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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________to ______________
Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
- -------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock par value $.10 per share
Name of exchange on which registered: American Stock Exchange
Indicate by check mark whether the registrant: (1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 28, 1999, the aggregate market value of the outstanding common
stock, exclusive of the shares held by affiliates of the registrant, was
$30,382,802.25.
The number of shares outstanding of the registrant's common stock, $.10 par
value, was 1,509,792 at February 28, 1999.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
Page
----
Part I
Item 1 - Business 3
Item 2 - Properties 13
Item 3 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Part II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6 - Selected Financial Data 16
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 7A- Quantitative and Qualitative Disclosures About Market Risk 32
Item 8 - Financial Statements and Supplementary Data 32
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 33
Part III
Item 10 - Directors and Executive Officers of the Registrant 33
Item 11 - Executive Compensation 35
Item 12 - Security Ownership of Certain Beneficial Owners
and Management 38
Item 13 - Certain Relationships and Related Transactions 39
Part IV
Item 14 - Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 40
Signatures
2
PART I
ITEM 1. BUSINESS
General
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. It's 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 is a member of the
Federal Deposit Insurance Corporation. The Bank's main office is at 5 Bissell
Street, Lakeville, Connecticut 06039. It's telephone number is (860) 435-9801.
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Market Area
The Bank provides banking services to its customers from its three (3) offices
which are located in Lakeville, Salisbury and Sharon, Connecticut.
Substantially, all of the Bank's customers reside in or maintain their principal
offices in Litchfield County, Connecticut or in Dutchess County or Columbia
County, New York or in Berkshire County, Massachusetts.
Lending Activities
Lending is the principal business of the Bank and loans represent the largest
portion of the Banks 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. The Bank has also increased its activity with home equity
loans as well. These type of loans 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 and are completely serviced by the Bank.
3
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 a position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investment Activities
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. At December 31, 1998, it totaled
$81,290,000 which represents approximately 37.42% of total assets and it
produced interest and dividend income of $3,432,000 for the year 1998.
Source of funds: 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
during the year 1998.
The Bank is a member of the Federal Home Loan Bank of Boston. Borrowings totaled
$41,120,000 at December 31, 1998.
For additional information relating to the asset, deposit and borrowing
components of the Company, see item 7, Management's Discussion and Analysis and
the accompanying Consolidated Financial Statements.
Other Services
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts, 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.
Competition
The Bank encounters competition in all phases of its business. Several
competitive financial institutions have offices in the Salisbury, Connecticut
banking market. In addition, the Bank competes with banking institutions located
in Massachusetts and New York. A number of these institutions have higher
lending limits and greater resources than the Bank and provide certain services
that the Bank does not provide.
4
The banking business in the area served by the Bank is very competitive. Based
on information published by the Federal Reserve Bank of Boston in June 1997, the
Salisbury, Connecticut banking market consists of eight (8) commercial and
savings banks with a total of twelve (12) banking offices. The Bank has a 45.05
percent market share of deposits in the market.
SALISBURY, CONNECTICUT
ALL INSTITUTIONS, BY TOTAL DEPOSITS
Number of Dollars in Total Deposits
Branches Thousands (Percent)
l. Salisbury Bancorp, Lakeville .................. 2 $ 149,000 45.05%
(Salisbury Bank & Trust Company) ............. (2) ($149,000) --
2. Canaan National Bancorp, Canaan ................ 1 $ 51,000 15.39%
(Canaan National Bank) ........................ (1) ($ 51,000) --
3. NewMil Bancorp, New Milford .................... 2 $ 32,000 9.76%
(New Milford Savings Bank) .................... (2) ($ 32,000) --
4. Iron Bancshares, Inc., Salisbury ............... 3 $ 27,000 8.21%
(National Iron Bank) .......................... (3) ($ 27,000) --
5. Torrington Savings Bank ........................ 1 $ 25,000 7.62%
6. People's Mutual Holdings, Bridgeport ........... 1 $ 19,000 5.85%
(Peoples Bank) ................................ (1) ($ 19,000) --
7. Litchfield Bancorp ............................. 1 $ 14,000 4.11%
8. Union Savings Bank ............................. 1 $ 13,000 4.01%
-- --------- ------
All Commercial Banking and Thrift Organizations 12 $ 330,000 100.00%
Herfindahl-Hirschman Index: 2,555
Three Firm Concentration Ratio: 70.20%
Note: The table is based on June 30, 1997 deposit data. It reflects all mergers
and bank holding company acquisitions completed by November 1, 1998.
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. 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.
5
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 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 of and
mergers with Connecticut banks and bank holding companies 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 Bank Holding Company Act.
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 of the voting stock of any bank.
6
The BHCA also allows the Federal Reserve Board to determine (by order or by
regulation) what activities are so closely related to banking as to be a proper
incident of banking, and thus, whether the Company can engage in such
activities. The BHCA prohibits the Company and the Bank from engaging in certain
tie-in arrangements in connection with any extension of credit, sale of property
or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
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 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 months, is equal to 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.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making
7
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, among other things, to open branch
offices and to consummate merger transactions and other business combinations.
The Connecticut Banking Commissioner conducts periodic examinations of the Bank.
The Connecticut banking statutes also restrict the ability of the Bank to
declare cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed 15% of the Bank's capital, surplus, undivided profits and loan reserves.
In addition, under Connecticut law, the beneficial ownership of more than 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
OPERATIONS".
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 "Satisfactory". 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.
8
Insurance companies, investment counseling firms and other businesses and
individuals actively compete with the Bank for personal and corporate trust
services and investment counseling services.
Employees
As of February 28, 1999, the Bank had 62 employees, of whom 56 were full-time
and 6 were part-time. The employees are not represented by a collective
bargaining unit.
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE
ACT, INDUSTRY GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, are presented on the following pages of this Report
on Form 10-K.
Page(s) of
Item of Guide 3 This Report
- --------------- -----------
I. Distribution of Assets, Liabilities and Stockholders' 20
Equity; Interest Rates and Interest Differential
II. Investment Portfolio 9
III. Loan Portfolio 11
IV. Summary of Loan Loss Experience 25
V. Deposits 26
VI. Return on Equity and Assets 16
VII.Short-Term Borrowings 12
Investment Portfolio
As of December 1994, Salisbury Bank and Trust Company adopted Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 provides for the
categorization of investments into three groups and further provides for the
accounting and reporting treatment of each group. Investments may be classified
as held-to-maturity, available-for-sale, or trading. The Bank does not purchase
or hold any investment securities for the purpose of trading such investments.
The following tables sets forth the carrying amounts of the investment
securities as of December 31:
9
1998 1997 1996
------- ------- -------
Available-for-sale securities:
(at fair value)
Equity securities ................................ $ 116 $ 123 $ 109
U.S. Treasury securities and other
U.S. government corporations and agencies ....... 43,578 33,175 20,790
Obligations of states and political subdivisions . 9,553 6,983 2,225
Corporate securities ............................. 0 37 1,019
Mortgage-backed securities ....................... 25,408 7,193 8,887
------- ------- -------
$78,655 $47,511 $33,030
======= ======= =======
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies ....... $ -- $ -- $ 2,500
Obligations of states and political subdivisions . 25 857 1,676
Mortgage-backed securities ....................... 554 915 1,205
------- ------- -------
$ 579 $ 1,772 $ 5,381
======= ======= =======
Federal Home Loan Bank stock ..................... $ 2,056 $ 833 $ 771
======= ======= =======
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,
1998:
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
------ ----- ----- ----- ----- ----- ----- ----- -----
(dollars in thousands)
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 25 7.50% 25
Mortgage-backed
securities 554 6.73% 554
Available-for-sale
securities
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $23,349 5.54% $10,075 6.64% $10,154 5.93% $ 0 $43,578
Obligations of state and
political subdivisions 2,307 4.92% 7,246 4.91% 9,553
Mortgage-backed
securities 466 7.45% 4,830 6.86% 20,112 6.52% 25,408
10
Loan Portfolio
The following table represents the composition of the loan portfolio at December
31 in each of the past five years:
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Commercial, financial and agricultural ...... $ 10,692 $ 11,575 $ 12,047 $ 13,428 $ 11,849
Real Estate-construction and land development 3,392 4,203 4,839 5,065 4,947
Real Estate - residential ................... 80,451 77,336 75,756 71,283 68,167
Real Estate-commercial ...................... 14,909 13,355 13,607 13,948 13,004
Consumer .................................... 10,430 10,805 10,433 9,394 8,183
Other ....................................... 535 655 743 139 299
--------- --------- --------- --------- ---------
120,409 117,929 117,425 113,257 106,449
Allowance for possible loan losses .......... (1,260) (1,226) (1,242) (1,160) (1,309)
Unearned income ............................. (6) (12) (34) (14) (15)
--------- --------- --------- --------- ---------
Net loans .................... $ 119,143 $ 116,691 $ 116,149 $ 112,083 $ 105,125
========= ========= ========= ========= =========
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, 1998. Also provided are the amounts due after one
year classified according to the sensitivity to changes in interest rates.
Within One After One But After Five
Year Within Five Years Years Total
---- ----------------- ----- -----
Commercial, financial,
agricultural and real estate commercial $ 169 $5,918 $19,514 $25,601
Real estate-construction
and land development 3,392 0 0 3,392
------- ------ ------- -------
$3,561 $5,918 $19,514 $28,993
Maturities after
One Year with:
Fixed interest rates $1,013 $ 3,593
Variable interest rates 4,905 15,921
------ -------
$5,918 $19,514
Nonaccrual, Past Due and Restructured Loans
At December 31, 1998, approximately 44.86% of nonaccrual loans and approximately
88.99% of accruing loans past due 90 days or more are secured by 1-4 family
residential properties. Approximately 21.21% of restructured loans are secured
by 1-4 family residential properties. When a mortgage loan becomes 90 days past
due, and there is not sufficient collateral to cover the principal and accrued
interest, the Bank stops accruing interest unless there are unusual
circumstances which allow exception. Generally the only loan types that the Bank
reclassifies to nonaccrual are those secured by real estate. All others are
usually charged off if they become 90 days or more delinquent.
11
The following table summarizes the Bank's nonaccrual, past due, and restructured
loans:
(dollars in thousands)
December 31
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Nonaccrual loans ............. $1,208 $1,328 $1,316 $1,793 $1,916
Accruing loans past due
90 days or more ............. 109 279 49 8 11
Restructured loans ........... 547 764 1,547 2,003 2,690
Information with respect to non-accrual and restructured loans
at December 31, 1998, 1997 and 1996 is as follows:
December 31
1998 1997 1996
---- ---- ----
(dollars in thousands)
Interest income that would have been
recorded under original terms ....................... $83 $84 $88
Interest income recorded during the period .......... 8 7 57
Commitments to lend additional funds ................ 0 0 0
Short-Term Borrowings
The following table is a summary of borrowings for each of the last three years:
1998 1997 1996
------- ------- -------
Federal Home Loan Bank Advances
Average interest rate
At year end ............................... 5.01% 6.37% 6.36%
For the year .............................. 6.02% 6.59% 6.19%
Average amount outstanding during the year .... $15,267 $ 5,191 $ 2,926
Maximum amount outstanding at any month ....... $41,120 $ 6,000 $ 4,750
Amount outstanding at year end ................ $41,120 $ 5,497 $ 4,527
12
ITEM 2. PROPERTIES
The following table sets forth the location and other related information
regarding the Bank's offices and other properties occupied as of December 31,
1998.
OFFICES LOCATION STATUS
- ------- -------- ------
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
ITEM 3. LEGAL PROCEEDINGS -None
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 1998 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Before Salisbury Bancorp, Inc. became the holding company for Salisbury Bank and
Trust Company, the Common Stock of the Bank was traded only infrequently and no
substantial public market for the stock existed. The Common Stock was not quoted
on the Nasdaq Inter-dealer Quotation System. Some trading did take place
however, in the over-the-counter market, where the stock was traded as a
non-NASDAQ issue. The stock had several market makers who listed the issue in
the National Bureau "Pink Sheets", an interdealer quotation system. The Bank had
the bulletin board quotation symbol "SBTL". Those trades which occurred may not
provide a reliable indication of the market value of the Common Stock, as only a
limited trading market existed, and the market price may be substantially
affected by the relatively insubstantial volume of transactions.
The following table sets forth for the period indicated the range of high and
low prices by quarter of the Bank's Common Stock until August 24, 1998. On
August 24, 1998 each share of Bank Common Stock was exchanged for six shares of
Company Common Stock and the stock began trading on the American Stock Exchange.
The trading symbol for the stock is "SAL". The market prices have been adjusted
to reflect the six for one exchange which became effective August 24, 1998.
These prices represent actual sales between individual purchasers and sellers,
and do not reflect commissions paid to brokers.
13
High/Low
--------
1997(1) (2)
First quarter $11.12 $10.00
Second quarter $11.16 $10.67
Third quarter $12.08 $11.25
Fourth quarter $14.17 $12.17
1998(2)
First quarter $16.67 $15.00
Second quarter $20.83 $20.67
Third quarter $20.83 $20.83
(to August 23, 1998)
(1) source of information: Smith Barney, Inc.
(2) source of information: A.G. Edwards & Sons, Inc.
On August 24, 1998, Salisbury Bancorp, Inc. stock began trading on the American
Stock Exchange. The following table represents the high and low sales prices
from August 24, 1998 for each quarter through December 31, 1998 after the
six-for-one exchange. These prices represent actual sales between individual
purchasers and sellers, and do not reflect commissions paid to brokers.
High/Low
--------
1998
Third quarter $21.75 $19.00
(from August 24, 1998
to September 30, 1998)
Fourth quarter $23.00 $17.50
The following table shows per share quarterly cash dividends the Bank declared
during 1997 and the first and second quarters of 1998. Per share data has been
restated to reflect the six-for-one stock exchange described above. 1998 third
and fourth quarter dividends were declared by the Company.
1997 1998
---- ----
1st quarter $.08 $.11
2nd quarter $.08 $.11
3rd quarter $.09 $.11
4th quarter $.25 $.27
Holders of Company Common Stock are entitled to receive dividends when, and if
declared by the Board of Directors out of funds legally available therefor.
However, the Company's ability to pay dividends is limited by prudent banking
principles applicable to all bank holding companies. Generally, the Company's
ability to pay dividends is limited by the Bank's ability to dividend funds to
the Company. Under the Connecticut banking statutes, subject to any restrictions
contained in its Certificate of Incorporation, a bank such as the Bank may not
declare a dividend on its capital stock
14
except from its net profits. "Net profits" is defined as the remainder of all
earnings from current operations. The total of all dividends by a bank in any
calendar year may not, unless specifically approved by the banking commissioner,
exceed the total of its net profits of that year combined with its retained net
profits of the preceding two (2) years.
Based upon the number of record holders, the approximate number of holders of
Company's Common Stock is 600 as of March 12, 1999.
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF COMPANY
At or For the Years Ended December 31
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
[dollars in thousands]
Statement of Condition Data:
Loans, Net .............................................. $119,143 $116,691 $116,149 $112,083 $105,125
Allowance For Possible Loan Losses ...................... 1,260 1,226 1,242 1,160 1,309
Investments ............................................. 81,290 50,116 39,181 37,081 39,982
Total Assets ............................................ 217,226 183,433 175,363 166,818 156,620
Deposits ................................................ 153,151 156,173 150,149 148,640 136,858
Borrowings .............................................. 41,120 5,497 4,527 0 3,000
Shareholders' Equity .................................... 21,555 20,483 18,789 17,605 16,178
Nonperforming Assets .................................... 1,935 2,297 3,269 4,467 5,507
Statement of Income Data:
Interest and Fees on Loans .............................. $ 9,480 $ 9,459 $ 9,347 $ 8,418 $ 6,828
Interest and Dividends on Securities
and Other Interest Income ........................... 3,881 3,165 2,727 2,549 2,714
Interest Expense ........................................ 6,043 5,707 5,518 5,289 4,034
-------- -------- -------- -------- --------
Net Interest Income ..................................... 7,318 6,917 6,556 5,678 5,508
Provision for Possible Loan Losses ...................... 120 50 275 250 60
Trust Department Income ................................. 1,031 934 752 693 746
Other Income ............................................ 735 553 668 450 471
Net Gain on Sales of Securities ......................... 0 4 12 192 7
Other Expenses .......................................... 5,347 4,766 4,547 4,213 4,229
-------- -------- -------- -------- --------
Pre Tax Income .......................................... 3,617 3,592 3,166 2,550 2,443
Income Taxes ............................................ 1,299 1,402 1,052 990 923
-------- -------- -------- -------- --------
Net Income .............................................. $ 2,318 $ 2,190 $ 2,114 $ 1,560 $ 1,520
======== ======== ======== ======== ========
At or For the Years Ended December 31
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
[dollars in thousands]
Per Share Data:*
Earnings per common share ............................... $ 1.48 $ 1.41 $ 1.35 $ 0.98 $ 0.94
Earnings per common share, assuming dilution ............ $ 1.47 $ 1.40 $ 1.35 $ 0.98 $ 0.94
Cash Dividends Declared ................................. $ 0.60 $ 0.52 $ 0.45 $ 0.33 $ 0.32
Book Value (at year end) ................................ $ 13.85 $ 13.06 $ 12.08 $ 11.12 $ 10.11
Selected Statistical Data:
Return on Average Assets ................................ 1.22% 1.24% 1.25% 0.97% 0.97%
Return on Average Shareholders' Equity .................. 11.27% 11.10% 11.59% 9.16% 9.33%
Dividend Payout Ratio ................................... 40.13% 37.24% 33.27% 33.04% 33.92%
Average Shareholders' Equity to Average Assets .......... 10.79% 11.13% 10.80% 10.54% 10.34%
Net Interest Spread ..................................... 3.20% 3.33% 3.32% 2.99% 3.22%
Net Interest Margin ..................................... 4.14% 4.21% 4.14% 3.77% 3.72%
* Per share data for 1997, 1996, 1995 and 1994 has been restated to reflect the
six-for-one stock exchange described in Note 1 of the consolidated financial
statements.
16
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION
AND
RESULTS OF OPERATION
OVERVIEW
We are pleased to report to you as Salisbury Bancorp, Inc. (the "Company"). The
reorganization was completed on August 24, 1998 and Salisbury Bank and Trust
Company (the "Bank") began operating through a holding company structure as the
sole subsidiary of the Company, a corporation organized under the laws of the
State of Connecticut. The Mission Statement of Salisbury Bancorp, Inc. and
Salisbury Bank and Trust Company, its sole subsidiary, provides a standard
against which the Company's performance should be measured as follows:
o We strive to make Salisbury Bank and Trust Company the leading community bank
in the tri-state area.
o We are committed to providing professional financial services in a friendly
and responsive manner.
o We are dedicated to being an active corporate citizen in the communities we
serve.
o We will inspire our staff to grow personally and professionally.
o Our achievement of these goals will continue to assure customer satisfaction,
profitability and enhanced shareholder value.
Management is pleased with the progress made during 1998 towards fulfilling its
Mission Statement. The Company continued to build shareholder value through
improved earnings and asset quality which resulted in increases to book value
and dividends per share. Continued prudent management is essential to
maintaining the quality and sustainability of the Company's earnings. The new
holding company structure coupled with our commitment to investing in
technological and human resources provides a strong foundation for building
shareholder value and provides us with additional flexibility as we continue to
develop new personalized financial products and services to meet the needs of
our customers.
The following is Management's discussion of the financial condition and results
of operations on a consolidated basis for the three (3) years ended December 31,
1998, of Salisbury Bancorp, Inc. The consolidated financial statements of
Salisbury Bancorp, Inc. include the accounts of Salisbury Bank and Trust Company
which became its sole subsidiary on August 24, 1998. Earnings per share and
dividends per share computations for 1997, 1996, 1995 and 1994 have been
restated to reflect the six for one stock exchange when the Company acquired all
of the capital stock of the Bank. Management's discussion should be read in
conjunction with the consolidated financial statements and the related notes
presented elsewhere herein.
17
Salisbury Bancorp, Inc. reported net income for 1998 of $2,318,000 or $1.47
diluted per share earnings. This represents a 5.84% increase over the $2,190,000
earned in 1997. On an earnings per share basis, 1998 increased 5.00% over the
$1.40 diluted per share earnings for 1997. The earnings and diluted per share
earnings for 1997 represented a 4.44% and 3.70% improvement, respectively, over
the $2,114,000 or $1.35 diluted per share earned in 1996. Growth in net income
and earnings per share during 1998 primarily reflect both an increase in earning
assets and the continuing efforts of management to control operating expenses.
Management is pleased with the continued growth of earnings and the improvements
in the quality and sustainability of the Company's earnings.
The Company's risk-based capital ratios, which include the risk-weighted assets
and capital of Salisbury Bank and Trust Company, were 20.62% for Tier 1 capital
and 21.90% for total capital at December 31, 1998. These ratios substantially
exceeded the regulatory minimums for bank holding companies of 4% for Tier 1
capital and 8% for total capital.
Nonperforming assets, which include nonaccrual loans, loans restructured and
other real estate owned, were $1,935,000 or 0.89% of total assets outstanding at
year end 1998. This reflects a decrease of 15.76% when compared to year end 1997
nonperforming assets of $2,297,000 which were 1.25% of total assets. At December
31, 1998, the allowance for loan losses was $1,260,000 or 1.05% of total loans
outstanding and 71.80% of nonperforming loans.
As a result of the Company's financial performance, the Board of Directors
increased the dividends declared on the Company's common stock by 15.39% during
1998 from $.52 per share in 1997 to $.60 per share in 1998. A $.45 dividend per
share was paid in 1996. Despite the payment of increased dividends, per share
book value increased to $13.85 at December 31, 1998 compared to $13.06 at
December 31, 1997 and $12.08 at December 31, 1996.
RESULTS OF OPERATIONS
Net Interest Income
Net interest and dividend income which is the difference between interest and
dividends earned on earning assets and interest paid on deposits and borrowings
represents the largest component of the Company's operating income. The
principal earning asset of the Company is the loan portfolio of the Bank, which
is primarily comprised of mortgage loans and home equity loans on one-to-four
family properties, a variety of consumer loans and small business loans.
Representing approximately 39.26% of the Company's earning assets, the
investment portfolio is also an important element in the management of the
balance sheet. These funds are used to meet the liquidity needs of the Company
while also providing a source of revenue. For the following discussion, interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
18
(Amounts in thousands)
Years Ended December 31 1998 1997 1996
---- ---- ----
Interest Income
(financial statements) ........... $ 13,361 $ 12,624 $ 12,074
Tax Equivalent Adjustment ......... 206 175 115
Interest Expense .................. (6,043) (5,707) (5,518)
-------- -------- --------
Net Interest Income-FTE ........... $ 7,524 $ 7,092 $ 6,671
======== ======== ========
In 1998, net interest income-FTE increased $432,000 or 6.09% over 1997. Net
interest margins decreased from 4.21% in 1997 to 4.14% in 1998. This is
primarily the result of pressures on margins created by aggressive competition
for business, coupled with a year in which there was a decline in interest
rates.
As a result, however, total average earning assets increased $13,255,000 to
$181,725,000 or 7.87% during 1998. Average deposits increased slightly during
1998; however, lower rate trends resulted in a decrease in interest expense on
deposits of $241,000 or 4.50%. The overall increase in interest expense is the
result of the additional borrowings from the Federal Home Loan Bank.
Net interest income-FTE increased $421,000 or 6.31% from 1996 to 1997. Interest
on earning assets increased approximately 5.00% with an increase in the average
yield while interest expense increased only 3.43%. The overall result reflected
an increase in the net interest margin to 4.21% in 1997 from 4.14% in 1996.
The following table reflects average balances, interest earned or paid and rates
for the three years ended December 31, 1998, 1997 and 1996. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges collected which are not
deemed to be material. Interest earned on Tax exempt securities in the table is
presented on a fully taxable-equivalent basis. A federal tax rate of 34% was
used in performing these calculations. Actual tax exempt income earned in 1998
was $400,000 with a yield of 5.05%. Actual tax exempt income in 1997 was
$262,000 with a yield of 4.76% and 1996 actual tax exempt income was $150,000
with a yield of 4.72%.
19
AVERAGE BALANCES, INTEREST EARNED OR PAID AND RATES
DECEMBER 31
[Amount in Thousands] 1998 1997
----------------------------------------------------------------------------------------
[Unaudited]
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE * BALANCE PAID RATE *
----------------------------------------------------------------------------------------
ASSETS
Interest Earning Assets:
Loans $118,417 $9,480 8.01% $117,991 $9,459 8.02%
Taxable Securities 46,903 3,032 6.46% 37,959 2,496 6.58%
Tax-Exempt Securities 7,917 606 7.65% 5,505 437 7.94%
Federal Funds 8,080 425 5.26% 6,601 384 5.82%
Other Interest Income 408 24 5.88% 414 23 5.56%
----------------------------------- -----------------------------------
Total interest earning assets 181,725 13,567 7.47% 168,470 12,799 7.60%
------ ------
Allowance for loan (1,254) (1,218)
losses
Cash & due from
Banks 4,572 4,565
Premise, Equipment 2,901 2,999
Net unrealized
gain/loss on AFS Securities 538 170
Other Assets 2,135 2,274
-------- --------
Total Average Assets $190,617 $177,260
======== ========
AVERAGE BALANCES, INTEREST EARNED OR PAID AND RATES
DECEMBER 31
[Amount in Thousands] 1996
---------------------------------------
[Unaudited]
INTEREST
AVERAGE EARNED/ YIELD
BALANCE PAID RATE *
---------------------------------------
ASSETS
Interest Earning Assets:
Loans $115,298 $9,347 8.11%
Taxable Securities 33,091 2,088 6.31%
Tax-Exempt Securities 3,178 265 8.34%
Federal Funds 9,257 483 5.22%
Other Interest Income 135 6 4.44%
-----------------------------------
Total interest earning assets 160,959 12,189 7.57%
------
Allowance for loan (1,205)
losses
Cash & due from
Banks 4,227
Premise, Equipment 3,317
Net unrealized
gain/loss on AFS Securities (77)
Other Assets 1,793
---------
Total Average Assets $169,014
=========
AVERAGE BALANCES, INTEREST EARNED OR PAID AND RATES
DECEMBER 31
[Amount in Thousands] 1998 1997
---------------------------------------------------------------------------------------
[Unaudited]
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE * BALANCE PAID RATE *
---------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
NOW/Money Market
deposits $50,373 $1,531 3.04% $51,050 $1,602 3.14%
Savings deposits 14,547 355 2.44% 13,869 354 2.55%
Time deposits 61,316 3,238 5.28% 63,431 3,409 5.37%
Borrowed funds 15,267 919 6.02% 5,191 342 6.59%
----------------------------------- -----------------------------------
Total interest bearing
liabilities 141,503 6,043 4.27% 133,541 5,707 4.27%
----- -----
Demand Deposits 27,234 23,118
Other Liabilities 1,308 880
Shareholders' Equity 20,572 19,721
-------- --------
Total Liabilities and
Equity $190,617 $177,260
======== ========
Net Interest Income $7,524 $7,092
====== ======
Net Interest Spread 3.20% 3.33%
Net Interest Margin 4.14% 4.21%
AVERAGE BALANCES, INTEREST EARNED OR PAID AND RATES
DECEMBER 31
[Amount in Thousands] 1996
---------------------------------------
[Unaudited]
INTEREST
AVERAGE EARNED/ YIELD
BALANCE PAID RATE *
---------------------------------------
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
NOW/Money Market
deposits $48,472 $1,449 2.99%
Savings deposits 13,780 363 2.63%
Time deposits 64,593 3,525 5.46%
Borrowed funds 2,926 181 6.19%
-----------------------------------
Total interest bearing
liabilities 129,771 5,518 4.25%
-----
Demand Deposits 20,277
Other Liabilities 721
Shareholders' Equity 18,245
--------
Total Liabilities and
Equity $169,014
========
Net Interest Income $6,671
======
Net Interest Spread 3.32%
Net Interest Margin 4.14%
* Annualized
20
Volume and Rate Change Table
The following table sets forth for the period indicated a summary of changes in
interest earned and interest paid resulting from changes in volume and changes
in rates. The table is stated on a FTE basis.
1998 compared to 1997 1997 compared to 1996
Increase (Decrease) Due to (1) Increase (Decrease) Due to (1)
(dollars in thousands)
Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- -------
Interest earned on:
Loans ............................ $ 34 $ (13) $ 21 $ 218 $ (106) $ 112
Taxable investment securities .... 725 (189) 536 323 85 408
Tax-exempt investment securities . 191 (22) 169 184 (12) 172
Other interest income ............ 85 (43) 42 (130) 48 (82)
------- ------- ------- ------- ------- -------
Total interest earning assets .... $ 1,035 $ (267) $ 768 $ 595 $ 15 $ 610
======= ======= ======= ======= ======= =======
Interest paid on:
NOW/Money Market deposits ........ $ (21) $ (50) $ (71) $ 80 $ 73 $ 153
Savings deposits ................. 17 (16) 1 2 (11) (9)
Time deposits .................... (113) (58) (171) (58) (58) (116)
Borrowed funds ................... 664 (87) 577 140 21 161
------- ------- ------- ------- ------- -------
Total interest bearing liabilities $ 547 $ (211) $ 336 $ 164 $ 25 $ 189
======= ======= ======= ======= ======= =======
Net interest income change ....... $ 488 $ (56) $ 432 $ 431 $ (10) $ 421
======= ======= ======= ======= ======= =======
(1) The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute
dollar amount of the change in each.
Noninterest Income
The Company's income from noninterest revenue activities increased 18.44% in
1998 and represented 11.67% of revenues compared to 10.56% in 1997 and 10.60% in
1996. The Trust Department continues to grow and as a result, trust income for
1998 increased 10.39% to $1,031,000 compared to income in 1997 and 1996 of
$934,000 and $752,000, respectively. Other noninterest income increased 31.96%
to $735,000 in 1998. This is primarily the result of increased fees for
insufficient funds and from an increase of 47.68% in interchange fees from an
increase in MasterMoney debit card transactions and VISA credit card
transactions. This compares to other noninterest income of $557,000 and $680,000
respectively for 1997 and 1996.
21
Noninterest Expense
Noninterest expense totaled $5,347,000 in 1998. Salaries and employee benefits
increased $232,000, or 9.68%. This is primarily the result of salary increases
and increased costs of employee benefits. Occupancy and equipment expense
increased $96,442 when comparing 1998 to 1997. This is attributable to the
Company's continuing commitment to upgrading its technological capabilities and
data processing. This commitment to utilizing technology to facilitate the
personalized delivery of financial products and services is considered to be a
key component to the Company's continued success as a leading community based
financial institution. During 1998, the Company incurred some one time expenses
that resulted in an increase in noninterest expenses for the year. Several years
ago the Company purchased property in New York state on which it intended to
build a branch facility. However, impediments to interstate de novo branching
have delayed this branch initiative and the property has been reclassified on
the Company's books as other real estate owned ("OREO") property and its
carrying value written down. This resulted in an expense of $65,000. The Company
also recorded a profit of operation on other real estate owned of $52,000 for
1998. However, there was an OREO property on the Company's books that was
disposed of in 1998 at a cost of $170,000 and is reflected in the total other
expenses of $1,374,000.
Income Taxes
In 1998, the Company's tax expense was $1,299,000, an effective tax rate of
35.92%. This compares to income tax expense of $1,402,000 in 1997, an effective
tax rate of 39.03%. Tax expense in 1996 was $1,052,000, as a litigation
settlement in favor of the Company resulted in a state tax refund which lowered
the effective tax rate to 33.23%. The decrease in the effective tax rate is
primarily the result of an increase in tax exempt income.
FINANCIAL CONDITION
Total assets increased to $217,226,000 at December 31, 1998 compared to
$183,433,000 at December 31, 1997. This is primarily from an increase in
borrowings of $35,623,000 to $41,120,000. These increased borrowings are the
results of an interest rate risk strategy designed to prevent loss of income
primarily in a falling rate environment and a strategy directed at providing the
Company with competitive fixed rate mortgage products. The overall result was an
increase in earning assets, most of which are reflected in the significant
growth of the securities portfolio. The year 1998 was one of aggressive
competition for loans and the second strategy was designed to provide funds for
new fixed rate mortgages and provide fixed rate funds to prevent a decrease in
the portfolio resulting from a market driven by declining interest rates. At
year end 1998, the net loan portfolio increased $2,452,000 over year end 1997.
Securities Portfolio
As of December 31, 1998, the securities portfolio, including Federal Home Loan
Bank of Boston stock, totaled $81,290,000, representing an increase of
$31,174,000 or 62.20% from $50,116,000 at year end 1997. The Company manages the
securities portfolio in accordance with the investment policy adopted by the
Board of Directors. The primary objectives are to provide interest and dividend
income, to help to address for cash flow requirements and to manage
interest-rate risk and
22
asset-quality diversification of the Company's assets. The primary component of
the total portfolio is U.S. Government sponsored agencies which accounted for
53.61% of the portfolio at December 31, 1998. The remaining portion of the
portfolio primarily consists of U. S. Treasury, State and municipal obligations
and mortgage-backed securities. At December 31, 1998, securities totaling
$78,655,000 were classified as available-for-sale and securities totaling
$579,000 were classified as held-to-maturity. The Company continues to use
arbitrage strategy by borrowing funds and then investing them at a rate of
return higher than the borrowing cost. This together with less robust loan
demand resulted in the increase in size of the securities portfolio and at the
same time, generated additional interest income. The net unrealized gain on
securities available-for-sale, net of tax effect increased to $357,000 at
December 31, 1998 compared to $297,000 at December 31, 1997. The improvement is
attributable to declining interest rates and positive performances in the stock
market during 1998.
Loans
Net loans at December 31, 1998 totaled $119,143,000 compared to $116,691,000 at
December 31, 1997. Competition for loans, especially residential mortgage loans,
in the Company's market area remains aggressive as the pressures of declining
interest rates and customer demand for fixed rate products increased. The
Company was able to increase loans, however, the mix of the portfolio has
changed. Adjustable rate mortgage loans outstanding have decreased approximately
13.7% while fixed rate mortgage loans have increased approximately 51.4%.
The Company's credit function is designed to insure adherence to a high level of
credit standards. The process begins with analysis of applications and continues
with ongoing monitoring of outstanding loans especially delinquent loans, as
loan losses potentially are reduced when problems are identified early.
Charge-offs are taken promptly when loans are deemed uncollectible by
management.
Loan Loss Provision
The loan loss provision for the year ended December 31, 1998 was $120,000
compared to $50,000 for the same period in 1997. At December 31, 1998, the
allowance for loan losses was $1,260,000 representing 1.0% of total loans
outstanding as compared to $1,226,000 or 1.0% of total loans outstanding at year
end 1997.
Loan loss allowances are calculated on a monthly basis and submitted to the
Board of Directors for approval each month. All categories of loans are included
in the allowance except student loans which are fully guaranteed.
Each loan is given a risk rating code at inception according to a system. These
risk ratings are monitored by the loan officer and senior management. If there
is a deterioration in the credit, the risk rating is adjusted accordingly.
Commercial loans are also evaluated for Y2K risk according to the officer's
perception of risk determined by discussions with borrowers and Y2K assessment
questionnaires.
23
Impaired loans receive individual evaluation of the allowance necessary on a
monthly basis. Impaired loans are defined as residential real estate mortgages
with balances of $300,000 or more and commercial loans over $100,000 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.
These commercial loans and residential mortgage loans will then be considered
impaired under any one 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 each 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.
The loss factor applied as a general allowance is determined by a periodic
Analysis of the Loan Loss Reserve. This analysis considers historical loan
losses and loan delinquency figures for the last three years. It also looks at
delinquency trends over the most recent quarter.
The credit card delinquency and loss history is evaluated separately 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. Average net losses for the last three years by
loan type are examined as well as trends by type for the last three years. The
Bank's loan mix over that same period of time is analyzed.
A loan loss allocation is made for each type of loan and multiplied by the loan
mix percentage for each loan type to produce a weighted average factor.
The following table summarizes historical data of the Bank with respect to loans
outstanding, loan losses and recoveries, and changes in the allowance for
possible loan losses:
24
Years Ended December 31
(dollars in thousands)
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Balance at January 1: ................. $1,226 $1,242 $1,160 $1,309 $1,284
------ ------ ------ ------ ------
Charge-offs:
Commercial, financial and agricultural 7 0 19 144 10
Real estate mortgage ................. 53 38 160 262 38
Consumer ............................. 52 66 67 22 33
------ ------ ------ ------ ------
112 104 246 428 81
------ ------ ------ ------ ------
Recoveries:
Commercial, financial and agricultural 0 11 27 2 0
Real estate mortgage ................. 13 7 7 4 37
Consumer ............................. 13 20 19 23 9
------ ------ ------ ------ ------
26 38 53 29 46
------ ------ ------ ------ ------
Net charge-offs ....................... 86 66 193 399 35
------ ------ ------ ------ ------
Provisions charged to operations ...... 120 50 275 250 60
Balance at December 31: ............... $1,260 $1,226 $1,242 $1,160 $1,309
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding ............ .07% .06% .17% .36% .04%
Ratio of allowance for loan losses
to year-end loans .................... 1.05% 1.04% 1.06% 1.02% 1.23%
The following table reflects the allocation of the allowance for possible loan
losses and the percent of loans in each category of total outstanding loans:
Years Ended December 31
(dollars in thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Commercial, financial and
agricultural ................ $ 182 8.90% $ 190 9.82% $ 174 10.26% $ 250 11.86% $ 250 11.13%
Real estate construction
and land development ........ 0 3.01% 0 3.56% 0 4.12% 0 4.47% 0 4.65%
Real estate mortgage ......... 982 78.59% 941 76.90% 969 76.11% 800 75.26% 800 75.26%
Consumer ..................... 95 8.96% 94 9.16% 60 8.88% 60 8.29% 85 7.69%
Other loans .................. 1 .54% 1 .56% 39 .63% 50 .17% 174 .28%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,260 100.00% $1,226 100.00% $1,242 100.00% $1,160 100.00% $1,309 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The provision to the allowance for possible loan losses is charged to operating
expenses and is based on past experience, current economic conditions and
management's judgement of the amount necessary to cover possible losses on the
collection of loans. The Bank records provisions for estimated loan losses,
which are charged against earnings, in the period they are established.
25
Determining the proper level of allowance required management to make estimates
using assumptions and information which is often subjective and changing. In
management's judgement, the allowance for loan losses is adequate to absorb
probable losses in the existing portfolio.
Deposits
Deposits at year end 1998 totaled $153,151,000 compared to $156,173,000 at year
end 1997. Although less at year end 1998 than in 1997, the actual average daily
amount of deposits in 1998 increased $2,002,000 or 1.3% over average daily
deposits in 1997. Although the Company is committed to providing quality
service, competition from non banking entities continues to be very aggressive
for customer funds. The following table illustrates the average daily amount of
deposits and rates paid on such deposits and illustrates the change in mix
between 1998 and 1997.
Management believes that in light of the current interest rate environment
aggressive competition for deposits is likely to continue.
The following table shows the average deposit balances and average interest rate
paid for the last three years:
Years Ended December 31
1998 1997 1996
------------------ ----------------- ---------------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
(dollars in thousands)
Demand $ 27,234 $ 23,118 $ 20,277
NOW 15,592 1.24% 15,690 1.47% 16,331 1.51%
Money Market 34,781 3.84% 35,360 3.88% 32,141 3.74%
Savings 14,547 2.44% 13,869 2.55% 13,780 2.63%
Time 61,316 5.28% 63,431 5.37% 64,593 5.46%
-------- -------- --------
$153,470 3.34% $151,468 3.54% $147,122 3.63%
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1998 are summarized as follows:
(dollars in thousands)
3 months or less $ 3,175
Over 3 through 6 months 2,069
Over 6 through 12 months 3,887
Over 12 months 2,508
-------
Total $15,384
=======
Borrowings
Total borrowings increased from $5,497,000 on December 31, 1997 to $41,120,000
as of December 31, 1998. The increase in borrowings is the result of an interest
rate risk strategy designed to protect earnings in a declining interest rate
environment and also directed at providing a source of funds to grow interest
earning assets; primarily fixed rate mortgage products. Management expects that
it will continue to employ this arbitrage strategy as efforts continue to grow
earning assets.
26
Asset/Liability Management
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee implements and monitors compliance with
these policies regarding the Bank's asset and liability management practices
with regard to interest rate risk, liquidity and capital.
Interest Rate Risk
Interest rate risk is defined as the sensitivity of the Company's income to
short and long term changes in interest rates. One of the primary financial
objectives of the Company is to manage its interest rate risk and control the
sensitivity of the Company's earnings to changes in interest rates in order to
prudently improve net interest income and the Company's interest rate margins
and manage the maturities and interest rate sensitivities of assets and
liabilities. One method of monitoring interest rate risk is a gap analysis which
identifies the differences between the amount of assets and the amount of
liabilities which mature or reprice during specific time frames and the
potential effect on earnings of such maturities or repricing opportunities.
Model simulation is used to evaluate the impact on earnings of potential changes
in interest rates. "Rate shock" is also used to measure earnings volatility due
to immediate increase or decrease in market rates up to 200 basis points. To
this end, because the Company was asset sensitive, a strategy was implemented
during the year designed to decrease net interest income sensitivity primarily
during a falling rate environment. Short term Federal Home Loan Bank advances
were taken and longer term investments were made. Management continues to seek
strategies to further reduce the impact of declining interest rates. Conversely
should interest rates rise, Company earnings would also improve as currently
structured.
Liquidity
The objective of the Company's liquidity management process is to assess funding
requirements so as to efficiently meet the cash needs of borrowers and
depositors at a reasonable cost. These cash flow needs include the withdrawal of
deposits on demand or at maturity, the repayment of borrowings as they mature,
and lending opportunities. Asset liability is achieved through the management of
readily marketable investment securities as well as managing asset maturities
and pricing of loan and deposit products.
The Company's subsidiary, Salisbury Bank and Trust Company, is a member of the
Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. Additionally, federal funds and
borrowings on repurchase agreements are available to fund short term cash needs.
At December 31, 1998, the Company had approximately $23,857,000 in loan
commitments outstanding. It is expected that these commitments will be funded
primarily by deposits, loan repayments and maturing investments. The Company has
ample liquidity to meet its present and foreseeable needs.
27
Capital
At December 31, 1998, the Company had $21,555,000 in equity compared with
$20,483,000 in 1997 and $18,789,000 in 1996. From a regulatory standpoint, the
Company exceeded regulatory capital ratios and the Bank is categorized as "well
capitalized". Therefore, the Bank is entitled to pay the lowest deposit premium
possible. The Company and the Bank's actual capital amounts and ratios are
presented in the following table:
Actual
Ratio
-----
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated 21.90%
Salisbury Bank and Trust Company 20.05%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 20.62%
Salisbury Bank and Trust Company 18.77%
Tier 1 Capital (to Average Assets)
Consolidated 10.42%
Salisbury Bank and Trust Company 9.54%
As of December 31, 1997 Bank only:
Total Capital (to Risk Weighted Assets) 21.26%
Tier 1 Capital (to Risk Weighted Assets) 20.04%
Tier 1 Capital (to Average Assets) 11.08%
As of December 31, 1996 Bank only:
Total Capital (to Risk Weighted Assets) 19.75%
Tier 1 Capital (to Risk Weighted Assets) 18.52%
Tier l Capital (to Average Assets) 10.92%
Maintaining strong capital is essential to bank safety and soundness which
influences customer confidence, potential investors, regulators and
shareholders. However, the effective management of capital requires generating
attractive returns on equity to build value for shareholders while maintaining
appropriate levels of capital to fund growth, meeting regulatory requirements
and being consistent with prudent industry practices.
28
Disclosure relating to "Year 2000"
The "Year 2000 issue" refers to a wide variety of potential computer issues that
may arise from the inability of computer programs to properly process
date-sensitive information relating to the Year 2000, years thereafter and to a
lesser degree the Year 1999.
The State of the Company's Readiness
The Company continues to address Year 2000 issues related to products and
services, as well as the supporting infrastructure of systems, processes,
facilities and vendor relationships. A company-wide Year 2000 ("Y2K") program
has been implemented to determine Y2K issues and define a strategy to assure Y2K
readiness. The Company is using a multi-phase approach to the Year 2000, which
includes awareness, inventory, assessment, renovation, validation,
implementation and post- implementation. The program as it relates to awareness,
inventory and assessment is completed. The remainder of the Y2K program is
scheduled to be completed by June 30, 1999, barring any unforeseen problems.
The Company has substantially completed the remediation of its network hardware,
personal computers and operating systems. The server located in our branch in
Salisbury, Connecticut is being upgraded. In December, 1998 the Bank received a
new server for that office. It is our intention to utilize this server for
several months, to test our "in-house mission critical" imaging system, before
installing it at our branch office. There are two ATMs that require an upgrade
in order to become Year 2000 compliant. These upgrades are scheduled to be
completed in early first quarter of 1999. The Company continues to upgrade and
test application software as vendors provide new releases.
The Company's mission critical systems are either in remediation (the Year 2000
project phase where hardware, systems and applications are fixed, upgraded or
replaced to be Year 2000 ready) or testing (the phase in which Year 2000
remediation is validated). The Company has utilized both internal and external
resources to remediate and test for Year 2000 readiness. The majority of the
Company's systems requiring remediation have been modified or replaced. The
Company plans to test the remaining systems by March 31, 1999.
The Company notes that it is critically dependent on certain unrelated third
parties for the conduct of its business, such as telecommunications, energy
providers, the Federal Reserve payment system and the automated clearinghouse
system. Although the Company is monitoring these parties' progress and Year 2000
readiness, there are few, if any, alternatives for obtaining these services.
The Company utilizes several third-party service providers for its core
applications. The service providers are making adequate progress in meeting
their established goals for Year 2000 qualifications of their system and the
related products utilized by the Company.
The Risks of the Company's Year 2000 Issues
Failure to resolve a material Year 2000 issue could result in the interruption
in, or a failure of, certain normal business activities or operations such as
servicing depositors, processing transactions or
29
originating and servicing loans. The Company plans to continue to work with
third party service providers and business partners to ascertain their Year 2000
compliance status and to coordinate testing efforts. There can be no assurance
that the computer systems of others on which the Company relies will be Year
2000 ready on a timely basis. In addition, failure to resolve Year 2000 issues
by another party, or remediation or conversion that is incompatible with the
Company's computer systems could have a material adverse effect on the Company.
The Company recognizes that from a customer standpoint, a Year 2000 problem
could affect a borrower's ability to service debts if their direct operations,
vendors or customers are impacted. Based on the Company's borrower assessment,
in general, the loan portfolio appears to have low to medium risk elements
associated with Year 2000. Management will continue to monitor these risks and
will consider this risk in underwriting commercial credits through the year
1999.
Management recognizes the Company's exposure to the risk of a liquidity crisis
or financial losses stemming from the withdrawal of significant deposits or
other sources of funds as the Year 2000 approaches. The Company has a
Contingency Plan to identify and prioritize sources of liquidity. Based on the
Company's analysis and given the Company's strong earnings record, high
liquidity and strong capital position, management is of the opinion that Y2K
liquidity risk should not have a significant impact on the Company.
The Company and the Bank are subject to examination and supervision by the Board
of Governors of the Federal Reserve System, and both the FDIC and Connecticut
Department of Banking, respectively. These agencies are actively examining the
status of preparation of the institutions which they supervise for compliance
with applicable laws and prudent industry practices, including those associated
with preparation of the Year 2000. As regulated institutions, the Company and
the Bank could be subject to formal and informal supervisory actions if
preparation for the Year 2000 failed to satisfy regulatory requirements or
prudent industry standards. As regulated institutions, banks and holding
companies face greater regulatory and litigation risks for failure to adequately
prepare for the Year 2000 than many companies in other industries. However, such
risks are not considered by Management to be probable based upon the current
level of preparation for the Year 2000 and the Company's plans to prepare for
the Year 2000.
The Costs to Address the Company's Year 2000 Issues
Costs to modify computer systems have been, and will continue to be expensed as
incurred and are not expected to have a material impact on the Company's future
financial results or condition. The Company's budget for Y2K related expenses in
1999 is $50,000.
Although the Company does not specifically monitor the cost of internal
resources diverted to the Year 2000 project, these costs have consumed, and can
be expected to continue to consume, a substantial amount of time of key staff.
Management will fund these Year 2000 costs from normal cash flow.
30
The Company's Contingency Plans
The Company has a Year 2000 business resumption plan that helps supplement the
Company's comprehensive Disaster Recovery Policy and Program as a part of the
Company's contingency planning. To further the Company's Disaster Recovery
initiative, the Company has an auxiliary power generator in one of its branch
locations. Management anticipates using this location as a provisional
operations center during the duration of Year 2000 failure scenarios, if any.
Management plans to re-deploy staff resources, as necessary during this period,
to help assure manual completion of critical operational activities. The Company
is in the process of testing the business resumption plan and expects to
complete testing prior to June 30, 1999.
The Company has contingency plans for its mission critical systems and will
refine these plans in 1999. However, there can be no assurance that the
Company's remediation efforts and contingency plans will be sufficient to avoid
unforeseen business disruptions or other problems resulting from the Year 2000
issue.
Forward Looking Statements
Certain statements contained in this Annual Report, including those contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere, are forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and are thus prospective.
Such forward looking statements are subject to risks, uncertainties and other
factors which could cause actual results to differ materially from future
results expressed or implied by such statements. Such factors include, but are
not limited to changes in interest rates, regulation, competition and the local
and regional economy.
Statement of Management's Responsibility
Management is responsible for the integrity and objectivity of the financial
statements and other information appearing in this Annual Report. The financial
statements were prepared in accordance with generally accepted accounting
principles 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 the financial records are
reliable for the purpose of preparing financial statements.
31
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.
With regard to equity price risk the Company's stock is traded on the American
Stock Exchange and as a result the value of its common stock will change in a
manner similar to price movements for example in the S&P 500 index. A discussion
of credit risk, interest rate risk and liquidity risk can be found in Part II,
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors' January 11, 1999............................F-1
Consolidated Balance Sheets at December 31, 1998
and 1997 ..................................................................F-2
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996...........................................F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996.......................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...........................................F-6
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1998, 1997 and 1996...............................F-8
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 1998.........................................F-23
Statement of Income for the period August 24, 1998 to December 31, 1998....F-24
Statement of Changes in Stockholders' Equity for the period
August 24, 1998 to December 31, 1998.....................................F-25
Statement of Cash Flows for the period August 24, 1998 to
December 31, 1998 .......................................................F-26
32
SHATSWELL, MacLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01960-3635
TELEPHONE (978) 535-0206
FACSIMILE (978) 535-9908
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 1998 and 1997 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, 1998.
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 generally accepted auditing
standards. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 11, 1999
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
ASSETS
Cash and due from banks ........................................................ $ 5,525,258 $ 7,180,643
Interest bearing demand deposits with other banks .............................. 409,344 166,947
Federal funds sold ............................................................. 6,200,000 4,325,000
------------ ------------
Cash and cash equivalents ........................................... 12,134,602 11,672,590
Investments in available-for-sale securities (at fair value) ................... 78,655,408 47,511,291
Investments in held-to-maturity securities (fair values of $573,075 as of
December 31, 1998 and $1,790,362 as of December 31, 1997) ................... 579,078 1,771,723
Federal Home Loan Bank stock, at cost .......................................... 2,056,000 833,300
Loans, net ..................................................................... 119,142,785 116,691,065
Other real estate owned ........................................................ 180,000 205,000
Premises and equipment ......................................................... 2,399,607 2,707,458
Accrued interest receivable .................................................... 1,383,349 1,299,186
Other assets ................................................................... 695,391 741,207
------------ ------------
Total assets ........................................................ $217,226,220 $183,432,820
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits ................................................................ $ 27,434,614 $ 26,497,015
Savings and NOW deposits ....................................................... 64,885,607 67,445,595
Time deposits .................................................................. 60,830,923 62,230,844
------------ ------------
Total deposits ...................................................... 153,151,144 156,173,454
Federal Home Loan Bank advances ................................................ 41,119,806 5,496,975
Other liabilities .............................................................. 1,399,832 1,279,281
------------ ------------
Total liabilities ................................................... 195,670,782 162,949,710
------------ ------------
Stockholders' equity:
Common stock, par value $.10 per share in 1998 and $3.33 per share in
1997; authorized 3,000,000 shares in 1998 and 500,000 shares in 1997;
issued and outstanding, 1,556,286 shares in 1998 and 261,398 shares in 1997 155,629 870,451
Paid-in capital ............................................................. 4,882,027 4,543,265
Retained earnings ........................................................... 16,160,547 14,772,805
Accumulated other comprehensive income ...................................... 357,235 296,589
------------ ------------
Total stockholders' equity .......................................... 21,555,438 20,483,110
------------ ------------
Total liabilities and stockholders' equity .......................... $217,226,220 $183,432,820
============ ============
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, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Interest and dividend income:
Interest and fees on loans ............................... $ 9,479,885 $ 9,459,235 $ 9,347,382
Interest and dividends on securities:
Taxable ................................................ 2,971,296 2,413,960 2,012,107
Tax-exempt ............................................. 400,206 288,599 174,822
Dividends on equity securities ......................... 60,636 55,225 51,179
Other interest ........................................... 449,329 407,263 488,825
------------ ------------ ------------
Total interest and dividend income ................. 13,361,352 12,624,282 12,074,315
------------ ------------ ------------
Interest expense:
Interest on deposits ..................................... 5,124,335 5,364,746 5,336,829
Interest on Federal Home Loan Bank advances .............. 919,336 341,811 180,964
------------ ------------ ------------
Total interest expense ............................. 6,043,671 5,706,557 5,517,793
------------ ------------ ------------
Net interest and dividend income ................... 7,317,681 6,917,725 6,556,522
Provision for loan losses ................................... 120,000 50,000 275,000
------------ ------------ ------------
Net interest and dividend income after provision for
loan losses ...................................... 7,197,681 6,867,725 6,281,522
------------ ------------ ------------
Other income:
Trust department income .................................. 1,031,255 934,163 751,951
Service charges on deposit accounts ...................... 347,188 251,733 277,714
Securities gains, net .................................... 4,372 11,676
Other income ............................................. 387,217 300,544 390,924
------------ ------------ ------------
Total other income ................................. 1,765,660 1,490,812 1,432,265
------------ ------------ ------------
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Other expense:
Salaries and employee benefits ........................... 2,631,604 2,399,275 2,375,438
Occupancy expense ........................................ 242,099 206,432 227,483
Equipment expense ........................................ 427,935 367,160 268,386
Data processing .......................................... 251,175 257,301 307,933
Insurance ................................................ 95,503 87,289 72,242
Provision for loss on other real estate owned ............ 97,563
Other real estate owned writedowns ....................... 65,000
Net cost (profit) of operation of other real estate owned (52,196) 12,231 6,633
Printing and stationery .................................. 137,889 137,698 170,824
Legal expense ............................................ 173,279 141,303 75,954
Other expense ............................................ 1,373,901 1,157,467 944,815
------------ ------------ ------------
Total other expense ................................ 5,346,189 4,766,156 4,547,271
------------ ------------ ------------
Income before income taxes ......................... 3,617,152 3,592,381 3,166,516
Income taxes ................................................ 1,299,249 1,402,000 1,052,152
------------ ------------ ------------
Net income ......................................... $ 2,317,903 $ 2,190,381 $ 2,114,364
============ ============ ============
Earnings per common share ................................... $ 1.48 $ 1.41 $ 1.35
============ ============ ============
Earnings per common share,
assuming dilution ........................................ $ 1.47 $ 1.40 $ 1.35
============ ============ ============
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, 1998, 1997 and 1996
Number Accumulated
of Other
Shares Common Paid-in Retained Treasury Comprehensive
Issued Stock Capital Earnings Stock Income Total
------ ----- ------- -------- ----- ------ -----
Balance, December 31, 1995 263,975 $879,035 $4,690,860 $11,987,411 $ $47,382 $17,604,688
Comprehensive income:
Net income 2,114,364
Net change in unrealized holding gain
on available-for-sale securities,
net of tax effect of $25,606 35,961
Comprehensive income 2,150,325
Repurchase of common stock (459,502) (459,502)
Retirement of fractional shares (8) (33) (492) (525)
Dividends reinvested (2,760 shares
from treasury) 9 6,125 145,791 151,925
Employee stock options exercised (1,116
shares from treasury) (13,092) 58,880 45,788
Dividends declared ($0.45 per share) (703,553) (703,553)
--------- -------- ---------- ----------- -------- -------- -----------
Balance, December 31, 1996 263,967 879,011 4,683,401 13,398,222 (254,831) 83,343 18,789,146
Comprehensive income:
Net income 2,190,381
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect of $146,165 213,246
Comprehensive income 2,403,627
Repurchase of common stock (184,668) (184,668)
Transfer treasury stock to reduce shares
issued (7,602) (25,315) (414,184) 439,499
Sale of stock 499 1,662 25,113 26,775
Retirement of fractional shares (11) (41) (806) (847)
Dividends reinvested 2,256 7,512 153,774 161,286
Employee stock options exercised 2,289 7,622 95,967 103,589
Dividends declared ($0.52 per share) (815,798) (815,798)
--------- -------- ---------- ----------- -------- -------- -----------
Balance, December 31, 1997 261,398 870,451 4,543,265 14,772,805 296,589 20,483,110
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(Continued)
Number Accumulated
of Other
Shares Common Paid-in Retained Treasury Comprehensive
Issued Stock Capital Earnings Stock Income Total
------ ----- ------- -------- ----- ------ -----
Comprehensive income:
Net income 2,317,903
Net change in unrealized holding gain
on available-for-sale securities,
net of tax effect 60,646
Comprehensive income 2,378,549
Stock options exercised 1,409 4,692 61,956 66,648
Formation of holding company, change in
par value 1,295,210 (707,185) 707,185
Repurchase of common stock (463,972) (463,972)
Transfer treasury stock to reduce (6,466) (12,161) (451,811) 463,972
shares issued
Retirement of fractional shares (199) (661) (17,202) (17,863)
Stock options exercised 4,934 493 38,634 39,127
Dividends declared ($.60 per share) (930,161) (930,161)
--------- -------- ---------- ----------- -------- -------- -----------
Balance, December 31, 1998 1,556,286 $155,629 $4,882,027 $16,160,547 $ $357,235 $21,555,438
========= ======== ========== ============ ======== ======== ===========
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(continued)
Reclassification disclosure for the year ended December 31, 1998:
Net unrealized gains on available-for-sale securities $89,449
Less reclassification adjustment for realized gains or losses in net income 0
Other comprehensive income before income tax effect 89,449
Income tax expense (28,803)
-------
Other comprehensive income, net of tax $60,646
=======
Accumulated other comprehensive income as of December 31, 1998, 1997 and 1996
consists of net unrealized holding gains on available-for-sale securities, net
of taxes.
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 2,317,903 $ 2,190,381 $ 2,114,364
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 120,000 50,000 275,000
Depreciation and amortization 249,396 263,999 171,260
(Accretion) amortization of securities, net (23,117) 41,912 63,696
Deferred tax expense (benefit) (92,332) 28,042 130,110
Securities gains, net (4,372) (11,676)
Increase in interest receivable (84,163) (197,016) (17,447)
Increase in interest payable 43,613 37,430 9,544
(Increase) decrease in cash surrender value of insurance
policies 223,393 34,602 (102,175)
(Increase) decrease in prepaid expenses (69,608) 15,491 8,496
Increase in accrued expenses 43,133 45,235 100,637
(Increase) decrease in other assets (2,369) (2,362) 7,213
Increase in other liabilities 364 2,683 1,664
Gain on donation of other real estate owned (70,000)
Donation of other real estate owned 170,000
Provision for losses on other real estate owned 97,563
Other real estate owned writedowns 65,000
Payments received on other real estate owned 8,000
Change in unearned income (5,718) (22,372) 20,253
(Gain) loss on sales of other real estate owned, net 10,581 2,000 (23,757)
Increase (decrease) taxes payable (99,352) 218,257 (389,316)
------------ ------------ ------------
Net cash provided by operating activities 2,796,724 2,703,910 2,463,429
------------ ------------ ------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (1,222,700) (62,300) (70,200)
Purchases of available-for-sale securities (55,125,378) (39,948,273) (26,253,355)
Proceeds from sales of available-for-sale securities 13,911,038 4,778,391
Proceeds from maturities of available-for-sale securities 24,096,304 10,886,961 19,089,290
Proceeds from maturities of held-to-maturity securities 1,190,168 3,599,606 1,365,108
Net increase in loans (2,787,950) (605,276) (4,442,791)
Other real estate owned expenses capitalized (2,000)
Proceeds from sales of other real estate owned 184,419 195,800 206,656
Capital expenditures (81,545) (353,888) (381,404)
Recoveries of loans previously charged-off 26,948 38,320 53,180
------------ ------------ ------------
Net cash used in investing activities (33,719,734) (12,338,012) (5,657,125)
------------ ------------ ------------
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
(continued)
1998 1997 1996
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts (1,622,389) 5,827,039 7,346,168
Net increase (decrease) in time deposits (1,399,921) 197,750 (5,837,848)
Advances from Federal Home Loan Bank 44,000,000 4,250,000 4,750,000
Principal payments on advances from Federal Home Loan Bank (8,377,169) (3,279,883) (223,142)
Dividends paid (839,439) (779,691) (556,044)
Issuance of common stock 105,775 264,875 197,713
Net repurchase of common stock (463,972) (157,893) (459,502)
Retirement of fractional shares (17,863) (847) (525)
----------- ----------- -----------
Net cash provided by financing activities 31,385,022 6,321,350 5,216,820
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 462,012 (3,312,752) 2,023,124
Cash and cash equivalents at beginning of year 11,672,590 14,985,342 12,962,218
----------- ----------- -----------
Cash and cash equivalents at end of year $12,134,602 $11,672,590 $14,985,342
=========== =========== ===========
Supplemental disclosures:
Interest paid $6,000,058 $5,669,127 $5,508,249
Income taxes paid 1,490,933 1,155,701 1,601,206
Transfer of loans to other real estate owned 195,000 170,000 777,119
Loans originated from sales of other real estate owned 173,200 688,000
Other real estate owned transferred to loans 60,000
Premises transferred to other real estate owned 140,000
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
NOTE 1 - NATURE OF OPERATIONS
Salisbury Bancorp, Inc. (Company) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, with Salisbury Bank &
Trust Company (Bank) as its wholly-owned subsidiary.
On August 24, 1998, the Company acquired all of the capital stock of the Bank
pursuant to a plan of reorganization approved by the Bank's stockholders on June
27, 1998. The stockholders of the Bank became stockholders of the Company. Each
share of common stock of the Bank was exchanged for six shares of common stock
of the Company. The par value of the Bank's shares is $3.33 per share. The par
value of the Company's shares is $.10 per share.
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
three banking offices located in Connecticut. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in residential, real estate, consumer and small business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles 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.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank, and the Bank's
wholly-owned subsidiary, SBT Realty, Inc. SBT Realty, Inc. holds and
manages bank owned real estate situated in New York state. All
significant intercompany accounts and transactions have been eliminated
in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand
deposits with other banks and federal funds sold.
Cash and due from banks as of December 31, 1998 includes $1,125,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
F-8
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. 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 balance sheet. 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 balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances reduced by any charge-offs, the allowance for loan losses and
any deferred fees or costs on originated loans or unamortized premiums
or discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the
related loan's yield. The Company is amortizing these amounts over the
contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations
and is decreased by loan losses, net of recoveries. The provision for
loan losses is based on management's evaluation of current and
anticipated economic conditions, changes in the character and size of
the loan portfolio, and other indicators.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. The Company measures impaired loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
The Company considers for impairment all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Company considers
its residential real estate loans and consumer loans that are not
individually significant to be large groups of smaller balance
homogeneous loans.
F-9
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Company
reviews its loans for impairment on a loan-by-loan basis. The Company
does not apply impairment to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a loan
is not generally accrued when the loan becomes ninety or more days
overdue. The Company may place a loan on nonaccrual status but not
classify it as impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is an individually insignificant residential
mortgage loan or consumer loan. Impaired loans are charged-off when
management believes that the collectibility of the loan's principal is
remote. Substantially all of the Company's loans that have been
identified as impaired have been measured by the fair value of existing
collateral.
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.
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 Financial Accounting Standards Board Statement 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 Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company
classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
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:
Statement of Financial Accounting Standards 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.
F-10
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. The carrying amount of accrued interest approximates its fair
value.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for FHLB 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 FHLB advances.
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:
Prior to 1996, the Company recognized stock-based compensation using
the intrinsic value approach set forth in APB Opinion No. 25. As of
January 1, 1996, the Company had the option, under SFAS No. 123, of
changing its accounting method for stock-based compensation from the
APB No. 25 method to the fair value method introduced in SFAS No. 123.
The Company elected to continue using the APB No. 25 method. Entities
electing to continue to follow the provisions of APB No. 25 must make
pro forma disclosure of net income and earnings per share, as if the
fair value method of accounting defined in SFAS No. 123 had been
applied. The Company has made the pro forma disclosures required by
SFAS No. 123.
EARNINGS PER SHARE:
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share" is effective for periods ending after December 15,
1997. SFAS No. 128 simplifies the standards of computing earnings per
share (EPS) previously found in APB Opinion No. 15. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
The Company has computed and presented EPS for the years ended December
31, 1998 and 1997 in accordance with SFAS No. 128. Basic EPS as so
computed does not differ materially from primary EPS that would have
resulted if APB Opinion No. 15 had been applied. In accordance with
SFAS No. 128, EPS data presented has been restated for the year ended
December 31, 1996. Basic EPS so restated does not differ from primary
EPS previously presented under APB Opinion No. 15.
F-11
Fully diluted EPS is presented for 1997 but would not have been
required if the APB criteria had still been in effect. Fully diluted
EPS for 1996 is presented but was not required in previous years'
financial statements under the APB No. 15 criteria then in effect.
NOTE 3 - SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows as of December 31:
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----------- -------- -------- -----------
Available-for-sale securities:
December 31, 1998:
Equity securities $ 12,331 $104,141 $ $ 116,472
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 43,311,027 293,669 26,671 43,578,025
Debt securities issued by states of the United States
and political subdivisions of the states 9,292,443 296,179 35,505 9,553,117
Mortgage-backed securities 25,448,060 77,969 118,235 25,407,794
----------- -------- -------- -----------
$78,063,861 $771,958 $180,411 $78,655,408
=========== ======== ======== ===========
December 31, 1997:
Equity securities $ 12,330 $111,017 $ $ 123,347
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 33,001,914 173,748 700 33,174,962
Debt securities issued by states of the United States
and political subdivisions of the states 6,806,263 176,857 6,983,120
Corporate debt securities 36,596 12 36,608
Mortgage-backed securities 7,152,090 49,073 7,909 7,193,254
----------- -------- -------- -----------
$47,009,193 $510,707 $ 8,609 $47,511,291
=========== ======== ========= ===========
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
----------- -------- -------- -----------
Held-to-maturity securities:
December 31, 1998:
Debt securities issued by states of the United States
and political subdivisions of the states $ 25,000 $ 98 $ $ 25,098
Mortgage-backed securities 554,078 6,101 547,977
----------- -------- --------- -----------
$ 579,078 $ 98 $ 6,101 $ 573,075
=========== ======== ========= ===========
December 31, 1997:
Debt securities issued by states of the United States
and political subdivisions of the states $ 857,058 $ 8,038 $ $ 865,096
Mortgage-backed securities 914,665 10,601 925,266
----------- -------- --------- -----------
$ 1,771,723 $ 18,639 $ $ 1,790,362
=========== ======== ========= ===========
F-12
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
1998:
Held-to-maturity Available-for-sale
securities: securities:
--------------------------- -----------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
-------- -------- ----------- -----------
Debt securities other than mortgage-backed
securities:
Due within one year $ $ $33,293,234 $33,383,925
Due after one year through five years 25,000 25,098 11,282,124 11,492,630
Due after five years through ten years 7,521,992 7,747,561
Due after ten years 506,120 507,026
Mortgage-backed securities 554,078 547,977 25,448,060 25,407,794
-------- -------- ----------- -----------
$579,078 $573,075 $78,051,530 $78,538,936
======== ======== =========== ===========
During 1998, there were no sales of available-for-sale securities. During 1997,
proceeds from sales of available-for-sale securities amounted to $13,911,038.
Gross realized gains and gross realized losses on those sales amounted to
$23,140 and $18,768, respectively. During 1996, proceeds from sales of
available-for-sale securities amounted to $4,778,391. Gross realized gains and
gross realized losses on those sales amounted to $17,953 and $6,277,
respectively.
There were no issuers of securities whose carrying amount exceeded 10% of
stockholder's equity as of December 31, 1998.
A total carrying amount of $5,941,061 of debt securities was pledged to secure
public deposits and for other purposes as required by law as of December 31,
1998.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
1998 1997
--------- ---------
(in thousands)
Commercial, financial and agricultural $ 10,692 $ 11,575
Real estate - construction and land development 3,392 4,203
Real estate - residential 80,451 77,336
Real estate - commercial 14,909 13,355
Consumer 10,430 10,805
Other 535 655
--------- ---------
120,409 117,929
Allowance for loan losses (1,260) (1,226)
Unearned income (6) (12)
--------- ---------
Net loans $ 119,143 $ 116,691
========= =========
F-13
Loans restructured in a troubled debt restructuring before January 1, 1995, the
effective date of SFAS No. 114, that are not impaired based on the terms
specified by the restructuring agreement are as follows as of December 31:
1998 1997
---- ----
Aggregate recorded investment $0 $763,858
Gross interest income that would have been recorded in the year if
the loans had been current in accordance with their original
terms and had been outstanding throughout the year or since
origination 0 63,644
Interest income on the loans included in net income for the year 0 57,023
Loans whose terms were modified are not included above, if, subsequent to
restructuring, their effective interest rates were equal to or greater than the
rate that the Bank was willing to accept for a new loan with comparable risk.
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 1998.
Total loans to such persons and their companies amounted to $2,000,293 as of
December 31, 1998. During 1998 advances of $353,337 were made and repayments
totaled $305,609.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
1998 1997 1996
---------- ---------- ----------
Balance at beginning of period $1,225,819 $1,241,807 $1,159,552
Provision for loan losses 120,000 50,000 275,000
Recoveries of loans previously charged off 26,948 38,320 53,180
Loans charged off (112,279) (104,308) (245,925)
---------- ---------- ----------
Balance at end of period $1,260,488 $1,225,819 $1,241,807
========== ========== ==========
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:
1998 1997
--------------------------- -------------------------
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 $1,565,531 $250,253 $1,740,835 $276,026
Loans for which there is no related allowance for credit losses 0 0 0 0
---------- -------- ---------- --------
Totals $1,565,531 $250,253 $1,740,835 $276,026
========== ======== ========== ========
Average recorded investment in impaired loans during the
year ended December 31 $1,611,963 $1,526,563
========== ==========
Related amount of interest income recognized during the
time, in the year ended December 31, that the
loans were impaired
Total recognized $ 59,242 $ 87,961
========== ==========
Amount recognized using a cash-basis method of
accounting $ 0 $ 0
========== ==========
F-14
NOTE 5 - ALLOWANCE FOR OTHER REAL ESTATE OWNED
Changes in the allowance for other real estate owned were as follows for the
year ended December 31, 1996:
Balance at beginning of period $ 24,000
Provision charged to operating expenses 97,563
Charge-offs (121,563)
---------
Balance at end of period $ 0
=========
There was no activity in the allowance for other real estate owned during 1998
and 1997.
NOTE 6 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
1998 1997
----------- -----------
Land $ 293,194 $ 433,194
Buildings 1,989,981 1,988,729
Furniture and equipment 1,884,502 1,802,480
----------- -----------
4,167,677 4,224,403
Accumulated depreciation and amortization (1,768,070) (1,516,945)
----------- -----------
$ 2,399,607 $ 2,707,458
=========== ===========
NOTE 7 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $15,384,302 and $14,324,229
as of December 31, 1998 and 1997, respectively.
For time deposits as of December 31, 1998, the aggregate amount of maturities
for years ended December 31, and thereafter are:
1999 $40,032,265
2000 13,136,635
2001 3,113,683
2002 1,738,914
2003 and thereafter 2,809,426
-----------
$60,830,923
===========
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the Federal Home Loan Bank of Boston for the five
fiscal years ending after December 31, 1998 and thereafter are summarized as
follows:
INTEREST RATE RANGE AMOUNT
------------------- ------
1999 5.61% - 6.58% $11,407,827
2000 5.68% - 6.58% 1,354,686
2001 5.38% - 6.58% 4,353,547
2002 5.68% - 6.58% 1,113,140
2003 5.68% - 6.58% 993,295
Thereafter 4.18% - 6.45% 21,897,311
-----------
$41,119,806
===========
F-15
Advances are secured by the Company's stock in that institution, its residential
real estate mortgage portfolio and the remaining U.S. government and agencies
obligations not otherwise pledged.
NOTE 9 - PENSION PLAN
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
The following tables set forth information about the plan as of December 31 and
the years then ended:
1998 1997
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,036,649 $ 1,967,430
Actuarial gain (loss) 188,421 (51,107)
Service cost 111,513 90,327
Interest cost 174,076 149,021
Benefits paid (102,945) (119,022)
----------- -----------
Benefit obligation at end of year 2,407,714 2,036,649
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,283,646 2,059,355
Actual return on plan assets 395,755 282,093
Employer contribution 69,097 61,220
Benefits paid (102,945) (119,022)
----------- -----------
Fair value of plan assets at end of year 2,645,553 2,283,646
----------- -----------
Funded status 237,839 246,997
Unrecognized net loss from actuarial experience (372,400) (346,315)
Unrecognized prior service cost 8,943 9,835
Unamortized net asset existing at date of adoption of
SFAS No. 87 66,095 73,826
----------- -----------
Accrued benefit cost included in other liabilities $ (59,523) $ (15,657)
=========== ===========
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 6.0% for 1998, 1997 and 1996, respectively. The
weighted-average expected long-term rate of return on assets was 8.0% for 1998,
1997 and 1996.
Components of net periodic benefit cost:
1998 1997 1996
--------- --------- ---------
Service cost $ 111,513 $ 90,327 $ 95,645
Interest cost on benefit obligation 174,076 149,021 143,170
Expected return on assets (181,249) (162,668) (146,756)
Amortization of prior service cost 8,623 8,623 8,623
--------- --------- ---------
Net periodic benefit cost $ 112,963 $ 85,303 $ 100,682
========= ========= =========
F-16
NOTE 10 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
1998 1997 1996
----------- ----------- -----------
Current:
Federal $ 1,034,773 $ 1,008,406 $ 899,985
State 356,808 365,552 311,905
State tax refund (289,848)
----------- -----------
1,391,581 1,373,958 922,042
----------- ----------- -----------
Deferred:
Federal (72,755) 6,794 105,015
State (19,577) 21,248 25,095
----------- ----------- -----------
(92,332) 28,042 130,110
----------- ----------- -----------
Total income tax expense $ 1,299,249 $ 1,402,000 $ 1,052,152
=========== =========== ===========
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
1998 1997 1996
% 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 (3.8) (2.7) (2.8)
Other items (.5) .6 1.1
State tax, net of federal tax benefit 6.2 7.1 7.0
State tax refund (6.1)
---- ---- ----
35.9% 39.0% 33.2%
==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
1998 1997
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 299,507 $ 290,537
Interest on non-performing loans 3,483 4,898
Accrued deferred compensation 26,342 29,285
Post retirement benefits 8,279 6,558
Other real estate owned property writedown 25,938
Deferred origination costs 5,752
Accrued pensions 23,576 6,304
--------- ---------
Gross deferred tax assets 392,877 337,582
--------- ---------
Deferred tax liabilities:
Deferred state tax refund (35,897) (58,148)
Accelerated depreciation (390,521) (404,476)
Discount accretion (1,510) (654)
Net unrealized gain on available-for-sale securities (234,312) (205,509)
OREO property writedown (1,687)
--------- ---------
Gross deferred tax liabilities (662,240) (670,474)
--------- ---------
Net deferred tax liabilities $(269,363) $(332,892)
========= =========
Deferred tax assets as of December 31, 1998 and 1997 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1998, the Company had no operating loss and tax credit
carryovers for tax purposes.
F-17
NOTE 11 - FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
1998 1997
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Financial assets:
Cash and cash equivalents $ 12,134,602 $ 12,134,602 $ 11,672,590 $ 11,672,590
Available-for-sale securities 78,655,408 78,655,408 47,511,291 47,511,291
Held-to-maturity securities 579,078 573,075 1,771,723 1,790,362
Federal Home Loan Bank stock 2,056,000 2,056,000 833,300 833,300
Loans 119,142,785 120,152,000 116,691,065 117,327,000
Accrued interest receivable 1,383,349 1,383,349 1,299,186 1,299,186
Financial liabilities:
Deposits 153,151,144 153,598,000 156,173,454 156,295,000
Federal Home Loan Bank advances 41,119,806 41,000,000 5,496,975 5,512,000
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
1998 1997
----------- -----------
Commitments to originate loans $ 6,501,105 $ 4,115,467
Standby letters of credit 30,000 30,000
Unadvanced portions of loans:
Home equity 6,322,988 5,540,649
Commercial lines of credit 5,830,971 6,300,446
Construction 1,433,789 723,494
Credit cards 3,737,896 2,855,645
----------- -----------
$23,856,749 $19,565,701
=========== ===========
F-18
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are also presented
in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated $22,505 21.90% $8,223 8.0% N/A
Salisbury Bank & Trust Company 20,522 20.05 8,190 8.0 $10,237 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 21,198 20.62 4,111 4.0 N/A
Salisbury Bank & Trust Company 19,215 18.77 4,095 4.0 6,142 6.0
Tier 1 Capital (to Average Assets)
Consolidated 21,198 10.42 8,138 4.0 N/A
Salisbury Bank & Trust Company 19,215 9.54 8,056 4.0 10,071 5.0
F-19
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, 1997 Bank only:
Total Capital (to Risk Weighted Assets) $21,412 21.26% $8,059 8.0% $10,074 >10.0%
Tier 1 Capital (to Risk Weighted Assets) 20,186 20.04 4,029 4.0 6,044 >6.0
Tier 1 Capital (to Average Assets) 20,186 11.08 7,290 4.0 9,113 >5.0
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 1998 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $11,254,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 14 - STOCK COMPENSATION PLAN
The Company has a fixed option, stock-based compensation plan, which is
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plan. Compensation expense, as measured by APB Opinion 25,
was immaterial for each of the three years in the three year period ended
December 31, 1998. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the method of FASB Statement 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1998 1997 1996
---------- ---------- ----------
Net income As reported $2,317,903 $2,190,381 $2,114,364
Pro forma $2,317,903 $2,176,163 $2,100,927
Earnings per common share As reported $1.48 $1.41 $1.35
Pro forma $1.48 $1.40 $1.35
Earnings per common share,
assuming dilution As reported $1.47 $1.40 $1.35
Pro forma $1.47 $1.39 $1.34
Under the Employee Stock Purchase Plan, the Company may grant options to its
eligible employees for up to 25,000 shares of common stock. Each employee of the
Company is eligible to become a participant in the Plan following the completion
of one year of service. Under the plan, the exercise price of each option equals
not less than 85% of the market price of the Company's stock on the date of
grant and an option's maximum term is two years. Options are exercisable at the
grant date.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of 4
percent for each year; expected volatility of 10 percent for 1997 and 5 percent
for 1996; risk-free interest rates of 5.62 and 4.96 percent, respectively;
expected life of 1 year for each year and estimated forfeiture rate of 55
percent for each year.
F-20
A summary of the status of the Company's fixed stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years ending on those dates is
presented below:
1998 1997 1996
--------------------------- --------------------------- -------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning
of year 26,850 $7.68 39,660 $7.03 44,082 $6.60
Granted 21,420 7.93 23,178 7.23
Exercised (13,388) 7.85 (13,734) 7.34 (6,696) 6.69
Forfeited (9,042) 7.31 (20,496) (6.92) (20,904) 6.39
----- ----- ------ ----- ------ -----
Outstanding at end of year 4,420 $7.93 26,850 $7.68 39,660 $7.03
===== ====== ======
Options exercisable at
year-end 4,420 26,850 39,660
Weighted-average fair value
of options granted during
the year N/A $1.48 $1.29
The following table summarizes information about fixed stock options outstanding
as of December 31, 1998:
Options Outstanding and Exercisable
----------------------------------------------------------------
Number Weighted-Average
Outstanding Remaining Weighted-Average
Exercise Prices as of 12/31/98 Contractual Life Exercise Price
--------------- -------------- ---------------- --------------
$7.93 4,420 1 Month $7.93
The earnings per share data, numbers of options and option prices per share
shown in this note have been adjusted to reflect the six-for-one stock exchange
described in Note 1.
NOTE 15 - EARNINGS PER SHARE (EPS)
The earnings per share and dividends per share computations for 1997 and 1996
have been restated to reflect the six-for-one stock exchange described in Note
1.
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net income are as follows:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Year ended December 31, 1998
Basic EPS
Net income and income available to common stockholders $2,317,903 1,570,445 $1.48
Effect of dilutive securities, options 7,937
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,317,903 1,578,382 $1.47
========== =========
Year ended December 31, 1997
Basic EPS
Net income and income available to common stockholders $2,190,381 1,556,010 $1.41
Effect of dilutive securities, options 11,496
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,190,381 1,567,506 $1.40
========== =========
F-21
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Year ended December 31, 1996
Basic EPS
Net income and income available to common stockholders $2,114,364 1,560,546 $1.35
Effect of dilutive securities, options 10,230
---------- ---------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,114,364 1,570,776 $1.35
========== =========
NOTE 16 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation including the reclassification of
treasury stock purchases after December 31, 1996 as reductions in the number of
shares of common stock issued rather than as separate components of
stockholders' equity. This reclassification was made to conform to Connecticut
law.
NOTE 17 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
F-22
SALISBURY BANCORP, INC.
(Parent Company Only)
BALANCE SHEET
December 31, 1998
ASSETS
Cash in bank $ 57,288
Investments in available-for-sale securities (at fair value) 2,341,425
Investment in subsidiary 19,571,849
Other assets 5,660
------------
Total assets $ 21,976,222
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 420,197
Other liabilities 587
------------
Total liabilities 420,784
Stockholders' equity:
Common stock, $.10 per share, authorized 3,000,000 shares; issued
and outstanding 1,556,286 shares 155,629
Paid-in capital 21,125,986
Retained earnings (accumulated deficit) (83,412)
Accumulated other comprehensive income 357,235
------------
Total stockholders' equity 21,555,438
------------
Total liabilities and stockholders' equity $ 21,976,222
============
F-23
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENT OF INCOME
For the Period August 24, 1998 to December 31, 1998
Dividend income from subsidiary $ 2,725,000
Taxable interest on securities 19,110
2,744,110
Legal expense 70,816
Formation expense 51,320
Supplies and printing 4,349
Other expense 23,462
-----------
149,947
Income before income tax benefit and equity in undistributed net loss
of subsidiary 2,594,163
Income tax benefit 5,164
-----------
Income before equity in undistributed net loss of subsidiary 2,599,327
Equity in undistributed net loss of subsidiary (the excess of dividends from
subsidiary over net income of subsidiary) (2,091,533)
-----------
Net income $ 507,794
===========
F-24
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period August 24, 1998 to December 31, 1998
Retained Accumulated
Earnings Other
Common Paid-in (Accumulated Comprehensive
Stock Capital Deficit) Income Total
-------- ----------- --------- -------- -----------
Formation of holding company $155,426 $21,150,862 $ $236,011 $21,542,299
Comprehensive income:
Net income 507,794
Net change in unrealized holding gain
on available-for-sale securities, net
of tax effect:
Parent only 140
Subsidiary 121,084
Comprehensive income 629,018
Stock options exercised 493 38,634 39,127
Repurchase of common stock (290) (63,510) (63,800)
Dividends declared (591,206) (591,206)
-------- ----------- --------- -------- -----------
Balance, December 31, 1998 $155,629 $21,125,986 $ (83,412) $357,235 $21,555,438
======== =========== ========= ======== ===========
F-25
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENT OF CASH FLOWS
For the Period August 24, 1998 to December 31, 1998
Cash flows from operating activities:
Net income $ 507,794
Adjustments to reconcile net income to net cash provided by operating
activities:
Undistributed loss of subsidiary 2,091,533
Deferred tax benefit (5,751)
Accretion of securities (19,110)
Increase in taxes payable 587
-----------
Net cash provided by operating activities 2,575,053
-----------
Cash flows from investing activities:
Purchases of available-for-sale securities (2,322,083)
Net cash used in investing activities (2,322,083)
-----------
Cash flows from financing activities:
Issuance of common stock 39,127
Net repurchase of common stock (63,800)
Dividends paid (171,009)
-----------
Net cash used in financing activities (195,682)
-----------
Net increase in cash and cash equivalents 57,288
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year $ 57,288
===========
F-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the two 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.
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 years and the year in which he was first
appointed an Executive Officer of the Company.
EXECUTIVE
OFFICE OF THE
NAME AGE POSITION COMPANY SINCE:
- ---- --- -------- --------------
John F. Perotti 52 President and Chief 1998 (1)
Executive Officer
Craig E. Toensing 61 Secretary 1998 (2)
John F. Foley 48 Chief Financial Officer 1998 (3)
(1) Mr. Perotti is the President and Chief Executive Officer of the Bank and
has been an Executive Officer of the Bank since 1982.
(2) Mr. Toensing is the Senior Vice President and Trust Officer of the Bank and
has been an Executive Officer of the Bank since 1982.
(3) Mr. Foley is Vice President, Comptroller and Principal Financial Officer of
the Bank and has been an Executive Officer of the Bank since 1986.
Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide for a Board
of Directors of not less than seven (7) members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors of the Company
is divided into three (3) classes as nearly equal in number as possible. Classes
of directors serve for staggered three (3) year terms. A successor class is to
be elected at each annual meeting of shareholders. When the terms of office of
the members of one class expire vacant directorships may be filled, until the
expiration of the term of the vacated directorship, by the vote of a majority of
the directors then in office. The Company does
33
not have a nominating committee but has a prescribed procedure for shareholders
to make a nomination set forth in the Company's Bylaws.
The following table sets forth certain information, as of February 28, 1999 with
respect to the directors of the Company.
Position Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- ----- --------
John R. H. Blum 69 Director 1998 1999
Louise F. Brown 55 Director 1998 1999
Gordon C. Johnson 64 Director 1998 2000
Holly J. Nelson 45 Director 1998 2000
John E. Rogers 69 Director 1998 2000
Walter C. Shannon, Jr. 63 Director 1998 2000
John F. Perotti 52 President, CEO, 1998 2001
and Director
Craig E. Toensing 61 Secretary and 1998 2001
Director
Michael A. Varet 57 Director 1998 2001
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the positions
described for at least five (5) years.
John R. H. Blum is an attorney in private practice and former Commissioner of
Agriculture for the State of Connecticut. He has been a director of the Bank
since 1995 and was elected Chairman of the Board of Directors of the Company and
the Bank in 1998.
Louise F. Brown has been a director of the Bank since 1992 and is a partner at
the Sharon office in the law firm of Gager & Peterson.
Gordon C. Johnson has been a director of the Bank since 1994 and is a Doctor of
Veterinary Medicine.
Holly J. Nelson has been a director of the Bank since 1995 and is a partner in
the store Oblong Books and Music, LLC.
34
John E. Rogers has been a director of the Bank since 1964 and retired as
Chairman of the Board of the Bank in 1984. He also served as President of the
Bank from 1969 to 1981.
Walter C. Shannon, Jr. is President of Wagner McNeil, Inc., President of William
J. Cole Agency, Inc. and President of DBI, Inc. He has been a director of the
Bank since 1993.
John F. Perotti is President and Chief Executive Officer of the Company and the
Bank. Prior to that he served as Executive Vice President and Chief Operating
Office 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.
Craig E. Toensing has been a director of the Bank since 1995 and is Senior Vice
President and Trust Officer of the Bank.
Michael A. Varet has been a partner in the law firm of Piper and Marbury, L.L.P.
since 1995. Prior to 1995, Mr. Varet was a member and Chairman of Varet & Fink,
P.C., formerly Milgrim, Thomajan & Lee, P.C. 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 August
24, 1998 and of written representations by certain executive officers and
directors, all persons subject to the reporting requirements of Section 16(a)
filed the required reports on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
Fees
During 1998, Directors received $300 for each Board of Directors meeting
attended and $100 for each committee meeting attended. Beginning January 1999,
each Director will receive an annual retainer of $2,000 and $500 for each Board
of Directors meeting attended and $200 for each committee meeting attended.
Directors Perotti and Toensing received no additional compensation for their
services as members of any board committee during 1998. Beginning January 1999,
Directors Perotti and Toensing will receive no additional compensation for their
services as members of the Board of Directors or as members of any board
committee.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company for services rendered in all
capacities during the fiscal years ended December 31, 1998, 1997 and 1996. No
other current executive officer of the Company received cash compensation in
excess of $100,000.
35
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Securities Underlying
Options/ All Other
Name and Principal SAR's Compensation
Position Year Salary($) Bonus($) (#) (1) ($) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
John F. Perotti 1998 $141,984 $19,700 --- $4,500(3)
President and 1997 135,864 25,092 1,710 6,000(3)
Chief Executive Officer 1996 128,760 3,247 1,782 3,900(3)
Craig E. Toensing 1998 $104,856 $15,249 --- $4,500(3)
Secretary of the Company 1997 100,320 19,297 1,266 5,700(3)
Senior Vice President 1996 96,000 2,435 1,344 3,300(3)
and Trust Officer of the Bank
(1) The number of shares presented represent options to acquire shares of
common stock of the Company.
(2) Compensation above does not include accrual of benefits under the Bank's
defined pension plan or supplemental arrangements described below.
(3) Directors fees paid.
In 1988, the Bank adopted an Employee Stock Purchase Plan under Section 423 of
the Internal Revenue Code of 1986 for the benefit of its eligible employees. It
was designed to provide employees with an opportunity to have a stake in the
long term future of the Bank by purchasing its stock. Under the plan, the Bank
could grant options to employees and the Bank received no cash payments in
connection with the grant of options under the plan. The grant of stock options
could be made to all employees who had completed one year of service. The
exercise price of the options on the date of the grant was equal to 85% of the
fair market value of the stock on the date of the grant. All employees granted
options had the same rights and privileges. Each option provided that the
employee could purchase a number of shares of Common Stock for an aggregate
purchase price equal to a percentage of compensation as determined by the
Compensation Committee (which was uniform for all employees and could not exceed
10%). The Employee Stock Purchase Plan was terminated effective December 31,
1997.
Aggregated Options/SAR Exercises in Last Fiscal Year
Shares Acquired Value Realized
Name on Exercise (#) (1) ($) (2)
---- ------------------- --------------
John F. Perotti 1,710 $ 2,349.00
Craig E. Toensing 1,266 $ 1,772.40
(1) The number of shares presented represent options to acquire shares of
common stock of the Company.
(2) Value realized is the difference between the fair market value of the
Company's common stock on the date exercised and the exercise price of the
options exercised.
36
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, terms 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 Company 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 year of service. Pension benefits are based upon average
base salary (determined as of each January 1st) during the highest five
consecutive years of service prior to attaining normal retirement date. The
amount of annual benefit is fifty percent (50%) of average base salary less
fifty percent (50%) of the primary Social Security benefit, pro rated for less
than 25 years of service, plus one-half of one percent (.5%) of average base
salary for each of up to ten additional years of service. This benefit formula
may be modified to conform with recent changes in the pension laws.
The present average base salary and years of service to date of Messrs. Perotti
and Toensing are: Mr. Perotti: $141,507; 26 years; Mr. Toensing: $106,481; 18
years. The following table shows estimated annual retirement benefits payable at
normal retirement date as a straight life annuity for various average base
salary and service categories before the offset of a portion of the primary
Social Security benefit.
Average
Base Salary Estimated Annual Retirement Benefit With
at Retirement Years of Service at Retirement Indicated
- ------------- ----------------------------------------
10 Years 20 Years 25 Years 35 Years
-------- -------- -------- --------
$80,000 $16,000 $32,000 $40,000 $44,000
90,000 18,000 36,000 45,000 49,500
100,000 20,000 40,000 50,000 55,000
110,000 22,000 44,000 55,000 60,500
120,000 24,000 48,000 60,000 66,000
130,000 26,000 52,000 65,000 71,500
140,000 28,000 56,000 70,000 77,000
150,000 30,000 60,000 75,000 82,500
160,000 32,000 64,000 80,000 88,000
37
Supplemental Retirement Arrangements
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
(increased by 5% per year or greater to reflect increases in the cost of living
index) for a period of ten (10) years. These payments are in addition to any
payments under the Bank's retirement plan. The Supplemental Retirement Agreement
includes provisions which would prevent Mr. Perotti from working for a
competitor in the proximity of the Bank.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of February 28, 1999
regarding the number of shares of Common Stock beneficially owned by each
director and officer and by all directors and officers as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,336 (3) 1.02%
Louise F. Brown 4,224 (4) .28%
John F. Foley 3,696 (5) .25%
Gordon C. Johnson 1,002 (6) .07%
Holly J. Nelson 798 (7) .05%
John F. Perotti 10,642 (8) .71%
John E. Rogers 28,770 (9) 1.91%
Walter C. Shannon, Jr. 3,444 (10) .23%
Craig E. Toensing 3,000 (11) .20%
Michael A. Varet 65,646 (12) 4.35%
---------- -----
All Directors and Officers 136,558 9.07%
as a group of (10 persons)
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director's spouse and/or his children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
38
(2) Percentages are based upon the 1,509,792 shares of the Bank's Common Stock
outstanding and entitled to vote on February 28, 1999. The definition of
beneficial owner includes any person who, directly or indirectly, through
any contract, agreement or understanding, relationship or otherwise has or
shares voting power or investment power with respect to such security.
(3) Includes 2,100 shares owned by John R. H. Blum's wife.
(4) Includes 2,136 shares owned by Louise F. Brown as custodian for her
children.
(5) Includes 1,518 shares owned jointly by John F. Foley and his wife and 66
shares owned by John F. Foley as custodian for his children.
(6) Includes 660 shares owned by Gordon C. Johnson's wife and for which Mr.
Johnson has disclaimed beneficial ownership.
(7) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(8) Includes 9,514 shares owned jointly by John F. Perotti and his wife and
1,128 shares in trust for his children.
(9) Includes 11,370 shares owned by John E. Rogers' wife.
(10) All shares are owned individually by Walter C. Shannon, Jr.
(11) Includes 42 shares owned by Craig E. Toensing as custodian for his son.
(12) Includes 18,540 shares owned by Michael A. Varet's wife, 6,186 shares owned
by his son and 12,360 shares as custodian for his children for which Mr.
Varet has disclaimed beneficial ownership.
Principal Shareholders of the Company
As of February 28, 1999, management was 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law who represented the Company during 1998 and which
the Company proposes to engage in 1999 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Gager & Peterson,
39
which represented the Company during 1998 and which the Company proposes to
engage in 1999 in connection with certain legal matters.
Walter C. Shannon, Jr. is a director of the Company and the President of Wagner
McNeil, Inc. which serves as the insurance agent for many of the Company's
insurance needs.
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, principal shareholders
of the Company, and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others and such loans did not involve more than the
normal risk of collectability or present other unfavorable features. Since
January 1, 1998, the highest aggregate outstanding principal amount of all loans
extended by the Bank to the Company's directors, executive officers and all
associates of such persons as a group was $2,029,564 or an aggregate principal
amount equal to 9.13% of the equity capital accounts of the Bank.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report on
Form l0-K.
1. Financial Statements:
The financial statements filed as part of this report are
listed in the index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or
the information is included in the consolidated financial
statements or notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization dated as of April 22, 1998, by
and between Salisbury Bancorp, Inc. and Salisbury Bank and Trust
Company.(1)
3.1 Certificate of Incorporation of Salisbury Bancorp, Inc.(2)
3.2 Bylaws of Salisbury Bancorp, Inc.(3)
10. Pension Supplement Agreement with John F. Perotti.(4)
21. Subsidiaries of the Company, page 44
40
27. Financial Data Schedule
(b) CURRENT REPORTS: The following reports on Form 8-K were
filed during the fourth quarter of the 1998 fiscal year:
1. On December 18, 1998 the Company filed a Form 8-K reporting
the declaration of an $.11 per share quarterly cash dividend
and a $.16 per share special cash dividend.
2. On December 18, 1998 the Company filed a Form 8-K announcing
a stock repurchase program to acquire up to approximately
10% of the outstanding common stock of the Company.
(1) Exhibit was filed on April 23, 1998 as Exhibit 2.1 to
Company's Registration Statement on Form S-4 (No. 333-50857)
and is incorporated herein by reference.
(2) 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.
(3) Exhibit was filed on April 23, 1998 as Exhibit 3.2 to
Company's Registration Statement on Form S-4 (No. 333-50857)
and is incorporated herein by reference.
(4) 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.
41
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 24, 1999.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
------------------------
John F. Perotti
President and
Chief Executive Officer
By: /s/ John F. Foley
------------------------
John F. Foley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John F. Perotti President, March 24, 1999
- --------------------------------
(John F. Perotti) Chief Executive Officer
and Director
/s/ John R. H. Blum Director March 24, 1999
- -----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 24, 1999
- -----------------------------
(Louise F. Brown)
/s/ Gordon C. Johnson Director March 24, 1999
- -----------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 24, 1999
- -----------------------------
(Holly J. Nelson)
/s/ John E. Rogers Director March 24, 1999
- -----------------------------
(John E. Rogers)
/s/ Walter C. Shannon, Jr. Director March 24, 1999
- -----------------------------
(Walter C. Shannon, Jr.)
/s/ Craig E. Toensing Director March 24, 1999
- -----------------------------
(Craig E. Toensing)
/s/ Michael A. Varet Director March 24, 1999
- -----------------------------
(Michael A. Varet)
42