43,762
============ ==========
In 2004 and 2003 the Bank capitalized mortgage servicing rights totaling
$112,187 and $69,844, respectively and amortized $66,019 and $1,924,
respectively. The balance of capitalized mortgage servicing rights included in
other assets at December 31, 2004 and 2003 was $498,371 and $67,250,
respectively. On September 10, 2004 the Bank acquired mortgage servicing rights
of $392,256, exclusive of $2,388 in valuation allowance, through the acquisition
of Canaan National Bancorp, Inc. Prior to 2003, the Bank 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 years ended December 31:
2004 2003
------- ----
Balance, beginning of year $ 670 $ 0
Additions 5,621 670
Valuation allowance from business combination 2,388 0
Reductions (706) 0
------- ----
Balance, end of year $ 7,973 $670
======= ====
The fair value of the mortgage servicing rights was $516,322 and $74,512 as of
December 31, 2004 and 2003, respectively.
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 $49,026,331 and $6,753,826 at December 31, 2004 and
2003, respectively.
F-16
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
2004 2003
----------- -----------
Land $ 483,344 $ 350,644
Buildings 5,338,726 2,766,168
Furniture and equipment 2,364,380 1,888,716
----------- -----------
8,186,450 5,005,528
Accumulated depreciation and amortization (2,252,472) (2,113,366)
----------- -----------
$ 5,933,978 $ 2,892,162
=========== ===========
NOTE 6 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2004 and 2003 was $32,955,388 and $23,588,591,
respectively.
For time deposits as of December 31, 2004, the scheduled maturities for years
ended December 31 are as follows:
2005 $50,171,859
2006 23,566,989
2007 11,000,082
2008 3,623,817
2009 2,974,837
Fair value adjustment 28,096
-----------
$91,365,680
===========
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2004. Total deposits to such persons and their companies amounted to $1,672,885
and $610,337 as of December 31, 2004 and 2003, respectively.
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, 2004 and thereafter are summarized as follows:
AMOUNT
------
2005 $21,399,466
2006 6,610,009
2007 1,589,044
2008 1,577,699
2009 1,320,213
Thereafter 46,141,788
Fair value adjustment 575,064
-----------
$79,213,283
===========
F-17
As of December 31, 2004, the following advances from the FHLB were redeemable at
par at the option of the FHLB:
MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT
------------- ------------------------ --------
01/24/11 01/24/05 and quarterly thereafter $ 1,000,000
04/27/09 01/26/05 and quarterly thereafter 500,000
04/27/09 01/26/05 and quarterly thereafter 500,000
01/25/10 01/26/05 and quarterly thereafter 19,000,000
02/08/10 02/07/05 and quarterly thereafter 600,000
02/28/11 02/28/05 and quarterly thereafter 850,000
02/28/11 02/28/05 and quarterly thereafter 10,000,000
03/07/11 03/07/05 and quarterly thereafter 1,000,000
12/16/13 03/15/05 and quarterly thereafter 10,000,000
12/15/10 03/15/05 and quarterly thereafter 800,000
12/20/10 03/21/05 and quarterly thereafter 500,000
12/27/10 03/28/05 and quarterly thereafter 1,000,000
03/01/11 03/01/06 and quarterly thereafter 500,000
The advances also include $400,000 borrowed in 2002 at 4.37% which is a
Knock-out Advance with a Strike Rate of 7%. If the three month LIBOR rate
exceeds the Strike Rate of 7% on April 8, 2005 and quarterly thereafter, the
FHLB will require that this borrowing become due immediately upon the Strike
Date as defined in the Contract. As of December 31, 2004, the three month LIBOR
was 2.56%. The maturity date is April 9, 2007.
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, 2004, the interest rates on FHLB advances ranged from 1.49
percent to 6.30 percent. At December 31, 2004, the weighted average interest
rate on FHLB advances was 4.29 percent.
NOTE 8 - EMPLOYEE BENEFITS
- --------------------------
The Bank 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 Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.
F-18
The following tables set forth information about the plan as of December 31 and
the years then ended:
2004 2003 2002
----------- ----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,762,015 $ 2,019,027 $ 2,345,618
Adjustment 960,236
Actuarial (gain) loss (12,650) 489,531 67,008
Service cost 259,513 188,104 124,322
Interest cost 220,533 148,033 189,459
Benefits paid (80,676) (82,680) (707,380)
----------- ----------- -----------
Benefit obligation at end of year 4,108,971 2,762,015 2,019,027
----------- ----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,787,563 1,396,711 2,171,193
Actual return on plan assets 140,306 205,463 (244,376)
Contributions 992,322 268,069 177,274
Benefits paid (80,676) (82,680) (707,380)
----------- ----------- -----------
Fair value of plan assets at end of year 2,839,515 1,787,563 1,396,711
----------- ----------- -----------
Funded status (1,269,456) (974,452) (622,316)
Unrecognized net loss from actuarial experience 1,503,149 560,356 177,951
Unrecognized prior service cost 3,589 93,653 94,544
Unamortized net obligation existing at date of adoption of
SFAS No. 87 2,771 58,364 58,364
----------- ----------- -----------
Prepaid (accrued) benefit cost included in other
assets (liabilities) $ 240,053 $ (262,079) $ (291,457)
=========== =========== ===========
The $960,236 adjustment made to the 2004 beginning of year projected benefit
obligation is a result of a change in calculation methodology from the prior
actuary to the current actuary, hired by the Bank in April 2004, including the
effect of reflecting salary increases in the determination of liabilities. The
adjustment also includes liability gains and losses due to demographic
experience. Net periodic cost for the year ended December 31, 2004 of $490,190
includes additional amortization of the transition obligation and additional
amortization of prior service cost in the amounts of $46,921 and $89,172,
respectively, as a result of this adjustment. Net income for the year ended
December 31, 2004 was reduced by $83,085, net of tax benefit of $53,008, related
to this adjustment.
Amounts recognized in the balance sheets as of December 31, 2004 and 2003
consist of:
2004 2003
--------- ---------
Prepaid (accrued) benefit cost $ 240,053 $(262,079)
Accrued benefit liability (441,413)
Intangible asset 152,017
Accumulated other comprehensive loss 289,396
--------- ---------
Net amount recognized $ 240,053 $(262,079)
========= =========
The accumulated benefit obligation for the Bank's defined benefit pension plan
was $2,824,624 and $2,491,054 at December 31, 2004 and 2003, respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2004 and 2003. The rate of increase in
future compensation levels was based on the following graded table for 2004:
AGE RATE
--- ----
25 4.75%
35 4.25
45 3.75
55 3.25
65 3.00
F-19
No rate of increase in future compensation levels was used in 2003.
Components of net periodic cost are as follows:
2004 2003 2002
--------- --------- ---------
Service cost $ 259,513 $ 188,104 $ 124,322
Interest cost on benefit obligation 220,533 148,033 189,459
Expected return on assets (196,448) (107,010) (176,526)
Amortization of transition obligation 55,593 8,672 8,672
Amortization of prior service cost 90,064 892 892
Amortization of net loss 60,935
--------- --------- ---------
Net periodic cost $ 490,190 $ 238,691 $ 146,819
========= ========= =========
The discount rate used to determine the net periodic cost was 6% for 2004 and
2003 and the expected return on plan assets was 7.25% for 2004 and 2003.
The graded table was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2004 and no rate of increase was
used in 2003.
Pension expense is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on pension plan assets of 7.25%
each year. In developing the expected long-term rate of return assumption, asset
class return expectations were evaluated as well as long-term inflation
assumptions, and historical returns based on the current target asset
allocations of 60% equity and 40% fixed income. The Bank regularly reviews the
asset allocations and periodically rebalances investments when considered
appropriate. While all future forecasting contains some level of estimation
error, the Bank believes that 7.25% falls within a range of reasonable long-term
rate of return expectations for pension plan assets. The Bank will continue to
evaluate the actuarial assumptions, including expected rate of return, at least
annually, and will adjust as necessary.
Plan Assets
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 a 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 Bank's pension plan asset allocations by asset category are as follows:
December 31, 2004 December 31, 2003
---------------------- ----------------------
Asset Category Fair Value Percent Fair Value Percent
- ---------------------------------------------- ---------- ------- ---------- -------
Equity securities $1,054,531 37.1% $1,082,595 60.6%
U.S. Government treasury and agency securities 991,537 34.9 596,662 33.4
Corporate bonds 24,032 .9 24,015 1.3
Mutual funds 462,875 16.3
Money market mutual funds 306,540 10.8 84,291 4.7
---------- ------ ---------- ------
Total $2,839,515 100.0% $1,787,563 100.0%
========== ====== ========== ======
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2004 and 2003.
F-20
Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate, the five years
thereafter:
2005 $ 113,000
2006 91,000
2007 156,000
2008 91,000
2009 215,000
2010 - 2014 2,630,000
The Bank expects to contribute $330,080 to its pension plan in 2005.
The Bank adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute a percentage of their pay, subject to IRS
limitations. The Bank may make discretionary contributions to the Plan. The
Bank's contribution expense in the years ended December 31, 2004, 2003 and 2002
amounted to approximately $60,000, $46,000 and $53,000, 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:
2004 2003 2002
---------- ---------- ----------
Current:
Federal $ 631,007 $ 708,089 $ 790,590
State 250 422,520 302,533
---------- ---------- ----------
631,257 1,130,609 1,093,123
---------- ---------- ----------
Deferred:
Federal 131,788 126,996 4,143
State 11,903 10,345 10,504
---------- ---------- ----------
143,691 137,341 14,647
---------- ---------- ----------
Total income tax expense $ 774,948 $1,267,950 $1,107,770
========== ========== ==========
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended
December 31:
2004 2003 2002
------ ------ ------
% 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 (18.2) (15.8) (16.8)
Other items .2 1.0 3.5
State tax, net of federal tax benefit .2 5.6 5.0
------ ------ ------
Effective tax rates 16.2% 24.8% 25.7%
====== ====== ======
F-21
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2004 2003
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 662,814 $ 482,312
Interest on non-performing loans 24,611 2,426
Accrued deferred compensation 18,810 18,724
Post-retirement benefits 27,880 31,939
Other real estate owned property writedown 22,101 25,317
Accrued pensions 102,080
Capital loss carryforward 27,200
Mark to market purchase accounting adjustments 318,244
Preferred stock amortization 3,991
Net unrealized holding loss on available-for-sale securities 461,071
Minimum pension liability 112,720
----------- -----------
Gross deferred tax assets 1,566,722 775,518
Valuation allowance (27,200)
----------- -----------
1,539,522 775,518
----------- -----------
Deferred tax liabilities:
Core deposit intangible asset (621,035) (208,252)
Accelerated depreciation (1,030,994) (400,660)
Discount accretion (5,299) (9,383)
Mortgage servicing rights (169,446) (26,194)
Prepaid pension (81,619)
Net unrealized holding gain on available-for-sale securities (550,272)
----------- -----------
Gross deferred tax liabilities (1,908,393) (1,194,761)
----------- -----------
Net deferred tax liabilities $ (368,871) $ (419,243)
=========== ===========
Included in the net deferred tax liabilities activity during the year ending
December 31, 2004 is a $704,560 deferred tax liability recorded related to the
Canaan National Bancorp, Inc. merger.
As of December 31, 2004, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The Bank entered into an agreement with a third party in which the third party
is to provide the Bank with account processing services and other miscellaneous
services. Under the agreement, the Bank is obligated to pay monthly processing
fees through August 5, 2010. In the event the Bank chooses to cancel the
agreement prior to the end of the contract term a lump sum termination fee will
have to be paid. The fee shall be calculated as the average monthly billing,
exclusive of pass through costs for the past twelve months, multiplied by the
number of months and any portion of a month remaining in the contract term.
NOTE 11 - FINANCIAL INSTRUMENTS
- -------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing 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 Bank has in particular classes of financial instruments.
The Bank'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 Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
F-22
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 Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank 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 Bank 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, 2004 and 2003, the
maximum potential amount of the Bank's obligation was $31,900 and $20,000,
respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Bank may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows as of December
31:
2004 2003
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 11,677,494 $ 11,677,494 $ 12,128,801 $ 12,128,801
Available-for-sale securities 178,654,748 178,654,748 143,020,363 143,020,363
Held-to-maturity securities 218,374 219,623 229,425 234,394
Federal Home Loan Bank stock 5,413,200 5,413,200 3,771,000 3,771,000
Loans held-for-sale 375,000 381,347 275,000 278,719
Loans, net 201,978,499 201,271,000 139,563,318 140,419,000
Accrued interest receivable 2,256,499 2,256,499 1,875,948 1,875,948
Financial liabilities:
Deposits 298,841,846 299,977,000 218,457,450 219,891,000
FHLB advances 79,213,283 79,167,886 60,897,311 61,245,695
Due to broker 1,083,331 1,083,331
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:
2004 2003
----------- -----------
Commitments to originate loans $ 7,681,700 $ 2,337,315
Standby letters of credit 31,900 20,000
Unadvanced portions of loans:
Home equity 23,085,518 10,374,759
Commercial lines of credit 9,136,426 6,935,664
Construction 4,913,228 3,349,345
Consumer 11,021,451 5,986,321
----------- -----------
$55,870,223 $29,003,404
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
F-23
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
- ----------------------------
Bancorp 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,
2004, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2004, 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's 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, 2004:
Total Capital (to Risk Weighted Assets)
Consolidated $31,579 12.13% $20,825 >8.0% N/A
-
Salisbury Bank and Trust Company 31,008 11.90 20,840 >8.0 $26,050 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 28,940 11.12 10,412 >4.0 N/A
-
Salisbury Bank and Trust Company 28,369 10.89 10,420 >4.0 15,630 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 28,940 7.22 16,042 >4.0 N/A
-
Salisbury Bank and Trust Company 28,369 7.09 16,016 >4.0 20,020 >5.0
- -
F-24
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 and Trust Company 25,882 16.19 12,788 >8.0 $15,986 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 24,566 15.35 6,402 >4.0 N/A
-
Salisbury Bank and 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 and Trust Company 24,140 7.92 12,188 >4.0 15,235 >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 Bancorp will be entitled to dividends only when,
and if, declared by the Bancorp'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.
Under Connecticut law, the Bank may pay dividends only out of net profits. The
Connecticut Banking Commissioner's approval is required for dividend payments
which exceed the current year's net profits and retained net profits from the
preceding two years. As of December 31, 2004, the Bank is restricted from
declaring dividends to Bancorp in an amount greater than approximately $813,000.
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
- ---------------------------------------
At the 2001 annual meeting the stockholders of Bancorp 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 Bancorp 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
Bancorp. In 2004, 2003 and 2002, 840, 840 and 880 shares, respectively, were
issued under the Plan and the related compensation expense amounted to $31,836,
$23,688 and $22,220, respectively.
NOTE 15 - MERGER
- ----------------
On September 10, 2004, Canaan National Bancorp, Inc. ("Canaan National") merged
(the "Merger") with and into the Company. Under the terms of the Merger, the
shareholders of Canaan National received a total of $6,020,163 in cash and
257,483 shares of Bancorp common stock in exchange for all shares of Canaan
National Bancorp, Inc. stock. The value of the 257,483 shares issued was
$10,698,418 and was determined based on the September 10, 2004 closing market
price of $41.55 of Bancorp's common stock.
F-25
The Merger was accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded by
the Company at their fair values at the consummation date. During the appraisal
process, an identifiable intangible asset of $1,191,279 was calculated and is
being amortized to expense over a period of 12 years. Goodwill recorded totaled
$7,151,421 and will be analyzed for impairment on at least an annual basis.
Financial statement amounts for Canaan National are included in the Company's
consolidated financial statements beginning on the acquisition date. A summary
of net assets acquired is included in the supplemental disclosures in the cash
flow statement.
The following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisition of Canaan National had occurred at January 1,
2003:
Year Ended December 31,
---------------------------------
2004 2003
----------- -----------
Gross revenues $25,291,875 $26,027,000
Net income $ 4,870,000 $ 4,683,000
Net income per share $ 2.89 $ 2.78
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
- ----------------------------------------
The Company's assets as of December 31, 2004 and 2003 include goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001. In 2004 the
Company recorded $7,151,421 of additional goodwill from the merger with Canaan
National Bancorp, Inc. Goodwill recognized in the 2004 merger is not deductible
for tax purposes.
The Company evaluated its goodwill as of December 31, 2004 and 2003 and found no
impairment.
A summary of acquired amortized intangible assets is as follows:
As of December 31, 2004
-------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Core deposit intangible-branch purchase $ 888,606 $ 225,000 $ 663,606
Core deposit intangible-Canaan National merger 1,191,279 32,754 1,158,525
---------- --------- ----------
Total $2,079,885 $ 257,754 $1,822,131
========== ========= ==========
As of December 31, 2003
-------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
------ ------------ ------
Core deposit intangible-branch purchase $ 888,606 $ 156,645 $ 731,961
--------- --------- ---------
Total $ 888,606 $ 156,645 $ 731,961
========= ========= =========
Aggregate amortization expense was $101,109, $68,355 and $68,354 in 2004, 2003
and 2002, respectively. Amortization is being calculated on a straight-line
basis.
F-26
Estimated amortization expense for each of the five years succeeding 2004 is as
follows:
2005 $164,581
2006 164,581
2007 164,581
2008 164,581
2009 164,581
--------
$822,905
========
NOTE 17 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 18 - 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.
F-27
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
BALANCE SHEETS
--------------
December 31, 2004 and 2003
--------------------------
ASSETS 2004 2003
- ------ ----------- -----------
Checking account in Salisbury Bank and Trust Company $ 630 $ 391
Money market mutual funds 941,890 500,512
----------- -----------
Cash and cash equivalents 942,520 500,903
Investment in subsidiary 40,129,049 28,424,203
Due from subsidiary 33,000
Other assets 35,484 219,644
----------- -----------
Total assets $41,107,053 $29,177,750
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Dividends payable $ 403,776 $ 327,538
Other liabilities 3,677
----------- -----------
Total liabilities 407,453 327,538
Total stockholders' equity 40,699,600 28,850,212
----------- -----------
Total liabilities and stockholders' equity $41,107,053 $29,177,750
=========== ===========
F-28
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
2004 2003 2002
----------- ----------- -----------
Dividend income from subsidiary $ 7,510,000 $ 1,540,000 $ 1,300,000
Taxable interest on securities 4,375 2,873 5,616
----------- ----------- -----------
7,514,375 1,542,873 1,305,616
----------- ----------- -----------
Legal expense 10,500 26,823 6,909
Supplies and printing 2,042 6,873 4,407
Other expense 24,167 63,405 18,591
----------- ----------- -----------
36,709 97,101 29,907
----------- ----------- -----------
Income before income tax benefit and equity in (distributed)
undistributed net income of subsidiary 7,477,666 1,445,772 1,275,709
Income tax benefit (5,647) (32,000) (8,260)
----------- ----------- -----------
Income before equity in (distributed) undistributed net
income of subsidiary 7,483,313 1,477,772 1,283,969
Equity in undistributed net (loss) income of subsidiary (3,464,371) 2,362,330 1,914,826
----------- ----------- -----------
Net income $ 4,018,942 $ 3,840,102 $ 3,198,795
=========== =========== ===========
F-29
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities:
Net income $4,018,942 $ 3,840,102 $ 3,198,795
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net loss (income) of subsidiary 3,464,371 (2,362,330) (1,914,826)
Deferred tax expense 1,000 1,193
Increase in taxes receivable (5,647)
Decrease (increase) in due from subsidiary 33,000 (23,547) (3,615)
Decrease (increase) in other assets 189,807 (219,644)
Decrease in other liabilities (78,323)
Issuance of shares for Director's fees 31,836 23,688 22,220
----------- ----------- -----------
Net cash provided by operating activities 7,653,986 1,259,269 1,303,767
----------- ----------- -----------
Cash flows from investing activities:
Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163)
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc., net of expenses paid of $309,419 222,868
----------- ----------- -----------
Net cash used in investing activities (5,797,295)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,415,074) (1,295,533) (1,237,840)
----------- ----------- -----------
Net cash used in financing activities (1,415,074) (1,295,533) (1,237,840)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 441,617 (36,264) 65,927
Cash and cash equivalents at beginning of year 500,903 537,167 471,240
----------- ----------- -----------
Cash and cash equivalents at end of year $ 942,520 $ 500,903 $ 537,167
=========== =========== ===========
Supplemental disclosures:
Liability assumed in merger with Canaan National Bancorp, Inc. $ 82,000
F-30
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------
Summarized quarterly financial data for 2004 and 2003 follows:
(In thousands, except earnings per share)
2004 Quarters Ended
---------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
Interest and dividend income $ 3,755 $ 3,815 $ 4,105 $ 4,876
Interest expense 1,269 1,273 1,390 1,727
-------- -------- -------- --------
Net interest and dividend income 2,486 2,542 2,715 3,149
Provision for loan losses 60 60 60 70
Other income 1,092 1,122 1,124 1,417
Other expense 2,077 2,260 2,985 3,281
-------- -------- -------- --------
Income before income taxes 1,441 1,344 794 1,215
Income tax expense (benefit) 369 248 (2) 160
-------- -------- -------- --------
Net income $ 1,072 $ 1,096 $ 796 $ 1,055
======== ======== ======== ========
Earnings per common share $ .74 $ .77 $ .54 $ .63
======== ======== ======== ========
(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
======== ======== ======== ========
Earnings per common share $ .72 $ .70 $ .71 $ .57
======== ======== ======== ========
F-31
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
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of December 31, 2004, 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, 2004, there were no 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.
ITEM 9B. OTHER INFORMATION
None
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 58 Chairman and 1998 (1)
Chief Executive Officer
Richard J. Cantele, Jr. 45 President, Chief Operating
Officer and Secretary 2001 (2)
John F. Foley 54 Chief Financial Officer
And Treasurer 1998 (3)
(1) Mr. Perotti is also the Chairman and Chief Executive Officer of the Bank
and has been an Executive Officer of the Bank since 1982.
(2) Mr. Cantele is also the President and Chief Operating Officer of the Bank
and has been an Executive Officer of the Bank since 1989.
(3) Mr. Foley is also the Chief Financial Officer and Treasurer 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 eleven (11). 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
32
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.
The following table sets forth certain information, as of March 4, 2005, with
respect to the directors of the Company.
NOMINEES FOR ELECTION AT THE 2005 ANNUAL MEETING TO BE HELD ON APRIL 27, 2005
-----------------------------------------------------------------------------
Positions Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- ----- --------
Louis E. Allyn, II 57 Director 2004 2005
Dana A. Bartholomew 65 Director 2004 2005
John R. H. Blum 75 Presiding Director 1998 2005
Richard J. Cantele, Jr. 45 President, Chief Operating
Officer, Secretary
and Director 2005 2005
Robert S. Drucker 63 Director 2004 2005
Louise F. Brown 61 Director 1998 2005
Nancy F. Humphreys 63 Director 2001 2005
CONTINUING DIRECTORS
--------------------
Holly J. Nelson 51 Director 1998 2006
Walter C. Shannon, Jr. 69 Director 1998 2006
John F. Perotti 58 Chairman 1998 2007
Chief Executive Officer
and Director
Michael A. Varet 62 Director 1998 2007
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.
Louis E. Allyn, II has been a director of the Bank since 2004. He is President
of Allyndale Corporation.
Dana A. Bartholomew has been a director of the Bank since 2004, when he was
elected by the Board to fill a vacancy created by the resignation of Gordon C.
Johnson, D.V.M. He is President of Sheffield Water Company.
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 Presiding Director in 2005. Prior to that, he was
elected Chairman of the Board of Directors of the Company and the Bank since
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.
Richard J. Cantele, Jr. is Secretary of the Company and President and Chief
Operating Officer of the Company and the Bank. Prior to that he served as
Executive Vice President, Treasurer and Chief Operating Officer of the Bank and
Secretary of the Company. He has been a director of the Bank since 2005.
Robert S. Drucker has been a director of the Bank since 2004. He is proprietor
of Bob's Clothing and Barrington Outfitters.
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.
33
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 Chairman and Chief Executive Officer of the Company and the
Bank. Prior to that he served as President and Chief Executive Officer of the
Company and the Bank, 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 DLA Piper Rudnick Gray Cary US
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.
Based solely on a review of copies of reports filed with the SEC since January
1, 2004 and of written representations by certain executive officers and
directors, with the exception of the following, 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: Mr. Perotti filed one Form 4 late to
reflect one transaction and Mr. Foley filed one Form 4 late to reflect one
transaction.
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: Louis E. Allyn, II, Louise F. Brown, Nancy F.
Humphreys, 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 educational, 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 2004, each director received an annual retainer of $4,000. This amount
was prorated in cases involving new Directors. In addition, directors received
$500 for each Board of Directors meeting attended and $250 for each committee
meeting attended. Director Perotti received no additional compensation for his
service as director or member of any board committee during 2004. During 2001,
the Board of Directors and Shareholders approved a Directors Stock Retainer Plan
which, beginning in 2002, provides each non-employee director with up to 120
shares of restricted common stock as a component of their compensation. The Plan
is described in more detail on page 14 of the Company's Proxy Statement.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company and the Bank for services rendered
in all capacities during the fiscal years ended December 31, 2004, 2003, and
2002. All compensation expense was paid by the Bank.
34
Summary Compensation Table
Annual
Name and Principal Compensation(1) All Other
Position Year Salary($) Bonus($) Compensation($)
John F. Perotti 2004 $209,474 $66,042 $4,100 (4)
Chairman and 2003 195,178 28,101 4,000 (3)
Chief Executive Officer 2002 187,816 32,092 4,000 (2)
of the Company and the Bank
Richard J. Cantele, Jr. 2004 $139,750 $40,000 $3,595 (4)
Secretary of the Company 2003 124,237 18,857 2,862 (3)
President and Chief Operating 2002 109,434 18,332 2,553 (2)
Officer of the Company and the Bank
John F. Foley 2004 $100,460 $14,759 $2,304 (4)
Chief Financial Officer and Treasurer 2003 87,235 12,476 1,994 (3)
of the Company and the Bank 2002 83,174 14,785 1,704 (2)
Diane E. R. Johnstone 2004 $128,870 $16,206 $2,902 (4)
Sr. Vice President & Trust Officer 2003 119,734 16,412 2,723 (3)
of the Bank 2002 109,321 16,690 2,522 (2)
William C. Lambert 2004 $125,395 $16,260 $2,833 (4)
Vice President & Trust Officer 2003 115,333 14,521 2,597 (3)
of the Bank 2002 110,522 2,200 (2)
(1) Compensation does not include accrual of benefits under the Bank's defined
pension plan or supplemental retirement arrangements described below.
(2) The Bank's matching contribution to the 401(k) plan for 2002.
(3) The Bank's matching contribution to the 401(k) plan for 2003.
(4) The Bank's matching contribution to the 401(k) plan for 2004.
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 15 20 25 30 35
Retirement
- ------------------------------------------------------------------------------------
$ 75,000 $17,987 $23,983 $29,979 $31,854 $33,729
- ------------------------------------------------------------------------------------
$100,000 $25,487 $33,983 $42,479 $44,979 $47,478
- ------------------------------------------------------------------------------------
$125,000 $32,987 $43,983 $54,979 $58,104 $61,229
- ------------------------------------------------------------------------------------
$150,000 $40,487 $53,983 $67,479 $71,229 $74,979
- ------------------------------------------------------------------------------------
$175,000 $47,987 $63,983 $79,979 $84,354 $88,729
- ------------------------------------------------------------------------------------
$200,000 $55,487 $73,983 $92,979 $97,479 $102,479
- ------------------------------------------------------------------------------------
$225,000 $56,987 $75,983 $94,979 $100,104 $105,229
- ------------------------------------------------------------------------------------
$250,000 $56,987 $75,983 $94,979 $100,104 $105,225
- ------------------------------------------------------------------------------------
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
35
by .65% of the Social Security wage base 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, Foley, Lambert and Ms. Johnstone
are: Mr. Perotti: $227,216 with 32 years of service; Mr. Cantele: $133,306 with
24 years of service; Mr. Foley: $97,091 with 23 years of service; Mr. Lambert:
$123,369 with 3 years of service; and Ms. Johnstone: $116,789 with 17 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 2004.
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 that
would prevent Mr. Perotti from working for a competitor in the proximity of the
Bank.
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 2005 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 J. Morrison, 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 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 any 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 $4,100. The Plan expense was $67,126 for 2004.
36
- ----------------------------------------------------------------------------------------------------------------------
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 outstanding options, equity compensation plans (excluding
options, warrants and warrants and rights securities reflected in column (a))
rights
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans None None 12,440 (1)
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans not None None None
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Total None None 12,440
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
(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 2004, 840 shares were issued under the Plan and the
related compensation expense amounted to $31,836.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The following table sets forth certain information as of March 4, 2005 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)
-------------------- -----------------------
Louis E. Allyn, II 1,026 (3) .06%
Dana A. Bartholomew 2,339 (4) .14%
John R. H. Blum 15,696 (5) .93%
Louise F. Brown 2,448 (6) .15%
Richard J. Cantele, Jr. 2,883 (7) .17%
Robert S. Drucker 5,979 (8) .36%
John F. Foley 5,650 (9) .34%
Nancy F. Humphreys 1,360 (10) .08%
Holly J. Nelson 1,408 (11) .08%
John F. Perotti 10,972 (12) .65%
Walter C. Shannon, Jr. 3,964 (13) .24%
Michael A. Varet 66,006 (14) 3.92%
- ---------------------- -------- -----
(All Directors and Executive 119,731 7.12%
Officers of the Company
as a group of (12) 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 1,682,401 shares of the Company's Common
Stock outstanding and entitled to vote on March 4, 2005. 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) All shares are owned individually by Louis E. Allyn, II.
(4) Includes 2,005 shares owned jointly by Dana A. Bartholomew and his wife.
37
(5) Includes 2,100 shares owned by John R. H. Blum's wife.
(6) All shares are owned individually by Louise F. Brown.
(7) 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.
(8) Includes 1,500 shares owned by Robert S. Drucker's wife.
(9) Includes 1,852 shares owned jointly by John F. Foley and his wife, 1,370
owned by his wife and 100 shares owned by John F. Foley as custodian for
his children.
(10) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her husband.
(11) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(12) 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.
(13) All shares are owned individually by Walter C. Shannon, Jr.
(14) Includes 18,540 shares which are owned by Michael A. Varet's wife and
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 a member 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 2004, the Company may engage his
services in 2005 in connection with certain legal matters.
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, 2004, 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 $709,118, representing an aggregate
principal amount equal to 1.71% of the equity capital accounts of the Bank.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
38
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, 2004 and December 31,
2003 were $86,980 and $76,625, 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 regulatory audit requirements of the Trust
Department were $17,942 for the fiscal year ended December 31, 2004 and $11,590
for the fiscal year ended December 31, 2003.
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,
2004 and December 31, 2003 were $8,100 each year.
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
years ended December 31, 2004 and December 31, 2003.
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 2004 and 2003 were
approved per the Audit Committee's pre-approval policies.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form l0-K.
39
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-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certifications
(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 February 10, 2005 as Exhibit 3.2 to Company's Form
8-K/A 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.
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 28, 2005.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
---------------------------------
John F. Perotti
Chairman and
Chief Executive Officer
By: /s/ John F. Foley
---------------------------------
John F. Foley
Chief Financial Officer
and Treasurer
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 Chairman, March 28, 2005
- -------------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ Louis E. Allyn, II Director March 28, 2005
- --------------------------------
(Louis E. Allyn, II)
/s/ Dana A. Bartholomew Director March 28, 2005
- --------------------------------
(Dana A. Bartholomew)
/s/ John R. H. Blum Director March 28, 2005
- --------------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 28, 2005
- --------------------------------
(Louise F. Brown)
/s/ Richard J. Cantele, Jr. Director March 28, 2005
- --------------------------------
(Richard J. Cantele, Jr.)
/s/ Robert S. Drucker Director March 28, 2005
- --------------------------------
(Robert S. Drucker)
/s/ Nancy F. Humphreys Director March 28, 2005
- --------------------------------
(Nancy F. Humphreys)
/s/ Holly J. Nelson Director March 28, 2005
-------------------------------
(Holly J. Nelson)
/s/ Walter C. Shannon, Jr. Director March 28, 2005
- --------------------------------
(Walter C. Shannon, Jr.)
/s/ Michael A. Varet Director March 28, 2005
- --------------------------------
(Michael A. Varet)
41