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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-K

 


 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2003

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 33-22224-B

 


 

Beverly National Corporation

(Exact name of registrant as specified in its charter)

 


 

A Massachusetts Corporation   04-2832201

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

240 Cabot Street Beverly, Massachusetts   01915
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (978) 922-2100

 


 

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class


 

Name of each exchange on which registered


None    

 

Securities registered pursuant to 12(g) of the Act:

 

Common Stock (Par Value $2.50)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

 

As of June 30, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity is $37,615,872.

 

Note. – If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

 

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 1,840,575 shares outstanding as of March 16, 2004.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III

 

Portions of the Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2004.

 



Table of Contents

TABLE OF CONTENTS

 

             Page

PART I

    
    ITEM 1 –   BUSINESS    3
    ITEM 2 –   PROPERTIES    21
    ITEM 3 –   LEGAL PROCEEDINGS    22
    ITEM 4 –   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    22
PART II     
    ITEM 5 –   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS    23
    ITEM 6 –   SELECTED FINANCIAL DATA    24
    ITEM 7 –   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION    25
    ITEM 7A –   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    35
    ITEM 8 –   FINANCIAL STATEMENTS    37
    ITEM 9 –   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    38
    ITEM 9A –   CONTROLS AND PROCEDURES    38
PART III     
    ITEM 10 –   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT    38
    ITEM 11 –   EXECUTIVE COMPENSATION    39
    ITEM 12 –   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS    39
    ITEM 13 –   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS    39
    ITEM 14 –   PRINCIPAL ACCOUNTING FEES AND SERVICES    39
PART IV     
    ITEM 15 –   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K    40

SIGNATURES

   44

 

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PART I

 

ITEM 1. BUSINESS

 

Beverly National Corporation, a Massachusetts corporation (the “Company” or the “Holding Company”), is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. The Holding Company has one banking subsidiary, Beverly National Bank (the “Bank”), and also owns 100% of a Massachusetts Business Trust, Cabot Street Realty Trust. The principal executive office of the Company is located at 240 Cabot Street, Beverly, Massachusetts 01915, and the telephone number is (978) 922-2100. The Holding Company owns all outstanding shares of the Bank and Cabot Street Realty Trust.

 

Beverly National Corporation was incorporated in 1984 and became the bank holding company for Beverly National Bank in 1985. However, the historical roots of the Company run deep. Beverly National Bank became a national banking association on March 16, 1865, making it one of the oldest national banks in the United States. From 1802 until the creation of a national banking system in 1865, the Bank operated as a state chartered bank. The Bank is believed to be the oldest community bank and the third oldest national bank still operating in the United States.

 

The other subsidiary of the Company, Cabot Street Realty Trust, was incorporated in 1984 to hold certain real estate utilized by the Company to conduct its business. During recent years, the Company has experienced sustained growth in both the Company’s equity and its base of earning assets. This growth results from the consolidation of several competitors within the region, favorable economic conditions in the Bank’s market area and the Bank’s success in responding to such opportunities.

 

The Bank is engaged in substantially all of the business operations customarily conducted by an independent commercial bank in Massachusetts. Banking services offered include acceptance of checking, savings and time deposits and the making of commercial, real estate, installment and other loans. The Bank also offers a full range of trust services, financial planning, internet banking, official checks, traveler’s checks, safe deposit boxes, automatic teller machines and customary banking services to its customers. The Bank established a new subsidiary during the fourth quarter of 2001, Hannah Insurance Agency, which will focus on sales of annuities, life, long term and disability insurance. During 2003, Beverly National Security Corporation was established for the exclusive purpose of buying, selling or holding securities.

 

The business of the Bank is not significantly affected by seasonal factors.

 

In the last five years the Bank derived its operating income from the following sources:

 

     % of Operating Income

 
     2003

    2002

    2001

    2000

    1999

 

Interest and fees on loans

   64 %   66 %   67 %   67 %   67 %

Interest and dividends on securities and federal funds sold

   17     15     18     19     18  

Charges, fees and other sources

   19     19     15     14     15  
    

 

 

 

 

     100 %   100 %   100 %   100 %   100 %
    

 

 

 

 

 

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Competition

 

In Massachusetts generally, and in the Bank’s primary service area, there is intense competition in the commercial banking industry. In addition to commercial banks, the Bank competes with other financial institutions such as savings banks, savings and loan associations, credit unions and mortgage companies obtaining lendable funds and in making loans.

 

Within the communities in which the Bank operates its 8 offices, the Bank’s 23.4% market share represents the largest market share among the 13 banking institutions, which operate a total of 34 branches in such communities.

 

All of the offices of the Company and the Bank are located within a market area, which represents the North Shore Region (Region). This Region is comprised of Beverly and 18 communities, which are proximate to Beverly. In 2003, the Region included 155 banking offices with deposits of $7.359 billion. Of the 155 offices in this Region, 14 offices were operated by 14 credit unions. The remaining 141 offices were operated by 25 banks and represented $7.077 billion.

 

During recent years, the financial industry and the Region have undergone major changes through acquisitions and mergers. These trends will be further accentuated with the upcoming 2004 merger of Fleet and Bank of America.

 

The magnitude of these changes within the banking industry has served to perpetuate the instability within the structure of the Region’s banking industry. For example, 13 communities in the North Shore Region experienced branch turnover in excess of 40 percent during 1996-2001.

 

As of June 30, 2003, the Bank held 4.3% of the deposits in the Region and maintained 8 offices (two of which are education facilities) of the 155 offices in the Region 38.7% of the $7.359 billion deposit base is held by 3 competitors (each holding over 10% respectively). These 3 competitors maintain 45 of the 155 offices in the Region and have resources, products and delivery channels which are far more extensive than those of Beverly National Corporation.

 

The Bank’s market position reflects its recognition as a community bank serving Beverly and proximate communities, and its status as an effective local competitor in those communities in which it is based. The Bank’s resources and reputation as a community based financial institution facilitates its ability to attract and retain customers in the local areas in which it operates. However, the Bank has neither the resources nor the intent to compete on a broad geographic basis which would not be proximate to Beverly and nearby communities. To the extent that the business of the Company and the Bank extend beyond Beverly and proximate communities, such business is primarily the result of loyal customers who have maintained their relationships with the Bank despite geographic relocations involving their families or businesses.

 

Regulation of the Company

 

The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended. 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 Bank Holding Company Act generally requires prior approval by the Federal Reserve Board of the acquisition by the Company of substantially all the assets or more than five percent of the

 

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voting stock of any bank. The Bank Holding Company Act 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 Bank Holding Company Act 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. It is not possible 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 Bank Holding Company Act of 1956, as amended and the regulations of the Federal Reserve Board promulgated thereunder, no corporation may become a bank holding company as defined therein, without prior approval of the Board. The Company received the approval of the Board of Governors to become a bank holding company on May 29, 1984. The Company will generally have to secure prior approval of the Federal Reserve Board if it wishes to acquire more than 5% of the voting shares of another bank or company. The Company is also limited under the Bank Holding Company Act of 1956, as amended, as to the types of business in which it may engage.

 

The Company, as a bank holding company, is subject to the Massachusetts Bank Holding Company laws.

 

The regulations of the Federal Reserve Board, promulgated pursuant to the Bank Holding Company Act generally require 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.

 

The Gramm-Leach-Bliley Financial Services Modernization Act of 1999, provides bank holding companies, banks, securities firms, insurance companies and investment management firms the option of engaging in a broad range of financial and related activities by opting to become a “financial holding company.” These holding companies are subject to oversight by the Federal Reserve Board, in addition to the regulatory agencies. Under the financial holding company structure, financial holding companies have a less-restricted ability to purchase or establish non-bank

 

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subsidiaries which are financial in nature or which engage in activities which are incidental or complementary to a financial activity. Additionally, securities and insurance firms are now generally permitted to purchase full-service banks.

 

As a general rule, the individual entities within a financial holding company structure are regulated according to the type of services provided. Under this approach, a financial holding company with banking, securities, and insurance subsidiaries has to deal with several regulatory agencies (e.g., appropriate banking agency, SEC, state insurance commissioner). A financial holding company that is itself an insurance provider is subject to FRB oversight, as well as to regulation by the appropriate state insurance commissioner. Broker/dealer and insurance firms electing to become financial holding companies are subject to FRB regulation.

 

The Gramm-Leach-Bliley Act facilitates the ability of financial institutions to offer a wide range of financial services. Large financial institutions would appear to be the primary beneficiaries as a result of this Act because many community banks are less able to devote the capital and management resources needed to facilitate broad expansion of financial services.

 

To qualify as a financial holding company, a bank holding company must certify to the Federal Reserve System that it and its subsidiary banks satisfy the requisite criteria of being “well-capitalized,” “well-managed” and have a CRA rating of “satisfactory” or better. The Company meets all of the criteria to qualify as a financial holding company.

 

The Sarbanes-Oxley Act of 2002

 

In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes.

 

The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer, and to be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report.

 

In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer as a result of misconduct with any financial reporting requirements under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for (1) any bonus or other incentive-based or equity based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the SEC of the financial document embodying such financial reporting requirement; and (2) any profits realized from the sale of securities of the issuer during that 12-month period.

 

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The Sarbanes Oxley Act also instructs the SEC to require by rule:

 

  disclosure of all material off-balance sheet transactions and relationship that may have a material effect upon the financial status of an issuer; and

 

  the presentation of pro forma financial information in a manner that is not misleading, and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles.

 

The Sarbanes-Oxley Act also prohibits insider transactions in the Company’s stock during a lock out period of Company’s pension plans, and any profits of such insider transactions are to be disgorged. In addition, there is a prohibition of corporation loans to its executives, except in certain circumstances. The Sarbanes-Oxley Act also provides for mandated internal control report and assessment with the annual report and an attestation and a report on such report by Corporation’s auditor. The SEC also requires an issuer to institute a code of ethics for senior financial officers of the corporation. Furthermore, the Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10 years for securities fraud.

 

The USA Patriot Act

 

The terrorist attacks in September, 2001 have impacted the financial services industry and led to federal legislation that attempts to address certain issues involving financial institutions. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.

 

Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLA”). IMLA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and/or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.

 

Among its other provisions, IMLA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these acts.

 

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Regulation of the Bank

 

The Bank is subject to regulation by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. The business of the Bank is subject in certain areas to state laws applicable to banks.

 

Employees

 

The Company and the Bank employ 126 officers and employees, of which 100 are full time.

 

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Distribution of Assets, Liabilities and Stockholders’ Equity;

Interest Rates and Interest Differential

 

The following tables present the condensed average balance sheets and the components of net interest differential for the three years ended December 31, 2003, 2002 and 2001. The total dollar amount of interest income from earning assets and the resultant yields are calculated on a tax equivalent basis.

 

     2003

 
    

Average

Balance


  

Interest

Inc./Exp.


  

Yield/

Rate


 

ASSETS

                    

Federal funds sold

   $ 21,179,726    $ 210,446    0.99 %

Investments (1)

     89,048,487      2,936,260    3.30 %

Loans, net of unearned income (1,2,3)

     183,108,057      11,943,225    6.52 %
    

  

      

Total earning assets

     293,336,270      15,089,931    5.14 %
    

  

      

Other non interest-earning assets

     32,033,631              
    

             

Total average assets

   $ 325,369,901              
    

             

LIABILITIES AND STOCKHOLDERS’ EQUITY

                    

Savings deposits

   $ 65,510,956      531,290    0.81 %

NOW accounts

     62,796,283      273,280    0.44 %

Money market accounts

     45,170,405      464,852    1.03 %

Time deposits $100,000 and over

     9,269,876      232,382    2.51 %

Other time deposits

     48,874,538      1,285,034    2.63 %

Short term borrowings

     3,694,247      36,933    1.00 %
    

  

      

Total interest-bearing liabilities

     235,316,305      2,823,771    1.20 %
    

  

      

Non interest-bearing deposits

     61,214,238              

Other non interest-bearing liabilities

     3,279,654              

Stockholders’ equity

     25,559,704              
    

             

Total average liabilities and stockholders’ equity

   $ 325,369,901              
    

             

Net interest income

          $ 12,266,160       
           

      

Net yield on interest-earning assets

                 4.18 %

(1) Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $143,403. A federal tax rate of 34% was used in performing this calculation.
(2) Includes loan fees of $337,845.
(3) Includes non-accruing loan balances and interest received on non-accruing loans.

 

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Distribution of Assets, Liabilities and Stockholders’ Equity;

Interest Rates and Interest Differential (Continued)

 

     2002

 
    

Average

Balance


  

Interest

Inc./Exp.


  

Yield/

Rate


 

ASSETS

                    

Federal funds sold

   $ 24,310,411    $ 356,621    1.47 %

Investments (1)

     61,228,422      2,860,319    4.67 %

Loans, net of unearned income (1,2,3)

     187,930,320      13,752,598    7.32 %
    

  

      

Total earning assets

     273,469,153      16,969,538    6.21 %
    

  

      

Other non interest-earning assets

     29,247,154              
    

             

Total average assets

   $ 302,716,307              
    

             

LIABILITIES AND STOCKHOLDERS’ EQUITY

                    

Savings deposits

   $ 62,811,458      900,309    1.43 %

NOW accounts

     54,832,795      411,729    0.75 %

Money market accounts

     38,762,971      661,724    1.71 %

Time deposits $100,000 and over

     10,171,093      378,427    3.72 %

Other time deposits

     51,526,171      1,984,306    3.85 %

Short term borrowings

     0      0    N/A  
    

  

      

Total interest-bearing liabilities

     218,104,488      4,336,495    1.99 %
    

  

      

Non interest-bearing deposits

     57,136,552              

Other non interest-bearing liabilities

     3,129,878              

Stockholders’ equity

     24,345,389              
    

             

Total average liabilities and stockholders’ equity

   $ 302,716,307              
    

             

Net interest income

          $ 12,633,043       
           

      

Net yield on interest-earning assets

                 4.62 %

(1) Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $143,573. A federal tax rate of 34% was used in performing this calculation.
(2) Includes loan fees of $387,206.
(3) Includes non-accruing loan balances and interest received on non-accruing loans.

 

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Distribution of Assets, Liabilities and Stockholders’ Equity;

Interest Rates and Interest Differential(Continued)

 

     2001

 
    

Average

Balance


  

Interest

Inc./Exp.


  

Yield/

Rate


 

ASSETS

                    

Federal funds sold

   $ 18,491,233    $ 607,500    3.29 %

Investments (1)

     54,502,514      3,388,169    6.22 %

Loans, net of unearned income (1,2,3)

     171,453,488      14,424,250    8.41 %
    

  

      

Total earning assets

     244,447,235      18,419,919    7.54 %
    

  

      

Other non interest-earning assets

     27,840,294              
    

             

Total average assets

   $ 272,287,529              
    

             

LIABILITIES AND STOCKHOLDERS’ EQUITY

                    

Savings deposits

   $ 54,669,418      1,468,391    2.69 %

NOW accounts

     44,901,938      543,636    1.21 %

Money market accounts

     29,383,209      839,865    2.86 %

Time deposits $100,000 and over

     8,466,586      436,685    5.16 %

Other time deposits

     53,526,752      2,829,658    5.29 %

Short Term borrowings

     212,917      12,977    6.10 %
    

  

      

Total interest-bearing liabilities

     191,160,820      6,131,212    3.21 %
    

  

      

Non interest-bearing deposits

     54,856,183              

Other non interest-bearing liabilities

     2,325,762              

Stockholders’ equity

     23,944,764              
    

             

Total average liabilities and stockholders’ equity

   $ 272,287,529              
    

             

Net interest income

          $ 12,288,707       
           

      

Net yield on interest-earning assets

                 5.03 %

(1) Interest income and yield are stated on a fully tax-equivalent basis. The total amount of adjustment is $153,158. A federal tax rate of 34% was used in performing this calculation.
(2) Includes loan fees of $274,145.
(3) Includes non-accruing loan balances and interest received on non-accruing loans.

 

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Distribution of Assets, Liabilities and Stockholders’ Equity;

Interest Rates and Interest Differential (Continued)

 

The following tables show, for the periods indicated, the dollar amount of changes in interest income and interest expense resulting from changes in volume and interest rates.

 

     2003 compared to 2002

 
     Due to a change in:

 
     Volume(1)

    Rate(1)

    Total

 

Interest income from:

                        

Federal funds sold

   $ (45,925 )   $ (100,249 )   $ (146,174 )

Investments

     1,299,629       (1,223,688 )     75,941  

Loans, net of unearned income

     (352,890 )     (1,456,483 )     (1,809,373 )
    


 


 


Total

     900,814       (2,780,420 )     (1,879,606 )
    


 


 


Interest expense on:

                        

Savings deposits

     38,693       (407,713 )     (369,020 )

NOW accounts

     59,796       (198,244 )     (138,448 )

Money market accounts

     109,382       (306,254 )     (196,872 )

Time deposits $100,000 and over

     (33,531 )     (112,514 )     (146,045 )

Other time

     (102,116 )     (597,156 )     (699,272 )

Short term borrowings and notes payable

     0       36,933       36,933  
    


 


 


Total

     72,224       (1,584,948 )     (1,512,724 )
    


 


 


Net interest income

   $ $828,590     $ (1,195,472 )   $ (366,882 )
    


 


 


     2002 compared to 2001

 
     Due to a change in:

 
     Volume(1)

    Rate(1)

    Total

 

Interest income from:

                        

Federal funds sold

   $ 191,180     $ (442,059 )   $ (250,879 )

Investments

     418,119       (945,969 )     (527,850 )

Loans, net of unearned income

     1,386,183       (2,057,835 )     (671,652 )
    


 


 


Total

     1,995,482       (3,445,863 )     (1,450,381 )
    


 


 


Interest expense on:

                        

Savings deposits

     218,691       (786,771 )     (568,080 )

NOW accounts

     120,235       (252,142 )     (131,907 )

Money market accounts

     268,103       (446,244 )     (178,141 )

Time deposits $100,000 and over

     87,914       (146,172 )     (58,258 )

Other time

     (105,759 )     (739,593 )     (845,352 )

Short term borrowings and notes payable

     (12,977 )     0       (12,977 )
    


 


 


Total

     576,207       (2,370,922 )     (1,794,715 )
    


 


 


Net interest income

   $ 1,419,275     $ (1,074,941 )   $ 344,334  
    


 


 



(1) The change in interest attributed to both rate and volume has been allocated to the changes in the rate and the volume on a pro rated basis.

 

12


Table of Contents

Investment Portfolio

 

The following table indicates the carrying value of the Company’s consolidated investment portfolio at December 31, 2003, 2002 and 2001:

 

    

2003 Carrying

Value


  

2002 Carrying

Value


  

2001 Carrying

Value


Investments Held to Maturity:

                    

U.S. Treasury securities and obligations of U.S. Government corporations and agencies

   $ 43,775,027    $ -0-    $ -0-

Mortgage backed securities

     31,489,015      -0-      -0-

Obligations of states and political subdivisions

     1,937,250      546,308      651,513

Other debt securities

     500,000      500,000      500,000
    

  

  

     $ 77,701,292    $ 1,046,308    $ 1,151,513
    

  

  

Federal Reserve Bank Stock

   $ 142,500    $ 97,500    $ 97,500
    

  

  

Federal Home Loan Bank Stock

   $ 1,041,900    $ 744,800    $ 730,800
    

  

  

Investments Available for Sale

   $ 61,082,577    $ 54,969,100    $ 75,916,103
    

  

  

 

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The following table shows the maturities, amortized cost basis and weighted average yields of the Company’s consolidated investments in held to maturity and available for sale debt securities at December 31, 2003. The yields on state and municipal securities are presented on a tax equivalent basis. A federal tax rate of 34% was used in performing this calculation.*

 

(Dollars in Thousands)

 

  

Within

one year


   

After one

but within

five years


   

After five

but within

ten years


 

Maturing:


   Amount

   Yield

    Amount

   Yield

    Amount

   Yield

 

U.S. Govt. & agency obligations

   $ 0          $ 50,872    3.40 %   $ 14,141    4.16 %

Mortgage backed securities

     0            20,219    4.26 %     51,115    4.28 %

State and political subdivisions

     0            265    6.10 %     1,672    5.22 %

Other securities

     300    8.01 %     100    7.15 %     100    2.50 %
    

        

        

      

Total

   $ 300    8.01 %   $ 71,456    3.66 %   $ 67,028    4.27 %
    

        

        

      

* Federal Reserve Bank Stock and FHLB Stock are not included.

 

Non-Accrual, Past Due and Restructured Loans

 

It is the policy of the Bank to discontinue the accrual of interest on loans when, in management’s judgment, the collection of the full amount of interest is considered doubtful. This will generally occur once a loan has become 90 days past due, unless the loan is well secured and in the process of collection. Restructured loans generally may have a reduced interest rate, an extension of loan maturity, future benefits for current concessions and a partial forgiveness of principal or interest. The following table sets forth information on non-accrual, past due and restructured loans as of December 31, for each of the years indicated:

 

(In Thousands)    2003

   2002

   2001

   2000

   1999

Loans, non-accrual

   $ 1,007    $ 575    $ 337    $ 415    $ 363

Loans past due 90 days or more and still accruing

     0      1      0      0      200
    

  

  

  

  

Total

   $ 1,007    $ 576    $ 337    $ 415    $ 563
    

  

  

  

  

 

The amount of interest income recorded during 2003, 2002, 2001, 2000 and 1999 on non-accrual loans and restructured loans outstanding at December 31, amounted to $30,765 in 2003, $23,602 in 2002, $7,958 in 2001, $7,792 in 2000 and $3,932 in 1999. Had these loans performed in accordance with their original terms, the amount recorded would have been $52,161 in 2003, $40,579 in 2002, $24,662 in 2001, $40,671 in 2000 and $28,777 in 1999.

 

As of December 31, 2003, there were no loans which are not included above but were known to have information about possible credit problems of borrowers which caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

 

Most of the Bank’s business activity is with customers located within the state. As of December 31, 2003 loans to borrowers in the health care industry totaled $18,369,481 or 10.4% of total loans. The majority of the Bank’s loan portfolio is comprised of loans collateralized by real estate located in the state of Massachusetts.

 

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Table of Contents

The types of loans offered by the Bank include a broad spectrum of commercial loans, typical of those offered by community banks, along with a broad array of residential mortgage loans and other consumer based loans. The Bank’s residential real estate loans include both fixed and variable rate loans. The Bank also offers construction mortgage loans and revolving equity loans secured by residential mortgages.

 

In addition to relying upon the adequacy of collateral, the Bank’s primary underwriting consideration with respect to such loans are the ability of the borrower to repay the loan and the sources of available funds to repay such loans.

 

The Bank offers a variety of commercial loans which are generally but not always secured by real estate. Such loans may be structured on a term or demand basis. Additional underwriting concerns by the Bank with respect to such loans include the ability of commercial borrowers to withstand interest rate increases, reduced revenue and an assessment of the borrower’s ability to complete its project management, as well as an assessment of industry and economic considerations. Generally, loan to value limits for real estate loans do not exceed 80% if the premises are owner occupied or 70% if the premises are not owner occupied. However, under certain circumstances, such as instances in which the borrowers demonstrate exceptional cash flow, such loan to value standards may be exceeded with proper authorization consistent with the Bank’s lending policies. Personal guarantees are generally required on all commercial loans. The Bank also offers a variety of consumer loans on both a secured and unsecured basis.

 

Loan Portfolio

 

The following table summarizes the distribution of the Bank’s loan portfolio as of December 31 for the years indicated: (Dollars in Thousands)

 

     2003

    2002

    2001

    2000

    1999

 

Commercial, financial & agricultural

   $ 34,788     $ 37,903     $ 29,725     $ 26,985     $ 25,018  

Real estate-construction and land development

     4,409       2,209       4,993       3,532       6,278  

Real estate-residential

     63,346       81,245       72,577       73,106       57,827  

Real estate-commercial

     59,196       57,703       54,497       51,361       48,546  

Consumer

     7,233       7,576       8,571       8,857       8,239  

Municipal tax-exempt obligations

     6,739       5,442       8,736       6,625       3,477  

Other

     233       668       408       766       741  
    


 


 


 


 


       175,944       192,746       179,507       171,232       150,126  

Allowance for loan losses

     (2,183 )     (2,013 )     (1,996 )     (1,913 )     (2,132 )

Deferred loan costs (fees), net

     651       661       453       299       209  
    


 


 


 


 


Net loans

   $ 174,412     $ 191,394     $ 177,964     $ 169,618     $ 148,203  
    


 


 


 


 


 

15


Table of Contents

Loan maturities for commercial, financial and agricultural loans at December 31, 2003 were as follows: $15,444,801 due in one year or less; $17,339,565 due after one year through five years; $2,003,595 due after five years. Of the Bank’s commercial, financial and agricultural loans due after one year, $4,970,153 have floating or adjustable rates and $14,373,007 have fixed rates.

 

Loan maturities for real estate construction and land development at December 31, 2003 were as follows: $2,822,100 due in one year or less, $1,586,875 due after one year through five years and $-0- due after five years. Of the Bank’s real estate construction and land development loans due after one year, $1,586,875 have adjustable rates and none have fixed rates.

 

Summary of Loan Loss Experience

 

The following table summarizes historical data with respect to loans outstanding, loan losses and recoveries, and the allowance for loan losses at December 31 for each of the years indicated:

 

(Dollars In Thousands)    2003

    2002

    2001

    2000

    1999

 

Average loans outstanding, net of unearned income

   $ 183,108     $ 187,930     $ 171,453     $ 157,776     $ 139,694  
    


 


 


 


 


Allowance for loan losses

                                        

Balance at beginning of period

   $ 2,013     $ 1,996     $ 1,913     $ 2,132     $ 1,935  
    


 


 


 


 


(Charge-offs):

                                        

Real Estate-Construction

     0       0       0       0       0  

Real Estate-Residential

     0       0       0       0       0  

Real Estate-Commercial

     0       0       0       (31 )     (2 )

Commercial, Financial & Agric.

     (44 )     (518 )     (93 )     (294 )     (5 )

Consumer

     (34 )     (14 )     (9 )     (24 )     (14 )

Recoveries:

                                        

Real Estate-Construction

     0       0       0       0       0  

Real Estate-Residential

     0       168       2       23       6  

Real Estate-Commercial

     0       0       0       31       190  

Commercial, Financial & Agric.

     119       75       45       50       19  

Consumer

     9       2       3       26       3  
    


 


 


 


 


Net recoveries (charge-offs)

     50       (287 )     (52 )     (219 )     197  
    


 


 


 


 


Provision for loan losses

     120       304       135       0       0  
    


 


 


 


 


Balance at period end

   $ 2,183     $ 2,013     $ 1,996     $ 1,913     $ 2,132  
    


 


 


 


 


Ratio of net (charge-offs)

                                        

Net recoveries to average loans

     0.03 %     (0.15 )%     (0.03 )%     (0.14 )%     0.14 %
    


 


 


 


 


 

Allowance for Loan Losses:

 

An allowance for loan losses is maintained to provide for losses which are currently identified or are inherent on loans in the current portfolio. 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

 

16


Table of Contents

the character and size of the loan portfolio, and other indicators. The balance in the allowance for loan losses is considered adequate by Management to absorb any reasonably foreseeable loan losses.

 

The following table reflects the allocation of the allowance for loan losses and the percentage of loans in each category to total outstanding loans as of December 31 for each of the years indicated:

 

    2003

    2002

    2001

    2000

    1999

 

(Dollars in Thousands)

 

  Amt.

 

Percent of

Loans in

Category
to Total

Loans


    Amt.

 

Percent of

Loans in

Category

to Total

Loans


    Amt.

 

Percent of

Loans in

Category

to Total

Loans


    Amt.

 

Percent of

Loans in

Category

to Total

Loans


    Amt.

 

Percent of

Loans in

Category

To Total

Loans


 

Commercial, Financial & Agricultural

  $ 1,138   19.8 %   $ 873   19.7 %   $ 749   16.6 %   $ 924   15.7 %   $ 929   16.7 %

Real Estate-Construction

    29   2.6 %     25   1.1 %     51   2.8 %     75   2.1 %     72   4.2 %

Real Estate-Residential

    229   36.0 %     371   42.2 %     283   40.4 %     202   42.7 %     154   38.5 %

Real Estate-Commercial

    764   33.6 %     737   29.9 %     612   30.3 %     416   30.0 %     549   32.3 %

Consumer

    12   4.1 %     5   3.9 %     27   4.8 %     39   5.2 %     29   5.5 %

Municipal Tax Exempt Loans

    6   3.8 %     0   2.8 %     0   4.9 %     0   3.9 %     34   2.3 %

Other

    5   0.1 %     2   0.4 %     0   0.2 %     0   0.4 %     0   0.5 %

Unallocated

    0   0.0 %     0   0.0 %     274   0.0 %     257   0.0 %     365   0.0 %
   

 

 

 

 

 

 

 

 

 

Total

  $ 2,183   100.0 %   $ 2,013   100.0 %   $ 1,996   100.0 %   $ 1,913   100.0 %   $ 2,132   100.0 %
   

 

 

 

 

 

 

 

 

 

 

The Bank formally determines the adequacy of the allowance on a quarterly basis. This determination is based on assessment of credit quality or “risk rating” of loans by senior management, which is submitted to the Board of Directors for approval. Loans are initially risk rated when originated and reviewed periodically. If there is deterioration in the credit, the risk rating is adjusted accordingly.

 

The allowance also includes a component resulting from the application of the measurement criteria of Statements of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS114”). Impaired loans receive individual evaluation of the allowance necessary on a quarterly basis. The Bank’s Loan Policy states that 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, the loan is considered impaired.

 

Commercial loans and residential mortgages are considered to be impaired under any one of the following circumstances: non-accrual status; loans over 90 days delinquent; troubled debt restructures consummated after December 31, 1994; or 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 an assessment of 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.

 

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Table of Contents

The loss factor applied as a general allowance is determined by a periodic analysis of the Allowance for Loan Losses. This analysis considers historical loan losses and delinquency figures. It also looks at delinquency trends.

 

Concentrations of credit and local economic factors are also evaluated on a periodic basis. Historical average net losses by loan type are examined and any identified trends are assessed. The Bank’s loan mix over that same period of time is also 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.

 

At December 31, 2003, the allowance for loan losses totaled $2,183,000 representing 217% of nonperforming loans which totaled $1,007,000 and 1.25% of total loans of $174,411,000. This compared to $2,013,000 representing 349% of nonperforming loans which totaled $576,000 and 1.1% of total loans of $191,394,000 at December 31, 2002. A total of $78,000 of loans were charged off by the Bank during 2003 as compared to $532,000 charged off during 2002. A total of $128,000 was recovered of previously charged off loans during 2003 compared to $245,000 recovered during 2002. Management believes that the allowance for loan losses is adequate. However, while management estimates loan losses using the best available information, no assurances can be given that future additions to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans and other factors, both within and outside of management’s control. Additionally, with expectations of the Bank to continue to grow its loan portfolio, ongoing periodic provisions to the allowance are likely to be necessary to maintain adequate coverage ratios.

 

18


Table of Contents

Deposits

 

The following table shows the average deposits and average interest rate paid for the last three years:

 

     2003

    2002

    2001

 
    

Average

Balance


  

Average

Rate


   

Average

Balance


  

Average

Rate


   

Average

Balance


  

Average

Rate


 

Demand Deposits

   $ 61,214,238    0.00 %   $ 57,136,552    0.00 %   $ 54,856,183    0.00 %

NOW Accounts

     62,796,283    .44 %     54,832,795    0.75 %     44,901,938    1.21 %

Money Market Accounts

     45,170,405    1.03 %     38,762,971    1.71 %     29,383,209    2.86 %

Savings Deposits

     65,510,956    0.81 %     62,811,458    1.43 %     54,669,418    2.74 %

Time Deposits $100,000 and over

     9,269,876    2.51 %     10,171,093    3.72 %     8,466,586    5.16 %

Other Time Deposits

     48,874,538    2.63 %     51,526,171    3.85 %     53,526,752    5.29 %
    

        

        

      

Total

   $ 292,836,296    0.95 %   $ 275,241,040    1.58 %   $ 245,804,086    2.50 %
    

        

        

      

 

As of December 31, 2003, the Bank had certificates of deposit in amounts of $100,000 and over, aggregating $10,152,690. These certificates of deposit mature as follows:

 

Maturity


   Amount

3 months or less

   $ 3,684,500

Over 6 months through 12 months

     2,870,528

Over 12 months

     3,597,662
    

Total

   $ 10,152,690
    

 

Securities Sold Under Agreements to Repurchase

 

The securities sold under agreements to repurchase as of December 31, 2003 are securities sold on a short term basis by the Bank accounted not as sales, but as borrowings. The securities consisted of mortgage-backed securities issued By U.S. Government Corporations. The securities were held in the Bank’s safekeeping account at the Federal Reserve Bank under the control of the Bank and pledged to the purchasers of the securities. The purchasers have agreed to sell to the bank substantially identical securities at the maturity of the agreements.

 

The average securities sold under agreements to repurchase in 2003 was $3,694,247 with a weighted average rate paid of 1.00%.

 

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Table of Contents

Return on Equity and Assets

 

    

Year ended

December 31,


 
     2003

    2002

    2001

 

Return on average total assets (net income divided by average total assets)

   .67 %   .79 %   .94 %

Return on average stockholders’ equity (net income divided by average stockholders’ equity)

   8.52 %   9.78 %   10.68 %

Dividend payout ratio (total declared dividends divided by net income)

   66.63 %   61.27 %   48.68 %

Equity to assets ratio (average stockholders’ equity as a percentage of average total assets)

   7.86 %   8.04 %   8.79 %

 

Quarterly Results of Operations (Unaudited)

 

Summarized quarterly financial data for 2003 and 2002 as follows:

 

    

(in thousands, except earnings per share)

2003 Quarter Ended


     March 31

   June 30

   Sept 30

   Dec 31

Interest and dividend income

   $ 3,817    $ 3,826    $ 3,727    $ 3,576

Interest expense

     771      785      657      611
    

  

  

  

Net interest and dividend income

     3,046      3,041      3,070      2,965

Provision for loan losses

     100      20      0      0

Other income

     1,054      979      644      939

Other expense

     3,021      3,103      2,812      3,189
    

  

  

  

Income before income taxes

     979      897      902      715

Income tax expense

     375      352      343      246
    

  

  

  

Net income

   $ 604    $ 545    $ 559    $ 469
    

  

  

  

Basic earnings per common share

   $ 0.33    $ 0.31    $ 0.30    $ 0.26

Earnings per common share assuming dilution

   $ 0.32    $ 0.29    $ 0.29    $ 0.24
    

(in thousands, except earnings per share)

2002 Quarter Ended


     March 31

   June 30

   Sept 30

   Dec 31

Interest and dividend income

   $ 4,419    $ 4,279    $ 4,190    $ 3,937

Interest expense

     1,282      1,154      1,025      875
    

  

  

  

Net interest and dividend income

     3,137      3,125      3,165      3,062

Provision for loan losses

     66      80      69      89

Other income

     847      916      996      1,113

Other expense

     3,117      3,289      3,131      2,804
    

  

  

  

Income before income taxes

     801      672      961      1,282

Income tax expense

     268      250      361      455
    

  

  

  

Net income

   $ 533    $ 422    $ 600    $ 827
    

  

  

  

Basic earnings per common share

   $ 0.31    $ 0.24    $ 0.34    $ 0.46

Earnings per common share assuming dilution

   $ 0.29    $ 0.23    $ 0.32    $ 0.44

 

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Table of Contents

Short-Term Borrowings

 

The Bank engages in certain borrowing agreements throughout the year. These are in the ordinary course of the Bank’s business. Federal funds purchased represent daily transactions which the Bank uses to manage its funds and liquidity position to comply with regulatory requirements. Interest rates fluctuate daily reflecting existing market conditions. Listed below are the short term borrowings during 2003, 2002 and 2001.

 

     2003

   2002

   2001

 

Average year to date balance:

   -0-    -0-    $ 212,917  

Rate

   N/A    N/A      6.10 %

 

ITEM 2. PROPERTIES

 

The Bank’s main office (15,000 square feet) at 240 Cabot Street, Beverly, Massachusetts is owned by the Bank. The Bank completed renovations in 1988, which has enhanced the Bank’s ability to effectively serve its customer base.

 

The Bank’s Operation Center (12,000 square feet) is located at 246 Cabot Street, immediately adjacent to the Bank’s main office, and is owned by Cabot Street Realty Trust. The Operations Center provides a loan center and an on-site item processing facility for the Bank.

 

The Bank’s South Hamilton office, built in 1991 (2,382 square feet) at 25 Railroad Avenue, South Hamilton, Massachusetts is owned by the Company. The office is part of a four-unit condominium. The three other units are owned by third parties.

 

The Bank’s Topsfield office (2,310 square feet) at 15 Main Street, Topsfield, Massachusetts is rented by the Bank from a third party with a term that expires February 2005 with an additional (1) five-year renewal period. The 2003 annual rent was $44,551.

 

The Bank’s North Beverly Plaza office (5,126 square feet) at 63 Dodge Street, Beverly, Massachusetts is leased by the Bank from a third party with a term that expires October 2006. The rent for 2003 was $45,900.

 

The Bank, in 1997, established a full-service Branch Office, at Cummings Center (3,502 square feet), Cummings Center, 100 Cummings Center-Suites 101M and 101N, Beverly, Massachusetts. The 2003 rent for the Cummings Center Branch was $74,583 with a term that expires September 2006.

 

The Bank, in January 2000, established a full-service branch office (1,250 square feet) at 11 Summer Street, Manchester-by-the-Sea, Massachusetts. The 2003 rent for the Manchester Branch Office was $51,000 with a term that expires December 2029.

 

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Table of Contents

On November 6, 2003, the Bank entered into a 15 year lease for a branch office located in Danvers, Massachusetts. The lease term begins on the earlier of the (1) the date the branch office opens to the public or (2) the commencement date, as defined in the lease agreement. The fixed minimum annual rent for each year of the lease is as follows:

 

Term Year


   Annual
Amount


1-5

   $ 185,000

6-10

     212,750

11-15

     244,663

 

The Bank has ten automated teller machines (“ATMs”) in Massachusetts of which three are stand alone and are located at Beverly Hospital, Herrick Street, Beverly; Crosby’s Market, Manchester-by-the-Sea; Cummings Center parking lot, 100 Cummings Center, Beverly, along with eight cash dispensing machines at various retail locations.

 

The Bank maintains two high school branches: Hamilton-Wenham Regional High School (340 square feet) at Bay Road, Hamilton, Massachusetts; and Beverly High School (491 square feet) at Sohier Road, Beverly, Massachusetts.

 

In Management’s opinion, all properties occupied by the Bank are in good condition, and are adequate at present and for the foreseeable future for the purposes for which they are being used and are properly insured.

 

ITEM 3. LEGAL PROCEEDINGS

 

There are no pending material legal proceedings other than ordinary routine litigation incidental to normal business to which the Company or the Bank is a party or to which any of their properties are subject.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to a vote of security holders during the quarter ended December 31, 2003.

 

22


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

There is limited trading in the Company’s Common Stock, which is not listed on any public exchange or the National Association of Securities Dealers National Market System, or the Small Cap Market System. However, the Common Stock of Beverly National Corporation is traded on the Over-the-Counter Bulletin Board and the Stock Symbol is (“BVNC”).

 

The following table sets forth, to the best knowledge of Management, the representative prices for each quarterly period during the last two years. The sale prices of these market trades are based on private transactions that Management is aware of and transactions reported by Advest for 2003 and on Bloomberg for 2002.

 

     2003

   2002

Quarter ended March 31,

   $21.10 – $22.50    $15.64 – $17.14

Quarter ended June 30,

   $21.22 – $23.00    $18.06 – $21.58

Quarter ended Sept. 30,

   $22.05 – $25.80    $20.40 – $22.25

Quarter ended Dec. 31,

   $23.90 – $30.00    $20.25 – $21.75

 

Holders

 

The number of record holders of the Company’s common stock was 668 as of March 16, 2004.

 

Dividends

 

The Company declared quarterly cash dividends of $.20 per share during 2003 totaling $.80 per share in 2003. The Company declared quarterly cash dividends of $.20 per share plus a 200th anniversary special dividend of $.05 and a stock dividend of 5% on its outstanding common stock, which amounted to an aggregate dividend per share of $.85, during 2002. Adjusted for the 5% stock dividend, dividends paid per share were $.83 per share in 2002.

 

The Company’s ability to pay dividends is limited by the prudent banking principles applicable to all bank holding companies and Massachusetts corporate law. As a practical matter, the Company’s ability to pay dividends is generally limited by the Bank’s ability to dividend funds to the Company.

 

For restrictions on the ability of the Bank to pay dividends to the Company, see Note 15, of the Financial Statements.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Equity Compensation Plan Information

 

Plan Category


  

Number of securities to be

issued upon exercise of

outstanding options,

warrants and rights


  

Weighted average exercise

price of outstanding options,

warrants and rights


  

Number of securities remaining

available for future issuance

under equity compensation plans

(excluding securities reflected in

column (a))


     (a)    (b)    (c)

Equity compensation plans approved by security holders

   79,878    $ 14.03    61,740

Equity compensation plans not approved by security holders

   90,213    $ 11.47    0
    
  

  

Total

   170,091    $ 12.67    61,740
    
  

  

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following table sets forth selected financial data for the last five years.

 

     Year Ended December 31,

 
     2003

    2002

    2001

    2000

    1999

 

EARNINGS DATA

                                        

Interest Income

   $ 14,946,528     $ 16,825,965     $ 18,266,761     $ 17,340,522     $ 15,294,670  

Interest Expense

     2,823,771       4,336,495       6,131,212       5,796,687       5,208,819  

Net Interest Income

     12,122,757       12,489,470       12,135,549       11,543,835       10,085,851  

Provision for Loan Losses

     120,000       303,890       135,000       0       0  

Non Interest Income

     3,616,247       3,872,653       3,136,893       2,844,528       2,609,112  

Non Interest Expense

     12,125,662       12,342,414       11,005,624       10,119,967       9,104,983  

Income Before Income Taxes

     3,493,342       3,715,819       4,131,818       4,268,396       3,589,980  

Income Taxes

     1,316,331       1,334,301       1,574,209       1,567,405       1,357,339  

Net Income

     2,177,011       2,381,518       2,557,609       2,700,991       2,232,641  

PER SHARE DATA*

                                        

Net Income-Basic

   $ 1.20     $ 1.35     $ 1.49     $ 1.59     $ 1.36  

Net Income-Diluted

   $ 1.14     $ 1.28     $ 1.39     $ 1.48     $ 1.23  

Cash Dividends

   $ 0.80     $ 0.83     $ 0.72     $ 0.63     $ 0.54  

Book Value (at end of period)

   $ 14.32     $ 14.24     $ 14.03     $ 13.26     $ 12.22  

BALANCE SHEET DATA

                                        

Total Assets

     347,174,768       310,528,354       310,328,758       264,103,525       221,437,654  

Loans

     176,594,331       193,406,867       179,960,227       171,331,168       148,985,964  

Allowance for Loan Losses

     2,182,675       2,012,578       1,996,376       1,912,696       2,132,386  
    


 


 


 


 


Loans, Net of Allowance

     174,411,656       191,394,289       177,963,851       169,418,472       146,853,578  

Investments

     139,968,269       56,857,708       77,895,916       55,799,644       47,829,036  

Deposits

     308,280,816       281,295,684       284,112,610       238,902,582       199,252,479  

Stockholders’ Equity

     26,242,030       25,433,145       23,561,564       22,735,232       20,218,279  

FINANCIAL RATIOS

                                        

Return on Average Assets

     0.67 %     0.79 %     0.94 %     1.12 %     1.03 %

Return on Average Equity

     8.52 %     9.78 %     10.68 %     12.63 %     11.44 %

Net Interest Margin

     4.18 %     4.62 %     5.03 %     5.24 %     5.07 %

Leveraged Capital Ratio

     7.78 %     7.87 %     8.59 %     9.41 %     9.44 %

* Per share information has been adjusted to reflect the June 2002 5% stock dividend.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

Critical Accounting Estimates

 

In preparing the Company’s financial statements, Management selects and applies numerous accounting policies. In applying these policies, Management must make estimates and assumptions. The accounting policy that is most susceptible to critical estimates and assumptions is the allowance for loan losses. The determination of an appropriate provision is based on a determination of the probable amount of credit losses in the loan portfolio. Many factors influence the amount of potential charge-offs of loans deemed to be uncollectible. These factors include the specific characteristics of the loan portfolio and general economic conditions nationally and locally. While Management carefully considers these factors in determining the amount of the allowance for loan losses, future adjustments may be necessary due to changed conditions, which could have an adverse impact on reported earnings in the future. See “Provisions and Allowance for Loan Losses.”

 

Consolidated Balance Sheets

 

The total assets of the Company as of December 31, 2003, amounted to $347,174,768 as compared to $310,528,354 at December 31, 2002. This increase amounted to $36,646,414 or 11.8%.

 

The total assets of the Company as of December 31, 2002, amounted to $310,528,354 as compared to $310,328,758 at December 31, 2001. This increase amounted to $199,596 or 0.1%.

 

The economy of the Company’s market area is considered stable. However, economic uncertainty continues to be a factor in the financial decision making process for both commercial and consumer banking customers.

 

Investment Portfolio

 

The securities reported in Available-for-Sale 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. The securities reported in Securities-Held-to-Maturity are carried at amortized cost.

 

Securities-Held-to-Maturity

 

The investments in Securities-Held-to-Maturity totaled $77,701,292 at December 31, 2003 as compared to $1,046,308 at December 31, 2002. Given the current interest rate environment, the market uncertainties and to help preserve capital, the Company has placed a large percentage of investments in the Held-to-Maturity category. State and municipal obligations held to maturity totaled $1,937,250 at December 31, 2003, as compared to $546,308 at December 31, 2002. This increase totaled $1,390,942 or 254.6%.

 

The investments in Securities-Held-to-Maturity totaled $1,046,308 at December 31, 2002 as compared to $1,151,513 at December 31, 2001. This is a decrease of $105,205 or 9.1%. Of this amount, state and municipal obligations held to maturity totaled $546,308 at December 31, 2002, as compared to $651,513 at December 31, 2001. This decrease totaled $105,205 or 16.1%.

 

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It is management’s intent to hold those securities designated as Held-to-Maturity in the investment securities portfolio until maturity.

 

Securities-Available-for-Sale

 

Securities-Available-for-Sale are primarily comprised of short to medium term U.S. Government corporations and agencies and mortgage backed securities. The balance of Securities-Available-for-Sale totaled $61,082,577 as of December 31, 2003 as compared to the balance of Securities-Available-for-Sale, which totaled $54,969,100 as of December 31, 2002, an increase of $6,113,477 or 11.1%.

 

The balance of Securities-Available-for-Sale totaled $54,969,100 as of December 31, 2002 as compared to the balance of Securities-Available-for-Sale, which totaled $75,916,103 as of December 31, 2001, a decrease of $20,947,003 or 27.6%.

 

Federal Funds Sold

 

The balance of federal funds sold totaled $4,000,000 at December 31, 2003 in comparison to $33,000,000 at December 31, 2002 and in comparison to $24,000,000 at December 31, 2001, reflecting the growth of core deposits, which strengthened the Bank’s liquidity position. In 2003 the excess liquidity was deployed within the investment portfolio.

 

Loans

 

Net Loans at December 31, 2003, totaled $174,411,656 as compared to $191,394,289 at December 31, 2002. This is a decrease of $16,982,633 or 8.9%.

 

Commercial Loans totaled $34,787,962 at December 31, 2003, as compared to $37,902,656 at December 31, 2002. This is a decrease of $3,114,694 or 8.2%. This is attributed to increased competition for business loans in the area. Municipal loans totaled $6,972,233 at December 31, 2003, as compared to $6,110,134 at December 31, 2002. This is an increase of $862,099 or 14.1%, which can be attributed to increased activity in the local lending market for industrial revenue bonds. Real estate residential loans, excluding mortgage loans held for sale, totaled $63,345,679 at December 31, 2003, as compared to $81,245,275 at December 31, 2002. This is a decrease of $17,899,596 or 22.0%. The decrease of residential mortgage loan balances can be attributed to the low interest rate environment, in which mortgages have been refinanced at lower rates and subsequently sold in the secondary market. A total of $16,245,705 residential real estate mortgages were sold in the secondary market in 2003. Real estate commercial loans totaled $59,195,713 at December 31, 2003 as compared to $57,702,355 at December 31, 2002, representing an increase of $1,493,358 or 2.6%. There has been increased competition for commercial loans, from both traditional and non-traditional sources. Consumer loans totaled $7,233,142 at December 31, 2003, as compared to $7,576,333 at December 31, 2002. This is a decrease of $343,191 or 4.5%.

 

Net Loans at December 31, 2002, totaled $191,394,289 as compared to $177,963,851 at December 31, 2001. This increase was $13,430,438 or 7.6%.

 

Commercial Loans totaled $37,902,656 at December 31, 2002, as compared to $29,725,011 at December 31, 2001. This is an increase of $8,177,645 or 27.5%. This is attributed to increased business from merged banks in the area. The growth in the Bank’s loan portfolio has been

 

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primarily in the commercial real estate and commercial portfolios. Municipal loans totaled $6,110,134 at December 31, 2002, as compared to $9,143,907 at December 31, 2001. This is a decrease of $3,033,773 or 33.2%, which can be attributed to increased competition in the municipal local lending market. Real estate residential loans, excluding mortgage loans held for sale, totaled $81,245,275 at December 31, 2002, as compared to $72,577,156 at December 31, 2001. This is an increase of $8,668,119 or 11.9%. The increase of residential mortgage loan balances in 2002 can be attributed to the low interest rate environment, in which mortgages have been refinanced to long term fixed rates. Despite such growth, a total of $15,982,444 residential real estate mortgages were sold in the secondary market in 2002. Real estate commercial loans totaled $57,702,355 at December 31, 2002 as compared to $54,496,797 at December 31, 2001, representing an increase of $3,205,558 or 5.9%. There has been increased competition for commercial loans, from both traditional and non-traditional sources, during both 2002 and 2001. Consumer loans totaled $7,576,333 at December 31, 2002, as compared to $8,570,970 at December 31, 2001. This is a decrease of $994,637 or 11.6%.

 

As of December 31, 2003, loans to borrowers in the health care industry totaled $18,369,481 or 10.4% of total loans. The majority of the Bank’s loan portfolio is comprised of loans collateralized by real estate located in the Bank’s market area.

 

Premises and Equipment

 

Premises and equipment totaled $3,825,654 at December 31, 2003 as compared to $4,417,696 at December 31, 2002. This is a net decrease of $592,042 or 13.4%, which can be attributed to the depreciation.

 

Premises and equipment totaled $4,417,696 at December 31, 2002 as compared to $4,876,282 at December 31, 2001. This is a net decrease of $458,586 or 9.4%, which can be attributed to the depreciation.

 

Deposits

 

Deposits totaled $308,280,816 at December 31, 2003, as compared to $281,295,684 at December 31, 2002. The increase of $26,985,132 or 9.6% can be attributed to the development of a sales oriented culture within the Bank’s retail banking function. The Bank has focused on growth of its core deposit base. The continued growth of the core deposits is attributable to the ongoing effort to develop and broaden financial relationships with our customers. Demand deposits totaled $61,442,551 at December 31, 2003 as compared to $59,951,379 at December 31, 2002. This is an increase of $1,491,379 or 2.5%. Interest bearing deposits totaled $246,838,265 at December 31, 2003 as compared to $221,344,305 at December 31, 2002. This is an increase of $25,493,960 or 11.5%.

 

Deposits totaled $281,295,684 at December 31, 2002, as compared to $284,017,818 at December 31, 2001. The Bank has focused on growth of its core deposit base. The continued growth of the core deposits is attributable to the ongoing effort to develop and broaden financial relationships with our customers. Time deposits totaled $56,490,854 at December 31, 2002 as compared to $67,160,704 at December 31, 2001. This is a decrease of $10,669,850 or 15.9%. The decrease of high cost deposits was partially offset by lower cost core deposits.

 

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Borrowings

 

Securities Sold Under Repurchase Agreements, totaled $9,943,208 at December 31, 2003 as compared to $-0- at December 31, 2002. The Bank utilizes Securities Sold Under Repurchase Agreements as an alternative funding source and as a product to respond to the treasury function needs of commercial customers.

 

Capital

 

The increase in capital during 2003 of $808,885 can be attributed to internal capital growth of $726,486 (net income less dividends) and exercised stock options and related activity of $618,150. There was a negative change in the net unrealized gain (net of tax) for the Available-for-Sale securities, which totaled $535,751.

 

The increase in capital during 2002 of $1,871,581 can be attributed to internal capital growth of $922,354 (net income less dividends) and exercised stock options and related activity of $989,327. During the year 2002, the Company repurchased 17,500 shares of its common stock for an aggregate repurchase price of $389,375. The negative change in the net unrealized gain (net of tax) for the Available-for-Sale securities totaled $88,568.

 

Consolidated Statements of Income

 

Net Interest Income

 

Net interest and dividend income totaled $12,122,757 for the year ended December 31, 2003, as compared to $12,489,470 for the year ended December 31, 2002. This decrease was $366,713 or 2.9%. The decreased interest income was partially offset by decreased interest expense.

 

Net interest and dividend income totaled $12,489,470 for the year ended December 31, 2002, as compared to $12,135,549 for the year ended December 31, 2001. This increase was $353,921 or 2.9%. During 2002, decreased interest income and increased provision for loan losses were more than offset by decreased interest expense.

 

Loan Income

 

Interest and fees on loans totaled $11,815,602 for the year ended December 31, 2003, as compared to $13,618,426 for 2002. This is a decrease of $1,802,824 or 13.2%, is primarily attributable to both decreased interest rates and, to a lesser extent, is attributable to decreased volume of loans.

 

Interest and fees on loans totaled $13,618,426 for the year ended December 31, 2002, as compared to $14,286,139 for 2001. This is a decrease of $667,713 or 4.7% which is attributable to decreased interest rates despite the increased volume of loans.

 

Investment Securities Income

 

Taxable investment securities income for the 12 months ended December 31, 2003, totaled $2,858,347 as compared to $2,807,555 for the same time period in 2002. This is an increase of $50,792 or 1.8%. The average balance of taxable investments of government agencies and mortgage backed securities increased in 2003, but the investments purchased during the year were invested at lower rates, due to the interest rate environment.

 

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Taxable investment securities income for the 12 months ended December 31, 2002, totaled $2,807,555 as compared to $3,317,212 for the same time period in 2001. This is a decrease of $509,657 or 15.4%. The decrease is the result of bonds which were called or sold during 2002. The average balance of taxable investments of government agencies and mortgage backed securities increased in 2002, but the investments purchased during the year were invested at lower rates, due to the interest rate environment.

 

Tax exempt investment securities income for the 12 months ended December 31, 2003, totaled $43,873 as compared to $27,650 for the same period in 2002. This is an increase of $16,223 or 58.7%.

 

Tax exempt investment securities income for the 12 months ended December 31, 2002, totaled $27,650 as compared to $44,258 for the same period in 2001. This is a decrease of $16,608 or 37.5%. Investment in tax exempt bonds have been limited to those communities and political subdivisions within the Company’s market area.

 

Other Interest Income

 

Other interest income totaled $211,698 for the 12 months ended December 31, 2003, as compared to $358,438 for the same time period in 2002, a decrease of $146,740 or 40.9%. This decrease is attributable to a lower interest rate environment.

 

Other interest income totaled $358,438 for the 12 months ended December 31, 2002, as compared to $612,084 for the same time period in 2001, a decrease of $253,646 or 41.4%. This decrease is attributable to a lower interest rate environment, although the Company kept a higher volume of federal funds sold.

 

Interest Expense

 

Interest expense on deposits totaled $2,786,838 for the year ended December 31, 2003, as compared to $4,336,495 for the year ended December 31, 2002. This is a decrease of $1,549,657 or 35.7%. Core deposit growth created a lower interest expense in a lower interest rate environment. The interest expense on short-term borrowings for the 12 months ended December 31, 2003 totaled $36,933 as compared to $-0- for the 12 months ending December 31, 2002. This increase of $36,933 is due to the initiation of the program in 2003 to sell Securities Under Agreements to Repurchase.

 

Interest expense on deposits totaled $4,336,495 for the year ended December 31, 2002, as compared to $6,118,235 for the year ended December 31, 2001. This is a decrease of $1,781,740 or 29.1%. The decrease of certificate of deposit balances along with core deposit growth created a lower interest expense in a lower interest rate environment. The interest expense on short-term borrowings for the 12 months ended December 31, 2002 totaled $ -0-, as compared to $12,977 for the 12 months ending December 31, 2001. There were no short-term borrowings for the period ended December 31, 2002 and the interest expense was $12,977 for the period ended December 31, 2001.

 

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Provisions and Allowance for Loan Losses

 

There was a $120,000 provision to the allowance for loan losses (“ALLL”) for the 12 month period ended December 31, 2003 and $303,890 provision for the same period in 2002. The limited 2003 provision was warranted due to the limited growth of the loan portfolio. At December 31, 2003 the Company’s allowance for loan losses was $2,182,675 representing 1.24% of gross loans, as compared to $2,012,578, representing a ratio of 1.04% of gross loans at December 31, 2002.

 

The Company’s non-accrual loans totaled to $1,006,740 at December 31, 2003, as compared to $574,569 at December 31, 2002. Combined non-accrual loans and past due loans 90 days or more remained low and amounted to $1,006,740 at December 31, 2003, as compared to $575,229 at December 31, 2002, while non-accrual and delinquent loans increased in 2003, the volume of such loans remained low as a percentage of the portfolio.

 

The ratio of non-performing assets to total loans, mortgages held for sale and other real estate owned (“OREO”) was 0.57% for December 31, 2003, as compared to 0.30% as of December 31, 2002. The ratio of allowance for loan losses to non-performing assets equaled 216.8% at December 31, 2003, as compared to 349.9% at December 31, 2002.

 

Loans totaling $78,101 were charged off by the Company during 2003 as compared to $532,664 charged off during the corresponding period in 2002. These charge-offs consisted primarily of loans to small businesses. Recoveries of loans previously charged off totaled $128,198 during 2003 as compared to $244,976 during the corresponding period in 2002. Management does not consider either the decrease in charged off loans or the increase of recoveries of previously charged off loans to be indicative of any trends.

 

There was a $303,890 provision to the allowance for loan losses for the 12 month period ended December 31, 2002 and $135,000 provision for the same period in 2001. The 2002 provision was warranted due to the continued growth of the loan portfolio. An additional factor contributing to the need for an increased provision during 2002 included management’s evaluation of economic conditions at the national level. At December 31, 2002 the Company’s allowance for loan losses was $2,012,578 representing 1.04% of gross loans, as compared to $1,996,376, representing a ratio of .81% of gross loans at December 31, 2001.

 

The Company’s non-accrual loans totaled to $574,569 at December 31, 2002, as compared to $336,906 at December 31, 2001. Combined non-accrual loans and past due loans 90 days or more remained low and amounted to $575,229 at December 31, 2002, as compared to $336,906 at December 31, 2001.

 

The ratio of non-performing assets to total loans, mortgages held for sale and other real estate owned (“OREO”) was 0.30% for December 31, 2002, as compared to 0.19% as of December 31, 2001. The ratio of allowance for loan losses to non-performing assets equaled 349.9% at December 31, 2002, as compared to 592.5% at December 31, 2001.

 

Loans totaling $532,664 were charged off by the Company during 2002 as compared to $102,071 charged off during the corresponding period in 2001. These charge-offs consisted primarily of loans to small businesses. Recoveries of loans previously charged off totaled $244,976 during 2002 as compared to $50,751 during the corresponding period in 2001. Management does not consider either the increase in charged off loans or the increase of Recoveries of previously charged off loans to be indicative of any trends.

 

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Non-Interest Income

 

Non-interest income totaled $3,616,247 in 2003 as compared to $3,872,653 in 2002. Income from fiduciary activities totaled $1,540,084 for the 12 months ended December 31, 2003, as compared to $1,612,911 for the same time period in 2002, a decrease of $72,827 or 4.5%. Earnings from recurring fiduciary income decreased due to market valuations in the earlier part of the year. Service charges and other deposit fee income totaled $1,062,477 for the 12 months ending December 31, 2003 as compared to $882,538 for the same time period in 2002. This increase of $179,939 can be attributed to additional services and a higher volume of accounts. Other income totaled $377,832 for the 12 months ended December 31, 2003 as compared to $622,210 for the same period in 2002. Income from security gains totaled $247,982 for the 12 months ended December 31, 2003 as compared to $299,567 of security gains for the 12 months ended December 31, 2002.

 

Non-interest income totaled $3,872,653 in 2002 as compared to $3,136,893 in 2001. Income from fiduciary activities totaled $1,612,911 for the 12 months ended December 31, 2002, as compared to $1,714,760 for the same time period in 2001, a decrease of $101,849 or 5.9%. Earnings from recurring fiduciary income decreased due to market value erosion. Service charges and other deposit fee income totaled $882,538 for the 12 months ending December 31, 2002 as compared to $755,772 for the same time period in 2001. This increase of $126,766 can be attributed to additional services and a higher volume of accounts. Other income totaled $622,210 for the 12 months ended December 31, 2002 as compared to $472,088 for the same period in 2001. Income from security gains totaled $299,567 for the 12 months ended December 31, 2002 as compared to no security gains for the 12 months ended December 31, 2001.

 

Other Expense

 

The total non-interest expense totaled $12,125,662 for 2003 as compared to $12,342,414 in 2002. This is a decrease of $216,752 or 1.8%. Salaries and benefits expense was basically unchanged primarily due to the non-reoccurrence of the 2002 cost of transition of the chief executive officer. Occupancy expense increased $19,783 or 2.0%. This increase represents higher repairs and maintenance costs. Equipment costs decreased $155,456 or 22.4% and can be attributed to limited equipment purchases made in 2003.

 

The total non-interest expense totaled $12,342,414 for 2002 as compared to $11,005,624 in 2001. This is an increase of $1,336,790 or 12.1%. Salaries and benefits expense increased $1,021,869 or 16.8% primarily due to transition of the chief executive officer and additional personnel costs associated to retail, processing and trust. Occupancy expense decreased $81,668 or 7.5%. This decrease represents lower repairs and maintenance costs. Equipment costs increased $90,271 or 14.9% and can be attributed to check processing equipment and continued upgrades of computer equipment to support the technology of the commercial and consumer banking operations, as well as the trust department operating systems. In 2002, professional fees increased $152,174 or 43.7% due to executive search fees primarily. Marketing and Public Relations decreased $71,711 or 15.7%. Other expenses totaled $1,694,252 for 2002 as compared to $1,500,257 in 2001, an increase of $193,995 or 12.9%.

 

Income Taxes

 

Income tax expense totaled $1,316,331 for the year ended December 31, 2003 as compared to $1,334,301 for the same time period in 2002. This decrease reflects the decrease of taxable income.

 

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Income tax expense totaled $1,334,301 for the year ended December 31, 2002 as compared to $1,574,209 for the same time period in 2001. This decrease reflects the decrease of taxable income.

 

Net Income

 

Net income was $2,177,011 for the twelve months ended 2003 as compared to $2,381,518 for 2002, which is a decrease of $204,507 or 8.6%.

 

Net income was $2,381,518 for 2002 as compared to $2,557,609 for 2001, which is a decrease of $176,091 or 6.9%.

 

Capital Resources

 

As of December 31, 2003, the Company had total capital in the amount of $26,242,030 as compared with $25,433,145 at December 31, 2002, which represents an increase of $808,885 or 3.2%. The capital ratios of the Company and the Bank exceed applicable regulatory requirements (see Note 15 to the Financial Statements).

 

Banks and bank holding companies are generally required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their adjusted total assets. As of December 31, 2003, the Bank’s Tier 1 capital amounted to 7.00% as compared to 6.78% of total average assets at December 31, 2002.

 

Similarly, the Company’s Tier 1 capital amounted to 7.78% at December 31, 2003 as compared to 7.87% at December 31, 2002. Banks and holding companies must maintain minimum levels of risk-based capital equal to risk weighted assets of 8.00%. At December 31, 2003, the Bank’s ratio of risk based capital to risk weighted assets amounted to 12.56% for Tier 1 and 13.71% for total capital, which satisfies the applicable risk-based capital requirements. At December 31, 2002, the Bank’s ratio of risk-based capital to risk-weighted assets amounted to 11.03% for Tier 1 and 12.10% for total capital. Similarly, the Company’s ratio of risk-based capital to risk-weighted assets, at December 31, 2003, amounted to 13.87% for Tier 1 and 15.02% for total capital which exceeds all applicable regulatory requirements. At December 31, 2002, the Company’s ratio of risk-based capital to risk-weighted assets amounted to 12.74% for Tier 1 and 13.79% of total capital. In the opinion of Management, capital levels are adequate to meet the presently foreseeable needs of the Company and the Bank.

 

As of December 31, 2002, the Company had total capital in the amount of $25,433,145 as compared with $23,561,564 at December 31, 2001, which represents an increase of $1,871,581 or 7.9%. The Company repurchased 119,148 shares of its common stock which were placed in treasury stock.

 

Banks and bank holding companies are generally required to maintain Tier 1 capital at a level equal to or greater than 4.0% of their adjusted total assets. As of December 31, 2002, the Bank’s Tier 1 capital amounted to 6.78% as compared to 7.10% of total average assets at December 31, 2001.

 

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Similarly, the Company’s Tier 1 capital amounted to 7.87% at December 31, 2002 as compared to 8.59% at December 31, 2001. Banks and holding companies must maintain minimum levels of risk-based capital equal to risk weighted assets of 8.00%. At December 31, 2002, the Bank’s ratio of risk based capital to risk weighted assets amounted to 11.03% for Tier 1 and 12.10% for total capital, which satisfies the applicable risk-based capital requirements. At December 31, 2001, the Bank’s ratio of risk-based capital to risk-weighted assets amounted to 11.83% for Tier 1 and 12.97% for total capital. Similarly, the Company’s ratio of risk-based capital to risk-weighted assets, at December 31, 2002, amounted to 12.74% for Tier 1 and 13.79% for total capital which exceeds all applicable regulatory requirements. At December 31, 2001, the Company’s ratio of risk-based capital to risk-weighted assets amounted to 13.24% for Tier 1 and 14.36% of total capital.

 

Liquidity

 

The primary function of asset/liability management is to assure adequate liquidity and maintain an appropriate balance between interest-sensitive earning assets and interest-bearing liabilities. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates.

 

Certain marketable investment securities, particularly those of shorter maturities, are the principal source of asset liquidity. Total securities maturing in one year or less amounted to approximately $300,000 or 0.2% at December 31, 2003 of the investment securities portfolio, and $3,134,580 at December 31, 2002, representing 5.7% of the investment securities portfolio. Total securities maturing in one year or less amounted to approximately $1,105,600 at December 31, 2001, representing 16.8% of the investment securities portfolio. Assets such as federal funds sold, mortgages held for sale, as well as maturing loans are also sources of liquidity.

 

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Table of Contents

The Company’s goals are to be substantially neutral with respect to interest rate sensitivity, and to maintain a net cumulative gap at one year or less than 15% of total earning assets. The Company believes that it is successfully managing its interest rate risk consistent with these goals. Listed below is a gap analysis as of December 31, 2003 by re-pricing date or maturity.

 

Gap Analysis

 

(Dollars in Thousands)

 

  

0-31

Days


   

1-3

Months


   

3-6

Months


   

6-12

Months


   

1-5

Years


   

Over 5

Years


 

ASSETS

                                                

Investments(2)

   $ 9,538     $ 11,513     $ 23,735     $ 13,870     $ 17,073     $ 64,997  

Interest Bearing Demand Deposits

     191       0       0       0       0       0  

Fed Funds Sold

     4,000       0       0       0       0       0  

Total Loans(1)

     20,848       2,092       3,864       8,512       59,778       81,500  
    


 


 


 


 


 


Total Earning Assets

     34,577       13,605       27,599       22,382       76,851       146,497  
    


 


 


 


 


 


LIABILITIES

                                                

Non-interest Bearing Deposits

     0       0       0       0       0       61,443  

Savings

     0       0       21,343       0       43,271       0  

NOW Accounts

     0       0       23,707       0       48,140       0  

Money Market Accounts

     51,570       0       0       0       0       0  

Time Deposits $100,000 and over

     1,588       1,865       1,468       1,030       3,286       0  

Other Time Deposits

     3,088       7,478       9,294       12,165       17,545       0  
    


 


 


 


 


 


Total Deposits

     56,246       9,343       55,812       13,195       112,242       61,443  
    


 


 


 


 


 


Securities Sold Under Agreements to Repurchase

     9,943       0       0       0       0       0  
    


 


 


 


 


 


Total Deposits & Securities Sold Under Agreements to Repurchase

     66,189       9,343       55,812       13,195       112,242       61,443  
    


 


 


 


 


 


Net Asset (Liability) Gap

   $ (31,612 )   $ 4,262     $ (28,213 )   $ 9,187     $ (35,391 )   $ 85,054  
    


 


 


 


 


 


Cumulative Gap

   $ (31,612 )   $ (27,350 )   $ (55,563 )   $ (46,376 )   $ (81,767 )   $ 3,287  
    


 


 


 


 


 


% Cumulative Gap

     (9.83 )%     (8.51 )%     (17.28 )%     (14.42 )%     (25.43 )%     1.02 %

(1) Includes net deferred loan costs
(2) Includes Federal Reserve Bank stock and Federal Home Loan Bank stock

 

34


Table of Contents

Off Balance Sheet Arrangements

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. In the opinion of Management, these off-balance sheet arrangements are not likely to have a material effect on the Company’s financial conditions, results of operations, or liquidity. For a discussion of this matter, please see Note 13 to the Financial Statements.

 

Forward Looking Statements

 

This Form 10-K and future filings made by the Company with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by the Company and the Bank, and oral statements made by executive officers of the Company and the Bank, may include forward-looking statements relating to such matters as:

 

  (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Company and the Bank do business; and

 

  (b) expectations for increased revenues and earnings for the Company and Bank through growth resulting from acquisitions, attraction of new deposit and loan customers and the introduction of new products and services.

 

Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995.

 

The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may effect the operation, performance, development and results of the Company’s and Bank’s business include the following:

 

  (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;

 

  (b) changes in the legislative and regulatory environment that negatively impact the Company and Bank through increased operating expenses;

 

  (c) increased competition from other financial and non-financial institutions;

 

  (d) the impact of technological advances; and

 

  (e) other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.

 

Such developments could have an adverse impact on the Company’s and the Bank’s financial position and results of operation.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk is the risk of loss from adverse changes in market prices. In particular, the market price of interest-earning assets may be affected by changes in interest rates. Since net interest income (the difference or spread between the interest earned on loans and investments and the interest paid on deposits and borrowings) is the Company’s primary source of revenue, interest rate risk is the most significant non-credit related market risk to which the Company is exposed. Net interest income is affected by changes in interest rates as well as fluctuations in the level and duration of the Company’s assets and liabilities.

 

35


Table of Contents

Interest rate risk is the exposure of net interest income to adverse movements in interest rates. In addition to directly impacting net interest income, changes in interest rates can also affect the amount of new loan originations, the ability of borrowers to repay variable rate loans, the volume of loan prepayments and re-financings, the carrying value of investment securities classified as available for sale and the flow and mix of deposits.

 

The Company’s Asset/Liability Management Committee, comprised of the President of the Company, Chief Financial Officer, Senior Lending Officer, marketing, retail and finance Officers, is responsible for managing interest rate risk in accordance with policies approved by the Board of Directors regarding acceptable levels of interest rate risk, liquidity, and capital. This committee meets weekly and sets the rates paid on deposits, approves loan pricing and reviews investment transactions. This Asset/Liability Management Committee reports to the Risk Management Committee, which is comprised of several Directors, President and Chief Executive Officer, Senior Vice President and Chief Financial Officer, and Senior Vice President and Senior Lender, which review the above risk on a quarterly basis.

 

Interest rate risk is monitored using gap analysis, which identifies the differences between specific time frames assets and liabilities mature or reprice. An interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same period. A gap is considered positive, or “asset sensitive”, when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative, or “liability sensitive”, when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A corporation’s sensitivity gap can change under the differing “rate shocks” performed on the Company’s Balance Sheet.

 

The Company is subject to interest rate risk in the event that rates either increase or decrease. In the event that interest rates increase, the value of net assets (the liquidation value of stockholders equity) would decrease because the Company becomes liability sensitive, the assets of the Company extend out, as a result the liabilities will reprice faster than its assets. At December 31, 2003, it is estimated that an increase in interest rates of 200 basis points (for example, an increase in the prime rate from 4.00% to 6.00%) would decrease the value of net assets by $1,746,998. If interest rates were to decrease, the value of net assets would increase.

 

The fluctuation of interest rates also has an affect on the Company’s net interest income. In the event that interest rates decrease by 200 basis points (for example, a decrease in the prime rate from 4.00% to 2.00%) it is estimated that net interest income would decrease by $1,291,090. If interest rates were to increase, the Company’s sensitivity gap, shifts to a negative sensitivity, or “liability sensitive,” where net interest income would decrease by $282,010.

 

At December 31, 2003, it was estimated that the value of the net assets of the Company would decrease by $1,746,998 if interest rates were to increase by 200 basis points and that the Company’s net interest income would decline by $1,291,090 if interest rates were to decline by 200 basis points. The year-to-year change in these estimates is a result of a lengthening of the duration of the net assets of the Company.

 

36


Table of Contents

ITEM 8. FINANCIAL STATEMENTS

 

Index to Consolidated Financial Statements

 

Description


   Page Reference

Consolidated Balance Sheets at December 31, 2003 and 2002

   FS 2

Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001

   FS 3

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001

   FS 4-5

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

   FS 6-7

Notes to Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001 including:

   FS 8-30

Parent Company Only Balance Sheets at December 31, 2003 and 2002

   FS 30-31

Parent Company Only Statements of Income for the years ended December 31, 2003, 2002 and 2001

   FS 32

Parent Company Only Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

   FS 33

 

37


Table of Contents

LOGO

 

The Board of Directors and Stockholders

Beverly National Corporation

Beverly, Massachusetts

 

INDEPENDENT AUDITORS’ REPORT

 

We have audited the accompanying consolidated balance sheets of Beverly National Corporation and Subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beverly National Corporation and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

 

LOGO

SHATSWELL, MacLEOD & COMPANY, P.C.

 

West Peabody, Massachusetts

January 5, 2004

 

 

LOGO


Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

December 31, 2003 and 2002

 

     2003

    2002

 

ASSETS

                

Cash and due from banks

   $ 18,759,631     $ 17,228,634  

Interest bearing demand deposits with other banks

     190,658       153,031  

Federal funds sold

     4,000,000       33,000,000  
    


 


Cash and cash equivalents

     22,950,289       50,381,665  

Investments in available-for-sale securities (at fair value)

     61,082,577       54,969,100  

Investments in held-to-maturity securities (fair values of $77,910,696 as of December 31, 2003 and $1,046,308 as of December 31, 2002)

     77,701,292       1,046,308  

Federal Home Loan Bank stock, at cost

     1,041,900       744,800  

Federal Reserve Bank stock, at cost

     142,500       97,500  

Loans, net of the allowance for loan losses of $2,182,675 and $2,012,578, respectively

     174,411,656       191,394,289  

Mortgages held-for-sale

             1,622,500  

Premises and equipment

     3,825,654       4,417,696  

Accrued interest receivable

     1,243,694       1,148,290  

Other assets

     4,775,206       4,706,206  
    


 


Total assets

   $ 347,174,768     $ 310,528,354  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Deposits:

                

Noninterest-bearing

   $ 61,442,551     $ 59,951,379  

Interest-bearing

     246,838,265       221,344,305  
    


 


Total deposits

     308,280,816       281,295,684  

Securities sold under agreements to repurchase

     9,943,208          

Other liabilities

     2,708,714       3,799,525  
    


 


Total liabilities

     320,932,738       285,095,209  
    


 


Stockholders’ equity:

                

Preferred stock, $2.50 par value per share; 300,000 shares authorized; issued and outstanding none

                

Common stock, par value $2.50 per share; authorized 2,500,000 shares; issued 1,944,879 shares as of December 31, 2003 and 1,905,321 shares as of December 31, 2002; outstanding, 1,832,094 shares as of December 31, 2003 and 1,785,841 shares as of December 31, 2002

     4,862,198       4,763,303  

Paid-in capital

     6,280,618       5,852,014  

Retained earnings

     17,073,858       16,347,372  

Treasury stock, at cost (112,785 shares as of December 31, 2003 and 119,480 shares as of December 31, 2002)

     (1,527,461 )     (1,618,112 )

Accumulated other comprehensive (loss) income

     (447,183 )     88,568  
    


 


Total stockholders’ equity

     26,242,030       25,433,145  
    


 


Total liabilities and stockholders’ equity

   $ 347,174,768     $ 310,528,354  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2


Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

 

Years Ended December 31, 2003, 2002 and 2001

 

     2003

   2002

   2001

Interest and dividend income:

                    

Interest and fees on loans

   $ 11,815,602    $ 13,618,426    $ 14,286,139

Interest on debt securities:

                    

Taxable

     2,858,347      2,807,555      3,317,212

Tax-exempt

     43,873      27,650      44,258

Dividends on marketable equity securities

     17,008      13,896      7,068

Other interest

     211,698      358,438      612,084
    

  

  

Total interest and dividend income

     14,946,528      16,825,965      18,266,761
    

  

  

Interest expense:

                    

Interest on deposits

     2,786,838      4,336,495      6,118,235

Interest on other borrowed funds

     36,933             12,977
    

  

  

Total interest expense

     2,823,771      4,336,495      6,131,212
    

  

  

Net interest and dividend income

     12,122,757      12,489,470      12,135,549

Provision for loan losses

     120,000      303,890      135,000
    

  

  

Net interest and dividend income after provision for loan losses

     12,002,757      12,185,580      12,000,549
    

  

  

Other income:

                    

Income from fiduciary activities

     1,540,084      1,612,911      1,714,760

Service charges on deposit accounts

     643,178      528,239      482,605

Other deposit fees

     419,299      354,299      273,167

Gains on sales of available-for-sale securities, net

     247,982      299,567       

Gains on sales of loans, net

     387,872      455,427      194,273

Other income

     377,832      622,210      472,088
    

  

  

Total other income

     3,616,247      3,872,653      3,136,893
    

  

  

Other expense:

                    

Salaries and employee benefits

     7,141,710      7,114,194      6,092,325

Occupancy expense

     1,034,273      1,014,490      1,096,158

Equipment expense

     538,903      694,359      604,088

Contributions

     89,410      156,191      112,919

Data processing fees

     566,008      560,510      550,863

Marketing and public relations

     328,772      385,200      456,911

Stationery and supplies

     218,437      223,093      244,152

Professional fees

     500,950      500,125      347,951

Other expense

     1,707,199      1,694,252      1,500,257
    

  

  

Total other expense

     12,125,662      12,342,414      11,005,624
    

  

  

Income before income taxes

     3,493,342      3,715,819      4,131,818

Income taxes

     1,316,331      1,334,301      1,574,209
    

  

  

Net income

   $ 2,177,011    $ 2,381,518    $ 2,557,609
    

  

  

Earnings per common share

   $ 1.20    $ 1.35    $ 1.49
    

  

  

Earnings per common share, assuming dilution

   $ 1.14    $ 1.28    $ 1.39
    

  

  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3


Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Years Ended December 31, 2003, 2002 and 2001

 

     Common
Stock


   Paid-in
Capital


   Retained
Earnings


    Treasury
Stock


   

Accumulated
Other
Comprehensive
Income

(Loss)


    Total

 

Balance, December 31, 2000

   $ 4,197,245    $ 2,929,381    $ 15,982,441     $ (427,467 )   $ 53,632     $ 22,735,232  

Comprehensive income:

                                              

Net income

                   2,557,609                          

Net change in unrealized holding gain on available-for-sale securities, net of tax effect

                                   120,350          

Comprehensive income

                                           2,677,959  

Tax benefit for stock options

            31,060                              31,060  

Compensation expense relating to grants of common stock at prices less than market value

            40,757                              40,757  

Dividends declared ($.72 per share)

                   (1,245,004 )                     (1,245,004 )

Sale of 17,800 shares of common stock on exercise of stock options

     44,500      78,330                              122,830  

Purchases of treasury stock

                           (801,270 )             (801,270 )
    

  

  


 


 


 


Balance, December 31, 2001

     4,241,745      3,079,528      17,295,046       (1,228,737 )     173,982       23,561,564  

Comprehensive income:

                                              

Net income

                   2,381,518                          

Other comprehensive loss, net of tax effect

                                   (85,414 )        

Comprehensive income

                                           2,296,104  

Tax benefit for stock options

            429,680                              429,680  

Compensation expense relating to grants of common stock at prices less than market value

            5,009                              5,009  

Issuance of 5% common stock dividend

     223,688      1,646,340      (1,870,028 )                        

Dividends declared ($.83 per share)

                   (1,459,164 )                     (1,459,164 )

Sale of 119,148 shares of common stock on exercise of stock options

     297,870      691,457                              989,327  

Purchases of treasury stock

                           (389,375 )             (389,375 )
    

  

  


 


 


 


Balance, December 31, 2002

     4,763,303      5,852,014      16,347,372       (1,618,112 )     88,568       25,433,145  

Comprehensive income:

                                              

Net income

                   2,177,011                          

Other comprehensive loss, net of tax effect

                                   (535,751 )        

Comprehensive income

                                           1,641,260  

Tax benefit for stock options

            214,063                              214,063  

Stock award (500 shares from treasury stock)

            4,480              6,770               11,250  

Dividends declared ($.80 per share)

                   (1,450,525 )                     (1,450,525 )

Sale of 39,558 shares of common stock on exercise of stock options

     98,895      196,193                              295,088  

Reissuance of treasury stock under stock option plan (6,195 shares)

            13,868              83,881               97,749  
    

  

  


 


 


 


Balance, December 31, 2003

   $ 4,862,198    $ 6,280,618    $ 17,073,858     $ (1,527,461 )   $ (447,183 )   $ 26,242,030  
    

  

  


 


 


 


 

 

F-4


Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

Years Ended December 31, 2003, 2002 and 2001

(continued)

 

Reclassification disclosure for the years ended December 31:

                        
     2003

    2002

    2001

 

Other comprehensive income and reclassification disclosure for the years ended December 31:

                        

Unrealized (losses) gains on securities

                        

Net unrealized (loss) gain on available-for-sale securities

   $ (805,134 )   $ 301,107     $ 198,572  

Reclassification adjustment for realized gains in net income

     (247,982 )     (299,567 )        
    


 


 


       (1,053,116 )     1,540       198,572  

Income tax benefit (expense)

     431,042       (631 )     (78,222 )
    


 


 


       (622,074 )     909       120,350  
    


 


 


Minimum pension liability adjustment

     146,139       (146,139 )        

Income tax (expense) benefit

     (59,816 )     59,816          
    


 


       
       86,323       (86,323 )        
    


 


 


Other comprehensive (loss) income, net of tax

   $ (535,751 )   $ (85,414 )   $ 120,350  
    


 


 


Accumulated other comprehensive (loss) income consists of the following as of December 31:

 

     2003

    2002

    2001

 

Net unrealized holding (losses) gains on available-for-sale securities, net of taxes

   $ (447,183 )   $ 174,891     $ 173,982  

Minimum pension liability adjustment, net of taxes

             (86,323 )        
    


 


 


Accumulated other comprehensive (loss) income

   $ (447,183 )   $ 88,568     $ 173,982  
    


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

 

Cash flows from operating activities:

                        

Net income

   $ 2,177,011     $ 2,381,518     $ 2,557,609  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Net decrease (increase) in mortgages held-for-sale

     (7,098,480 )     72,020       (2,828,419 )

(Benefit) provision for mortgages held-for-sale

             (17,514 )     21,861  

(Increase) decrease in mortgage servicing rights assets

     40,306       (75,088 )     (45,094 )

Decrease in loan participation servicing liability

     (2,999 )     (5,408 )     (6,113 )

Depreciation and amortization

     783,286       725,955       694,470  

Compensation expense relating to grants of common stock at prices less than market

             5,009       40,757  

Stock awards

     11,250                  

Gains on sales of available-for-sale investments, net

     (247,982 )     (299,567 )        

Provision for loan losses

     120,000       303,890       135,000  

Deferred tax benefit

     (298,059 )     (266,503 )     (146,729 )

Decrease in taxes receivable

     128,817       199,016       404,405  

(Increase) decrease in interest receivable

     (95,404 )     410,756       331,042  

Decrease in interest payable

     (51,565 )     (184,320 )     (4,241 )

(Decrease) increase in accrued expenses

     (9,461 )     70,046       54,870  

Decrease (increase) in prepaid expenses

     16,669       (78,915 )     (120,861 )

Increase in tax payable

     488,262                  

(Decrease) increase in other liabilities

     (18,012 )     116,005       150,194  

Decrease (increase) in other assets

     781       28,067       (46,267 )

Decrease (increase) in cash surrender value of life insurance

     111,227       (79,834 )     (9,045 )

Decrease (increase) in RABBI Trust trading securities

     48,557       (193,121 )     (4,752 )

Amortization (accretion) of securities, net

     677,530       (6,669 )     (329,462 )

Loss on disposal of premises and equipment

     14,672                  

Gain on sales of assets, net

             (703 )     (612 )

Change in deferred loan costs, net

     10,382       (208,089 )     (154,067 )
    


 


 


Net cash provided by operating activities

     (3,193,212 )     2,896,551       694,546  
    


 


 


Cash flows from investing activities:

                        

Purchases of available-for-sale securities

     (79,539,532 )     (57,786,329 )     (112,675,308 )

Proceeds from sales of available-for-sale securities

     17,478,773       14,771,292       857,170  

Proceeds from maturities of available-for-sale securities

     54,490,878       64,270,021       74,350,000  

Purchases of held-to-maturity securities

     (78,274,598 )             (1,000,000 )

Proceeds from maturities of held-to-maturity securities

     1,593,354       105,000       16,994,500  

Purchases of Federal Home Loan Bank stock

     (297,100 )     (14,000 )     (94,600 )

Purchase of Federal Reserve Bank stock

     (45,000 )                

Loan originations and principal collections, net

     27,945,033       (13,537,005 )     (7,615,492 )

Recoveries of loans previously charged off

     128,198       244,976       50,751  

Purchase of loan

     (2,500,000 )                

Capital expenditures

     (277,816 )     (267,369 )     (430,055 )

Proceeds from sales of assets

             73,493       61,862  

Purchase of life insurance policies

     (1,000,000 )                

Redemption of life insurance policy

     255,829                  

Premiums paid on life insurance policies

     (66,836 )     (88,155 )     (88,155 )
    


 


 


Net cash (used in) provided by investing activities

     (60,108,817 )     7,771,924       (29,589,327 )
    


 


 


 

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BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2003, 2002 and 2001

(continued)

 

     2003

    2002

    2001

 

Cash flows from financing activities:

                        

Net increase in demand deposits, NOW and savings accounts

     24,709,699       7,910,066       36,797,795  

Net increase (decrease) in time deposits

     2,275,434       (10,632,200 )     8,412,233  

Increase in securities sold under agreements to repurchase

     9,943,208                  

Proceeds from exercise of stock options

     392,837       989,327       122,830  

Purchases of treasury stock

             (389,375 )     (801,270 )

Dividends paid

     (1,450,525 )     (1,459,164 )     (1,245,004 )
    


 


 


Net cash provided by (used in) financing activities

     35,870,653       (3,581,346 )     43,286,584  
    


 


 


Net (decrease) increase in cash and cash equivalents

     (27,431,376 )     7,087,129       14,391,803  

Cash and cash equivalents at beginning of year

     50,381,665       43,294,536       28,902,733  
    


 


 


Cash and cash equivalents at end of year

   $ 22,950,289     $ 50,381,665     $ 43,294,536  
    


 


 


Supplemental disclosures:

                        

Mortgages held-for-sale transferred to loans

   $ 8,720,980     $ 307,000     $ 1,022,821  

Interest paid

     2,875,336       4,520,815       6,135,453  

Income taxes paid

     997,311       1,401,788       1,316,533  

Equipment transferred to other assets

     4,120                  

Other assets transferred to premises and equipment

     5,347                  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

BEVERLY NATIONAL CORPORATION AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Years Ended December 31, 2003, 2002 and 2001

 

NOTE 1 - NATURE OF OPERATIONS

 

Beverly National Corporation (Company) is a state chartered corporation that was organized in 1984 to become the holding company of Beverly National Bank (Bank). The Company’s primary activity is to act as the holding company for the Bank. The Bank is a federally chartered bank, which was founded in 1802 and is headquartered in Beverly, Massachusetts. The Bank operates its business from six full service branches and two educational banking offices located in Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in consumer and small business loans. The Bank also operates a trust department that offers fiduciary and investment services.

 

NOTE 2 - ACCOUNTING POLICIES

 

The accounting and reporting policies of the Company and its subsidiaries conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting with the exception of fiduciary activities and certain minor sources of income which are reflected on a cash basis. The results of these activities do not differ materially from those which would result using the accrual method. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein.

 

USE OF ESTIMATES:

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

BASIS OF PRESENTATION:

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank and Cabot Street Realty Trust and the Bank’s wholly-owned subsidiaries, Beverly Community Development Corporation, Hannah Insurance Agency, Inc. and Beverly National Security Corporation. Cabot Street Realty Trust was formed for the purpose of real estate development. Beverly Community Development Corporation was formed to provide loans to small businesses and individuals in low income census tracts. Hannah Insurance Agency, Inc. was formed to market life insurance, disability insurance and long term care products. During 2003, Beverly National Security Corporation was established for the exclusive purpose of buying, selling or holding securities. 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 deposit accounts with other banks and federal funds sold.

 

Cash and due from banks as of December 31, 2003 and 2002 includes $9,791,000 and $10,964,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank.

 

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SECURITIES:

 

Investments in debt securities are adjusted for amortization of premiums and accretion of discounts computed so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis.

 

The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. This security classification may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

 

  Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements.

 

  Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital until realized.

 

  Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings.

 

Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

 

LOANS:

 

Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances adjusted for amounts due to borrowers on unadvanced loans, 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 and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the contractual life of the related loans.

 

Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months.

 

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Cash receipts of interest income on impaired loans is credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

 

ALLOWANCE FOR LOAN LOSSES:

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

 

PREMISES AND EQUIPMENT:

 

Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets.

 

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SERVICING:

 

Servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

 

MORTGAGES HELD-FOR-SALE:

 

Mortgages held-for-sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations.

 

Interest income on mortgages held-for-sale is accrued currently and classified as interest on loans.

 

OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:

 

Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Statement of Financial Accounting Standards (SFAS) No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring.” These properties are carried at the lower of cost or fair value less estimated costs to sell. Any write down from cost to 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, subsequent write downs and gains or losses recognized upon sale are included in other expense.

 

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.

 

FAIR VALUES OF FINANCIAL INSTRUMENTS:

 

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires that the Company disclose estimated fair values 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: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

Loans 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 by discounting the future cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

Mortgages held-for-sale: Fair values for mortgages held-for-sale are estimated based on outstanding investor commitments, or in the absence of such commitments, are based on current investor yield requirements.

 

Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value.

 

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Deposit liabilities: The fair values disclosed for demand deposits, regular savings, NOW accounts, and money market accounts are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for 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.

 

Securities sold under agreements to repurchase: The carrying amounts reported on the consolidated balance sheets for securities sold under agreements to repurchase approximate their fair values.

 

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.

 

ADVERTISING:

 

The Company directly expenses costs associated with advertising as they are incurred.

 

INCOME TAXES:

 

The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled.

 

STOCK BASED COMPENSATION:

 

At December 31, 2003, the Company has five stock-based employee compensation plans which are described more fully in Note 9. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Accordingly, no compensation cost has been recognized for its fixed stock option plans except that compensation costs of $5,009 in 2002 and $40,757 in 2001 were charged against income for the Director’s plan. In addition, $11,250 of compensation cost was recognized in 2003 for a stock award of 500 shares to an executive officer under his employment agreement. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

 

     Year Ended December 31

     2003

   2002

   2001

Net income, as reported

   $ 2,177,011    $ 2,381,518    $ 2,557,609

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     47,892      59,749      89,788
    

  

  

Pro forma net income

   $ 2,129,119    $ 2,321,769    $ 2,467,821

Earnings per share:

                    

Basic - as reported

   $ 1.20    $ 1.35    $ 1.49

Basic - pro forma

   $ 1.17    $ 1.32    $ 1.44

Diluted - as reported

   $ 1.14    $ 1.28    $ 1.39

Diluted - pro forma

   $ 1.12    $ 1.25    $ 1.34

 

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Table of Contents

SUPPLEMENTAL RETIREMENT PLAN:

 

In connection with its Supplemental Retirement Plan, the Company established a RABBI Trust to assist in the administration of the plan. The accounts of the RABBI Trust are consolidated in the Company’s consolidated financial statements. Any available-for-sale securities held by the RABBI Trust are accounted for in accordance with SFAS No. 115.

 

EARNINGS PER SHARE:

 

Basic earnings per share represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.

 

RECENT ACCOUNTING PRONOUNCEMENTS:

 

In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. This Statement did not have a material impact on the Company’s consolidated financial statements.

 

In October 2002, the FASB issued SFAS No. 147 “Acquisitions of Certain Financial Institutions” (“SFAS No. 147”) an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72 “Accounting for Certain Acquisitions of Banking or Thrift Institutions” and FASB Interpretation No. 9 “Applying APB Opinions No. 16 and 17” When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method” provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 “Business Combinations” and SFAS No. 142 “Goodwill and Other Intangible Assets.” Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used.

 

Paragraph 5 of SFAS No. 147, which relates to the application of the purchase method of accounting, was effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets were effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 were effective on October 1, 2002, with earlier application permitted. There was no impact on the Company’s consolidated financial statements on adoption of this Statement.

 

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In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee.

 

The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Company’s financial position or results of operations.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS Statement No. 123” (“SFAS No. 148”). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and currently uses the intrinsic value method of accounting for stock options.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company’s consolidated financial statements on adoption of this Statement.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Company’s consolidated financial statements.

 

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In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) (“FIN 46(R)”). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this interpretation has not and is not expected to have a material effect on the Company’s consolidated financial statements.

 

In December 2003, the FASB issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106” (“SFAS No. 132 (revised 2003)”). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” This Statement retains the disclosure requirements contained in SFAS No. 132, “Employers’ Disclosures About Pensions and Other Postretirement Benefits,” which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company’s consolidated financial statements.

 

NOTE 3 - INVESTMENTS IN SECURITIES

 

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values are as follows as of December 31:

 

    

Amortized
Cost

Basis


   Gains In
Accumulated
Other
Comprehensive
Income


   Losses In
Accumulated
Other
Comprehensive
Income


  

Fair

Value


Available-for-sale securities:

                           

December 31, 2003:

                           

Debt securities issued by U.S. government corporations and agencies

   $ 21,238,283    $ 8,676    $ 276,667    $ 20,970,292

Marketable equity securities

     756,439      91,065             847,504

Mortgage-backed securities

     39,844,896      6,503      586,618      39,264,781
    

  

  

  

     $ 61,839,618    $ 106,244    $ 863,285    $ 61,082,577
    

  

  

  

 

F-15


Table of Contents
    

Amortized
Cost

Basis


   Gains In
Accumulated
Other
Comprehensive
Income


   Losses In
Accumulated
Other
Comprehensive
Income


  

Fair

Value


December 31, 2002:

                           

Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies

   $ 32,040,062    $ 287,672    $ 7,824    $ 32,319,910

Marketable equity securities

     1,275,553      55,300             1,330,853

Mortgage backed securities

     21,357,410      7,093      46,166      21,318,337
    

  

  

  

     $ 54,673,025    $ 350,065    $ 53,990    $ 54,969,100
    

  

  

  

 

    

Amortized
Cost

Basis


   Gross
Unrecognized
Holding
Gains


   Gross
Unrecognized
Holding
Losses


  

Fair

Value


Held-to-maturity securities:

                           

December 31, 2003:

                           

Debt securities issued by U.S. government corporations and agencies

   $ 43,775,027    $ 164,428    $ 170,400    $ 43,769,055

Debt securities issued by states of the United States and political subdivisions of the states

     1,937,250      27,253             1,964,503

Debt securities issued by foreign governments

     500,000                    500,000

Mortgage-backed securities

     31,489,015      226,120      37,997      31,677,138
    

  

  

  

     $ 77,701,292    $ 417,801    $ 208,397    $ 77,910,696
    

  

  

  

December 31, 2002:

                           

Debt securities issued by states of the United States and political subdivisions of the states

   $ 546,308    $      $      $ 546,308

Debt securities issued by foreign governments

     500,000                    500,000
    

  

  

  

     $ 1,046,308    $      $      $ 1,046,308
    

  

  

  

 

The scheduled maturities of debt securities were as follows as of December 31, 2003:

 

     Available-For-Sale

   Held-To-Maturity

    

Fair

Value


   Amortized
Cost Basis


  

Fair

Value


Due within one year

   $      $ 300,000    $ 300,000

Due after one year through five years

     18,901,672      37,022,686      37,081,055

Due after five years through ten years

     2,068,620      8,889,591      8,852,503

Mortgage backed securities

     39,264,781      31,489,015      31,677,138
    

  

  

     $ 60,235,073    $ 77,701,292    $ 77,910,696
    

  

  

 

Proceeds from sales of available-for-sale securities in 2003, 2002 and 2001 amounted to $17,478,773, $14,771,292 and $857,170, respectively. Gross realized gains and losses in the year ended December 31, 2003 were $248,607 and $625, respectively. The tax expense applicable to these net realized gains amounted to $101,499 for the year ended December 31, 2003. Gross realized gains and losses in the year ended December 31, 2002 were $299,567 and $0, respectively. The tax expense applicable to the realized gains amounted to $122,613 for the year ended December 31, 2002. There were no gains or losses realized from sales in 2001 which consisted of money-market mutual funds.

 

F-16


Table of Contents

There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders’ equity as of December 31, 2003.

 

Total carrying amounts of $33,720,930 and $15,238,290 of securities were pledged to secure treasury tax and loan, trust funds and public funds on deposit, and securities sold under agreements to repurchase as of December 31, 2003 and 2002, respectively.

 

In connection with its supplemental retirement plan described in Note 9, the Company set up a RABBI Trust which includes trading securities. The RABBI Trust is included in other assets on the consolidated balance sheets. The portion of trading gains for the year ended December 31, 2003 and trading losses for the year ended December 31, 2002 that relates to trading securities still held at year end amounted to $139,322 and $(69,904), respectively. The fair value of trading securities held in the RABBI Trust as of December 31, 2003 and 2002 was $696,189 and $744,746, respectively.

 

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31, 2003:

 

     Less than 12 Months

   12 Months or Longer

   Total

    

Fair

Value


   Unrealized
Losses


  

Fair

Value


   Unrealized
Losses


  

Fair

Value


   Unrealized
Losses


Description of securities:

                                         

Debt securities issued by U.S. government corporations and agencies

   $ 28,840,373    $ 447,067    $      $      $ 28,840,373    $ 447,067

Federal agency mortgage-backed securities

     46,939,912      624,615                    46,939,912      624,615
    

  

  

  

  

  

Total temporarily impaired securities

   $ 75,780,285    $ 1,071,682    $      $      $ 75,780,285    $ 1,071,682
    

  

  

  

  

  

 

The investments in the Company’s investment portfolio that are temporarily impaired as of December 31, 2003 consist of debt securities issued by U.S. government corporations and agencies with strong credit ratings. The unrealized losses in the above table are attributable to changes in market interest rates. Company management does not intend to sell these securities in the near term future, and due to the securities relative short duration, anticipates that the unrealized losses that currently exist will be dramatically reduced going forward.

 

NOTE 4 - - LOANS

 

Loans consisted of the following as of December 31:

 

     2003

    2002

 

Commercial, financial and agricultural

   $ 34,787,962     $ 37,902,656  

Real estate - construction and land development

     4,408,975       2,209,105  

Real estate - residential

     63,345,679       81,245,275  

Real estate - commercial

     59,195,713       57,702,355  

Consumer

     7,233,142       7,576,333  

Other

     6,972,233       6,110,134  
    


 


       175,943,704       192,745,858  

Allowance for loan losses

     (2,182,675 )     (2,012,578 )

Deferred loan costs, net

     650,627       661,009  
    


 


Net loans

   $ 174,411,656     $ 191,394,289  
    


 


 

F-17


Table of Contents

Changes in the allowance for loan losses were as follows for the years ended December 31:

 

     2003

    2002

    2001

 

Balance at beginning of period

   $ 2,012,578     $ 1,996,376     $ 1,912,696  

Loans charged off

     (78,101 )     (532,664 )     (102,071 )

Provision for loan losses

     120,000       303,890       135,000  

Recoveries of loans previously charged off

     128,198       244,976       50,751  
    


 


 


Balance at end of period

   $ 2,182,675     $ 2,012,578     $ 1,996,376  
    


 


 


 

Certain directors and executive officers of the companies in which they have significant ownership interest were customers of the Bank during 2003. Total loans to such persons and their companies amounted to $443,103 as of December 31, 2003. During 2003 principal payments and advances totaled $69,821 and $34,080, respectively.

 

The following table sets forth information regarding nonaccrual loans and accruing loans 90 days or more overdue as of December 31:

 

     2003

   2002

Nonaccrual loans

   $ 1,006,740    $ 574,569
    

  

Accruing loans which are 90 days or more overdue

   $      $ 660
    

  

 

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:

 

     2003

   2002

     Recorded
Investment
In Impaired
Loans


   Related
Allowance
For Credit
Losses


   Recorded
Investment
In Impaired
Loans


   Related
Allowance
For Credit
Losses


Loans for which there is a related allowance for credit losses

   $ 866,237    $ 526,000    $ 54,502    $ 3,000

Loans for which there is no related allowance for credit losses

     0             379,564       
    

  

  

  

Totals

   $ 866,237    $ 526,000    $ 434,066    $ 3,000
    

  

  

  

Average recorded investment in impaired loans during the year ended December 31

   $ 585,988           $ 512,703       
    

         

      

Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired

                           

Total recognized

   $ 26,174           $ 27,599       
    

         

      

Amount recognized using a cash-basis method of accounting

   $ 26,174           $ 27,599       
    

         

      

 

No valuation allowance for the carrying amount of mortgage servicing rights at December 31, 2003 and 2002 was recorded because management estimates that there is no impairment in the carrying amount of those rights. The fair values of these rights approximated their carrying amount. Changes in the mortgage servicing asset, which are included in other assets, were as follows for the years ended December 31:

 

     2003

    2002

 

Balance at beginning of period

   $ 293,098     $ 218,010  

Capitalized mortgage servicing rights

     184,250       186,638  

Amortization

     (224,556 )     (111,550 )
    


 


Balance at end of period

   $ 252,792     $ 293,098  
    


 


 

F-18


Table of Contents

NOTE 5 - PREMISES AND EQUIPMENT

 

The following is a summary of premises and equipment as of December 31:

 

     2003

    2002

 

Land

   $ 421,077     $ 421,077  

Buildings

     4,496,139       4,488,003  

Furniture and equipment

     3,782,332       3,757,831  

Leasehold improvements

     1,776,031       1,774,031  

Construction in progress

     10,060       12,260  
    


 


       10,485,639       10,453,202  

Accumulated depreciation and amortization

     (6,659,985 )     (6,035,506 )
    


 


     $ 3,825,654     $ 4,417,696  
    


 


 

NOTE 6 - DEPOSITS

 

The aggregate amount of time deposit accounts in denominations of $100,000 or more were $10,152,690 and $8,733,740 as of December 31, 2003 and 2002, respectively.

 

For time deposits as of December 31, 2003, the scheduled maturities for the years ended December 31, are:

 

2004

   $ 37,935,888

2005

     12,220,937

2006

     5,684,104

2007

     2,876,209

2008

     49,149
    

     $ 58,766,287
    

 

Deposits from related parties held by the Company as of December 31, 2003 and 2002 amounted to $3,016,444 and $2,522,209, respectively.

 

NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

 

The securities sold under agreements to repurchase as of December 31, 2003 are securities sold on a short term basis by the Bank that have been accounted not as sales but as borrowings. The securities consisted of mortgage-backed securities issued by U.S. Government Corporations. The securities were held in the Bank’s safekeeping account at Federal Reserve Bank under the control of the Bank and pledged to the purchasers of the securities. The purchasers have agreed to sell to the Bank substantially identical securities at the maturity of the agreements.

 

NOTE 8 - INCOME TAXES

 

The components of the income tax expense are as follows for the years ended December 31:

 

     2003

    2002

    2001

 

Current:

                        

Federal

   $ 1,142,902     $ 1,121,772     $ 1,231,896  

State

     471,488       479,032       489,042  
    


 


 


       1,614,390       1,600,804       1,720,938  
    


 


 


Deferred:

                        

Federal

     (216,939 )     (188,114 )     (110,019 )

State

     (81,120 )     (78,389 )     (36,710 )
    


 


 


       (298,059 )     (266,503 )     (146,729 )
    


 


 


Total income tax expense

   $ 1,316,331     $ 1,334,301     $ 1,574,209  
    


 


 


 

F-19


Table of Contents

The reasons for the difference between the statutory federal income tax rates and the effective tax rates are summarized as follows for the years ended December 31:

 

     2003

    2002

    2001

 
     % of
Income


    % of
Income


    % of
Income


 

Federal income tax at statutory rate

   34.0 %   34.0 %   34.0 %

Increase (decrease) in tax resulting from:

                  

Tax-exempt income

   (4.2 )   (4.7 )   (3.8 )

Dividends paid to ESOP

   (1.0 )   (.9 )   (.7 )

Unallowable expenses

   .4     .3     1.5  

Other

   1.1           (.2 )

State tax, net of federal tax benefit

   7.4     7.2     7.3  
    

 

 

Effective tax rates

   37.7 %   35.9 %   38.1 %
    

 

 

 

The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:

 

     2003

   2002

Deferred tax assets:

             

Allowance for loan losses

   $ 740,335    $ 691,218

Deferred compensation

     641,845      641,152

Minimum pension liability

            59,816

Accrued retirement benefits

     136,098      122,838

Accrued interest on nonperforming loans

     24,605      7,398

Accrued pension expense

     318,610      158,974

Net unrealized loss on available-for-sale securities

     309,858       
    

  

Gross deferred tax assets

     2,171,351      1,681,396
    

  

Deferred tax liabilities:

             

Net unrealized holding gain on available-for-sale securities

            121,184

Accelerated depreciation

     97,127      141,244

Loan origination fees and costs, net

     265,065      269,317

Other adjustments

     22,346      15,624

Mortgage servicing rights

     42,000      58,499
    

  

Gross deferred tax liabilities

     426,538      605,868
    

  

Net deferred tax assets

   $ 1,744,813    $ 1,075,528
    

  

 

Deferred tax assets as of December 31, 2003 and 2002 have not been reduced by a valuation allowance because management believes that it is more likely than not that the full amount of deferred tax assets will be realized.

 

As of December 31, 2003, the Company had no operating loss and tax credit carryovers for tax purposes.

 

NOTE 9 - STOCK COMPENSATION PLANS

 

The Company has adopted five fixed option, stock-based compensation plans. Under the 1996 amended 1987 Incentive Stock Option Plan for Key Employees, the Company may grant up to 97,650 shares, at fair value, to key employees. Under the 1996 Incentive Stock Option Plan for Key Employees the Company may grant up to 75,390 shares of common stock, at fair value, to key employees. Under the 1998 Incentive Stock Option Plan for Key Employees the Company may grant up to 63,000 shares of common stock, at fair value, to present and future employees. Under the 1996, 1994 and 1993 amended 1987 Director’s plan, the Company may grant up to 113,400 shares of common stock to present and future directors at prices and exercise terms as determined by the Board of Directors. Under the 2002 amended 1998 Directors’ plan, the Company may grant up to 54,521 shares of common stock to present and future Directors. Under the 1998 Directors’ Plan, stock options are granted at prices and exercise terms as determined by the Board of Directors. In 2002, the 1998 Director’s Stock Option Plan was amended so that all options granted under the plan shall immediately vest in full upon a Director reaching mandatory retirement age and that all options granted shall expire if not exercised within 90 days after the Director’s retirement.

 

F-20


Table of Contents

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 2002 and 2001: dividend yield of 4.4% for 2002 and 4.5% for 2001; expected volatility of 11.6% for 2002 and 13% for 2001; risk-free interest rate of 4.4% for 2002 and 5.54% for 2001 and expected lives of 4.7 years for 2002 and 5 years for 2001.

 

A summary of the status of the Company’s fixed stock option plans as of December 31, 2003, 2002 and 2001 and changes during the years ending on those dates is presented below. The status for the year ended 2001 has been restated to reflect the 5% stock dividend in 2002:

 

     2003

   2002

   2001

Fixed Options


   Shares

    Weighted-Average
Exercise Price


   Shares

    Weighted-Average
Exercise Price


   Shares

    Weighted-Average
Exercise Price


Outstanding at beginning of year

     227,709     $ 11.89      313,026     $ 9.61      310,716     $ 9.17

Granted

                    42,425       17.80      22,050       13.36

Exercised

     (45,753 )     8.59      (123,887 )     7.99      (18,690 )     6.57

Forfeited

     (11,865 )     13.48      (3,855 )     15.70      (1,050 )     14.52
    


        


        


     

Outstanding at end of year

     170,091       12.67      227,709       11.89      313,026       9.61
    


        


        


     

Options exercisable at year-end

     101,344              120,401              199,395        

Weighted-average fair value of options granted during the year

   $ 0.00            $ 1.42            $ 2.87        

 

The following table summarizes information about fixed stock options outstanding as of December 31, 2003:

 

     Options Outstanding

   Options Exercisable

Range of Exercise Prices


   Number
Outstanding
as of 12/31/03


  

Weighted-Average
Remaining
Contractual Life


   Weighted-Average
Exercise Price


   Number
Exercisable
as of 12/31/03


   Weighted-Average
Exercise Price


5.67

   1,260    0.38 years    5.67    945    5.67

7.29 – 7.79

   35,620    2.12 years    7.32    21,130    7.30

8.21 – 8.57

   12,401    2.59 years    8.37    7,701    8.38

9.67

   17,500    3.00 years    9.67    9,688    9.67

13.36 – 13.40

   34,020    4.96 years    13.39    23,691    13.37

14.52

   10,290    6.00 years    14.52    3,864    14.52

15.69 – 15.76

   21,840    4.20 years    15.70    12,285    15.70

16.67

   24,660    3.10 years    16.67    9,540    16.67

20.50

   12,500    2.50 years    20.50    12,500    20.50
    
            
    
     170,091    3.50 years    12.67    101,344    12.82
    
            
    

 

NOTE 10 - EMPLOYEE BENEFITS OTHER THAN POSTRETIREMENT, MEDICAL AND LIFE INSURANCE BENEFITS

 

Defined benefit pension plan

 

On December 20, 2001 the Company amended its defined benefit pension plan effective January 1, 1997. The amendment changed the plan to be a “safe harbor plan” and provide benefits equal to 1.45% of final average pay per year of service plus .65% of final average pay in excess of covered compensation per year of service, not to exceed 30 years of service. The amendment created a prior service cost of $937,543 that will be amortized over the average remaining working lifetime of the participants beginning in 2002. The plan covers substantially all full time employees who meet certain eligibility requirements. Prior to the amendment the benefits paid were based on 2 1/2% of the final average salary for each of the first 20 years of service plus an additional 1% for each of the next 10 years of service less 1 2/3% of the member’s social security benefit for each year of service (maximum 30 years).

 

F-21


Table of Contents

The following tables set forth information about the plan as of December 31 and the years then ended:

 

     2003

    2002

 

Change in projected benefit obligation:

                

Benefit obligation at beginning of year

   $ 7,210,815     $ 6,726,827  

Service cost

     295,657       258,018  

Interest cost

     496,765       463,594  

Benefits paid

     (320,879 )     (304,033 )

Liability loss

     37,255       66,409  
    


 


Benefit obligation at end of year

     7,719,613       7,210,815  
    


 


Change in plan assets:

                

Plan assets at estimated fair value at beginning of year

     4,543,297       5,598,997  

Employer contribution

     497,956          

Actual return on plan assets

     994,506       (751,667 )

Benefits paid

     (320,879 )     (304,033 )
    


 


Fair value of plan assets at end of year

     5,714,880       4,543,297  
    


 


Funded status

     (2,004,733 )     (2,667,518 )

Unrecognized net loss

     612,663       1,200,375  

Unrecognized prior service cost

     852,709       907,686  

Unamortized net asset existing at date of adoption of SFAS No. 87

             (16,725 )
    


 


Accrued benefit cost included in other liabilities

   $ (539,361 )   $ (576,182 )
    


 


Amounts recognized in the balance sheet as of December 31, consist of:

                

Accrued benefit cost

   $ (539,361 )   $ (576,182 )

Accrued benefit liability

             (1,053,825 )

Intangible asset

             907,686  

Accumulated other comprehensive loss

             146,139  
    


 


Net amount recognized

   $ (539,361 )   $ (576,182 )
    


 


 

The accumulated benefit obligation for the defined benefit pension plan was $6,046,596 and $5,543,956 at December 31, 2003 and 2002, respectively.

 

The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.0% and 4.5% for 2003, 7.0% and 4.5% for 2002 and 7.5% and 4.5% for 2001, respectively. The expected long-term rate of return on assets was 9.0% for 2003, 2002 and 2001.

 

The expected long-term rate of return on plan assets for the pension plan is based on historical returns on plan assets, current and future asset allocations, and Company management’s outlook for long-term interest rates.

 

Components of net periodic (benefit) cost:

 

     2003

    2002

    2001

 

Service cost

   $ 295,657     $ 258,018     $ 273,123  

Interest cost on benefit obligation

     496,765       463,594       404,327  

Expected return on assets

     (408,967 )     (504,147 )     (524,500 )

Amortization of prior service cost

     54,977       54,977       2,512  

Amortization of net transition asset

     (16,725 )     (26,547 )     (26,547 )

Amortization of net loss (gain) from earlier periods

     39,428               (20,031 )
    


 


 


Net periodic cost

   $ 461,135     $ 245,895     $ 108,884  
    


 


 


 

F-22


Table of Contents

Plan Assets

 

The Company’s pension plan asset allocations by asset category are as follows:

 

     December 31, 2003

    December 31, 2002

 
     Fair Value

   Percent

    Fair Value

   Percent

 

Money market securities

   $ 168,128    2.9 %   $ 12,501    .3 %

Fixed income securities

     1,925,430    33.7 %     1,575,889    34.7  

Equity securities

     3,621,322    63.4       2,954,907    65.0  
    

  

 

  

Total

   $ 5,714,880    100.0 %   $ 4,543,297    100.0 %
    

  

 

  

 

The plan’s investments are managed in accordance with the Bank’s Trust Department investment management policies and procedures. To achieve the Company’s investment objectives, assets within the plan are allocated among a number of asset classes to ensure a proper level of diversification, risk, return and liquidity. The plan’s investment portfolio is managed under a “balanced” asset allocation objective, and as of December 31, 2003 the allocation guidelines are as follows:

 

     Range

   Long-Term
Target


Equity securities

   50% to 70%    60%

Fixed income securities

   30% to 50%    35%

Money market investments

   0% to 5%    5%

 

There were no securities of the Company and related parties included in plan assets as of December 31, 2003 and 2002.

 

The Company expects to contribute $400,000 to its pension plan in 2004.

 

Supplemental Retirement Plan

 

On December 24, 1996 the Company adopted a Supplemental Retirement Plan for two executive officers. This plan provides nonfunded retirement benefits designed to supplement benefits available through the Company’s retirement plan for employees.

 

The following tables set forth information about the plan as of December 31 and the years then ended:

 

     2003

    2002

 

Changes in projected benefit obligation:

                

Benefit obligation at beginning of year

   $ 1,300,590     $ 1,174,006  

Service cost

             23,508  

Interest cost

     91,041       89,814  

Benefit paid

     (123,230 )     (53,120 )

Actuarial (gain) loss

     (1,795 )     66,382  
    


 


Benefit obligation at end of year

     1,266,606       1,300,590  

Plan assets

     0       0  
    


 


Funded status

     (1,266,606 )     (1,300,590 )

Unrecognized net loss

     128,264       168,575  
    


 


Accrued pension cost included in other liabilities

   $ (1,138,342 )   $ (1,132,015 )
    


 


 

The accumulated benefit obligation for the supplemental retirement plan was $1,266,606 and $1,300,590 at December 31, 2003 and 2002, respectively.

 

F-23


Table of Contents

On November 6, 2001, the Board of Directors of the Company approved a resolution to increase the benefit under the plan to one of the participants. The above tables reflect an increase in the Company’s liability as a result of the resolution.

 

     2003

   2002

Components of net periodic cost:

             

Service cost

   $      $ 23,508

Interest cost

     91,041      89,814

Amortization of unrecognized net loss

     38,516       
    

  

Net periodic pension cost

   $ 129,557    $ 113,322
    

  

 

Certain assets of the Company, consisting of U.S. Government obligations, corporate bonds, equity instruments and life insurance policies, are in a Rabbi Trust. The Rabbi Trust is used to assist in the administration of the plan and is subject to the claims of creditors in the case of insolvency. The fair value of the assets in the Rabbi Trust amounted to $1,166,426 and $1,148,148 at December 31, 2003 and 2002, respectively. Such assets did not include any securities of the Company. See Note 3.

 

The supplemental retirement agreements under the plan provide that the officers do not have any right, title or interest in or to any specified assets of the Company, or any trust or escrow arrangement. In connection with the agreements, the Company established two trust agreements. The trustee of the trusts is another bank.

 

The discount rate and estimated pay increases used in determining the projected benefit obligation were 7.0% and 0.0% for 2003, 7.0% and 0.0% for 2002 and 7.5% and 0.0% for 2001, respectively.

 

Defined contribution plan

 

Effective January 1, 2002, the Bank merged its profit sharing plan, The Profit-Sharing Plan for Employees of The Beverly National Bank, and its 401(k) plan, the Beverly National Bank 401(k) Retirement Plan and Trust, to form the Beverly National Bank 401(k) Profit Sharing Plan. In the new plan, the Bank’s matching contribution is increased from 3.0% to 4.5% of compensation. Total contributions under this new Plan amounted to $187,453 for 2003 and $172,088 for 2002, respectively.

 

The Company’s contributions to the previous profit-sharing plan were $17,956 in 2001.

 

The Company’s contributions to the previous 401(k) plan were $106,722 in 2001.

 

Employee Stock Ownership Plan

 

The Company sponsors an Employee Stock Ownership Plan (ESOP). This plan is offered to employees who have attained age 21 and who have been employed by the Company and completed a minimum of 1,000 hours of employment. The plan entitles Company employees to common stock or cash upon retirement, disability, death or separation from service from the Company based on a vesting schedule. Benefits become 25% vested after two years of vesting service and increase to 100% vested after five years of vesting service.

 

The Company makes annual contributions to the ESOP in amounts determined by the board of directors, subject to a limitation based on earnings and capital of the Company. Such contributions are first made to permit required payments of amounts due under any acquisition loans. Dividends received by the ESOP on shares of the Company owned by the ESOP are used to repay any acquisition loans or are credited to the accounts of allocated shares. The ESOP may borrow money to purchase shares of the Company. The shares are pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid in the year. Any debt of the ESOP is recorded as debt and the shares pledged as collateral are reported as unearned ESOP shares in the statement of financial position. ESOP compensation expense totalled $0 in 2003, $88,766 in 2002 and $169,000 in 2001.

 

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Table of Contents

The ESOP shares were as follows as of December 31:

 

     2003

   2002

Allocated shares

   124,800    134,688
    
  

Total ESOP shares

   124,800    134,688
    
  

 

Change in Control

 

One of the Company’s executive officers has a change in control agreement (agreement) with the Company. Under the agreement, if the executive officer’s employment is terminated subsequent to a change in control as defined in the agreement, then the officer is entitled to a lump sum equal to the product of the average sum of annual base compensation, including salary and bonus, for the five preceding years (or the term of employment, if less) multiplied by three.

 

Three executive officers have employment agreements which state that if the executive officer’s employment is terminated subsequent to a change in control as defined in the agreement, then the officers are entitled to a lump sum equal to the product of the average sum of annual base compensation, including salary and bonus, paid to the executive officer for the five preceding years multiplied by two.

 

In addition, one executive officer has an employment agreement which states that if involuntary termination and/or termination by the officer for good reason as defined in the agreement occurs within 24 months following a change in control also defined in the agreement, that the officer will be entitled to a lump sum amount equal to the product of the average sum of annual base compensation, salary plus bonus, for the five preceding years (or the term of employment, if less) multiplied by two less one hundred ($100).

 

NOTE 11 - POSTRETIREMENT BENEFITS OTHER THAN PENSION

 

The Company provides postretirement medical and life insurance benefits for retired employees. During 1993 the Company adopted SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pension.” The Company elected to amortize the cumulative effect of the change in accounting for postretirement benefits of $859,500 which represents the accumulated postretirement benefit obligation (APBO) existing as of January 1, 1993. The APBO is being amortized on a straight-line basis over a twenty year period. The Company continues to fund medical and life insurance benefit costs on a pay-as-you-go basis. Participation in this plan was frozen in 1993 to include only individuals who met certain age and service requirements. The program was adjusted in 2003 to cap the reimbursement of the Medicare Part B rate at the 2003 level for medical reimbursement and discontinue the dental coverage subsidy for all participants.

 

The following tables set forth information about the plan as of December 31 and the years then ended:

 

     2003

    2002

 

Change in accumulated postretirement benefit obligation:

                

Benefit obligation at beginning of year

   $ 685,020     $ 659,626  

Plan amendment

     (83,621 )        

Service cost

     2,376       1,932  

Interest cost

     44,443       48,477  

Actuarial (gain) loss

     (31,931 )     40,266  

Benefits paid

     (56,970 )     (65,281 )
    


 


Benefit obligation at end of year

     559,317       685,020  
    


 


Fair value of plan assets at end of year

     0       0  
    


 


Funded status

     (559,317 )     (685,020 )

Unrecognized net actuarial gain

     (75,988 )     (44,406 )

Unrecognized transition obligation

     303,979       430,500  
    


 


Accrued benefit cost included in other liabilities

   $ (331,326 )   $ (298,926 )
    


 


 

F-25


Table of Contents

Components of net periodic cost:

 

     2003

    2002

    2001

 

Service cost

   $ 2,376     $ 1,932     $ 1,321  

Interest cost on benefit obligation

     44,443       48,477       49,830  

Amortization of prior service cost

     42,900       42,900       42,900  

Amortization of actuarial gain

     (349 )     (736 )     (2,456 )
    


 


 


Net periodic cost

   $ 89,370     $ 92,573     $ 91,595  
    


 


 


 

     2003

    2002

 

Assumptions:

            

Weighted-average assumptions used to determine benefit obligation at December 31:

            

Discount rate

   7.00 %   7.00 %

Weighted-average assumption used to determine net periodic cost for years ended December 31:

            

Discount rate

   7.00 %   7.50 %

Assumed health care cost trend rates at December 31:

            

Health care cost trend rate assumed for next year

   7.00 %   7.50 %

Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)

   5.50 %   5.50 %

Year that the rate reaches the ultimate trend rate

   2006     2006  

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

 

    

1-Percentage-

Point Increase


  

1-Percentage-

Point Decrease


 

Effect on total of service and interest cost components

   $ 890    $ (843 )

Effect on postretirement benefit obligation

   $ 6,193    $ (5,857 )

 

NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES

 

The Company is obligated under various lease agreements covering branch offices and ATM locations. The terms expire between February 29, 2005 and December 31, 2029. Options to renew for additional terms are included under the operating lease agreements. The total minimum rental due in future periods under these existing agreements is as follows as of December 31, 2003:

 

2004

   $ 251,440

2005

     211,516

2006

     167,866

2007

     69,000

2008

     66,000

Years thereafter

     1,386,000
    

Total minimum lease payments

   $ 2,151,822
    

 

Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. The total rental expense amounted to $257,826 for 2003, $239,430 for 2002 and $229,719 for 2001.

 

F-26


Table of Contents

On November 6, 2003, the Company entered into a 15 year lease for a branch office which is not included in the above commitment schedule. The lease term begins on the earlier of (1) the date the branch office opens to the public or (2) the commencement date, as defined in the lease agreement. The fixed minimum annual rent for each year of the lease is as follows:

 

TERM YEAR


   ANNUAL AMOUNT

       1 - 5

   $ 185,000

      6 - 10

     212,750

      11-15

     244,663

 

The Company entered into an agreement with a data processing services provider. Under the agreement, the Company is obligated to pay monthly minimum processing fees equal to $16,116 through February 2009 and the Company may cancel the agreement at any time, provided the Company pays a termination fee equal to forty percent (40%) of the Estimated Remaining Value as defined in the agreement.

 

NOTE 13 - FINANCIAL INSTRUMENTS

 

The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. 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.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2003 and 2002, the maximum potential amount of the Company’s obligation was $352,226 and $375,595, respectively, for financial and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

 

F-27


Table of Contents

The estimated fair values of the Company’s financial instruments, all of which are held or issued for purposes other than trading, are as follows as of December 31:

 

     2003

   2002

     Carrying
Amount


  

Fair

Value


   Carrying
Amount


  

Fair

Value


Financial assets:

                           

Cash and cash equivalents

   $ 22,950,289    $ 22,950,289    $ 50,381,665    $ 50,381,665

Available-for-sale securities

     61,082,577      61,082,577      54,969,100      54,969,100

Held-to-maturity securities

     77,701,292      77,910,696      1,046,308      1,046,308

Federal Home Loan Bank stock

     1,041,900      1,041,900      744,800      744,800

Federal Reserve Bank stock

     142,500      142,500      97,500      97,500

Loans, net

     174,411,656      175,339,000      191,394,289      192,642,000

Mortgages held-for-sale

                   1,622,500      1,663,983

Accrued interest receivable

     1,243,694      1,243,694      1,148,290      1,148,290

Financial liabilities:

                           

Deposits

     308,280,816      308,736,000      281,295,684      281,712,000

Securities sold under agreements to repurchase

     9,943,208      9,943,208              

 

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.

 

     2003

   2002

Commitments to originate loans

   $ 1,290,000    $ 5,149,000

Standby letters of credit

     352,226      375,595

Unadvanced portions of loans:

             

Consumer

     2,927,995      2,412,965

Home equity

     14,649,356      9,115,407

Commercial lines of credit

     14,392,010      11,660,439

Commercial construction

     73,700      356,798

Residential construction

     802,381      1,052,033
    

  

     $ 34,487,668    $ 30,122,237
    

  

 

There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities.

 

NOTE 14 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

 

Most of the Bank’s business activity is with customers located within the state. As of December 31, 2003, loans to borrowers in the health care industry totaled $18,369,481, or 10.4% of total loans. The majority of the Bank’s loan portfolio is comprised of loans collateralized by real estate located in the state of Massachusetts.

 

NOTE 15 - REGULATORY MATTERS

 

The Bank, as a National Bank is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year’s earnings (as defined) plus the retained earnings (as defined) from the prior two years. As of December 31, 2003 the Bank could declare dividends up to $3,039,681, without the approval of the Comptroller of the Currency.

 

F-28


Table of Contents

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 Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

As of December 31, 2003, the most recent notification from the Office of the Comptroller of the Currency 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 institution’s category.

 

The Company’s and the Bank’s actual capital amounts and ratios are also presented in the table.

 

     Actual

    For Capital
Adequacy Purposes


    To Be Well
Capitalized Under
Prompt Corrective
Action Provisions


 
     Amount

   Ratio

    Amount

   Ratio

    Amount

   Ratio

 
     (Dollar amounts in thousands)  

As of December 31, 2003:

                                       

Total Capital (to Risk Weighted Assets):

                                       

Consolidated

   $ 28,888    15.02 %   $ 15,382    ³8.0 %     N/A       

Beverly National Bank

     26,025    13.71       15,187    ³8.0     $ 18,984    ³10.0 %

Tier 1 Capital (to Risk Weighted Assets):

                                       

Consolidated

     26,664    13.87       7,691    ³4.0       N/A       

Beverly National Bank

     23,842    12.56       7,594    ³4.0       11,390    ³6.0  

Tier 1 Capital (to Average Assets):

                                       

Consolidated

     26,664    7.78       13,709    ³4.0       N/A       

Beverly National Bank

     23,842    7.00       13,620    ³4.0       17,025    ³5.0  

As of December 31, 2002:

                                       

Total Capital (to Risk Weighted Assets):

                                       

Consolidated

   $ 26,419    13.79 %   $ 15,330    ³8.0 %     N/A       

Beverly National Bank

     22,739    12.10       15,038    ³8.0     $ 18,798    ³10.0 %

Tier 1 Capital (to Risk Weighted Assets):

                                       

Consolidated

     24,407    12.74       7,665    ³4.0       N/A       

Beverly National Bank

     20,727    11.03       7,519    ³4.0       11,279    ³6.0  

Tier 1 Capital (to Average Assets):

                                       

Consolidated

     24,407    7.87       12,400    ³4.0       N/A       

Beverly National Bank

     20,727    6.78       12,235    ³4.0       15,294    ³5.0  

 

F-29


Table of Contents

NOTE 16 - STOCK DIVIDEND, EARNINGS PER SHARE (EPS) AND DIVIDENDS DECLARED PER SHARE

 

On June 21, 2002, the Company paid a 5% stock dividend to shareholders of record on June 5, 2002. Based on the number of common shares outstanding on the record date, the Company issued 89,475 new shares. The fair market value of the additional shares issued, aggregating $1,870,028, was charged to retained earnings, and common stock and additional paid-in capital were increased by $223,688 and $1,646,340, respectively. All references in the accompanying financial statements to the number of common shares and per share amounts are based on the increased number of shares giving retroactive effect to the stock dividend. Earnings per common share, earnings per common share assuming dilution, and dividends declared per share as previously reported for 2001 have been reduced by $0.08, $0.07, and $0.04, respectively to reflect the issuance of the 2002 stock dividend.

 

Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income are as follows:

 

     Income
(Numerator)


   Shares
(Denominator)


   Per-Share
Amount


Year ended December 31, 2003

                    

Basic EPS

                    

Net income and income available to common stockholders

   $ 2,177,011      1,813,206    $ 1.20

Effect of dilutive securities, options

            90,148       
    

  

      

Diluted EPS

                    

Income available to common stockholders and assumed conversions

   $ 2,177,011      1,903,354    $ 1.14
    

  

      

Year ended December 31, 2002

                    

Basic EPS

                    

Net income and income available to common stockholders

   $ 2,381,518      1,757,687    $ 1.35

Effect of dilutive securities, options

            102,143       
    

  

      

Diluted EPS

                    

Income available to common stockholders and assumed conversions

   $ 2,381,518    $ 1,859,830    $ 1.28
    

  

      

Year ended December 31, 2001

                    

Basic EPS

                    

Net income and income available to common stockholders

   $ 2,557,609      1,714,090    $ 1.49

Effect of dilutive securities, options

            123,801       
    

  

      

Diluted EPS

                    

Income available to common stockholders and assumed conversions

   $ 2,557,609      1,837,891    $ 1.39
    

  

      

 

NOTE 17 - RECLASSIFICATION

 

Certain amounts in the prior year have been reclassified to be consistent with the current year’s statement presentation.

 

NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS

 

The following financial statements presented are for the Beverly National Corporation (Parent Company Only) and should be read in conjunction with the consolidated financial statements.

 

F-30


Table of Contents

BEVERLY NATIONAL CORPORATION

(Parent Company Only)

 

BALANCE SHEETS

 

December 31, 2003 and 2002

 

     2003

    2002

 

ASSETS

                

Cash

   $ 819     $ 66  

Investment in Beverly National Bank

     23,365,669       21,719,653  

Investment in Cabot Street Realty Trust

     634,431       605,576  

Investment in available-for-sale securities (at fair value)

     717,218       1,270,453  

Loans

     624,000       731,000  

Premises and equipment

     465,548       482,334  

Accounts receivable from subsidiaries

     27,630       110,228  

Interest receivable

     663       905  

Prepaid and deferred taxes

     411,932       527,730  
    


 


Total assets

   $ 26,247,910     $ 25,447,945  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY

                

Accrued audit expense

   $ 5,880     $ 14,800  
    


 


Total liabilities

     5,880       14,800  
    


 


Stockholders’ equity:

                

Preferred stock, $2.50 par value per share; 300,000 shares authorized; issued and outstanding none

                

Common stock, par value $2.50 per share; authorized 2,500,000 shares; issued 1,944,879 shares as of December 31, 2003 and 1,905,321 shares as of December 31, 2002; outstanding, 1,832,094 shares as of December 31, 2003 and 1,785,841 shares as of December 31, 2002

     4,862,198       4,763,303  

Paid-in capital

     6,280,618       5,852,014  

Retained earnings

     17,073,858       16,347,372  

Treasury stock, at cost (112,785 shares as of December 31, 2003 and 119,480 shares as of December 31, 2002)

     (1,527,461 )     (1,618,112 )

Accumulated other comprehensive (loss) income

     (447,183 )     88,568  
    


 


Total stockholders’ equity

     26,242,030       25,433,145  
    


 


Total liabilities and stockholders’ equity

   $ 26,247,910     $ 25,447,945  
    


 


 

F-31


Table of Contents

BEVERLY NATIONAL CORPORATION

(Parent Company Only)

 

STATEMENTS OF INCOME

 

Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

Interest and dividend income:

                      

Interest on taxable investment securities

   $ 11,344     $ 12,432     $ 40,901

Dividends on marketable equity securities

     8,122       6,538       5,230

Interest on loans and receivables from subsidiaries

     47,979       59,037       74,803

Dividends from Beverly National Bank

     1,444,345       1,358,003       1,243,316
    


 


 

Total interest and dividend income

     1,511,790       1,436,010       1,364,250
    


 


 

Other income:

                      

Rental income

     36,000       36,000       36,000
    


 


 

Total other income

     36,000       36,000       36,000
    


 


 

Expenses:

                      

Occupancy expense

     16,786       16,786       16,771

Professional fees

     95,264       145,633       88,014

Other expense

     45,474       54,717       92,393
    


 


 

Total expenses

     157,524       217,136       197,178
    


 


 

Income before income tax expense (benefit) and equity in undistributed net income of subsidiaries

     1,390,266       1,254,874       1,203,072

Income tax (benefit) expense

     (54,996 )     (69,717 )     5,403
    


 


 

Income before equity in undistributed net income of subsidiaries

     1,445,262       1,324,591       1,197,669
    


 


 

Equity in undistributed net income of subsidiaries:

                      

Beverly National Bank

     702,894       1,003,949       1,332,838

Cabot Street Realty Trust

     28,855       52,978       27,102
    


 


 

Total equity in undistributed net income of subsidiaries

     731,749       1,056,927       1,359,940
    


 


 

Net income

   $ 2,177,011     $ 2,381,518     $ 2,557,609
    


 


 

 

F-32


Table of Contents

BEVERLY NATIONAL CORPORATION

(Parent Company Only)

 

STATEMENTS OF CASH FLOWS

 

Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

 

Cash flows from operating activities:

                        

Net income

   $ 2,177,011     $ 2,381,518     $ 2,557,609  

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Undistributed net income of subsidiaries

     (731,749 )     (1,056,927 )     (1,359,940 )

(Decrease) increase in accrued expenses

     (8,920 )     (3,800 )     14,600  

Depreciation expense

     16,786       16,786       16,771  

Increase in dividend receivable

     (523 )                

Compensation expense relating to grants of common stock at prices less than market value

             5,009       40,757  

Stock award

     11,250                  

Change in prepaid and deferred taxes

     397,821       (65,530 )     (1,183 )

Accretion of securities

                     (19,300 )

Decrease in interest receivable

     765       2,017       26,955  
    


 


 


Net cash provided by operating activities

     1,862,441       1,279,073       1,276,269  
    


 


 


Cash flows from investing activities:

                        

Purchases of available-for-sale securities

     (1,028,000 )     (1,121,500 )     (875,000 )

Proceeds from maturities of available-for-sale securities

                     600,000  

Proceeds from sales of available-for-sale securities

     1,617,000       415,000       857,170  

Additional investment in subsidiary

     (1,500,000 )                

Loan originations and principal collections, net

     107,000       265,000       86,000  
    


 


 


Net cash provided by (used in) investing activities

     (804,000 )     (441,500 )     668,170  
    


 


 


Cash flows from financing activities:

                        

Proceeds from exercise of stock options

     392,837       989,327       122,830  

Purchases of treasury stock

             (389,375 )     (801,270 )

Dividends paid

     (1,450,525 )     (1,459,164 )     (1,245,004 )
    


 


 


Net cash used in financing activities

     (1,057,688 )     (859,212 )     (1,923,444 )
    


 


 


Net increase (decrease) in cash and cash equivalents

     753       (21,639 )     20,995  

Cash and cash equivalents at beginning of year

     66       21,705       710  
    


 


 


Cash and cash equivalents at end of year

   $ 819     $ 66     $ 21,705  
    


 


 


Supplemental disclosure:

                        

Income taxes paid (received)

   $ (452,817 )   $ (4,187 )   $ 6,586  

 

The Parent Only Statements of Changes in Stockholders’ Equity are identical to the Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001, and therefore are not reprinted here.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

There were no changes in or disagreements with accountants on accounting and financial disclosure during the Company’s two (2) most recent fiscal years.

 

ITEM 9A CONTROLS AND PROCEDURES

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s Management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based solely on the definition of “disclosure controls and procedures” in Rule 13a-5(e). In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

 

Within 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

There have been no significant changes in the Company’s internal controls or in other factors that could materially affect, or are reasonably likely to materially affect, the internal controls subsequent to the date the Company completed its evaluation. Therefore, no corrective actions were taken.

 

PART III

 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information regarding Directors and Executive Officers of the Company is omitted from this Report as the Company has filed its definitive proxy statement within 120 days after the end of the fiscal year covered by this Form 10-K, and the information included therein is incorporated by reference.

 

Code of Ethics

 

The Company has adopted a Code of Ethics that applies to the Company’s Chief (Principal) Executive Officer and Chief (Principal) Financial Officer. Such Code of Ethics may be obtained by any person, without charge, upon request, by writing to Peter Simonsen, Beverly National Corporation, 240 Cabot Street, Beverly, Massachusetts 01915.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Information regarding Executive Compensation is omitted from this Report as the Company has filed its definitive proxy statement within 120 days after the end of the fiscal year covered by this Form 10-K, and the information included therein is incorporated by reference.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholders is omitted from this Report as the Company has filed its definitive proxy statement within 120 days after the end of the fiscal year covered by this Form 10-K, and the information included therein is incorporated by reference.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Information regarding Certain Relationships and Related Transactions is omitted from this Report as the Company has filed its definitive proxy statement within 120 days after the end of the fiscal year covered by this Form 10-K, and the information included therein is incorporated by reference.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information regarding Principal Accounting Fees and Services is omitted from this Report as the Company has filed its definitive proxy statement within 120 days after the end of the fiscal year covered by this Form 10-K, and the information included therein is incorporated by reference.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)    EXHIBIT INDEX     
3.1    Articles of Organization of Corporation, as Amended    (1)
3.2    By-Laws of Corporation, as Amended    (2)
10.1    Indenture dated as of January 21, 1976 between Benjamin Brown and Virgil C. Brink, Trustees of Y & M Trust, and Beverly National Bank    (3)
10.2    1987 Incentive Stock Option Plan for Key Employees    (4)
10.3    1987 Directors’ Plan, as amended    (5)
10.4    Employment Agreement dated May 31, 1991 between Beverly National Corporation and Lawrence M. Smith, as amended on February 6, 2002    (6)
10.5    Severance Agreement dated July 8, 1987 between Beverly National Corporation and Lawrence M. Smith    (7)
10.6    Beverly National Corporation Plan for Severance Compensation After Hostile Takeover    (8)
10.7    Employment Agreement between Beverly National Corporation and Julia L. Robichau dated December 24, 1996    (9)
10.8    Change in Control Agreement between Beverly National Corporation and Julie L. Robichau dated December 24, 1996    (10)
10.9    Consulting Agreement between Beverly National Corporation and Julia L. Robichau dated December 24, 1996    (11)
10.10    Supplemental Executive Retirement Agreement between Beverly National Corporation and Lawrence M. Smith dated December 24, 1996, as amended on Feb. 6, 2002    (12)
10.11    Supplemental Executive Retirement Agreement between Julia L. Robichau dated December 24, 1996    (13)
10.12    1996 Incentive Stock Option Plan for Key Employees    (14)
10.13    1998 Incentive Stock Option Plan for Key Employees    (15)
10.14    1998 Directors Plan    (16)
10.15    Lawrence M. Smith Contract Extension    (17)

 

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10.16    Julia L. Robichau Amendment to Consulting Agreement    (18)
10.17    Julia L. Robichau Amendment to Supplemental Executive Retirement Agreement    (19)
10.18    First Amendment to Change and Control Agreement between Beverly National Corporation and Lawrence M. Smith    (20)
10.19    First Amendment to Split Dollar Agreement between Beverly National Corporation and Lawrence M. Smith    (21)
10.20    Change in Control Agreement between Beverly National Corporation and Peter E. Simonsen dated February 23, 2000    (22)
10.21    Employment Agreement between Beverly National Corporation and Peter E. Simonsen dated February 23, 2000    (23)
10.22    Change in Control Agreement between Beverly National Corporation and James E. Rich, Jr. dated February 23, 2000    (24)
10.23    Employment Agreement between Beverly National Corporation and James E. Rich, Jr. dated February 23, 2000    (25)
10.24    Change in Control Agreement between Beverly National Corporation and Deborah A. Rosser dated February 23, 2000    (26)
10.25    Employment Agreement between Beverly National Corporation and Deborah A. Rosser dated February 23, 2000    (27)
10.26    Change in Control Agreement between Beverly National Corporation and Paul J. Germano dated February 23, 2000    (28)
10.27    Employment Agreement between Beverly National Corporation and Paul J. Germano dated February 23, 2000    (29)
10.28    Employment Agreement between Beverly National Corporation and Donat A. Fournier dated July 29, 2002    (30)
10.29    Change in Control Agreement with Donat A. Fournier dated July 29, 2002    (31)
10.30    First Amendment to the Amended and Restated Supplemental Executive Retirement Agreement dated December 24, 1996 between Beverly National Corporation and Lawrence M. Smith dated June 27, 2002 ..    (32)
10.31    Employment Agreement dated May 31, 1991, as amended December 22, 1998 and February 6, 2002 between Beverly National Corporation and Lawrence M. Smith dated June 27, 2002    (33)

 

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10.32    Employment Agreement between Beverly National Corporation and John Putney dated October 6, 2003
10.33    Change in Control Agreement with John Putney dated October 6, 2003
21.    Subsidiaries of Corporation
23.    Consent of Shatswell, MacLeod & Company, P.C.
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-15(e)
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-15(e)
32    Certification Pursuant to 18 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the of the Sarbanes-Oxley Act of 2002

 

(b) The Company filed a Form 8-K on October 27, 2003 to report that the Company’s Board of Directors declared a dividend of $0.20 per share to be paid on October 28, 2003 to stockholders of record as of October 21, 2003. The Company also reported earnings for the nine (9) months ended September 30, 2003.

 

(1) Incorporated herein by reference to the identically numbered exhibits to the Annual Report 10-KSB for December 31, 1994.

 

(2) Incorporated herein by reference to identically numbered exhibits to the Annual Report 10-KSB for December 31, 1993.

 

(3) Incorporated herein by reference to identically numbered exhibits filed as part of Corporation’s Registration Statement on Form S-18 (file No. 33-22224-B filed with the Commission on July 9, 1988.

 

(4) Incorporated herein by reference to Exhibit 4(a) to the Corporation’s Registration Statement on Form S-8 (No. 33-347) filed on January 22, 1996.

 

(5) Incorporated herein by reference to Exhibit 4(b) to the Corporation’s Registration Statement on Form S-8 (No. 33-347) filed on January 22, 1996.

 

(6) Incorporated herein by reference to Exhibit 10.8 to the Annual Report 10-KSB for December 31, 1996.

 

(7) Incorporated herein by reference to Exhibit 10.9 to the Annual Report Form 10-KSB for December 31, 1996.

 

(8) Incorporated herein by reference to Exhibit 10.10 to the Annual Report Form 10-KSB for December 31, 1996.

 

(9) Incorporated herein by reference to Exhibit 10.12 to the Annual Report Form 10-KSB for December 31, 1996.

 

(10) Incorporated herein by reference to Exhibit 10.13 to the Annual Report Form 10-KSB for December 31, 1996.

 

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(11) Incorporated herein by reference to Exhibit 10.14 to the Annual Report Form 10-KSB for December 31, 1998.

 

(12) Incorporated herein by reference to Exhibit 10.15 to the Annual Report Form 10-KSB for December 31, 1998.

 

(13) Incorporated herein by reference to Exhibit 10.16 to the Annual Report Form 10-KSB for December 31, 1998.

 

(14) Incorporated herein by reference to Exhibit 10.17 to the Annual Report Form 10-KSB for December 31, 1998.

 

(15) Incorporated herein by reference to Exhibit 10.18 to the Annual Report Form 10-KSB for December 31, 1999.

 

(16) Incorporated herein by reference to Exhibit 10.19 to the Annual Report Form 10-KSB for December 31, 1999.

 

(17) Incorporated herein by reference to Exhibit 10.20 to the Annual Report Form 10-KSB for December 31, 1999.

 

(18) Incorporated herein by reference to Exhibit 10.21 to the Annual Report Form 10-KSB for December 31, 1999.

 

(19) Incorporated herein by reference to Exhibit 10.22 to the Annual Report Form 10-KSB for December 31, 1999.

 

(20) Incorporated herein by reference to Exhibit 10.23 to the Annual Report Form 10-KSB for December 31, 1999.

 

(21) Incorporated herein by reference to Exhibit 10.24 to the Annual Report Form 10-KSB for December 31, 1999.

 

(22) Incorporated herein by reference to Exhibit 10.25 to the Annual Report Form 10-KSB for December 31, 1999.

 

(23) Incorporated herein by reference to Exhibit 10.26 to the Annual Report Form 10-KSB for December 31, 1999.

 

(24) Incorporated herein by reference to Exhibit 10.27 to the Annual Report Form 10-KSB for December 31, 1999.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 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.

 

BEVERLY NATIONAL CORPORATION

 

Date:   3/23/04   By:  

/s/ Donat A. Fournier


            President & CEO and Director, Principal Executive Officer
Date:   3/23/04   By:  

/s/ Peter E. Simonsen


            Treasurer, Principal Financial & Accounting 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.

 

Date


 

Name and Capacity


3/23/04

 

/s/ Donat A. Fournier


Donat A. Fournier,

President & CEO &

Director, Principal Executive Officer

3/23/04

 

/s/ Richard H. Booth


Richard H. Booth - Director

3/23/04

 

/s/ Neiland J. Douglas, Jr


Neiland J. Douglas, Jr. - Director

3/29/04

 

/s/ John N. Fisher


John N. Fisher - Director

3/29/04

 

/s/ Mark B. Glovsky


Mark B. Glovsky - Director

3/23/04

 

/s/ John L. Good, III


John L. Good, III - Director

3/29/04

 

/s/ Alice B. Griffin


Alice B. Griffin - Director

3/23/04

 

/s/ Robert W. Luscinki


Robert W. Luscinski - Director

3/23/04

 

/s/ Clark R. Smith


Clark R. Smith - Director

3/23/04

 

/s/ James D. Wiltshire


James D. Wiltshire - Director

 

44