-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RtPSh1C9y3Xzd0nKpd4e/Pa/ub3PrrLtXlbL7JSYURxSZLjTuEyUQmgvmU5/bPcg mv9FdDHAklCj2EwX4zjEfw== 0000914317-05-001093.txt : 20050329 0000914317-05-001093.hdr.sgml : 20050329 20050329165636 ACCESSION NUMBER: 0000914317-05-001093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050329 DATE AS OF CHANGE: 20050329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SALISBURY BANCORP INC CENTRAL INDEX KEY: 0001060219 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 061514263 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24751 FILM NUMBER: 05710277 BUSINESS ADDRESS: STREET 1: 5 BISSELL ST CITY: LAKEVILLE STATE: CT ZIP: 06039-1868 BUSINESS PHONE: 8604359801 MAIL ADDRESS: STREET 1: 5 BISSELL ST CITY: LAKEVILLE STATE: CT ZIP: 06039-1868 10-K 1 form10k-66709_sal.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________to ______________ Commission file number 0-24751 --------- SALISBURY BANCORP, INC. (Exact name of Registrant as specified in its charter) Connecticut 06-1514263 - -------------------------------------------------------------- ----------------------------------- (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) 5 Bissell Street, Lakeville, CT 06039 - -------------------------------------------------------------- ------------------------- (Address of Principal Executive Offices) (Zip Code)
Registrant"s telephone number, including area code: 860-435-9801 ------------ Securities registered pursuant to Section 12 (b) of the Act: None ---- Securities registered pursuant to Section 12 (g) of the Act: Common stock par value $.10 per share -------------------------------------
Name of exchange on which registered: American Stock Exchange ----------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant"s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | Indicate by check mark whether the registrant is an accelerated filer. Yes | | No |X| State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: June 30, 2004: $47,651,640 Note. If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated. APPLICABLE ONLY TO CORPORATE REGISTRANTS The Company had 1,682,401 shares outstanding as of March 4, 2005. Documents Incorporated by Reference: None TABLE OF CONTENTS -----------------
Page ---- Part I Item 1 - Business 3 (a) General Development of the Business 3 (b) Financial Information about Industry Segments 3 (c) Narrative Description of Business 4 (d) Financial Information about Foreign and Domestic Operations and Export Sales 8 Item 2 - Properties 13 Item 3 - Legal Proceedings 14 Item 4 - Submission of Matters to a Vote of Security Holders 14 Part II Item 5 - Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities 14 (a) Market Information 14 (b) Holders 14 (c) Dividends 14 (d) Securities Authorized for Issuance Under Equity Compensation Plans 14 Item 6 - Selected Financial Data 15 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7A- Quantitative and Qualitative Disclosures about Market Risk 30 Item 8 - Financial Statements and Supplementary Data 31 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 32 Item 9A- Controls and Procedures 32 Item 9B- Other Information 32 Part III Item 10 -Directors and Executive Officers of the Registrant 32 Item 11 -Executive Compensation 34 Item 12 -Security Ownership of Directors and Management and Related Stockholder Matters 37 Item 13-Certain Relationships and Related Transactions 38 Item 14-Principal Accounting Fees and Services 39 Part IV Item 15 - Exhibits and Financial Statement Schedules 40 Signatures 41
2 PART I ITEM 1. BUSINESS (a) General Development of the Business Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation that was formed in 1998. Its primary activity is to act as the holding company for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which accounts for most of the Company's net income. The Bank assumed its present name in 1925 following the acquisition by the Robbins Burrall Trust Company of the Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in 1909 as the successor to a private banking firm established in 1874. The Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a state bank and trust company by the State of Connecticut and its deposits are insured by the Federal Deposit Insurance Corporation in accordance with the Federal Deposit Insurance Act. The Bank's main office is at 5 Bissell Street, Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801. On September 10, 2004 the Company completed the acquisition of Canaan National Bancorp, Inc. and the merger of The Canaan National Bank with and into Salisbury Bank and Trust Company. Following of the merger, the Bank operated five (5) full service offices which are located in Canaan, Lakeville, Salisbury and Sharon, Connecticut and South Egremont, Massachusetts. In addition, a branch in Sheffield, Massachusetts opened in March 2005. Most of the Bank's business is derived from customers located in Litchfield County, Connecticut or in Dutchess County or Columbia County, New York or in Berkshire County, Massachusetts. (b) Financial Information about Industry Segments The Company's products and services are all of a nature of a commercial bank and trust company. Lending Lending is a principal business of the Bank, and loans represent a large portion of the Bank's assets. The portfolio consists of many types of loans. These include residential mortgages, home equity lines of credit, monthly installment loans for consumers, as well as commercial loans, which include lines of credit, short term loans, Small Business Administration ("SBA") loans and real estate loans for business customers. The primary lending activity has been the origination of first mortgage loans for the purchase, refinance or construction of residential properties in the Bank's market area. Loans secured by mortgages on a borrower's principal residence are generally viewed as the least vulnerable to major economic changes and at the same time provide a significant yet relatively stable source of interest income. Presently, loans are maintained in the Bank's portfolio as well as sold to investors on the secondary mortgage market. This provides customers the opportunity to choose from a wide array of competitive mortgage products and rate structures. The Bank also originates a variety of other loans for consumer and business purposes. Although these loans represent a smaller percentage of the total loan portfolio, the Bank is in the position of being a full service retail lender to its consumers and a full service commercial lender to its business customers. Investments The Company's investment portfolio is also an important component of the Balance Sheet. It provides a source of earnings in the form of interest and dividends. It also plays a role in the interest rate risk management of the Company and it provides a source of liquidity. The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S. Treasury and mortgage-backed securities and securities of political subdivisions of the states. At December 31, 2004, it totaled $184,286,000 which represents approximately 43.56% of total assets and it produced interest and dividend income of $6,905,000 for the year 2004 as compared with $6,385,000 for 2003 and $6,358,000 for 2002 respectively. 3 Deposits and Borrowings The Bank's primary sources of funds are deposits, borrowings and principal payments on loans. Although competition for funds from non-banking institutions remains aggressive, the Bank continues its efforts to build multiple account relationships with its customers. As a result, average daily deposits increased 14.42% to $244,167,000 during 2004. The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB"). Borrowings from FHLBB totaled $79,213,000 at December 31, 2004 as compared with $60,897,000 at December 31, 2003. For additional information relating to the asset, deposit and borrowing components of the Company, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation and the accompanying Consolidated Financial Statements. Fiduciary The Bank provides trust, investment and financial planning services to its customers. The Bank has a full service Trust Department. Among the services offered are: custody and agency accounts and estate planning and estate settlement. Another service is that of serving as Guardian or Conservator of estates and managing the financial position of Guardianships or Conservatorships. Self directed IRAs and Pension plans are also offered. All Others The Company also offers safe deposit rentals, foreign exchange, a full menu of electronic fund transfer services and other ancillary services to businesses and individuals. (c) Narrative Description of Business Salisbury Bancorp, Inc. is a bank holding company, which as described above, has one subsidiary, Salisbury Bank and Trust Company (the "Bank"). The Bank is a full-service commercial bank and its activities encompass a broad range of services which includes a complete menu of deposit services, multiple mortgage products and various other types of loans for both business and personal needs. Full trust services are also available. The Bank owns and operates two subsidiaries, SBT Realty, Inc. which is incorporated under the laws of the State of New York and SBT Mortgage Corp. which is incorporated under the laws of the State of Connecticut. SBT Realty, Inc. holds and manages bank owned real estate situated in New York State. Competition The Company and the Bank encounter competition in all phases of their business. There are numerous financial institutions that have offices in the areas in which the Company and Bank compete in Northwestern Connecticut, Western Massachusetts and proximate areas of New York State. All of the offices of the Bank are located in the northwest corner of Litchfield County, Connecticut and South Berkshire County, Massachusetts. The Bank maintains six (6) banking offices within these two counties and also attracts customers from nearby Columbia County and Dutchess County, New York. The bank's market area within the four counties is served by 47 commercial banks and savings banks. The Bank has a 2.75% market share of deposits in such market. Banks compete on the basis of price, including rates paid on deposits and charged on borrowings, convenience and quality of service. Savings and loan associations are able to compete aggressively with commercial banks in the important area of consumer lending. Credit unions and small loan companies are each significant factors in the consumer market. Insurance companies, investment firms, credit and mortgage companies, brokerage firms cash management accounts, money-market funds and retailers are all significant competitors for various types of business. Insurance companies, investment counseling 4 firms and other businesses and individuals actively compete with the Bank for personal and corporate trust services and investment counseling services. Many non-bank competitors are not subject to the extensive regulation described below under "LEGISLATION, REGULATION AND SUPERVISION" and in certain respects may have a competitive advantage over banks in providing certain services. In marketing its services, the Bank emphasizes its position as a hometown bank with personal service, flexibility and prompt responsiveness to the needs of its customers. Moreover, the Bank competes for both deposits and loans by offering competitive rates and convenient business hours. In addition to providing banking services to customers in its primary service areas, the Bank is a member of the automatic teller machine networks and offers internet banking services, which allow the Bank to deliver certain financial services to customers regardless of their proximity to the primary service area of the Bank. Connecticut has enacted legislation which liberalized banking powers for thrift institutions thereby improving their competitive position with other banks. In addition, the Connecticut Interstate Banking Act permits acquisitions and mergers of Connecticut banks and bank holding companies of or with banks and bank holding companies in other states. Accordingly, it is possible for large super-regional organizations to enter many new markets including the market served by the Bank. Certain of these competitors, by virtue of their size and resources, may enjoy certain efficiencies and competitive advantages over the Bank in the pricing, delivery, and marketing of their products and services. It is possible that such legislative authority will increase the number or the size of financial institutions competing with the Bank for deposits and loans in its market place, although it is impossible to predict the effect upon competition of such legislation. Legislation, Regulation and Supervision General Virtually every aspect of the business of banking is subject to regulation including such matters as the amount of reserves that must be established against various deposits, the establishment of branches, mergers, non-banking activities and other operations. Numerous laws and regulations also set forth special restrictions and procedural requirements with respect to the extension of credit, credit practices, the disclosure of credit terms and discrimination in credit transactions. The descriptions of the statutory provisions and regulations applicable to banks set forth below do not purport to be a complete description of such statutes and regulations and their effects on the Bank. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any changes and the impact such changes might have on the Bank's future business and earnings are difficult to determine. Federal Reserve Board Regulation The Company is a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and files with the Federal Reserve Board the reports as required under the BHCA. The BHCA generally requires prior approval by the Federal Reserve Board of the acquisition by the Company of substantially all of the assets or more than five percent (5%) of the voting stock of any bank. The BHCA also allows the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the Company can engage in such activities. The BHCA prohibits the Company and the Bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services. Federal legislation permits adequately capitalized bank holding companies to venture across state lines to offer banking services through bank subsidiaries to a wide geographic market. It is possible for large super-regional organizations to enter many new markets including the market served by the Bank, although it is impossible to assess what impact this will have on the Company or the Bank. 5 The Federal Reserve Act imposes certain restrictions on loans by the Bank to the Company and certain other activities, on investments, in their stock or securities, and on the taking by the Bank of such stock or securities as collateral security for loans to any borrower. Under the BHCA and the regulations of the Federal Reserve System promulgated thereunder ("Regulation Y"), no corporation may become a bank holding company as defined therein, without prior approval of the Federal Reserve Board. The Company received the approval to become a bank holding company on June 18, 1998. The Company will also have to secure prior approval of the Federal Reserve Board if it wishes to acquire voting shares of any other bank, if after such acquisition it would own or control more than five percent (5%) of the voting share of such bank. The BHCA imposes limitations upon the Company as to the types of business in which it may engage. Regulation Y requires bank holding companies to provide the Federal Reserve Board with written notice before purchasing or redeeming equity securities if the gross consideration for the purchase or redemption, when aggregated with the net consideration paid by the Company for all such purchases or redemptions during the preceding twelve (12) months, is equal to ten percent (10%) or more of the Company's consolidated net worth. For purposes of Regulation Y, "net consideration" is the gross consideration paid by a company for all of its equity securities purchased or redeemed during the period, minus the gross consideration received for all of its equity securities sold during the period other than as part of a new issue. However, a bank holding company need not obtain Federal Reserve Board approval of any equity security redemption when: (i) the bank holding company's capital ratios exceed the threshold established for "well-capitalized" state member banks before and immediately after the redemption; (ii) the bank holding company is well-managed; and (iii) the bank holding company is not the subject of any unresolved supervisory issues. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the "GLBA"), provides bank holding companies, banks, securities firms, insurance companies, and investment management firms the option of engaging in a broad range of financial and related activities by opting to become a "financial holding company." These holding companies will be subject to oversight by the Federal Reserve Board, in addition to other regulatory agencies. Under the financial holding company structure, bank holding companies have greater ability to purchase or establish nonbank subsidiaries which are financial in nature or which engage in activities which are incidental or complementary to a financial activity. Additionally, for the first time, securities and insurance firms are permitted to purchase full-service banks. While the GLBA Act facilitates the ability of financial institutions to offer a wide range of financial services, large financial institutions would appear to be the beneficiaries as a result of this Act because many community banks are less able to devote the capital and management resources needed to facilitate broad expansion of financial services. The Company qualified and registered as a financial holding company in May 3, 2000. In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002. The purpose of the Sarbanes-Oxley Act is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes. The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a registered public accounting firm from performing specified nonaudit services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the audit committee of an issuer with responsibility for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services. It requires each committee member to be a member of the board of directors of the issuer, and to be otherwise independent. The Sarbanes-Oxley Act further requires the chief executive officer and chief financial officer of an issuer to make certain certifications as to each annual or quarterly report. In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses and profits under certain circumstances. Specifically, if an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer as a result of misconduct with any financial reporting requirements under the securities laws, the chief executive officer and chief financial officer of the issuer shall be required to reimburse the issuer for (1) any bonus or other incentive-based or equity based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the SEC of the financial document embodying such financial reporting requirements; and (2) any profits realized from the sale of securities of the issuer during that 12-month period. 6 The Sarbanes-Oxley Act also instructs the SEC to require by rule: o Disclosure of all material off-balance sheet transactions and relationship that may have a material effect upon the financial status of an issuer; and o The presentation of pro forma financial information in a manner that is not misleading, and which is reconcilable with the financial condition of the issuer under generally accepted accounting principles. The Sarbanes-Oxley Act also prohibits insider transactions in the Company's stock during a lock out period of Company's pension plans, and any profits of such insider transactions are to be disgorged. In addition, there is a prohibition of company loans to its executives, except in certain circumstances. The Sarbanes-Oxley Act also provides for mandated internal control report and assessment with the annual report and an attestation and a report on such report by Company's auditor. The SEC also requires an issuer to institute a code of ethics for senior financial officers of the company. Furthermore, the Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10 years for securities fraud. The terrorist attacks in September, 2001 have impacted the financial services industry and led to federal legislation that attempts to address certain issues involving financial institutions. On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 200 (the "USA Patriot Act"). Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and/or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions. Among its other provisions, IMLA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under these acts. Connecticut Regulation The Company is incorporated in the State of Connecticut and is subject to the Connecticut Business Corporation Act and the Connecticut Bank Holding Company Statutes. As a state-chartered bank and member of the Federal Deposit Insurance Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut Banking Commissioner and the FDIC. Applicable laws and regulations impose restrictions and requirements in many areas, including capital requirements, maintenance of reserves, establishment of new branch offices, mergers, making of loans and investments, consumer protection, employment practices and other matters. Any new regulations or amendments to existing regulations may materially affect the services offered, expenses incurred and/or income generated by the Bank. The Connecticut Banking Commissioner regulates the Bank's internal organization as well as its deposit, lending and investment activities. The approval of the Connecticut Banking Commissioner is required to, among other things, open branch offices and consummate merger transactions and other business combinations. The Connecticut Banking Commissioner conducts periodic examinations of the Bank. The Connecticut banking statutes also restrict the ability of the 7 Bank to declare cash dividends to its shareholders. Subject to certain limited exceptions, loans made to any one obligor may not exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits and loan reserves. In addition, under Connecticut law, the beneficial ownership of more than ten percent (10%) of any class of voting securities of a bank may not be acquired by any person or groups of persons acting in concert without the approval of the Connecticut Banking Commissioner. FDIC Regulation The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for each insured depositor. FDIC insurance of deposits may be terminated by the FDIC, after notice and a hearing, upon a finding by the FDIC that the insured institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule or order of, or condition imposed by, the FDIC. A bank's failure to meet the minimum capital and risk-based capital guidelines discussed below would be considered to be unsafe and unsound banking practices. The Bank, as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many of the areas also regulated by the Connecticut Banking Commissioner. The FDIC also conducts its own periodic examinations of the Bank, and the Bank is required to submit financial and other reports to the FDIC on a quarterly and annual basis, or as otherwise required by the FDIC. FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance of deposits. Under FDIC regulations, FDIC-insured, state-chartered banks which are not members of the Federal Reserve System, must meet certain minimum capital requirements, including a leverage capital ratio and a risk-based capital ratio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION". The Community Reinvestment Act ("CRA") requires lenders to identify the communities served by the institution's offices and to identify the types of credit the institution is prepared to extend within such communities. The FDIC conducts examinations of insured institutions' CRA compliance and rates such institutions as "Outstanding", "Satisfactory", "Needs to Improve" and "Substantial Noncompliance". As of its last CRA examination, the Bank received a rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may inhibit an institution from undertaking certain activities, including acquisitions of other financial institutions, which require regulatory approval based, in part, on CRA compliance considerations. Similarly, failure of a bank to maintain a CRA rating of "Satisfactory" or better would preclude it or its holding company from engaging in any new financial activities pursuant to the Gramm-Leach-Bliley Act. Employees The Company's current workforce at March 14, 2005 consists of 130 employees of whom 111 were full time and 19 were part time. The employees are not represented by a collective bargaining unit. (d) Financial Information about Foreign and Domestic Operations and Export Sales The Company does not have any foreign business operations or export sales of its own. However, it does provide financial services including wire transfers and foreign currency exchange to other businesses involved in foreign trade. 8 STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY GUIDE 3 The statistical disclosures required pursuant to Industry Guide 3, not contained in Management's Discussion and Analysis of Financial Condition and Results of Operations, are presented on the following pages of this Report on Form 10-K. Page(s) of Item of Guide 3 This Report - --------------- ----------- I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential 18 II. Investment Portfolio 10 III. Loan Portfolio 11 IV. Summary of Loan Loss Experience 12 V. Deposits 25 VI. Return on Equity and Assets 11 VII. Short-Term Borrowings 13 9 Investment Portfolio The Company categorizes investments into three groups and further provides for the accounting and reporting treatment of each group. Investments may be classified as held-to-maturity, available-for-sale, or trading. The Bank does not purchase or hold any investment securities for the purpose of trading such investments. The following tables set forth the carrying amounts of the investment securities as of December 31: (dollars in thousands)
2004 2003 2002 ------------------------------ Available-for-sale securities: (at fair value) Equity securities $ 146 $ 136 $ 90 U.S. government agencies preferred stock 12,209 7,610 4,179 U.S. Treasury securities and other U.S. government corporations and agencies 53,416 51,979 41,635 Obligations of states and political subdivisions 58,452 45,988 42,792 Mortgage-backed securities 54,432 37,307 46,473 ------------------------------ $178,655 $143,020 $135,169 ============================== Held-to-maturity securities (at amortized cost) U.S. Treasury securities and other U.S. government corporations and agencies $ 0 $ 0 $ 0 Obligations of states and political subdivisions 0 0 0 Mortgage-backed securities 218 229 321 ------------------------------ $ 218 $ 229 $ 321 ============================== Federal Home Loan Bank stock $ 5,413 $ 3,771 $ 2,945 ==============================
For the following table, yields are not calculated and presented on a fully taxable-equivalent ("FTE") basis. The scheduled maturities of held-to-maturity securities and available-for-sale securities (other than equity securities) were as follows as of December 31, 2004: (dollars in thousands)
Under 1-5 5-10 Over 10 1 Year Yield Years Yield Years Yield Years Yield Total ---------------------------------------------------------------------------------------------------- Held-to-maturity - ---------------- securities - ---------- (at amortized cost) U.S. Treasury securities and other U.S. government corporations and agencies $ 0 $ 0 $ 0 $ 0 $ 0 Obligations of state and political subdivisions 0 0 0 0 0 Mortgage-backed securities 0 0 0 218 3.38% 218 -------- -------- -------- -------- -------- $ 0 $ 0 $ 0 $ 218 $ 218 ======== ======== ======== ======== ======== Available-for-sale - ------------------ Securities - ---------- (at fair value) U.S. Treasury securities and other U.S. government corporations and agencies $ 0 $ 0 $ 23,692 4.81% $ 29,724 4.19% $ 53,416 Obligations of state and political subdivisions $ 240 4.70% $ 0 $ 591 4.04% $ 57,621 4.75% $ 58,452 Mortgage-backed securities $ 0 $ 1,289 5.10% $ 1,439 5.35% $ 51,704 4.40% $ 54,432 -------- -------- -------- -------- -------- $ 240 $ 1,289 $ 25,722 $139,049 $166,300 ======== ======== ======== ======== ========
10 Loan Portfolio Analysis by Category (dollars in thousands)
December 31 2004 2003 2002 2001 2000 ------------------------------------------------------------- Commercial, financial and $ 15,127 $ 9,149 $ 10,127 $ 10,797 $ 8,592 agricultural Real Estate-construction and 14,290 15,307 6,027 3,935 6,275 land development Real Estate - residential 130,414 90,807 93,636 102,201 98,312 Real Estate-commercial 35,487 19,199 18,002 17,423 15,463 Consumer 9,122 6,692 9,007 10,030 10,673 Other 69 73 291 125 247 ------------------------------------------------------------- 204,509 141,227 137,090 144,511 139,562 Allowance for possible loan losses (2,512) (1,664) (1,458) (1,445) (1,292) Unearned income (19) (0) (0) (0) (0) ------------------------------------------------------------- Net loans $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270 =============================================================
There are no industry concentrations in the Bank's loan portfolio. The following table shows the maturity of commercial, financial and agricultural loans, real estate commercial loans and real estate-construction loans outstanding as of December 31, 2004. Also provided are the amounts due after one (1) year classified according to the sensitivity to changes in interest rates.
Due after Due in one one year to Due after year or less five years five years -------------------------------------------- Commercial, financial, agricultural and real estate commercial $ 4,385 $8,628 $ 37,601 Real estate-construction and land development 14,290 0 0 ----------------------------------------- $ 18,675 $8,628 $ 37,601 ========================================= Maturities after One Year with: Fixed interest rates $6,169 $ 8,629 Variable interest rates 2,459 28,972 ----------------------- $8,628 $ 37,601 =======================
Return on Equity and Assets The following table summarizes various financial ratios of the Company for each of the last three (3) years: Year ended December 31, ----------------------- 2004 2003 2002 ---- ---- ---- Return on average total assets (net income divided by average total assets) 1.14% 1.24% 1.13% Return on average shareholders' equity (net income divided by average shareholders' equity) 12.34% 13.41% 12.63% Dividend payout ratio (total declared dividends per share divided by net income per share) 35.96% 34.07% 39.11% Equity to assets ratio (average shareholders' equity as a percentage of average total assets) 9.20% 9.26% 8.92% 11 Non-accrual, Past Due and Restructured Loans At December 31, 2004, there were eleven (11) non-accrual loans in the Bank's portfolio all of which were secured by real estate. In the month following the month in which a mortgage loan becomes 90 days past due, the Bank generally stops accruing interest unless there are unusual circumstances which warrant an exception. Generally the only loan types that the Bank reclassifies to nonaccrual are those secured by real estate or large commercial loans on which substantial collateral exists. Other types of loans are generally charged off when they become 120 days or more delinquent. However, exceptions may be made as warranted. Nonaccrual, Past Due and Restructured Loans (dollars in thousands)
December 31 2004 2003 2002 2001 2000 ---------------------------------------------- Non-accrual $1,739 $ 75 $ 855 $ 372 $ 186 90 days or more past due 528 535 124 215 323 Restructured loans 0 0 271 0 12 ---------------------------------------------- Total nonperforming loans $2,267 $ 610 $1,250 $ 587 $ 521 ============================================== Total nonperforming loans as per- centage of the total loan portfolio 1.12% 0.43% 0.92% 0.41% 0.37% Allowance for loan losses as a per- centage of nonperforming loans 110.76% 272.79% 116.64% 246.17% 247.99%
Information with respect to non-accrual and restructured loans at December 31, 2004, 2003 and 2002 is as follows:
(dollars in thousands) Year Ended December 31 2004 2003 2002 ------------------------------ Interest income that would have been recorded under original terms $ 100 $ 4 $ 68 Gross interest recorded 72 0 49 ------------------------------ Foregone interest $ 28 $ 4 $ 19 ==============================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31 2004 2003 2002 2001 2000 -------------------------------------------------------------- Balance of the allowance for loan losses at beginning of year $1,664 $1,458 $ 1,445 $ 1,292 $1,160 Charge-offs: Commercial, financial and agricultural 0 71 60 0 0 Real estate mortgage 0 0 46 13 21 Consumer 70 84 146 88 50 -------------------------------------------------------------- Total charge-offs 70 155 252 101 71 -------------------------------------------------------------- Recoveries: Commercial, financial and agricultural 0 25 2 0 0 Real estate mortgage 0 0 1 87 6 Consumer 28 24 26 17 17 -------------------------------------------------------------- Total recoveries 28 49 29 104 23 -------------------------------------------------------------- Net charge-offs 42 106 223 (3) 48 Provisions charged to operations 250 312 300 150 180 Balance acquired from CNB 640 Transfer of allowance for loan losses to other liabilities 0 0 (64) 0 0 -------------------------------------------------------------- Balance at end of year $2,512 $1,664 $ 1,458 $ 1,445 $1,292 ============================================================== Ratio of net charge-offs to average loans outstanding .02% .01% .02% (.002%) .04% Ratio of allowance for loan losses to year end loans 1.23% 1.18% 1.07% 1.01% .93%
12 Allocation of the Allowance for Loan Losses (dollars in thousands)
Years Ended December 31 2004 2003 2002 2001 2000 ---------------- ---------------- ---------------- ---------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Commercial, financial and agricultural $ 613 7.40% $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16% Real estate construction and land development 83 6.99% 112 10.82% 50 4.40% 24 2.72% 0 4.50% Real estate mortgage 1,614 81.12% 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51% Consumer 198 4.46% 357 4.72% 244 6.57% 100 6.94% 65 7.65% Other loans 4 .03% 5 .05% 8 .21% 1 .09% 1 .18% ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ $2,512 100.00% $1,664 100.00% $1,458 100.00% $1,445 100.00% $1,292 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for possible loan losses are charged to operating expenses and are based on past experience, current economic conditions and management's judgement of the amount necessary to cover losses inherent in the portfolio. The Bank records provisions for estimated loan losses, which are charged against earnings, in the period they are established. Short-Term Borrowings (dollars in thousands) December 31 2004 2003 2002 ------------------------------ Federal Home Loan Bank Advances Average interest rate At year end 4.29% 4.06% 5.35% For the year 3.90% 4.21% 5.45% Average amount outstanding during the year $ 74,954 $65,282 $53,438 Maximum amount outstanding at any month $100,680 $74,705 $59,125 Amount outstanding at year end $ 79,213 $60,897 $51,891 ITEM 2. DESCRIPTION OF PROPERTIES The Company is not the owner or lessee of any properties. The Bank leases two (2) properties; a branch office at 51 Main Street, South Egremont, Massachusetts and a branch at 73 Main Street, Sheffield, Massachusetts which opened in March 2005. The Bank serves its customers from its six (6) offices which are located in Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield and South Egremont, Massachusetts. The Bank's trust department is located in a separate building adjacent to the main office of the Bank. The following table includes all property owned by the Bank, but does not include Other Real Estate Owned. OFFICES LOCATION STATUS Main Office 5 Bissell Street Owned Lakeville, Connecticut Trust Department 19 Bissell Street Owned Lakeville, Connecticut Salisbury Office 18 Main Street Owned Salisbury, Connecticut Sharon Office 29 Low Road Owned Sharon, Connecticut Canaan Operations 94 Main Street Owned Canaan, Connecticut Canaan Office 100 Main Street Owned Canaan, Connecticut 13 ITEM 3. LEGAL PROCEEDINGS Other than routine litigation incidental to its business, there are no material legal proceedings pending to which the Company, Bank, or their properties are subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the Company's 2004 fiscal year. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Market Information The Company's common stock is traded on The American Stock Exchange under the symbol "SAL". The following table presents the high and low sales prices of the Company's common stock.
2004 Quarters 2003 Quarters --------------------------------- --------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st --------------------------------- --------------------------------- Range of Stock prices: High $45.55 $43.05 $38.80 $41.55 $38.95 $32.25 $29.50 $30.00 Low $43.00 $36.00 $36.25 $38.50 $29.50 $29.00 $26.00 $26.00
(b) Holders There were approximately 742 holders of record of the common stock of the Company as of March 4, 2005. This number includes brokerage firms and other financial institutions which hold stock in their name, but which is actually owned by third parties. (c) Dividends Dividends are currently declared four times a year, and the Company expects to follow such practices in the future. During the year 2004, the Company declared a cash dividend each quarter of $.24 per share. Dividends for the year 2004 totaled $.96 per share which compared to total dividends of $.92 that were declared in the year 2003. At their February 25, 2005 meeting, the Directors of the Company declared a cash dividend of $.25 per share for the first quarter of 2005. The dividend will be paid on April 27, 2005 to shareholders of record as of March 31, 2005. Payments of all dividends are dependent upon the condition and earnings of the Company. The Company's ability to pay dividends is limited by the prudent banking principles applicable to all bank holding companies and by the provisions of Connecticut Corporate law, which provide that no distribution may be made by a company if, after giving it effect: (1) the company would not be able to pay its debts as they become due in the usual course of business or (2) the company's total assets would be less than the sum of its total liabilities plus amounts needed to satisfy any preferred stock rights. The following table presents cash dividends declared per share for the last two years:
2004 Quarters 2003 Quarters ----------------------------------------- ----------------------------------------- 4th 3rd 2nd 1st 4th 3rd 2nd 1st ----------------------------------------- ----------------------------------------- Cash dividends declared $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.23 $ 0.23 $ 0.23 $ 0.23
The dividends paid to shareholders of the Company are funded primarily from dividends received by the Company from the Bank. Reference should be made to Note 13 of the Consolidated Financial Statements for a description of restrictions on the ability of the Bank to pay dividends to the Company. (d) Securities Authorized for Issuance Under Equity Compensation Plans Equity Compensation Plan information is provided in Item 11 of this Form 10-K. 14 Item 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31 2004 2003 2002 2001 2000 --------- --------- --------- --------- --------- (dollars in thousands except per share data) Statement of Condition Data: Loans, Net $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270 Allowance For Loan Losses 2,512 1,664 1,458 1,445 1,292 Investments 184,286 147,021 138,435 105,593 91,922 Total Assets 423,101 311,100 293,107 283,602 249,054 Deposits 298,842 218,457 211,037 201,351 166,436 Borrowings 79,213 60,897 51,891 53,004 47,357 Shareholders' Equity 40,700 28,850 27,345 23,363 22,460 Nonperforming Assets 2,267 685 1,400 587 521 Statement of Income Data: Interest and Fees on Loans $ 9,592 $ 9,226 $ 9,677 $ 11,344 $ 10,494 Interest and Dividends on Securities and Other Interest Income 6,959 6,423 6,481 5,746 6,015 Interest Expense 5,659 5,613 6,898 8,301 8,284 --------- --------- --------- --------- --------- Net Interest Income 10,892 10,036 9,260 8,789 8,225 Provision for Loan Losses 250 313 300 150 180 Trust Department Income 1,411 1,252 1,100 1,070 1,108 Other Income 1,854 1,674 1,388 1,187 914 Net Gain (Loss) on Sales of Securities 1,490 1,058 634 130 (64) Other Expenses 10,603 8,599 7,775 6,755 5,797 --------- --------- --------- --------- --------- Pre Tax Income 4,794 5,108 4,307 4,271 4,206 Income Taxes 775 1,268 1,108 1,370 1,357 --------- --------- --------- --------- --------- Net Income $ 4,019 $ 3,840 $ 3,199 $ 2,901 $ 2,849 ========= ========= ========= ========= ========= Per Share Data: Earnings per common share $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92 Earnings per common share, assuming dilution $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92 Cash Dividends Declared per share $ 0.96 $ 0.92 $ 0.88 $ 0.84 $ 0.77 Book Value (at year end) $ 24.19 $ 20.26 $ 19.21 $ 16.43 $ 15.40 Selected Statistical Data: Return on Average Assets 1.14% 1.24% 1.13% 1.14% 1.23% Return on Average Shareholders' Equity 12.34% 13.47% 12.63% 12.25% 13.64% Dividend Payout Ratio 35.96% 34.07% 39.11% 41.38% 39.72% Average Shareholders' Equity to Average Assets 9.20% 9.21% 8.92% 9.27% 8.98% Net Interest Spread 3.22% 3.23% 3.13% 2.91% 2.83% Net Interest Margin 3.63% 3.65% 3.72% 3.71% 3.79%
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc. OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiary The following provides Management's comments on the financial condition and results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut corporation which is the holding company for Salisbury Bank and Trust Company, (the "Bank"). The Company and the Bank were formed in 1998 and 1848, respectively, and the Company's sole subsidiary is the Bank. On September 10, 2004, the Company acquired Canaan National Bancorp, Inc. and merged its subsidiary, The Canaan National Bank into the Bank. The Bank currently operates six (6) full service offices including a Trust Department located in the towns of Canaan, Lakeville, Salisbury and Sharon, Connecticut as well as South Egremont, Massachusetts. Our sixth branch in Sheffield, Massachusetts opened March 14, 2005. In order to provide a foundation for building shareholder value and servicing customers, the Company remains committed to investing in the technological and human resources necessary to developing new personalized financial products and services to meet the needs of customers. This discussion should be read in conjunction with the Company's consolidated financial statements and the notes to the consolidated financial statements that are presented as part of this Annual Report. RESULTS OF OPERATIONS - --------------------- Comparison of the Years Ended December 31, 2004 and 2003 - -------------------------------------------------------- Overview - -------- The earnings for the Company totaled $4,019,000 in 2004, an increase of $179,000 or 4.66% over year 2003 earnings of $3,840,000. Earnings per average share outstanding totaled $2.67 in 2004. This compares to earnings per average share outstanding of $2.70 in 2003 and $2.25 in 2002. The decrease in earnings per average share for 2004 is primarily the result of issuing 257,483 new shares of Company stock, in connection with the acquisition of Canaan National Bancorp, Inc. The Company's assets at December 31, 2004 totaled $423,101,000 which represents growth of $112,001,000 or 36.00% since December 31, 2003. This increase is primarily attributable to the Bank's acquisition of Canaan National Bancorp, Inc., which was completed during September 2004. In connection with this transaction, the Bank received approximately $54,000,000 in loans, a securities portfolio totaling approximately $44,000,000 and recorded goodwill of approximately $7.1 million. Canaan National Bancorp, Inc.'s fixed assets and bank premises were also included in the merger. Non-performing loans totaled $ 2,267,000 at December 31, 2004. This compares to non-performing loans totaling $610,000 for the corresponding period in 2003. Deposits at December 31, 2004 totaled $298,842,000 as compared to total deposits of $218,457,000 at December 31, 2003. This increase is primarily attributable to the approximately $76,000,000 in deposits that were assumed in the merger with Canaan National Bancorp, Inc. The Company is "well capitalized". The Company's risk-based capital ratios at December 31, 2004, which includes the risk-weighted assets and capital of the Salisbury Bank and Trust Company, were 11.12% for Tier 1 capital and 12.13% for total capital. The Company's leverage ratio was 7.22% at December 31, 2004. This compares to a Tier 1 capital ratio at December 31, 2003 of 15.35%, a total capital ratio of 16.44%, and a Company leverage ratio of 8.05%. The Board of Directors increased total dividends declared on the Company's common stock to $.96 per share in 2004. This compares to a $.92 per share dividend paid in 2003 and a $.88 per share dividend that was paid in 2002. Critical Accounting Estimates - ----------------------------- In preparing the Company's financial statements, management selects and applies numerous accounting policies. In applying these policies, management must make estimates and assumptions. The accounting policy that is most susceptible to critical estimates and assumptions is the allowance for loan losses. The determination of an appropriate provision is based on a determination of the probable amount of credit losses in the loan portfolio. Many factors influence the amount of future loan losses, relating to both the specific characteristics of the loan portfolio and general economic conditions nationally and locally. While management carefully considers these factors in determining the amount of the allowance for loan losses, future adjustments may be necessary due to changed conditions, which could have an adverse impact on reported earnings in the future. See "Provisions and Allowance for Loan Losses". 16 Net Interest and Dividend Income - -------------------------------- The Company earns income from two basic sources. The primary source is through the management of its financial assets and liabilities and involves functioning as a financial intermediary. The Company accepts funds from depositors or borrows funds and either lends the funds to borrowers or invests those funds in various types of securities. The second source is fee income, which is discussed in the noninterest income section of this analysis. Net interest income is the difference between the interest and fees earned on loans, interest and dividends earned on securities (the Company's earning assets) and the interest expense paid on deposits and borrowed funds, primarily in the form of advances from the Federal Home Loan Bank. The amount by which interest income will exceed interest expense depends on two factors: (1) the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and borrowed funds and (2) the interest rate earned on those interest earning assets compared with the interest rate paid on those interest-bearing deposits and borrowed funds. For this discussion, net interest income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest income restates reported interest income on tax exempt loans and securities as if such interest were taxed at the applicable State and Federal income tax rates for all periods presented.
(dollars in thousands) December 31, 2004 2003 2002 -------------------------------- Interest and Dividend Income (financial statements) $ 16,551 $ 15,650 $ 16,157 Tax Equivalent Adjustment 1,182 1,075 1,028 -------- -------- -------- Total Interest Income (on an FTE basis) 17,733 16,725 17,185 Interest Expense (5,659) (5,613) (6,898) -------- -------- -------- Net Interest Income-FTE $ 12,074 $ 11,112 $ 10,287 ======== ======== ========
The Company's 2004 total interest and dividend income on an FTE basis of $17,733,000 was $1,008,000 or 6.03% more than the total interest and dividend on an FTE basis of $16,725,000 in 2003. The increase is primarily attributable to an increase in earning assets as well as an economic environment experiencing an increase in interest rates. A change in the mix of earning assets during 2004 has increased tax exempt securities in the securities portfolio which has resulted in an increase in the tax equivalent adjustment of $1,182,000 in 2004 and $1,075,000 in 2003 when compared to the tax equivalent adjustment of $1,028,000 in 2002. Interest expense on deposits in 2004 decreased $127,000 or 4.43% to $2,739,000 compared to $2,866,000 for the corresponding period in 2003 and $4,039,000 in 2002. Interest expense for Federal Home Loan Bank advances increased $173,000 to $2,920,000 in 2004 compared to $2,747,000 in 2003 and $2,858,000 in 2002. The increase was primarily the result of an increase in advances during the year. Although competition remains aggressive and interest margins continue to be pressured, net interest income on an FTE basis increased $962,000 or 8.66% over 2003 and totaled $12,074,000 at December 31, 2004, compared to total net interest income on an FTE basis of $11,112,000 at December 31, 2003 and $10,287,000 in 2002. Net interest margin is net interest and dividend income expressed as a percentage of average earning assets. It is used to measure the difference between the average rate of interest and dividends earned on assets and the average rate of interest that must be paid to support those assets. To maintain its net interest margin, the Company must manage the relationship between interest earned and paid. The Company's 2004 net interest margin on an FTE basis was 3.63%. This compares to a net interest margin of 3.65% for 2003. The following table reflects average balances, interest earned or paid and rates for the three years ended December 31, 2004, 2003 and 2002. The average loan balances include both non-accrual and restructured loans. Interest earned on loans also includes fees on loans such as late charges that are not deemed to be material. Interest earned on tax exempt securities in the table is presented on a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in performing these calculations. Actual tax exempt income earned in 2004 was $2,294,000 with a yield of 4.68%. Actual tax exempt income in 2003 totaled $2,086,000 with a yield of 4.78% and in 2002 actual tax exempt income was $1,995,000 with a yield of 4.83%. 17 Volume and Rate Variance Analysis of Net Interest Income (Taxable equivalent basis)
(dollars in thousands) 2004 over 2003 2003 over 2002 ---------------------------- ----------------------------- Volume Rate Total Volume Rate Total ---------------------------- ----------------------------- Increase (decrease) in: Interest income on: Loans $ 1,139 $ (773) $ 366 $ 220 $ (671) $ (451) Taxable investment securities 593 143 736 1,025 (1,294) (269) Tax-exempt investment securities 393 (79) 314 165 (27) 138 Other interest income 6 8 14 (51) (33) (84) ------- ------- ------- ------- ------- ------- Total interest income $ 2,131 $ (701) $ 1,430 $ 1,359 $(2,025) $ (666) ------- ------- ------- ------- ------- ------- Interest expense on: NOW/Money Market deposits $ 19 $ 10 $ 29 $ (42) $ (402) $ (444) Savings deposits 84 (7) 77 (164) (129) (293) Time deposits 189 (261) (72) 65 (502) (437) Borrowed funds 407 (234) 173 732 (843) (111) ------- ------- ------- ------- ------- ------- Total interest expense $ 699 $ (492) $ 207 $ 591 $(1,876) $(1,285) ------- ------- ------- ------- ------- ------- Net interest margin $ 1,432 $ (209) $ 1,223 $ 768 $ (149) $ 619 ======= ======= ======= ======= ======= =======
18 YIELD ANALYSIS Average Balances, Interest Earned and Rates Paid
Year Ended December 31 (dollars in thousands) 2004 2003 2002 ---------------------------------------------------------------------------------------------------------- INTEREST INTEREST INTEREST AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE ASSETS Interest Earning Assets: Loans $160,382 $9,592 5.98% $142,752 $9,226 6.46% $139,582 $9,677 6.93% Taxable Securities $117,535 $4,613 3.92% $101,931 $4,299 4.22% $81,715 $4,341 5.31% Tax-Exempt Securities * $49,017 $3,475 7.09% $43,603 $3,161 7.25% $41,347 $3,045 7.36% Federal Funds $3,455 $39 1.13% $3,125 $29 0.93% $7,214 $111 1.54% Other Interest Income $1,809 $14 0.77% $1,359 $10 0.74% $549 $11 2.00% ----------------------- ------------------------ ------------------------- Total Interest Earning $332,198 $17,733 5.34% $292,770 $16,725 5.71% $270,407 $17,185 6.36% ------------ ------------ ------------- Assets Alowance for Loan Losses ($1,952) ($1,468) ($1,403) Cash & due from Banks $7,987 $6,425 $5,923 Premises,Equipment $3,865 $3,000 $2,810 Net unrealized gain/loss on AFS Securities ($412) $2,316 $1,083 Other Assets $12,330 $6,403 $5,263 ----------- ------------ ------------ Total Average Assets $354,016 $309,446 $284,083 =========== ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Now/Money Market Deposits $62,681 $382 0.61% $59,521 $363 0.61% $62,756 $807 1.29% Savings Deposits $54,596 $373 0.68% $45,975 $450 0.98% $37,629 $743 1.97% Time Deposits $75,241 $1,984 2.64% $68,898 $2,054 2.98% $67,157 $2,490 3.71% Borrowed Funds $74,954 $2,920 3.90% $65,282 $2,746 4.21% $51,966 $2,858 5.50% ----------------------- ------------------------ ------------------------- Total Interest Bearing Liabilities $267,472 $5,659 2.12% $239,676 $5,613 2.34% $219,508 $6,898 3.14% ------------ ------------ ------------- Demand Deposits $51,649 $38,998 $37,578 Other Liabilities $2,329 $2,130 $1,660 Shareholders' Equity $32,566 $28,642 $25,337 ----------- ------------ ------------ Total Liabilities and Equity $354,016 $309,446 $284,083 =========== ============ ============ Net Interest Income $12,074 $11,112 $10,287 ============ ============ ============= Net Interest Spread 3.22% 3.37% 3.21% Net Interest Margin 3.63% 3.80% 3.80% * Presented on a fully taxable equivalent ("FTE") basis
19 Noninterest Income - ------------------ Noninterest income increased $771,000 or 19.35% and totaled $4,755,000 for the year ended December 31, 2004 as compared to $3,984,000 for the year ended December 31, 2003. Trust Department income increased $159,000 to $1,411,000 primarily as a result of the efforts of new business development. Service charges on deposit accounts totaled $621,000 for 2004. This is an increase of $61,000 or 10.89% when comparing total service charges of $560,000 in 2003. The increase can be attributed to an increase in deposit account transactions. Gains on sales of available-for-sale securities totaled $1,490,000 in 2004 representing an increase of $432,000 or 40.83% compared to $1,058,000 in 2003. This increase is primarily attributable to movements in the markets which resulted in opportunities for the Company to enhance the return from the securities portfolio and at the same time realize gains on sales of available-for-sale securities. Mortgage refinancing remained very active during 2004 as rates remained attractive to consumers. Competition in the secondary mortgage market continues to be very aggressive. Gains on sale of loans held-for-sale increased $43,000 or 16.48% to $304,000 in 2004 compared to $261,000 in 2003. Other income increased 16.13% to $929,000 in 2004 compared to other income of $800,000 in 2003. This increase is primarily attributable to the increase in fees earned from activity in the secondary mortgage market due to the change of investors. Historically the Company has had few instances in which it foreclosed on properties and therefore has a low volume of OREO properties. The Company sold one OREO property during 2003. There were no OREO property sales in 2004. Noninterest Expense - ------------------- Noninterest expense increased 23.29% for the year ended December 31, 2004 as compared to the corresponding period in 2003. The components of noninterest expense and the changes in the period were as follows (amounts in thousands): 2004 2003 Change %Change -------------------------------------- Salaries and employee benefits $ 5,971 $ 4,834 $ 1,137 23.52 Occupancy expense 436 359 77 21.45 Trust department expense 339 409 (70) (17.11) Equipment expense 600 579 21 3.63 Data processing 711 576 135 23.44 Conversion expense 464 1 463 463.00 Insurance 122 115 7 6.09 Printing and stationery 254 184 70 38.04 Professional fees 272 300 (28) (9.33) Legal expense 106 128 (22) (17.19) Amortization of core deposit intangible 101 68 33 48.53 Other expense 1,227 1,047 180 17.19 ------- ------- ------- Total other expense $10,603 $ 8,600 $ 2,003 23.29 ======= ======= ======= The increase in salary and employee benefits is primarily due to an increase in staff attributable to the merger with Canaan National Bancorp, Inc. and the required employee time needed to make the system changes relating to the conversion of the core processing system, along with salary increases and the increase in the cost of employee benefits. The increase in occupancy expense is also directly related to the merger. The decrease in Trust department expenses is the result of management's efforts to control operating expenses. The increase in data processing costs are attributable to the changes made in the core processing system during the third quarter coupled with additional costs related to the merger. Conversion expenses are various nonrecurring expenses related to the conversion and the enhancement of the core account processing system. The increase in the core deposit intangible amortization is primarily the result of the fair market adjustment of the assets and liabilities acquired from Canaan National Bancorp, Inc. at merger. Other expense increases are primarily attributable to costs associated with the merger as previously mentioned. Income Taxes - ------------ In 2004, the Company's income tax provision totaled $775,000 which reflects an effective tax rate of 16.16%. This compares to an income tax provision of $1,268,000 and an effective tax rate of 24.82% for the same period in 2003. This decrease is primarily attributable to a decrease in taxable income. In addition, the Company formed a passive investment 20 company to operate a significant component of the Bank's residential mortgage lending activity. A passive investment company's structure is such that income earned results in a reduction of tax liability for the Company. Net Income - ---------- Overall, net income totaled $4,019,000 for the year ended December 31, 2004. This compares to net income of $3,840,000 for the year ended December 31, 2003. This is an increase of $179,000 or 4.66% and represents earnings per average share outstanding of $2.67. Earnings per average share outstanding for the year ended December 31, 2003 was $2.70. The decrease in the earnings per average share outstanding is primarily the result of issuing an additional 257,483 shares in connection with the acquisition of Canaan National Bancorp, Inc. RESULTS OF OPERATIONS - --------------------- Comparison of the Years Ended December 31, 2003 and 2002 - -------------------------------------------------------- Overview - -------- The earnings for the Company was $3,840,000 in 2003, an increase of $641,000 or 20.04% over year 2002 earnings of $3,199,000. As a result, earnings per average share outstanding increased $.45 or 20.00% to $2.70 in 2003. This compares to earnings per average share outstanding of $2.25 in 2002 and $2.03 in 2001. The improvement in net income was primarily the result of growth in earning assets that produced an increase in total net interest income, a reduction in interest expense and an increase in other noninterest income. The Company was "well capitalized". The Company's risk-based capital ratios at December 31, 2003, which includes the risk-weighted assets and capital of the Salisbury Bank and Trust Company, were 15.35% for Tier 1 capital and 16.44% for total capital. The Company's leverage ratio was 8.05% at December 31, 2003. This compared to a Tier 1 capital ratio at December 31, 2002 of 16.05%, a total capital ratio of 17.21%, and a Company leverage ratio of 7.80%. The Board of Directors increased total dividends declared on the Company's common stock to $.92 per share in 2003. This compared to an $.88 per share dividend paid in 2002 and an $.84 per share dividend that was paid in 2001. Net Interest and Dividend Income - -------------------------------- For this discussion, net interest income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest income restates reported interest income on tax exempt loans and securities as if such interest were taxed at the applicable State and Federal income tax rates for all periods presented. (dollars in thousands) December 31, 2003 2002 2001 ------------------------------ Interest and Dividend Income (financial statements) $ 15,650 $ 16,157 $ 17,089 Tax Equivalent Adjustment 1,075 1,028 504 -------- -------- -------- Total Interest Income (on an FTE basis) 16,725 17,185 17,593 Interest Expense (5,613) (6,898) (8,301) -------- -------- -------- Net Interest Income-FTE $ 11,112 $ 10,287 $ 9,292 ======== ======== ======== The Company's 2003 total interest and dividend income on an FTE basis of $16,725,000 was $460,000 or 2.68% less than the total interest and dividend on an FTE basis of $17,185,000 in 2002. Although there was an increase in earning assets, this decrease in interest and dividend income was primarily the result of an economic environment with lower interest rates. A change in the mix of earning assets during 2002 and continuing into 2003 created an increase in tax exempt securities in the securities portfolio which resulted in an increase in the tax equivalent adjustment of $1,075,000 in 2003 and $1,028,000 in 2002, when compared to the tax equivalent adjustment of $504,000 in 2001. 21 Interest expense on deposits in 2003 decreased $1,173,000 or 29.05% to $2,866,000 compared to $4,039,000 for the corresponding period in 2002 and $5,302,000 in 2001. Although deposits increased, generally lower interest rates resulted in the decrease. Interest expense for Federal Home Loan Bank advances decreased $111,000 to $2,747,000 in 2003 compared to $2,858,000 in 2002 and $2,999,000 in 2001. Lower interest rates resulted in the decrease in interest expense. Although interest margins continue to be pressured by generally lower interest rates and by aggressive competition, net interest income on an FTE basis increased $825,000 or 8.02% over 2002 and totaled $11,112,000 at December 31, 2003 compared to total net interest income on an FTE basis of $10,287,000 at December 31, 2002 and $9,292,000 in 2001. The Company's 2003 net interest margin on an FTE basis was 3.80%. This compares to a net interest margin of 3.80% for 2002. The following table reflects average balances, interest earned or paid and rates for the three years ended December 31, 2003, 2002 and 2001. The average loan balances include both non-accrual and restructured loans. Interest earned on loans also includes fees on loans such as late charges that are not deemed to be material. Interest earned on tax exempt securities in the table is presented on a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in performing these calculations. Actual tax exempt income earned in 2003 was $2,086,000 with a yield of 4.83%. Actual tax exempt income in 2002 totaled $1,995,000 with a yield of 4.88% and in 2001 actual tax exempt income was $977,000 with a yield of 4.95%. Volume and Rate Variance Analysis of Net Interest Income (Taxable equivalent basis)
(dollars in thousands) 2003 over 2002 2002 over 2001 ----------------------------- ------------------------------ Volume Rate Total Volume Rate Total ----------------------------- ------------------------------ Increase (decrease) in: Interest income on: Loans $ 220 $ (671) $ (451) $ (462) $(1,205) $(1,667) Taxable investment securities 1,025 (1,294) (269) 780 (840) (60) Tax-exempt investment securities 165 (27) 138 1,575 (33) 1,542 Other interest income (51) (33) (84) (100) (138) (238) ------- ------- ------- ------- ------- ------- Total interest income $ 1,359 $(2,025) $ (666) $ 1,793 $(2,216) $ (423) ------- ------- ------- ------- ------- ------- Interest expense on: NOW/Money Market deposits $ (42) $ (402) $ (444) $ (134) $ (961) $(1,095) Savings deposits (164) (129) (293) 496 (149) 347 Time deposits 65 (502) (437) 311 (825) (514) Borrowed funds 732 (843) (111) (81) (60) (141) ------- ------- ------- ------- ------- ------- Total interest expense $ 591 $(1,876) $(1,285) $ 592 $(1,995) $(1,403) ------- ------- ------- ------- ------- ------- Net interest margin $ 768 $ (149) $ 619 $ 1,201 $ (221) $ 980 ======= ======= ======= ======= ======= =======
Noninterest Income - ------------------ Noninterest income increased $862,000 or 27.61% and totaled $3,984,000 for the year ended December 31, 2003 as compared to $3,122,000 for the year ended December 31, 2002. Trust Department income increased $152,000 to $1,252,000 primarily as a result of the efforts of new business development. Service charges on deposit accounts totaled $560,000 for 2003. This is an increase of $88,000 or 18.64% when comparing total service charges of $472,000 in 2002. The increase can be attributed to an increase in deposit account transactions. Gains on sales of available-for-sale securities totaled $1,058,000 in 2003 representing an increase of $424,000 or 66.88% compared to $634,000 in 2002. This increase is primarily attributable to movements in the markets which resulted in opportunities for the Company to enhance the return from the securities portfolio and at the same time realize gains on sales of available-for-sale securities. Mortgage refinancing remained very active during 2003 as rates remained at all time lows. Competition in the secondary mortgage market continues to be very aggressive. Gains on sale of loans held-for-sale increased $34,000 or 14.98% to $261,000 in 2003 compared to $227,000 in 2002. Other income increased 16.28% to $800,000 in 2003 compared to other income of $688,000 in 2002. This increase is primarily attributable to the increase in fees earned from activity in the secondary mortgage market due to the change of investors. Historically the Company has had few instances in which it foreclosed on properties and therefore has a low volume of OREO properties. The Company acquired one OREO property during 2002, sold it in 2003 and realized a gain on the sale of $52,000. Noninterest Expense - ------------------- Noninterest expense increased 10.61% to $8,600,000 for the year ended December 31, 2003 as compared to $7,775,000 for 22 the corresponding period in 2002. Salaries and employee benefits totaled $4,834,000 for the twelve months ended December 31, 2003 compared to $4,235,000 for the same period in 2002. This is an increase of $599,000 or 14.14% over 2002 and is primarily the result of an increase in staff along with salary increases and the increase in the costs of employee benefits. Occupancy and equipment expenses increased $64,000 or 7.31% to $939,000 compared to $875,000 for 2002. The increase is primarily the result of expenses associated with routine maintenance and repairs of the Company's facilities and equipment. Data processing expenses increased $42,000 or 7.88% for the year ended December 31, 2003 over 2002 and totaled $575,000. This increase is attributable to normal increasing costs related to enhancing the delivery channels of products to our customers. Legal expenses totaled $128,000 for 2003. This is an increase of $67,000 or 110% when comparing total legal expense in 2002 of $61,000. The increase is primarily the result of additional services required due to compliance requirements of the Sarbanes-Oxley Act. Amortization expense of the "Core Deposit Intangible" assets associated with the 2001 People's Branch acquisition totaled $68,000 and did not change from 2002. Income Taxes - ------------ In 2003, the Company's income tax provision totaled $1,268,000, which reflected an effective tax rate of 24.82% compared to an income tax provision of $1,108,000 and an effective tax rate of 25.72% in 2002. Although there was a decrease in the effective tax rate, the provision increased $160,000, the result of an increase in taxable income. Net Income - ---------- Overall, net income totaled $3,840,000 for the year ended December 31, 2003 compared to net income of $3,199,000 for the year 2002 representing an increase of $641,000 or 20.04%. On an average per share outstanding basis, net income amounted to $2.70 per share for 2003 as compared to $2.25 for 2002. FINANCIAL CONDITION - ------------------- Comparison of the Years Ended December 31, 2004 and 2003 - -------------------------------------------------------- Total assets at December 31, 2004 were $423,101,000 compared to $311,100,000 at December 31, 2003. This is an increase of $112,001,000 or 36.00%. The increase primarily reflects the assets acquired from the merger with Canaan National Bancorp, Inc. Securities Portfolio - -------------------- The Company manages the securities portfolio in accordance with the investment policy adopted by the Board of Directors. The primary objectives are to earn interest and dividend income, provide liquidity to meet cash flow needs and to manage interest rate risk and asset-quality diversifications to the Company's assets. The securities portfolio also acts as collateral for deposits of public agencies. As of December 31, 2004, the securities portfolio, including Federal Home Loan Bank of Boston stock, totaled $184,286,000. This represents an increase of $37,265,000 or 25.35% over year-end 2003. The increase is attributable to the assets acquired as part of the merger previously mentioned. The make up of the securities portfolio is diversified among U.S. Government sponsored agencies, mortgage backed securities and securities issued by states of the United States and political subdivisions of the states. Securities are classified in the portfolio as either Securities-Available-for-Sale or Securities-Held-to-Maturity. The securities reported as available-for-sale are stated at fair value in the financial statements of the Company. Unrealized holding gains and losses (accumulated other comprehensive income/loss) are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital until realized. At December 31, 2004, the unrealized loss net of tax was $723,000. This compares to an unrealized gain net of tax of $686,000 at December 31, 2003. The securities reported as securities-held-to-maturity are stated at amortized cost. Federal Funds Sold - ------------------ The balance of federal funds sold totaled $2,271,000 at December 31, 2004. This compares to $2,272,000 at December 31, 2003. This represents a normal operating range of funds for daily cash needs and is considered to be adequate by Management. 23 Lending - ------- New business development during the year coupled with the loans acquired as part of the previously described merger resulted in an increase in total loans outstanding to $201,979,000 at December 31, 2004, as compared to $139,563,000 at December 31, 2003. This is an increase of $62,416,000 or 44.72%. Although the largest dollar volumes of loan activity continues to be in the residential mortgage area, the Company offers a wide variety of loan types and terms along with competitive pricing to customers. The Company's credit function is designed to ensure adherence to prudent credit standards despite competition for loans in the Company's market area. The following table represents the composition of the loan portfolio comparing December 31, 2004 to December 31, 2003:
December 31, 2004 December 31, 2003 ----------------- ----------------- (amounts in thousands) Commercial, financial and agricultural $ 15,127 $ 9,149 Real Estate-construction and land development 14,290 15,307 Real Estate-residential 130,414 90,807 Real Estate-commercial 35,487 19,199 Consumer 9,122 6,692 Other 69 73 --------- --------- $ 204,509 $ 141,227 Unearned Income (19) Allowance for loan losses (2,512) (1,664) --------- --------- Loans, net $ 201,978 $ 139,563 ========= =========
Provisions and Allowance for Loan Losses - ---------------------------------------- Total gross loans at December 31, 2004 were $204,509,000, when compared to total gross loans of $141,228,000 at December 31, 2003. This is an increase of $63,281,000 or 44.81% and reflects the merger with Canaan National Bancorp, Inc. as well as growth within the loan portfolio resulting from new business development. At December 31, 2004 approximately 88% of the Bank's loan portfolio was related to real estate products and although the portfolio increased during the year 2004, the concentration remained consistent as approximately 89% of the portfolio was related to real estate at December 31, 2003. The increase in total gross loans was primarily the result of an increase in construction mortgages. Otherwise there were no material changes in the composition of the loan portfolio during this period. Credit risk is inherent in the business of extending loans. The Bank monitors the quality of the portfolio to ensure that loan quality will not be sacrificed for growth or otherwise compromise the Company's objectives. Because of the risk associated with extending loans the Company maintains an allowance or reserve for credit losses through charges to earnings. The loan loss provision for the year 2004 was $250,000 as compared to $312,500 for the year ended December 31, 2003. The level of nonperfoming loans remains low as a percentage of total loans. Nonperforming loans totaled $2,267,000 or 1.11 % of total loans at December 31, 2004 as compared to $610,000 or .43% of total loans at December 31, 2003. Nonperforming loans are closely monitored by management. The Bank evaluates the adequacy of the allowance on a monthly basis. No material changes have been made in the estimation methods or assumptions that the Bank used in making this determination during the year ended December 31, 2004. Such evaluations are based on assessments of credit quality and "risk rating" of loans by senior management, which is submitted to the Board of Directors for approval. Loans are initially risk rated when originated. If there is deterioration in the credit, the risk rating is adjusted accordingly. The allowance also includes a component resulting from the application of the measurement criteria of Statements of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans receive individual evaluation of the allowance necessary on a monthly basis. Loans to be considered for impairment are defined in the Bank's Loan Policy as residential real estate mortgages with balances of $300,000 or more and commercial loans of $100,000 or more. Such loans are considered impaired when it is probable that the Bank will not be able to collect all principal and interest due according to the terms of the note. 24 Any such commercial loans and residential mortgages will be considered impaired under any of the following circumstances: 1. Non-accrual status; 2. Loans over 90 days delinquent; 3. Troubled debt restructures consummated after December 31, 1994; or 4. Loans classified as "doubtful", meaning that they have weaknesses, which make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The individual allowance for any impaired loan is based upon the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. Specifically identifiable and quantifiable losses are immediately charged off against the allowance. In addition, a risk of loss factor is applied in evaluating categories of loans generally as part of the periodic analysis of the Allowance for Loan Losses. This analysis reviews the allocations of the different categories of loans within the portfolio and considers historical loan losses and delinquency figures as well as any recent delinquency trends. The credit card delinquency and loss history is separately evaluated and given a special loan loss factor because management recognizes the higher risk involved in such loans. Concentrations of credit and local economic factors are also evaluated on a periodic basis. Historical average net losses by loan type are examined as well as trends by type. The Bank's loan mix over the same period of time is also analyzed. A loan loss allocation is made for each type of loan multiplied by the loan mix percentage for each loan type to produce a weighted average factor. There have been no reallocations within the allowance during the years ended December 31, 2004 and 2003. At December 31, 2004 the allowance for loan losses totaled $2,512,000, representing 110.81% of nonperforming loans, which totaled $2,267,000, and 1.11% of total loans of $204,509,000. This compares to $1,664,000, representing 272.79% of nonperforming loans, which totaled $610,000 and 1.18% of total loans of $141,228,000 at December 31, 2003. A total of $70,000 in loans was charged off during the year 2004, as compared to $155,000 during 2003. A total of $28,000 of previously charged off loans was recovered during the year ended December 31, 2004. Recoveries for the year 2003 totaled $49,000. When comparing the two years, net charge-offs were $42,000 for the year 2004 and during the year 2003 net charge-offs totaled $106,000. Management believes that the allowance for loan losses is adequate. While management estimates loan losses using the best available information, no assurances can be given that future additions to the allowance will not be necessary based on changes in economic and real estate market conditions, further information obtained regarding problem loans, identification of additional problem loans or other factors. Additionally, despite the overall good quality of the loan portfolio generally, with expectations of the Company to continue to grow its existing portfolio, future additions to the allowance may be necessary to maintain adequate reserve coverage. Deposits - -------- The Company offers a variety of deposit accounts with a range of interest rates and terms. Deposits at year-end 2004 totaled $298,842,000 compared to $218,457,000 at year-end 2003. This increase of $80,384,000 or 36.80% can be primarily attributed to the deposits acquired with the merger of the Canaan National Bancorp, Inc. merger. The Company continues its efforts to competitively price products and develop and maintain relationship banking with its customers. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and the aggressive competition from nonbanking entities. During the year, there was an increase in demand, NOW and savings accounts which are lower cost core deposits. The average daily amount of deposits by category and the average rates paid on such deposits are summarized in the following table: (dollars in thousands) Year ended December 31 2004 2003 2002 ---------------------------------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate ---------------------------------------------------------------- Demand $ 51,649 $ 38,998 $ 37,578 NOW 23,797 .01% 20,030 .31% 19,833 .82% Money Market 38,884 .83% 39,491 .76% 42,923 1.50% Savings 54,596 .68% 45,975 .98% 37,629 1.98% Time 75,241 1.65% 68,898 2.98% 67,157 3.71% ---------- ---------- ---------- $ 244,167 1.12% $ 213,392 1.34% $ 205,120 1.97% ========== ========== ========== 25 Maturities of time certificates of deposits of $100,000 or more outstanding for the years ended December 31 is summarized as follows: (dollars in thousands) Year Ended December 31 2004 2003 2002 --------------------------- Three months or less $ 9,540 $ 5,575 $ 3,454 Over three months through six months 1,011 1,343 3,630 Over six months through one year 7,517 5,591 7,913 Over one year 14,887 11,080 8,050 ------- ------- ------- Total $32,955 $23,589 $23,047 ======= ======= ======= Borrowings - ---------- As part of its operating strategy, the Company utilizes advances from the Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a strategy that is designed to increase interest income. These advances are made pursuant to various credit programs, each of which has its own interest rate and range of maturities. At December 31, 2004, the Company had $79,213,000 in outstanding advances from the Federal Home Loan Bank compared to $60,897,000 at December 31, 2003. Management expects that it will continue this strategy of supplementing deposit growth with advances from Federal Home Loan Bank of Boston. Interest Rate Risk - ------------------ Interest rate risk is the most significant market risk affecting the Company. Interest rate risk is defined as an exposure to a movement in interest rates that could have an adverse effect on net interest income. Net interest income is sensitive to interest rate risk to the degree that interest bearing liabilities mature or reprice on a different basis than earning assets. The Bank's assets and liabilities are managed in accordance with policies established and reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management Committee monitors asset and deposit levels, developments and trends in interest rates, liquidity and capital. One of the primary financial objectives is to manage interest rate risk and control the sensitivity of earnings to changes in interest rates in order to prudently improve net interest income and manage the maturities and interest rate sensitivities of assets and liabilities. To quantify the extent of these risks both in its current position and in actions it might take in the future, interest rate risk is monitored using gap analysis which identifies the differences between assets and liabilities which mature or reprice during specific time frames and model simulation which is used to "rate shock" the Company's asset and liability balances to measure how much of the Company's net interest income is "at risk" from sudden rate changes. An interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. At December 31, 2004, the Company was slightly asset sensitive (positive gap). This would suggest that the during a period of rising interest rates the Company would be in a better position to invest in higher yielding 26 assets resulting in growth in interest income. To the contrary, during a period of falling interest rates, a positive gap would result in a decrease in interest income. The level of interest rate risk at December 31, 2004 is within the limits approved by the Board of Directors. Liquidity - --------- Liquidity is the ability to raise funds on a timely basis at an acceptable cost in order to meet cash needs. Adequate liquidity is necessary to handle fluctuation in deposit levels, to provide for customers' credit needs, and to take advantage of investment opportunities as they are presented. The Company manages liquidity primarily with readily marketable investment securities, deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust Company is a member of the Federal Home Loan Bank of Boston which provides a source of available borrowings for liquidity. At December 31, 2004, the Company had approximately $48,157,000 in loan commitments outstanding. Management believes that the current level of liquidity is ample to meet the Company's needs for both the present and foreseeable future. Capital - ------- At December 31, 2004, the Company had $40,700,000 in shareholder equity compared to $28,850,000 at December 31, 2003. This represents an increase of $11,850,000 or 41.08%. Several components contributed to the change since December 2003. Earnings for the year totaled $4,019,000. Market conditions have reduced unrealized securities gains and resulted in a negative adjustment to comprehensive income of $723,000. The Company declared dividends in 2004 resulting in a decrease in capital of $1,491,000. The Company issued 840 new shares of common stock under the terms of the Director Stock Retainer Plan during the second quarter of 2004 which resulted in an increase in capital of $32,000. Under current regulatory definitions, the Company and the Bank are considered to be "well capitalized" for capital adequacy purposes. As a result, the Bank pays the lowest federal deposit insurance deposit premiums possible. One primary measure of capital adequacy for regulatory purposes is based on the ratio of risk-based capital to risk weighted assets. This method of measuring capital adequacy helps to establish capital requirements that are sensitive to the differences in risk associated with various assets. It takes in account off-balance sheet exposure in assessing capital adequacy and it minimizes disincentives to holding liquid, low risk assets. At year-end 2004, the Company had a risk-based capital ratio of 12.13% compared to 16.44% at December 31, 2003. The primary difference results from the negative effect of market movements on unrealized gains and therefore a decrease in comprehensive income. Maintaining strong capital is essential to bank safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices. Management believes that the capital ratios of the Company and Bank are adequate to continue to meet the foreseeable capital needs of the institution. As a result of the merger, each shareholder of Canaan National Bancorp, Inc. received 1.3371 shares of the Company, in addition to $31.20 in cash for each share of Canaan National Bancorp Inc. stock. As of September 10, 2004, a total of 257,483 shares of the Company were issued to shareholders of Canaan National Bancorp, Inc. This resulted in an increase in capital of $10,698,000. The value of these additional shares was determined based on the September 10, 2004 closing market price of $41.55 of Salisbury Bancorp Inc.'s common stock. Fractional shares of the Company were not issued as a result of the merger, but were paid at a price of $41.06 per share. At December 31, 2004, a total of 1,682,401 shares of the Company common stock were issued and outstanding. Impact of Inflation and Changing Prices - --------------------------------------- The Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Company are monetary and as a result, interest rates tend to have a greater impact on the Company's performance than do the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services, inflation could impact earnings in future periods. Recent Accounting Pronouncements - -------------------------------- In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement No. 133 27 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company's consolidated financial statements on adoption of this Statement. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any impact on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this interpretation did not have an impact on the Company's consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company's consolidated financial statements. In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor "carried over" in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment of a Loan." This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company's financial position or results of operations. 28 In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payments" ("SFAS 123R"). This Statement revises FASB Statement No. 123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective for the Company as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company does not believe the adoption of this Statement will have a material impact on the Company's financial position or results of operations. Recent Developments - ------------------- On November 18, 2003, the Company announced the execution of a definitive agreement (the "Agreement") to acquire Canaan National Bancorp, Inc. ("Canaan"), parent of The Canaan National Bank. Canaan is headquartered in Canaan, Connecticut and has a branch in Berkshire County, Massachusetts. On that date, it had assets of approximately $107 million. Under the terms of the Agreement, the shareholders of Canaan received merger considerations consisting of $31.20 in cash and 1.3371 shares of Salisbury common stock for every share of Canaan Stock. The purchase price represented 174.5% of Canaan's fully diluted tangible book value and 21.4 times Canaan's last twelve months earnings. The transaction was consummated on September 10, 2004. On March 14, 2005, the Company opened a new full-service branch office in Sheffield, Massachusetts. The branch is the Bank's second branch office in Berkshire County, Massachusetts along with the four branches in Northwestern Connecticut. Off-Balance Sheet Arrangements - ------------------------------ The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. In the opinion of management, these off-balance sheet arrangements are not likely to have a material effect on the Company's financial condition, results of operations, or liquidity. (See Note 11 to the Financial Statements). Forward Looking Statements - -------------------------- This Annual Report and future filings made by the Company with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by the Company and the Bank, and oral statements made by executive officers of the Company and the Bank, may include forward-looking statements relating to such matters as: (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Company and the Bank do business, and (b) expectations for increased revenues and earnings for the Company and Bank through growth resulting from acquisitions, attraction of new deposit and loan customers and the introduction of new products and services. Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. The Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of the Company's and Bank's business include the following: (a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates; (b) changes in the legislative and regulatory environment that negatively impact the Company and Bank through 29 increased operating expenses; (c) increased competition from other financial and non-financial institutions; (d) the impact of technological advances; and (e) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. Such developments could have an adverse impact on the Company's and the Bank's financial position and results of operations. STATEMENT OF MANAGEMENT'S RESPONSIBILITY - ---------------------------------------- Management is responsible for the integrity and objectivity of the consolidated financial statements and other information appearing in this Form 10-K. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America applying estimates and management's best judgment as required. To fulfill their responsibilities, management establishes and maintains accounting systems and practices adequately supported by internal accounting controls. These controls include the selection and training of management and supervisory personnel; an organization structure providing for delegation of authority and establishment of responsibilities; communication of requirements for compliance with approved accounting, control and business practices throughout the organization; business planning and review; and a program of internal audit. Management believes the internal accounting controls in use provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and that financial records are reliable for the purpose of preparing financial statements. Shatswell, MacLeod & Company, P.C. has been engaged to provide an independent opinion on the fairness of the consolidated financial statements. Their report appears in this Form 10-K. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------- The main components of market risk for the Company are equity price risk, credit risk, interest rate risk and liquidity risk. The Company's stock is traded on the American Stock Exchange under the symbol "SAL". As a result, the value of its common stock may fluctuate or respond to price movements relating to the banking industry or other indicia of investment. The Company manages interest rate risk and liquidity risk through an ALCO Committee comprised of outside Directors and senior management. The committee monitors compliance with the Bank's Asset/Liability Policy which establishes guidelines to meet various applicable regulatory rules and statutes, measures the various risks facing the bank on a consistent basis and coordinates the management of the bank's financial position. Model simulation is used to measure earnings volatility under both rising and falling interest rate scenarios. The Company's interest rate risk and liquidity position has not significantly changed from year end 2004. 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements - ------------------------------------------ Report of Independent Auditors' January 27, 2005 ............. F-1 Consolidated Balance Sheets at December 31, 2004 and 2003 .... F-2 Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002 ........................... F-3 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2004, 2003 and 2002 ....... F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 ........................... F-5 Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2003 and 2002 ............... F-7 Salisbury Bancorp, Inc. (parent company only) Balance Sheet for the Years Ended December 31, 2004 and 2003 F-28 Statement of Income for the Years Ended December 31, 2004, 2003 and 2002 ........................... F-29 Statement of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 ........................... F-30 Quarterly Results of Operations (unaudited) .................. F-31 31 [LETTERHEAD SHATSWELL, MacLEOD & COMPANY, P.C.] To the Board of Directors Salisbury Bancorp, Inc. Lakeville, Connecticut REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ------------------------------------------------------- We have audited the accompanying consolidated balance sheets of Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2004 and 2003 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. /s/ SHATSWELL, MacLEOD & COMPANY, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 27, 2005 F-1 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- December 31, 2004 and 2003 --------------------------
ASSETS 2004 2003 - ------ ------------- ------------ Cash and due from banks $ 7,283,667 $ 7,687,979 Interest bearing demand deposits with other banks 1,180,937 1,668,310 Money market mutual funds 941,890 500,512 Federal funds sold 2,271,000 2,272,000 ------------- ------------ Cash and cash equivalents 11,677,494 12,128,801 Investments in available-for-sale securities (at fair value) 178,654,748 143,020,363 Investments in held-to-maturity securities (fair values of $219,623 as of December 31, 2004 and $234,394 as of December 31, 2003) 218,374 229,425 Federal Home Loan Bank stock, at cost 5,413,200 3,771,000 Loans held-for-sale 375,000 275,000 Loans, less allowance for loan losses of $2,511,546 and $1,664,274 as of December 31, 2004 and 2003, respectively 201,978,499 139,563,318 Investment in real estate 75,000 75,000 Premises and equipment 5,933,978 2,892,162 Goodwill 9,509,305 2,357,884 Core deposit intangible 1,822,131 731,961 Accrued interest receivable 2,256,499 1,875,948 Cash surrender value of life insurance policies 3,293,548 3,153,941 Other assets 1,893,029 1,025,466 ------------- ------------ Total assets $ 423,100,805 $311,100,269 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 65,017,207 $ 43,631,778 Interest-bearing 233,824,639 174,825,672 ------------- ------------ Total deposits 298,841,846 218,457,450 Federal Home Loan Bank advances 79,213,283 60,897,311 Due to broker 1,083,331 Other liabilities 3,262,745 2,895,296 ------------- ------------ Total liabilities 382,401,205 282,250,057 ------------- ------------ Stockholders' equity: Common stock, par value $.10 per share; authorized 3,000,000 shares; issued and outstanding, 1,682,401 shares in 2004 and 1,424,078 shares in 2003 168,240 142,408 Paid-in capital 13,031,573 2,327,151 Retained earnings 28,222,466 25,694,836 Accumulated other comprehensive (loss) income (722,679) 685,817 ------------- ------------ Total stockholders' equity 40,699,600 28,850,212 ------------- ------------ Total liabilities and stockholders' equity $ 423,100,805 $311,100,269 ============= ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Years Ended December 31, 2004, 2003 and 2002 --------------------------------------------
2004 2003 2002 ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $ 9,592,478 $ 9,226,484 $ 9,677,332 Interest on debt securities: Taxable 4,499,725 4,186,368 4,143,851 Tax-exempt 2,293,706 2,086,134 1,995,114 Dividends on equity securities 112,008 112,340 219,245 Other interest 53,101 38,496 121,891 ----------- ----------- ----------- Total interest and dividend income 16,551,018 15,649,822 16,157,433 ----------- ----------- ----------- Interest expense: Interest on deposits 2,738,680 2,866,495 4,039,427 Interest on Federal Home Loan Bank advances 2,920,316 2,746,975 2,858,310 ----------- ----------- ----------- Total interest expense 5,658,996 5,613,470 6,897,737 ----------- ----------- ----------- Net interest and dividend income 10,892,022 10,036,352 9,259,696 Provision for loan losses 250,000 312,500 300,000 ----------- ----------- ----------- Net interest and dividend income after provision for loan losses 10,642,022 9,723,852 8,959,696 ----------- ----------- ----------- Noninterest income: Trust department income 1,410,814 1,252,000 1,100,160 Service charges on deposit accounts 620,771 560,291 472,201 Gain on sales of available-for-sale securities, net 1,489,905 1,058,140 634,080 Gain on sales of loans held-for-sale 304,354 261,418 227,244 Gain on sales of other real estate owned 52,151 Other income 929,337 800,099 688,128 ----------- ----------- ----------- Total noninterest income 4,755,181 3,984,099 3,121,813 ----------- ----------- ----------- Noninterest expense: Salaries and employee benefits 5,970,639 4,833,913 4,235,122 Occupancy expense 435,983 359,458 306,486 Equipment expense 600,127 579,395 568,422 Trust department expense 339,069 408,433 463,537 Data processing 710,950 575,441 533,405 Conversion expense 464,484 1,139 93,250 Insurance 121,959 114,806 114,184 Printing and stationery 253,725 183,970 187,021 Professional fees 272,426 300,209 224,564 Legal expense 106,134 127,772 60,561 Amortization of core deposit intangible 101,109 68,355 68,354 Other expense 1,226,708 1,047,008 920,038 ----------- ----------- ----------- Total noninterest expense 10,603,313 8,599,899 7,774,944 ----------- ----------- ----------- Income before income taxes 4,793,890 5,108,052 4,306,565 Income taxes 774,948 1,267,950 1,107,770 ----------- ----------- ----------- Net income $ 4,018,942 $ 3,840,102 $ 3,198,795 =========== =========== =========== Earnings per common share $ 2.67 $ 2.70 $ 2.25 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-3 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended December 31, 2004, 2003 and 2002 --------------------------------------------
Number Accumulated of Other Shares Common Paid-in Retained Comprehensive Issued Stock Capital Earnings (Loss) Income Total --------- --------- ------------ ------------ -------------- ------------ Balance, December 31, 2001 1,422,358 $ 142,236 $ 2,281,415 $ 21,218,155 $ (278,660) $ 23,363,146 Comprehensive income: Net income 3,198,795 Net change in unrealized holding loss on available-for-sale securities, net of tax effect 2,013,042 Comprehensive income 5,211,837 Issuance of 880 shares for Directors' fees 880 88 22,132 22,220 Dividends declared ($.88 per share) (1,252,257) (1,252,257) --------- --------- ------------ ------------ -------------- ------------ Balance, December 31, 2002 1,423,238 142,324 2,303,547 23,164,693 1,734,382 27,344,946 Comprehensive income: Net income 3,840,102 Net change in unrealized holding gain on available-for-sale securities, net of tax effect (1,048,565) Comprehensive income 2,791,537 Issuance of 840 shares for Directors' fees 840 84 23,604 23,688 Dividends declared ($.92 per share) (1,309,959) (1,309,959) --------- --------- ------------ ------------ -------------- ------------ Balance, December 31, 2003 1,424,078 142,408 2,327,151 25,694,836 685,817 28,850,212 Comprehensive income: Net income 4,018,942 Net change in unrealized holding gain on available-for-sale securities, net of tax effect (1,408,496) Comprehensive income 2,610,446 Shares issued for merger 257,483 25,748 10,672,670 10,698,418 Issuance of 840 shares for Directors' fees 840 84 31,752 31,836 Dividends declared ($.96 per share) (1,491,312) (1,491,312) --------- --------- ------------ ------------ -------------- ------------ Balance, December 31, 2004 1,682,401 $ 168,240 $ 13,031,573 $ 28,222,466 $ (722,679) $ 40,699,600 ========= ========= ============ ============ ============== ============
Reclassification disclosure for the years ended December 31:
2004 2003 2002 ----------- ----------- ----------- Net unrealized (losses) gains on available-for-sale securities $(1,106,610) $ (370,016) $ 3,931,446 Reclassification adjustment for net realized gains in net income (1,489,905) (1,058,140) (634,080) ----------- ----------- ----------- Other comprehensive (loss) income before income tax effect (2,596,515) (1,428,156) 3,297,366 Income tax benefit (expense) 1,011,343 556,267 (1,284,324) ----------- ----------- ----------- (1,585,172) (871,889) 2,013,042 ----------- ----------- ----------- Minimum pension liability adjustment 289,396 (289,396) Income tax (expense) benefit (112,720) 112,720 ----------- ----------- ----------- 176,676 (176,676) ----------- ----------- ----------- Other comprehensive (loss) income, net of tax $(1,408,496) $(1,048,565) $ 2,013,042 =========== =========== ===========
Accumulated other comprehensive (loss) income consists of the following as of December 31:
2004 2003 2002 ----------- ----------- ----------- Net unrealized holding (losses) gains on available-for-sale securities, net of taxes $ (722,679) $ 862,493 $ 1,734,382 Minimum pension liability adjustment, net of taxes (176,676) ----------- ----------- ----------- Accumulated other comprehensive (loss) income $ (722,679) $ 685,817 $ 1,734,382 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 2004, 2003 and 2002 --------------------------------------------
2004 2003 2002 ------------- ------------ ------------- Cash flows from operating activities: Net income $ 4,018,942 $ 3,840,102 $ 3,198,795 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of securities, net 289,214 395,030 454,034 Gain on sales of available-for-sale securities, net (1,489,905) (1,058,140) (634,080) Gain on sales of other real estate owned (52,151) Provision for loan losses 250,000 312,500 300,000 Change in loans held-for-sale (100,000) (275,000) Net increase in mortgage servicing rights (41,253) (67,250) Write-off of equipment 9,399 Depreciation and amortization 357,645 335,672 378,204 Amortization of core deposit intangible 101,109 68,355 68,354 Amortization (accretion) of fair value adjustments, net 215,557 (11,450) (100,484) Decrease (increase) in interest receivable 84,056 57,668 (252,348) Deferred tax expense 143,691 137,341 14,647 Decrease (increase) in prepaid expenses 270,965 (124,330) 94,379 Increase in cash surrender value of insurance policies (139,607) (49,585) (13,342) Increase in income tax receivable (53,889) (154,792) (20,977) Increase in other assets (71,917) (205,831) (11,058) (Decrease) increase in accrued expenses (750,246) 197,428 166,703 Increase (decrease) in interest payable 57,465 (80,151) (30,825) Increase (decrease) in other liabilities 367,956 20,000 (1,026) Issuance of shares for Directors' fees 31,836 23,688 22,220 Increase in unearned income on loans 18,529 ------------- ------------ ------------- Net cash provided by operating activities 3,569,547 3,309,104 3,633,196 ------------- ------------ ------------- Cash flows from investing activities: Redemption of Federal Reserve Bank stock 56,300 Purchases of Federal Home Loan Bank stock (351,000) (825,800) Purchases of available-for-sale securities (124,520,785) (89,014,647) (104,324,117) Proceeds from sales of available-for-sale securities 98,347,353 49,353,780 41,970,330 Proceeds from maturities of available-for-sale securities 32,998,864 31,044,359 28,715,141 Proceeds from maturities of held-to-maturity securities 10,968 91,497 70,445 Loan purchases (1,017,677) Loan originations and principal collections, net (8,191,577) (4,157,060) 8,112,107 Recoveries of loans previously charged off 28,302 48,508 29,148 Other real estate owned - expenditures capitalized (8,511) Capital expenditures (1,003,263) (475,024) (393,809) Proceeds from sale of equipment 436 Premiums paid on insurance policies (12,381) Purchase of life insurance policies (3,000,000) Life insurance policy proceeds 192,443 Cash and cash equivalents acquired from Canaan National Bancorp, Inc. net of expenses paid of $309,419 2,487,705 Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163) ------------- ------------ ------------- Net cash used in investing activities (6,156,860) (16,942,898) (26,658,370) ------------- ------------ -------------
F-5 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 2004, 2003 and 2002 -------------------------------------------- (continued)
2004 2003 2002 ------------- ------------ ------------ Cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 6,920,818 9,642,776 6,479,009 Net (decrease) increase in time deposits (2,141,902) (2,211,280) 3,307,391 Federal Home Loan Bank advances 5,000,000 Principal payments on advances from Federal Home Loan Bank (6,140,973) (10,993,296) (1,113,139) Net changes in short term advances 20,000,000 Decrease in other borrowed funds (86,863) Dividends paid (1,415,074) (1,295,533) (1,237,840) ------------- ------------ ------------ Net cash provided by financing activities 2,136,006 15,142,667 7,435,421 ------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents (451,307) 1,508,873 (15,589,753) Cash and cash equivalents at beginning of year 12,128,801 10,619,928 26,209,681 ------------- ------------ ------------ Cash and cash equivalents at end of year $ 11,677,494 $ 12,128,801 $ 10,619,928 ============= ============ ============ Supplemental disclosures: Interest paid $ 5,601,531 $ 5,693,621 $ 7,029,046 Income taxes paid 685,000 1,285,401 1,114,100 Transfer of allowance for loan losses to other liabilities 64,073 Loan granted to finance sale of other real estate owned 135,662 Loan transferred to other real estate owned 75,000 Transfer from equipment to other assets 2,815 Canaan National Bancorp, Inc. merger: Cash and cash equivalents acquired $ 2,797,124 Available-for-sale securities 42,776,284 Federal Home Loan Bank stock 1,291,200 Federal Reserve Bank stock 56,300 Net loans acquired 54,787,421 Fixed assets acquired 2,355,970 Accrued interest receivable 460,550 Other assets acquired 1,173,549 Core deposit intangible 1,191,279 ------------- 106,889,677 ------------- Deposits assumed 75,613,508 Federal Home Loan Bank borrowings assumed 19,500,346 Other borrowings assumed 86,863 Other liabilities assumed 1,812,381 ------------- 97,013,098 ------------- Net assets acquired 9,876,579 Merger costs 17,028,000 ------------- Goodwill $ 7,151,421 =============
The accompanying notes are an integral part of these consolidated financial statements. F-6 SALISBURY BANCORP, INC. AND SUBSIDIARY -------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2004, 2003 and 2002 -------------------------------------------- NOTE 1 - NATURE OF OPERATIONS - ----------------------------- Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was organized on April 24, 1998 to become a holding company, under which Salisbury Bank and Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp and the Bank are referred to together as the (Company). The Bank is a state chartered bank which was incorporated in 1874 and is headquartered in Lakeville, Connecticut. The Bank operates its business from four banking offices located in Connecticut and one banking office located in Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate, consumer and small business loans. The Bank also offers a full complement of trust and investment services. As described in Note 15, on September 10, 2004 Canaan National Bancorp, Inc. merged with and into the Company. NOTE 2 - ACCOUNTING POLICIES - ---------------------------- The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Bancorp and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned subsidiaries, SBT Realty, Inc., SBT Mortgage Service Corporation (the "PIC"), and CNB Insurance Agency, Inc. SBT Realty, Inc. holds and manages bank owned real estate situated in New York state. The PIC operates as a passive investment company and services residential mortgages. CNB Insurance Agency, Inc. was formed to sell insurance. All significant intercompany accounts and transactions have been eliminated in the consolidation. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks, interest bearing demand deposits with other banks, money market mutual funds and federal funds sold. Cash and due from banks as of December 31, 2004 and December 31, 2003 includes $649,000 and $906,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. F-7 SECURITIES: Investments in debt securities are adjusted for amortization of premiums and accretion of discounts so as to approximate the interest method. Gains or losses on sales of investment securities are computed on a specific identification basis. The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. -- Held-to-maturity securities are carried at amortized cost in the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements. -- Available-for-sale securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses are not included in earnings but are reported as a net amount (less expected tax) in a separate component of capital until realized. -- Trading securities are carried at fair value on the consolidated balance sheets. Unrealized holding gains and losses for trading securities are included in earnings. During the three years ended December 31, 2004 the Company did not classify any securities as trading. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. LOANS: Loans receivable that management has the intent and ability to hold until maturity or payoff, are reported at their outstanding principal balances adjusted for any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans or unamortized premiums or discounts on purchased loans. Interest on loans is recognized on a simple interest basis. Residential real estate loans are generally placed on nonaccrual when reaching 90 days past due or in process of foreclosure. Any equity line 90 days past due or in the process of foreclosure is placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. F-8 Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets. Estimated lives are 3 to 40 years for buildings and 1 to 25 years for furniture and equipment. F-9 OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES: Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." These properties are carried at the lower of cost or estimated fair value less estimated costs to sell. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets and subsequent writedowns are included in other expense. In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," the Bank classifies loans as in-substance repossessed or foreclosed if the Bank or its subsidiaries receives physical possession of the debtor's assets regardless of whether formal foreclosure proceedings take place. ADVERTISING: The Bank directly expenses costs associated with advertising as they are incurred. INCOME TAXES: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. FAIR VALUES OF FINANCIAL INSTRUMENTS: SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires that the Company disclose estimated fair value for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (including mortgage-backed securities): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans held-for-sale: Fair values of mortgage loans held-for-sale are based on commitments on hand from investors or prevailing market prices. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair values disclosed for interest and non-interest checking, passbook savings and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. F-10 Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on Federal Home Loan Bank advances. Due to broker: The carrying amount of due to broker approximates its fair value. Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. STOCK BASED COMPENSATION: Bancorp has a stock-based plan to compensate non-employee directors for their services. This plan is more fully described in Note 14. Compensation cost for these services is reflected in net income in an amount equal to the fair value of the shares of Bancorp common stock payable to the directors. EARNINGS PER SHARE: Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Weighted average common shares outstanding were 1,503,373 in 2004, 1,423,815 in 2003 and 1,422,959 in 2002. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is not presented because there were no common stock equivalents in the three year period ended December 31, 2004. RECENT ACCOUNTING PRONOUNCEMENTS: In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company's consolidated financial statements on adoption of this Statement. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any impact on the Company's consolidated financial statements. F-11 In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this interpretation did not have an impact on the Company's consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company's consolidated financial statements. In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor "carried over" in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment of a Loan." This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Company does not believe the adoption of SOP 03-3 will have a material impact on the Company's financial position or results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payments" ("SFAS 123R"). This Statement revises FASB Statement No. 123, "Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the consolidated financial statements. It establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share ownership plans. This Statement is effective for the Company as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company does not believe the adoption of this Statement will have a material impact on the Company's financial position or results of operations. F-12 NOTE 3 - INVESTMENTS IN SECURITIES - ---------------------------------- Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The amortized cost of securities and their approximate fair values are as follows as of December 31:
Amortized Gross Gross Cost Unrealized Unrealized Fair Basis Gains Losses Value ------------ ------------ ------------- ------------- Available-for-sale securities: December 31, 2004: Equity securities $ 3,031 $ 142,727 $ $ 145,758 U.S. government agencies preferred stock 13,488,364 1,490 1,280,752 12,209,102 Debt securities issued by the U.S. Treasury and other U. S. government corporations and agencies 53,771,554 53,170 408,766 53,415,958 Debt securities issued by states of the United States and political subdivisions of the states 58,052,206 630,317 230,178 58,452,345 Money market mutual funds 941,890 941,890 Mortgage-backed securities 54,523,343 209,599 301,357 54,431,585 ------------ ------------ ------------- ------------- 180,780,388 1,037,303 2,221,053 179,596,638 Money market mutual funds included in cash and cash equivalents (941,890) (941,890) ------------ ------------ ------------- ------------- $179,838,498 $ 1,037,303 $ 2,221,053 $ 178,654,748 ============ ============ ============= ============= December 31, 2003: Equity securities $ 3,031 $ 132,552 $ $ 135,583 U.S. government agencies preferred stock 8,074,043 463,628 7,610,415 Debt securities issued by the U.S. Treasury and other U. S. government corporations and agencies 51,886,017 329,421 235,866 51,979,572 Debt securities issued by states of the United States and political subdivisions of the states 44,609,900 1,521,298 143,363 45,987,835 Money market mutual funds 500,512 500,512 Mortgage-backed securities 37,034,607 372,971 100,620 37,306,958 ------------ ------------ ------------- ------------- 142,108,110 2,356,242 943,477 143,520,875 Money market mutual funds included in cash and cash equivalents (500,512) (500,512) ------------ ------------ ------------- ------------- $141,607,598 $ 2,356,242 $ 943,477 $ 143,020,363 ============ ============ ============= ============= Amortized Gross Gross Cost Unrealized Unrealized Fair Basis Gains Losses Value ------------ ------------ ------------- ------------- Held-to-maturity securities: December 31, 2004: Mortgage-backed securities $ 218,374 $ 1,249 $ $ 219,623 ============ ============ ============= ============= December 31, 2003: Mortgage-backed securities $ 229,425 $ 4,969 $ $ 234,394 ============ ============ ============= =============
F-13 The scheduled maturities of debt securities were as follows as of December 31, 2004:
Available-For-Sale Held-To-Maturity ------------------ -------------------- Amortized Fair Cost Fair Value Basis Value ------------ --------- --------- Due after one year through five years $ 240,497 $ $ Due after five years through ten years 18,293,190 Due after ten years 93,334,616 Mortgage-backed securities 54,431,585 218,374 219,623 ------------ --------- --------- $166,299,888 $ 218,374 $ 219,623 ============ ========= =========
During 2004, proceeds from sales of available-for-sale securities amounted to $98,347,353. Gross realized gains and gross realized losses on those sales amounted to $1,577,110 and $87,205, respectively. During 2003, proceeds from sales of available-for-sale securities amounted to $49,353,780. Gross realized gains and gross realized losses on those sales amounted to $1,136,732 and $78,592, respectively. During 2002, proceeds from sales of available-for-sale securities amounted to $41,970,330. Gross realized gains and gross realized losses on those sales amounted to $634,705 and $625, respectively. The tax provision applicable to these net realized gains amounted to $580,318, $412,146 and $246,974, respectively. The amortized cost basis and fair value of securities of issuers which exceeded 10% of stockholders' equity were as follows as of December 31, 2004: Amortized Cost Fair Basis Value ---------- ---------- Harris County, Texas $4,601,649 $4,617,662 Federal National Mortgage Association Preferred Stock 5,867,839 5,451,808 Federal Home Loan Mortgage Corporation Preferred Stock 7,620,525 6,757,294 Total carrying amounts of $4,712,905 and $2,586,127 of debt securities were pledged to secure public deposits, treasury tax and loan and for other purposes as required by law as of December 31, 2004 and 2003, respectively. The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than twelve months and for twelve months or more, and are temporarily impaired, are as follows as of December 31, 2004:
Less than 12 Months 12 Months or Longer Total ------------------------ ------------------------ ------------------------ Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----------- ----------- ----------- ----------- ----------- ----------- U.S. government agencies preferred stock $ 5,361,376 $ 357,227 $ 6,077,948 $ 923,525 $11,439,324 $ 1,280,752 Debt securities issued by the U.S. Treasury and other U. S. government corporations and agencies 29,234,293 361,483 2,045,291 47,283 31,279,584 408,766 Debt securities issued by states of the United States and political subdivisions of the states 17,253,451 158,929 3,157,198 71,249 20,410,649 230,178 Mortgage-backed securities 27,778,940 266,316 3,121,519 35,041 30,900,459 301,357 ----------- ----------- ----------- ----------- ----------- ----------- Total temporarily impaired securities $79,628,060 $ 1,143,955 $14,401,956 $ 1,077,098 $94,030,016 $ 2,221,053 =========== =========== =========== =========== =========== ===========
F-14 The securities that have been in an unrealized loss position for over twelve consecutive months are adjustable rate mortgage securities guaranteed by the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation and equity securities issued by U.S. government corporations and agencies. The decline is due to rapid prepayments on the underlying collateral and a low interest rate environment. Since there has been no credit deterioration and the market price decline is due to the current interest rate environment, management deems the securities temporarily impaired. The securities that have been in an unrealized loss position for less than twelve months consist of debt and equity securities issued by the U.S. treasury, U.S. government corporations and agencies, and states of the United States and political subdivisions of the states. The unrealized losses in these securities are attributable to changes in market interest rates. As management has the ability to hold securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary. NOTE 4 - LOANS - -------------- Loans consisted of the following as of December 31: 2004 2003 ------------- ------------- Commercial, financial and agricultural $ 15,126,711 $ 9,148,870 Real estate - construction and land development 14,289,715 15,306,946 Real estate - residential 130,414,119 90,806,942 Real estate - commercial 35,486,897 19,199,687 Consumer 9,121,747 6,691,762 Other 69,385 73,385 ------------- ------------- 204,508,574 141,227,592 Unearned income (18,529) Allowance for loan losses (2,511,546) (1,664,274) ------------- ------------- Net loans $ 201,978,499 $ 139,563,318 ============= ============= Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2004. Total loans to such persons and their companies amounted to $864,438 as of December 31, 2004. During 2004, principal advances of $624,908 were made and repayments totaled $895,615. Changes in the allowance for loan losses were as follows for the years ended December 31:
2004 2003 2002 ----------- ----------- ----------- Balance at beginning of period $ 1,664,274 $ 1,458,359 $ 1,444,504 Provision for loan losses 250,000 312,500 300,000 Recoveries of loans previously charged off 28,302 48,508 29,148 Loans charged off (69,742) (155,093) (251,220) Allowance related to business combination 638,712 Transfer to allowance for commitments (64,073) ----------- ----------- ----------- Balance at end of period $ 2,511,546 $ 1,664,274 $ 1,458,359 =========== =========== ===========
The following table sets forth information regarding nonaccrual loans and accruing loans 90 days or more overdue as of December 31: 2004 2003 ------ ---- (in thousands) Total nonaccrual loans $1,739 $ 75 ====== ==== Accruing loans which are 90 days or more overdue $ 528 $535 ====== ==== F-15 Information about loans that meet the definition of an impaired loan in Statement of Financial Accounting Standards No. 114 is as follows as of December 31:
2004 2003 --------------------------- ------------------------- Recorded Related Recorded Related Investment Allowance Investment Allowance In Impaired For Credit In Impaired For Credit Loans Losses Loans Losses ------------ ---------- ---------- ---------- Loans for which there is a related allowance for credit losses $ 183,317 $ 0 $ 0 $ 0 Loans for which there is no related allowance for credit losses ------------ ---------- ---------- ---------- Totals $ 183,317 $ 0 $ 0 $ 0 ============ ========== ========== ========== Average recorded investment in impaired loans during the year ended December 31 $ 73,327 $ 353,758 ============ ========== Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired Total recognized $ 5,843 $ 43,762 ============ ========== Amount recognized using a cash-basis method of accounting $ 5,843 $ 43,762 ============ ==========
In 2004 and 2003 the Bank capitalized mortgage servicing rights totaling $112,187 and $69,844, respectively and amortized $66,019 and $1,924, respectively. The balance of capitalized mortgage servicing rights included in other assets at December 31, 2004 and 2003 was $498,371 and $67,250, respectively. On September 10, 2004 the Bank acquired mortgage servicing rights of $392,256, exclusive of $2,388 in valuation allowance, through the acquisition of Canaan National Bancorp, Inc. Prior to 2003, the Bank did not sell loans with servicing retained and, therefore, did not record any mortgage servicing rights. Following is an analysis of the aggregate changes in the valuation allowance for mortgage servicing rights for the years ended December 31: 2004 2003 ------- ---- Balance, beginning of year $ 670 $ 0 Additions 5,621 670 Valuation allowance from business combination 2,388 0 Reductions (706) 0 ------- ---- Balance, end of year $ 7,973 $670 ======= ==== The fair value of the mortgage servicing rights was $516,322 and $74,512 as of December 31, 2004 and 2003, respectively. Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage and other loans serviced for others was $49,026,331 and $6,753,826 at December 31, 2004 and 2003, respectively. F-16 NOTE 5 - PREMISES AND EQUIPMENT - ------------------------------- The following is a summary of premises and equipment as of December 31: 2004 2003 ----------- ----------- Land $ 483,344 $ 350,644 Buildings 5,338,726 2,766,168 Furniture and equipment 2,364,380 1,888,716 ----------- ----------- 8,186,450 5,005,528 Accumulated depreciation and amortization (2,252,472) (2,113,366) ----------- ----------- $ 5,933,978 $ 2,892,162 =========== =========== NOTE 6 - DEPOSITS - ----------------- The aggregate amount of time deposit accounts in denominations of $100,000 or more as of December 31, 2004 and 2003 was $32,955,388 and $23,588,591, respectively. For time deposits as of December 31, 2004, the scheduled maturities for years ended December 31 are as follows: 2005 $50,171,859 2006 23,566,989 2007 11,000,082 2008 3,623,817 2009 2,974,837 Fair value adjustment 28,096 ----------- $91,365,680 =========== Certain directors and executive officers of the Company and companies in which they have a significant ownership interest were customers of the Bank during 2004. Total deposits to such persons and their companies amounted to $1,672,885 and $610,337 as of December 31, 2004 and 2003, respectively. NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES - ---------------------------------------- Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). Maturities of advances from the FHLB for the five fiscal years ending after December 31, 2004 and thereafter are summarized as follows: AMOUNT ------ 2005 $21,399,466 2006 6,610,009 2007 1,589,044 2008 1,577,699 2009 1,320,213 Thereafter 46,141,788 Fair value adjustment 575,064 ----------- $79,213,283 =========== F-17 As of December 31, 2004, the following advances from the FHLB were redeemable at par at the option of the FHLB: MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT ------------- ------------------------ -------- 01/24/11 01/24/05 and quarterly thereafter $ 1,000,000 04/27/09 01/26/05 and quarterly thereafter 500,000 04/27/09 01/26/05 and quarterly thereafter 500,000 01/25/10 01/26/05 and quarterly thereafter 19,000,000 02/08/10 02/07/05 and quarterly thereafter 600,000 02/28/11 02/28/05 and quarterly thereafter 850,000 02/28/11 02/28/05 and quarterly thereafter 10,000,000 03/07/11 03/07/05 and quarterly thereafter 1,000,000 12/16/13 03/15/05 and quarterly thereafter 10,000,000 12/15/10 03/15/05 and quarterly thereafter 800,000 12/20/10 03/21/05 and quarterly thereafter 500,000 12/27/10 03/28/05 and quarterly thereafter 1,000,000 03/01/11 03/01/06 and quarterly thereafter 500,000 The advances also include $400,000 borrowed in 2002 at 4.37% which is a Knock-out Advance with a Strike Rate of 7%. If the three month LIBOR rate exceeds the Strike Rate of 7% on April 8, 2005 and quarterly thereafter, the FHLB will require that this borrowing become due immediately upon the Strike Date as defined in the Contract. As of December 31, 2004, the three month LIBOR was 2.56%. The maturity date is April 9, 2007. Amortizing advances are being repaid in equal monthly payments and are being amortized from the date of the advance to the maturity date on a direct reduction basis. Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets. At December 31, 2004, the interest rates on FHLB advances ranged from 1.49 percent to 6.30 percent. At December 31, 2004, the weighted average interest rate on FHLB advances was 4.29 percent. NOTE 8 - EMPLOYEE BENEFITS - -------------------------- The Bank has an insured noncontributory defined benefit retirement plan available to all employees eligible as to age and length of service. Benefits are based on a covered employee's final average compensation, primary social security benefit and credited service. The Bank makes annual contributions which meet the Employee Retirement Income Security Act minimum funding requirements. F-18 The following tables set forth information about the plan as of December 31 and the years then ended:
2004 2003 2002 ----------- ----------- ----------- Change in projected benefit obligation: Benefit obligation at beginning of year $ 2,762,015 $ 2,019,027 $ 2,345,618 Adjustment 960,236 Actuarial (gain) loss (12,650) 489,531 67,008 Service cost 259,513 188,104 124,322 Interest cost 220,533 148,033 189,459 Benefits paid (80,676) (82,680) (707,380) ----------- ----------- ----------- Benefit obligation at end of year 4,108,971 2,762,015 2,019,027 ----------- ----------- ----------- Change in plan assets: Plan assets at estimated fair value at beginning of year 1,787,563 1,396,711 2,171,193 Actual return on plan assets 140,306 205,463 (244,376) Contributions 992,322 268,069 177,274 Benefits paid (80,676) (82,680) (707,380) ----------- ----------- ----------- Fair value of plan assets at end of year 2,839,515 1,787,563 1,396,711 ----------- ----------- ----------- Funded status (1,269,456) (974,452) (622,316) Unrecognized net loss from actuarial experience 1,503,149 560,356 177,951 Unrecognized prior service cost 3,589 93,653 94,544 Unamortized net obligation existing at date of adoption of SFAS No. 87 2,771 58,364 58,364 ----------- ----------- ----------- Prepaid (accrued) benefit cost included in other assets (liabilities) $ 240,053 $ (262,079) $ (291,457) =========== =========== ===========
The $960,236 adjustment made to the 2004 beginning of year projected benefit obligation is a result of a change in calculation methodology from the prior actuary to the current actuary, hired by the Bank in April 2004, including the effect of reflecting salary increases in the determination of liabilities. The adjustment also includes liability gains and losses due to demographic experience. Net periodic cost for the year ended December 31, 2004 of $490,190 includes additional amortization of the transition obligation and additional amortization of prior service cost in the amounts of $46,921 and $89,172, respectively, as a result of this adjustment. Net income for the year ended December 31, 2004 was reduced by $83,085, net of tax benefit of $53,008, related to this adjustment. Amounts recognized in the balance sheets as of December 31, 2004 and 2003 consist of: 2004 2003 --------- --------- Prepaid (accrued) benefit cost $ 240,053 $(262,079) Accrued benefit liability (441,413) Intangible asset 152,017 Accumulated other comprehensive loss 289,396 --------- --------- Net amount recognized $ 240,053 $(262,079) ========= ========= The accumulated benefit obligation for the Bank's defined benefit pension plan was $2,824,624 and $2,491,054 at December 31, 2004 and 2003, respectively. The discount rate used in determining the actuarial present value of the projected benefit obligation was 6.0% for 2004 and 2003. The rate of increase in future compensation levels was based on the following graded table for 2004: AGE RATE --- ---- 25 4.75% 35 4.25 45 3.75 55 3.25 65 3.00 F-19 No rate of increase in future compensation levels was used in 2003. Components of net periodic cost are as follows: 2004 2003 2002 --------- --------- --------- Service cost $ 259,513 $ 188,104 $ 124,322 Interest cost on benefit obligation 220,533 148,033 189,459 Expected return on assets (196,448) (107,010) (176,526) Amortization of transition obligation 55,593 8,672 8,672 Amortization of prior service cost 90,064 892 892 Amortization of net loss 60,935 --------- --------- --------- Net periodic cost $ 490,190 $ 238,691 $ 146,819 ========= ========= ========= The discount rate used to determine the net periodic cost was 6% for 2004 and 2003 and the expected return on plan assets was 7.25% for 2004 and 2003. The graded table was also used for the rate of compensation increase in determining the net periodic benefit cost in 2004 and no rate of increase was used in 2003. Pension expense is calculated based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets of 7.25% each year. In developing the expected long-term rate of return assumption, asset class return expectations were evaluated as well as long-term inflation assumptions, and historical returns based on the current target asset allocations of 60% equity and 40% fixed income. The Bank regularly reviews the asset allocations and periodically rebalances investments when considered appropriate. While all future forecasting contains some level of estimation error, the Bank believes that 7.25% falls within a range of reasonable long-term rate of return expectations for pension plan assets. The Bank will continue to evaluate the actuarial assumptions, including expected rate of return, at least annually, and will adjust as necessary. Plan Assets The pension plan investments are managed by the Trust Department of the Bank. The investments in the plan are reviewed and approved by the Trust Committee. The asset allocation of the plan is a balanced allocation. Debt securities are timed to mature when employees are due to retire. Debt securities are laddered for coupon and maturity. Equities are put in the plan to achieve a balanced allocation and to provide growth of the principal portion of the plan and to provide diversification. The Trust Committee reviews the policies of the plan. The prudent investor rule and applicable ERISA regulations are applied to the management of the funds and investment selections. The Bank's pension plan asset allocations by asset category are as follows:
December 31, 2004 December 31, 2003 ---------------------- ---------------------- Asset Category Fair Value Percent Fair Value Percent - ---------------------------------------------- ---------- ------- ---------- ------- Equity securities $1,054,531 37.1% $1,082,595 60.6% U.S. Government treasury and agency securities 991,537 34.9 596,662 33.4 Corporate bonds 24,032 .9 24,015 1.3 Mutual funds 462,875 16.3 Money market mutual funds 306,540 10.8 84,291 4.7 ---------- ------ ---------- ------ Total $2,839,515 100.0% $1,787,563 100.0% ========== ====== ========== ======
There were no securities of the Bancorp and related parties included in plan assets as of December 31, 2004 and 2003. F-20 Based on current data and assumptions, the following benefits are expected to be paid for each of the following five years and, in the aggregate, the five years thereafter: 2005 $ 113,000 2006 91,000 2007 156,000 2008 91,000 2009 215,000 2010 - 2014 2,630,000 The Bank expects to contribute $330,080 to its pension plan in 2005. The Bank adopted a 401(k) Plan effective in 2000. Under the Plan eligible participants may contribute a percentage of their pay, subject to IRS limitations. The Bank may make discretionary contributions to the Plan. The Bank's contribution expense in the years ended December 31, 2004, 2003 and 2002 amounted to approximately $60,000, $46,000 and $53,000, respectively. Discretionary contributions vest in full after five years. Eleven of the Company's executives have a change in control agreement ("agreement") with the Company. The agreements provide that if following a "change-in-control" of the Company or Bank, an Executive Officer is terminated under certain defined circumstances, or is reassigned, within a period of twelve (12) months following the change in control, such Executive Officer will be entitled to a lump sum payment equal to six or 12 months of his or her compensation based upon the most recent aggregate base salary paid to the Executive Officer in the twelve (12) month period immediately preceding the date of change in control. NOTE 9 - INCOME TAXES - --------------------- The components of income tax expense are as follows for the years ended December 31: 2004 2003 2002 ---------- ---------- ---------- Current: Federal $ 631,007 $ 708,089 $ 790,590 State 250 422,520 302,533 ---------- ---------- ---------- 631,257 1,130,609 1,093,123 ---------- ---------- ---------- Deferred: Federal 131,788 126,996 4,143 State 11,903 10,345 10,504 ---------- ---------- ---------- 143,691 137,341 14,647 ---------- ---------- ---------- Total income tax expense $ 774,948 $1,267,950 $1,107,770 ========== ========== ========== The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows for the years ended December 31: 2004 2003 2002 ------ ------ ------ % of % of % of Income Income Income ------ ------ ------ Federal income tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Tax-exempt income (18.2) (15.8) (16.8) Other items .2 1.0 3.5 State tax, net of federal tax benefit .2 5.6 5.0 ------ ------ ------ Effective tax rates 16.2% 24.8% 25.7% ====== ====== ====== F-21 The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
2004 2003 ----------- ----------- Deferred tax assets: Allowance for loan losses $ 662,814 $ 482,312 Interest on non-performing loans 24,611 2,426 Accrued deferred compensation 18,810 18,724 Post-retirement benefits 27,880 31,939 Other real estate owned property writedown 22,101 25,317 Accrued pensions 102,080 Capital loss carryforward 27,200 Mark to market purchase accounting adjustments 318,244 Preferred stock amortization 3,991 Net unrealized holding loss on available-for-sale securities 461,071 Minimum pension liability 112,720 ----------- ----------- Gross deferred tax assets 1,566,722 775,518 Valuation allowance (27,200) ----------- ----------- 1,539,522 775,518 ----------- ----------- Deferred tax liabilities: Core deposit intangible asset (621,035) (208,252) Accelerated depreciation (1,030,994) (400,660) Discount accretion (5,299) (9,383) Mortgage servicing rights (169,446) (26,194) Prepaid pension (81,619) Net unrealized holding gain on available-for-sale securities (550,272) ----------- ----------- Gross deferred tax liabilities (1,908,393) (1,194,761) ----------- ----------- Net deferred tax liabilities $ (368,871) $ (419,243) =========== ===========
Included in the net deferred tax liabilities activity during the year ending December 31, 2004 is a $704,560 deferred tax liability recorded related to the Canaan National Bancorp, Inc. merger. As of December 31, 2004, the Company had no operating loss and tax credit carryovers for tax purposes. NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------ The Bank entered into an agreement with a third party in which the third party is to provide the Bank with account processing services and other miscellaneous services. Under the agreement, the Bank is obligated to pay monthly processing fees through August 5, 2010. In the event the Bank chooses to cancel the agreement prior to the end of the contract term a lump sum termination fee will have to be paid. The fee shall be calculated as the average monthly billing, exclusive of pass through costs for the past twelve months, multiplied by the number of months and any portion of a month remaining in the contract term. NOTE 11 - FINANCIAL INSTRUMENTS - ------------------------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. F-22 Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income producing properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2004 and 2003, the maximum potential amount of the Bank's obligation was $31,900 and $20,000, respectively, for financial and standby letters of credit. The Bank's outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Bank may seek recourse through the customer's underlying line of credit. If the customer's line of credit is also in default, the Bank may take possession of the collateral, if any, securing the line of credit. The estimated fair values of the Bank's financial instruments, all of which are held or issued for purposes other than trading, are as follows as of December 31:
2004 2003 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 11,677,494 $ 11,677,494 $ 12,128,801 $ 12,128,801 Available-for-sale securities 178,654,748 178,654,748 143,020,363 143,020,363 Held-to-maturity securities 218,374 219,623 229,425 234,394 Federal Home Loan Bank stock 5,413,200 5,413,200 3,771,000 3,771,000 Loans held-for-sale 375,000 381,347 275,000 278,719 Loans, net 201,978,499 201,271,000 139,563,318 140,419,000 Accrued interest receivable 2,256,499 2,256,499 1,875,948 1,875,948 Financial liabilities: Deposits 298,841,846 299,977,000 218,457,450 219,891,000 FHLB advances 79,213,283 79,167,886 60,897,311 61,245,695 Due to broker 1,083,331 1,083,331
The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2. The amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31: 2004 2003 ----------- ----------- Commitments to originate loans $ 7,681,700 $ 2,337,315 Standby letters of credit 31,900 20,000 Unadvanced portions of loans: Home equity 23,085,518 10,374,759 Commercial lines of credit 9,136,426 6,935,664 Construction 4,913,228 3,349,345 Consumer 11,021,451 5,986,321 ----------- ----------- $55,870,223 $29,003,404 =========== =========== There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities. F-23 NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - --------------------------------------------------------- Most of the Bank's business activity is with customers located in northwestern Connecticut and bordering New York and Massachusetts towns. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Bank's loan portfolio is comprised of loans collateralized by real estate located in northwestern Connecticut and bordering New York and Massachusetts towns. NOTE 13 - REGULATORY MATTERS - ---------------------------- Bancorp and its subsidiary the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) As of December 31, 2004: Total Capital (to Risk Weighted Assets) Consolidated $31,579 12.13% $20,825 >8.0% N/A - Salisbury Bank and Trust Company 31,008 11.90 20,840 >8.0 $26,050 >10.0% - - Tier 1 Capital (to Risk Weighted Assets) Consolidated 28,940 11.12 10,412 >4.0 N/A - Salisbury Bank and Trust Company 28,369 10.89 10,420 >4.0 15,630 >6.0 - - Tier 1 Capital (to Average Assets) Consolidated 28,940 7.22 16,042 >4.0 N/A - Salisbury Bank and Trust Company 28,369 7.09 16,016 >4.0 20,020 >5.0 - -
F-24
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) As of December 31, 2003: Total Capital (to Risk Weighted Assets) Consolidated $26,308 16.44% $12,803 >8.0% N/A - Salisbury Bank and Trust Company 25,882 16.19 12,788 >8.0 $15,986 >10.0% - - Tier 1 Capital (to Risk Weighted Assets) Consolidated 24,566 15.35 6,402 >4.0 N/A - Salisbury Bank and Trust Company 24,140 15.10 6,394 >4.0 9,591 >6.0 - - Tier 1 Capital (to Average Assets) Consolidated 24,566 8.05 12,203 >4.0 N/A - Salisbury Bank and Trust Company 24,140 7.92 12,188 >4.0 15,235 >5.0 - -
The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Company's operating results and financial condition. The stockholders of Bancorp will be entitled to dividends only when, and if, declared by the Bancorp's Board of Directors out of funds legally available therefore. The declaration of future dividends will be subject to favorable operating results, financial conditions, tax considerations, and other factors. Under Connecticut law, the Bank may pay dividends only out of net profits. The Connecticut Banking Commissioner's approval is required for dividend payments which exceed the current year's net profits and retained net profits from the preceding two years. As of December 31, 2004, the Bank is restricted from declaring dividends to Bancorp in an amount greater than approximately $813,000. NOTE 14 - DIRECTORS STOCK RETAINER PLAN - --------------------------------------- At the 2001 annual meeting the stockholders of Bancorp voted to approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan provides non-employee directors of the Company with shares of restricted stock of Bancorp as a component of their compensation for services as directors. The maximum number of shares of stock that may be issued pursuant to the plan is 15,000. The first grant date under this plan preceded the 2002 annual meeting of stockholders. Each director whose term of office begins with or continues after the date the Plan was approved by the stockholders is issued an "annual stock retainer" consisting of 120 shares of fully vested restricted common stock of Bancorp. In 2004, 2003 and 2002, 840, 840 and 880 shares, respectively, were issued under the Plan and the related compensation expense amounted to $31,836, $23,688 and $22,220, respectively. NOTE 15 - MERGER - ---------------- On September 10, 2004, Canaan National Bancorp, Inc. ("Canaan National") merged (the "Merger") with and into the Company. Under the terms of the Merger, the shareholders of Canaan National received a total of $6,020,163 in cash and 257,483 shares of Bancorp common stock in exchange for all shares of Canaan National Bancorp, Inc. stock. The value of the 257,483 shares issued was $10,698,418 and was determined based on the September 10, 2004 closing market price of $41.55 of Bancorp's common stock. F-25 The Merger was accounted for using the purchase method of accounting. Accordingly, the assets acquired and liabilities assumed have been recorded by the Company at their fair values at the consummation date. During the appraisal process, an identifiable intangible asset of $1,191,279 was calculated and is being amortized to expense over a period of 12 years. Goodwill recorded totaled $7,151,421 and will be analyzed for impairment on at least an annual basis. Financial statement amounts for Canaan National are included in the Company's consolidated financial statements beginning on the acquisition date. A summary of net assets acquired is included in the supplemental disclosures in the cash flow statement. The following (unaudited) pro forma consolidated results of operations have been prepared as if the acquisition of Canaan National had occurred at January 1, 2003: Year Ended December 31, --------------------------------- 2004 2003 ----------- ----------- Gross revenues $25,291,875 $26,027,000 Net income $ 4,870,000 $ 4,683,000 Net income per share $ 2.89 $ 2.78 The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. NOTE 16 - GOODWILL AND INTANGIBLE ASSETS - ---------------------------------------- The Company's assets as of December 31, 2004 and 2003 include goodwill of $2,357,884 relating to the purchase of a branch of a bank in 2001. In 2004 the Company recorded $7,151,421 of additional goodwill from the merger with Canaan National Bancorp, Inc. Goodwill recognized in the 2004 merger is not deductible for tax purposes. The Company evaluated its goodwill as of December 31, 2004 and 2003 and found no impairment. A summary of acquired amortized intangible assets is as follows:
As of December 31, 2004 ------------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------ ------------ ------ Core deposit intangible-branch purchase $ 888,606 $ 225,000 $ 663,606 Core deposit intangible-Canaan National merger 1,191,279 32,754 1,158,525 ---------- --------- ---------- Total $2,079,885 $ 257,754 $1,822,131 ========== ========= ========== As of December 31, 2003 ------------------------------------- Gross Net Carrying Accumulated Carrying Amount Amortization Amount ------ ------------ ------ Core deposit intangible-branch purchase $ 888,606 $ 156,645 $ 731,961 --------- --------- --------- Total $ 888,606 $ 156,645 $ 731,961 ========= ========= =========
Aggregate amortization expense was $101,109, $68,355 and $68,354 in 2004, 2003 and 2002, respectively. Amortization is being calculated on a straight-line basis. F-26 Estimated amortization expense for each of the five years succeeding 2004 is as follows: 2005 $164,581 2006 164,581 2007 164,581 2008 164,581 2009 164,581 -------- $822,905 ======== NOTE 17 - RECLASSIFICATION - -------------------------- Certain amounts in the prior years have been reclassified to be consistent with the current year's statement presentation. NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS - -------------------------------------------------- The following condensed financial statements are for Salisbury Bancorp, Inc. (Parent Company Only) and should be read in conjunction with the Consolidated Financial Statements of Salisbury Bancorp, Inc. and Subsidiary. F-27 SALISBURY BANCORP, INC. ----------------------- (Parent Company Only) BALANCE SHEETS -------------- December 31, 2004 and 2003 --------------------------
ASSETS 2004 2003 - ------ ----------- ----------- Checking account in Salisbury Bank and Trust Company $ 630 $ 391 Money market mutual funds 941,890 500,512 ----------- ----------- Cash and cash equivalents 942,520 500,903 Investment in subsidiary 40,129,049 28,424,203 Due from subsidiary 33,000 Other assets 35,484 219,644 ----------- ----------- Total assets $41,107,053 $29,177,750 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Dividends payable $ 403,776 $ 327,538 Other liabilities 3,677 ----------- ----------- Total liabilities 407,453 327,538 Total stockholders' equity 40,699,600 28,850,212 ----------- ----------- Total liabilities and stockholders' equity $41,107,053 $29,177,750 =========== ===========
F-28 SALISBURY BANCORP, INC. ----------------------- (Parent Company Only) STATEMENTS OF INCOME -------------------- Years Ended December 31, 2004, 2003 and 2002 --------------------------------------------
2004 2003 2002 ----------- ----------- ----------- Dividend income from subsidiary $ 7,510,000 $ 1,540,000 $ 1,300,000 Taxable interest on securities 4,375 2,873 5,616 ----------- ----------- ----------- 7,514,375 1,542,873 1,305,616 ----------- ----------- ----------- Legal expense 10,500 26,823 6,909 Supplies and printing 2,042 6,873 4,407 Other expense 24,167 63,405 18,591 ----------- ----------- ----------- 36,709 97,101 29,907 ----------- ----------- ----------- Income before income tax benefit and equity in (distributed) undistributed net income of subsidiary 7,477,666 1,445,772 1,275,709 Income tax benefit (5,647) (32,000) (8,260) ----------- ----------- ----------- Income before equity in (distributed) undistributed net income of subsidiary 7,483,313 1,477,772 1,283,969 Equity in undistributed net (loss) income of subsidiary (3,464,371) 2,362,330 1,914,826 ----------- ----------- ----------- Net income $ 4,018,942 $ 3,840,102 $ 3,198,795 =========== =========== ===========
F-29 SALISBURY BANCORP, INC. ----------------------- (Parent Company Only) STATEMENTS OF CASH FLOWS ------------------------ Years Ended December 31, 2004, 2003 and 2002 --------------------------------------------
2004 2003 2002 ----------- ----------- ----------- Cash flows from operating activities: Net income $4,018,942 $ 3,840,102 $ 3,198,795 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net loss (income) of subsidiary 3,464,371 (2,362,330) (1,914,826) Deferred tax expense 1,000 1,193 Increase in taxes receivable (5,647) Decrease (increase) in due from subsidiary 33,000 (23,547) (3,615) Decrease (increase) in other assets 189,807 (219,644) Decrease in other liabilities (78,323) Issuance of shares for Director's fees 31,836 23,688 22,220 ----------- ----------- ----------- Net cash provided by operating activities 7,653,986 1,259,269 1,303,767 ----------- ----------- ----------- Cash flows from investing activities: Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163) Cash and cash equivalents acquired from Canaan National Bancorp, Inc., net of expenses paid of $309,419 222,868 ----------- ----------- ----------- Net cash used in investing activities (5,797,295) ----------- ----------- ----------- Cash flows from financing activities: Dividends paid (1,415,074) (1,295,533) (1,237,840) ----------- ----------- ----------- Net cash used in financing activities (1,415,074) (1,295,533) (1,237,840) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 441,617 (36,264) 65,927 Cash and cash equivalents at beginning of year 500,903 537,167 471,240 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 942,520 $ 500,903 $ 537,167 =========== =========== =========== Supplemental disclosures: Liability assumed in merger with Canaan National Bancorp, Inc. $ 82,000
F-30 NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - ----------------------------------------------------- Summarized quarterly financial data for 2004 and 2003 follows:
(In thousands, except earnings per share) 2004 Quarters Ended --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- Interest and dividend income $ 3,755 $ 3,815 $ 4,105 $ 4,876 Interest expense 1,269 1,273 1,390 1,727 -------- -------- -------- -------- Net interest and dividend income 2,486 2,542 2,715 3,149 Provision for loan losses 60 60 60 70 Other income 1,092 1,122 1,124 1,417 Other expense 2,077 2,260 2,985 3,281 -------- -------- -------- -------- Income before income taxes 1,441 1,344 794 1,215 Income tax expense (benefit) 369 248 (2) 160 -------- -------- -------- -------- Net income $ 1,072 $ 1,096 $ 796 $ 1,055 ======== ======== ======== ======== Earnings per common share $ .74 $ .77 $ .54 $ .63 ======== ======== ======== ======== (In thousands, except earnings per share) 2003 Quarters Ended --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- -------- -------- -------- Interest and dividend income $ 4,050 $ 3,955 $ 3,849 $ 3,796 Interest expense 1,526 1,461 1,316 1,310 -------- -------- -------- -------- Net interest and dividend income 2,524 2,494 2,533 2,486 Provision for loan losses 37 38 38 200 Other income 982 880 955 1,167 Other expense 2,042 1,958 2,074 2,526 -------- -------- -------- -------- Income before income taxes 1,427 1,378 1,376 927 Income tax expense 398 377 361 132 -------- -------- -------- -------- Net income $ 1,029 $ 1,001 $ 1,015 $ 795 ======== ======== ======== ======== Earnings per common share $ .72 $ .70 $ .71 $ .57 ======== ======== ======== ========
F-31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the two (2) most recent fiscal years, the Company and the Bank have had no changes in or disagreements with its independent accountants on accounting and financial disclosure matters. ITEM 9A. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer concluded that, based upon an evaluation as of December 31, 2004, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. During the year ended December 31, 2004, there were no changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT MANAGEMENT OF THE COMPANY The following table sets forth the name and age of each Executive Officer, his principal occupation for the last five (5) years and the year in which he was first appointed an Executive Officer of the Company.
Executive Officer Name Age Position of the Company since: ---- --- -------- --------------------- John F. Perotti 58 Chairman and 1998 (1) Chief Executive Officer Richard J. Cantele, Jr. 45 President, Chief Operating Officer and Secretary 2001 (2) John F. Foley 54 Chief Financial Officer And Treasurer 1998 (3)
(1) Mr. Perotti is also the Chairman and Chief Executive Officer of the Bank and has been an Executive Officer of the Bank since 1982. (2) Mr. Cantele is also the President and Chief Operating Officer of the Bank and has been an Executive Officer of the Bank since 1989. (3) Mr. Foley is also the Chief Financial Officer and Treasurer of the Bank and has been an Executive Officer of the Bank since 1986. Board of Directors The Certificate of Incorporation and Bylaws of the Company provide for a Board of Directors of not less than seven (7) members, as determined from time to time by resolution of the Board of Directors. The Board of Directors has set the number of directorships at eleven (11). The Board of Directors of the Company is divided into three (3) classes as nearly equal in number as possible. Classes of directors serve for staggered three (3) year terms. A successor class is to be elected at each annual meeting of shareholders when the terms of office of the members of one class expire. Vacant directorships 32 may be filled, until the expiration of the term of the vacated directorship, by the vote of a majority of the directors then in office. The following table sets forth certain information, as of March 4, 2005, with respect to the directors of the Company. NOMINEES FOR ELECTION AT THE 2005 ANNUAL MEETING TO BE HELD ON APRIL 27, 2005 -----------------------------------------------------------------------------
Positions Held Director Term Name Age with the Company Since Expiring ---- --- ---------------- ----- -------- Louis E. Allyn, II 57 Director 2004 2005 Dana A. Bartholomew 65 Director 2004 2005 John R. H. Blum 75 Presiding Director 1998 2005 Richard J. Cantele, Jr. 45 President, Chief Operating Officer, Secretary and Director 2005 2005 Robert S. Drucker 63 Director 2004 2005 Louise F. Brown 61 Director 1998 2005 Nancy F. Humphreys 63 Director 2001 2005 CONTINUING DIRECTORS -------------------- Holly J. Nelson 51 Director 1998 2006 Walter C. Shannon, Jr. 69 Director 1998 2006 John F. Perotti 58 Chairman 1998 2007 Chief Executive Officer and Director Michael A. Varet 62 Director 1998 2007
Presented below is additional information concerning the directors of the Company. Unless otherwise stated, all directors have held the position described for at least five (5) years. Louis E. Allyn, II has been a director of the Bank since 2004. He is President of Allyndale Corporation. Dana A. Bartholomew has been a director of the Bank since 2004, when he was elected by the Board to fill a vacancy created by the resignation of Gordon C. Johnson, D.V.M. He is President of Sheffield Water Company. John R. H. Blum is an attorney in private practice and former Commissioner of Agriculture for the State of Connecticut. He has been a director of the Bank since 1995 and was elected Presiding Director in 2005. Prior to that, he was elected Chairman of the Board of Directors of the Company and the Bank since 1998. Louise F. Brown has been a director of the Bank since 1992 and is a partner in the law firm of Ackerly Brown, LLP. Richard J. Cantele, Jr. is Secretary of the Company and President and Chief Operating Officer of the Company and the Bank. Prior to that he served as Executive Vice President, Treasurer and Chief Operating Officer of the Bank and Secretary of the Company. He has been a director of the Bank since 2005. Robert S. Drucker has been a director of the Bank since 2004. He is proprietor of Bob's Clothing and Barrington Outfitters. Nancy F. Humphreys has been a director of the Bank since 2001. She retired from Citigroup New York, Citibank in February of 2000, as Managing Director and Treasurer of Global Corporate Investment Bank North America. 33 Holly J. Nelson has been a director of the Bank since 1995. She is a member of Horses North, LLC, a tour operator, and is a member in Oblong Property Management, LLC. John F. Perotti is Chairman and Chief Executive Officer of the Company and the Bank. Prior to that he served as President and Chief Executive Officer of the Company and the Bank, Executive Vice President and Chief Operating Officer of the Bank and prior to that, he was Vice President and Treasurer of the Bank. He has been a director of the Bank since 1985. Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and President of William J. Cole Agency, Inc. He has been a director of the Bank since 1993. Michael A. Varet is a partner in the law firm of DLA Piper Rudnick Gray Cary US LLP. Mr. Varet has been a director of the Bank since 1997. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers, directors and persons who own more than ten percent (10%) of the Company's Common Stock, to file with the Securities and Exchange Commission (the "SEC") reports of ownership and changes in ownership of the Company's Common Stock. Executive officers, directors and any shareholders owning greater than ten percent (10%) of the Company's Common Stock are required by the SEC's regulations to furnish the Company with copies of all such reports that they file. Based solely on a review of copies of reports filed with the SEC since January 1, 2004 and of written representations by certain executive officers and directors, with the exception of the following, all persons subject to the reporting requirements of Section 16(a) are believed by management to have filed the required reports on a timely basis: Mr. Perotti filed one Form 4 late to reflect one transaction and Mr. Foley filed one Form 4 late to reflect one transaction. Code of Ethics - -------------- The Company has adopted a Code of Ethics that applies to the Company's Chief Executive Officer and Chief Financial Officer. A copy of such Code of Ethics is available upon request to any person, without charge, by writing to John F. Foley, Chief Financial Officer, Salisbury Bancorp, Inc., 5 Bissell Street, P. O. Box 1868, Lakeville, CT 06039. The Company has a separately standing Audit Committee which is comprised of the following independent Directors: Louis E. Allyn, II, Louise F. Brown, Nancy F. Humphreys, Holly J. Nelson and Michael A. Varet. While no member of the Audit Committee qualifies as an "audit committee financial expert" as such term is defined by federal securities laws and regulations, the Board of Directors believes the members of the Audit Committee bring educational, business and professional experience that is beneficial to the Audit Committee function of the Company and the Bank and is sufficient to enable the Audit Committee to fulfill its responsibility. ITEM 11. EXECUTIVE COMPENSATION Fees During 2004, each director received an annual retainer of $4,000. This amount was prorated in cases involving new Directors. In addition, directors received $500 for each Board of Directors meeting attended and $250 for each committee meeting attended. Director Perotti received no additional compensation for his service as director or member of any board committee during 2004. During 2001, the Board of Directors and Shareholders approved a Directors Stock Retainer Plan which, beginning in 2002, provides each non-employee director with up to 120 shares of restricted common stock as a component of their compensation. The Plan is described in more detail on page 14 of the Company's Proxy Statement. The following table provides certain information regarding the compensation paid to certain executive officers of the Company and the Bank for services rendered in all capacities during the fiscal years ended December 31, 2004, 2003, and 2002. All compensation expense was paid by the Bank. 34
Summary Compensation Table Annual Name and Principal Compensation(1) All Other Position Year Salary($) Bonus($) Compensation($) John F. Perotti 2004 $209,474 $66,042 $4,100 (4) Chairman and 2003 195,178 28,101 4,000 (3) Chief Executive Officer 2002 187,816 32,092 4,000 (2) of the Company and the Bank Richard J. Cantele, Jr. 2004 $139,750 $40,000 $3,595 (4) Secretary of the Company 2003 124,237 18,857 2,862 (3) President and Chief Operating 2002 109,434 18,332 2,553 (2) Officer of the Company and the Bank John F. Foley 2004 $100,460 $14,759 $2,304 (4) Chief Financial Officer and Treasurer 2003 87,235 12,476 1,994 (3) of the Company and the Bank 2002 83,174 14,785 1,704 (2) Diane E. R. Johnstone 2004 $128,870 $16,206 $2,902 (4) Sr. Vice President & Trust Officer 2003 119,734 16,412 2,723 (3) of the Bank 2002 109,321 16,690 2,522 (2) William C. Lambert 2004 $125,395 $16,260 $2,833 (4) Vice President & Trust Officer 2003 115,333 14,521 2,597 (3) of the Bank 2002 110,522 2,200 (2)
(1) Compensation does not include accrual of benefits under the Bank's defined pension plan or supplemental retirement arrangements described below. (2) The Bank's matching contribution to the 401(k) plan for 2002. (3) The Bank's matching contribution to the 401(k) plan for 2003. (4) The Bank's matching contribution to the 401(k) plan for 2004. Insurance In addition to the cash compensation paid to the executive officers of the Company and the Bank, the executive officers receive group life, health, hospitalization and medical insurance coverage. However, these plans do not discriminate in scope, term, or operation, in favor of officers or directors of the Company and the Bank and are available generally to all full-time employees. Pension Plan The Bank maintains a non-contributory defined pension plan for officers and other salaried employees of the Bank who become participants after attaining age 21 and completing one (1) year of service.
PENSION PLAN TABLE ==================================================================================== ESTIMATED ANNUAL RETIREMENT BENEFIT WITH YEARS OF SERVICE AT RETIREMENT ==================================================================================== Average Base Salary at 15 20 25 30 35 Retirement - ------------------------------------------------------------------------------------ $ 75,000 $17,987 $23,983 $29,979 $31,854 $33,729 - ------------------------------------------------------------------------------------ $100,000 $25,487 $33,983 $42,479 $44,979 $47,478 - ------------------------------------------------------------------------------------ $125,000 $32,987 $43,983 $54,979 $58,104 $61,229 - ------------------------------------------------------------------------------------ $150,000 $40,487 $53,983 $67,479 $71,229 $74,979 - ------------------------------------------------------------------------------------ $175,000 $47,987 $63,983 $79,979 $84,354 $88,729 - ------------------------------------------------------------------------------------ $200,000 $55,487 $73,983 $92,979 $97,479 $102,479 - ------------------------------------------------------------------------------------ $225,000 $56,987 $75,983 $94,979 $100,104 $105,229 - ------------------------------------------------------------------------------------ $250,000 $56,987 $75,983 $94,979 $100,104 $105,225 - ------------------------------------------------------------------------------------
Pension benefits are based upon average salary (determined as of each January 1st) during the highest five (5) consecutive years of services prior to attaining normal retirement age. The amount of the annual benefit is 2% of Average Salary offset 35 by .65% of the Social Security wage base per year of service (to a maximum of 25 years) plus one-half of 1% of Average Salary for each year of service over 25 years (to a maximum of ten years). This benefit formula may be modified to conform with changes in the pension laws. The present average salary (using last five years of salary only) and years of service to date of Messrs. Perotti, Cantele, Foley, Lambert and Ms. Johnstone are: Mr. Perotti: $227,216 with 32 years of service; Mr. Cantele: $133,306 with 24 years of service; Mr. Foley: $97,091 with 23 years of service; Mr. Lambert: $123,369 with 3 years of service; and Ms. Johnstone: $116,789 with 17 years of service. The above table shows estimated annual retirement benefits payable at normal retirement date as a straight life annuity for various average salary and service categories. The offset of social security was included in the table based on a participant being 65 years of age in 2004. Supplemental Retirement Arrangement In 1994, the Bank entered into a supplemental retirement arrangement (the "Supplemental Retirement Agreement") with John F. Perotti. Following disability or retirement at the earlier of the age of 65, or after thirty (30) years of service to the Bank, Mr. Perotti will receive monthly payments of $1,250 (adjusted annually to reflect the lesser of a five percent (5%) increase or "The Monthly Consumer Price Index for All Urban Consumers, United States City Average, All Items" published by the Bureau of Labor Statistics) for a period of ten (10) years. These payments are in addition to any payments under the Bank's retirement plan. The Supplemental Retirement Agreement includes provisions that would prevent Mr. Perotti from working for a competitor in the proximity of the Bank. Directors Stock Retainer Plan The shareholders of the Company voted to approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc." (the "Plan") at the 2001 Annual Meeting of Shareholders. The Plan provides non-employee directors of the Company with shares of restricted stock of the Company as a component of their compensation for services as non-employee directors. The maximum number of shares of stock that may be issued pursuant to the Plan shall not exceed 15,000. The first grant date under the plan was April 26, 2002. The "annual stock retainer" consisted of 120 shares of restricted common stock for each non-employee director who served for twelve months and a prorated number of shares to reflect the number of months served for any new non-employee director. The total number of restricted shares issued was 840. The next grant date under this plan will immediately precede the 2005 Annual Meeting of Shareholders. Change in Control Agreements The Bank entered into change in control agreements in 2003 with the following Officers of the Bank: John F. Perotti, Richard J. Cantele, Jr., John F. Foley, Todd M. Clinton, Diane E. R. Johnstone, Joseph C. Law, Lana J. Morrison, William C. Lambert, Sharon A. Pilz and Geoffrey A. Talcott. The agreements provide that if following a "change-in-control" of the Company or Bank, an Officer is terminated under certain defined circumstances, or is reassigned, within a period of twelve (12) months following the change in control, such Officer will be entitled to a lump sum payment equal to his or her twelve (12) month compensation based upon the most recent aggregate base salary paid to the Officer in the twelve (12) month period immediately preceding the date of change in control. In addition, the Bank entered into a change in control agreement in 2003 with Elizabeth Summerville which provides that if following a "change in control" of the Company or Bank, the Officer is terminated under certain defined circumstances, or is reassigned, within a period of twelve (12) months following the change in control, such Officer will be entitled to a lump sum payment equal to her six (6) month compensation based upon the most recent aggregate base salary paid to the Officer in the twelve (12) month period immediately preceding the date of the change in control. In no event shall any such payments be made in an amount which would cause them to be deemed non-deductible to the Bank by reason of the operation of Section 280G of the Internal Revenue Code. 401(k) Plan The Bank offers a 401(k) profit sharing plan. This plan began in the year 2000. Each Plan Year, the Bank will announce the amount of the matching contributions, if any. The amount of the matching contributions is directly related to the employees' 401(k) salary deferral contribution. For the Plan Year that began January 1, 2002, all eligible participants received a matching contribution equal to fifty percent (50%) of their 401(k) salary deferral contribution to the Plan; however, it is limited to two percent (2%) of the plan compensation not to exceed $4,100. The Plan expense was $67,126 for 2004. 36
- ---------------------------------------------------------------------------------------------------------------------- EQUITY COMPENSATION PLAN INFORMATION - ---------------------------------------------------------------------------------------------------------------------- Number of securities Weighted-average Number of securities remaining to be issued upon exercise price of available for future issuance under exercise of outstanding outstanding options, equity compensation plans (excluding options, warrants and warrants and rights securities reflected in column (a)) rights (a) (b) (c) - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans None None 12,440 (1) approved by security holders - ---------------------------------------------------------------------------------------------------------------------- Equity compensation plans not None None None approved by security holders - ---------------------------------------------------------------------------------------------------------------------- Total None None 12,440 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) At the 2001 annual meeting the shareholders of the Company voted to approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the "Plan"). This Plan provides non-employee directors of the Company with shares of restricted stock of the Company as a component of their compensation for services as directors. The maximum number of shares of stock that may be issued pursuant to the Plan is 15,000. The first grant date under this Plan preceded the 2002 annual meeting of shareholders. Each director whose term of office begins with or continues after the date the Plan was approved by the shareholders is issued a "annual stock retainer" consisting of 120 shares of fully vested restricted common stock of the Company. In 2004, 840 shares were issued under the Plan and the related compensation expense amounted to $31,836. ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information as of March 4, 2005 regarding the number of shares of Common Stock beneficially owned by each director and executive officer of the Company and by all directors and executive officers of the Company as a group. Number of Shares (1) Percentage of Class (2) -------------------- ----------------------- Louis E. Allyn, II 1,026 (3) .06% Dana A. Bartholomew 2,339 (4) .14% John R. H. Blum 15,696 (5) .93% Louise F. Brown 2,448 (6) .15% Richard J. Cantele, Jr. 2,883 (7) .17% Robert S. Drucker 5,979 (8) .36% John F. Foley 5,650 (9) .34% Nancy F. Humphreys 1,360 (10) .08% Holly J. Nelson 1,408 (11) .08% John F. Perotti 10,972 (12) .65% Walter C. Shannon, Jr. 3,964 (13) .24% Michael A. Varet 66,006 (14) 3.92% - ---------------------- -------- ----- (All Directors and Executive 119,731 7.12% Officers of the Company as a group of (12) persons) (1) The shareholdings also include, in certain cases, shares owned by or in trust for a director's spouse and/or children or grandchildren, and in which all beneficial interest has been disclaimed by the director. (2) Percentages are based upon the 1,682,401 shares of the Company's Common Stock outstanding and entitled to vote on March 4, 2005. The definition of beneficial owner includes any person who, directly or indirectly, through any contract, agreement or understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. (3) All shares are owned individually by Louis E. Allyn, II. (4) Includes 2,005 shares owned jointly by Dana A. Bartholomew and his wife. 37 (5) Includes 2,100 shares owned by John R. H. Blum's wife. (6) All shares are owned individually by Louise F. Brown. (7) Includes 1,197 shares owned jointly by Richard J. Cantele, Jr. and his wife and 6 shares owned by Richard J. Cantele, Jr. as custodian for his daughter. (8) Includes 1,500 shares owned by Robert S. Drucker's wife. (9) Includes 1,852 shares owned jointly by John F. Foley and his wife, 1,370 owned by his wife and 100 shares owned by John F. Foley as custodian for his children. (10) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her husband. (11) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child. (12) Includes 9,514 shares owned jointly by John F. Perotti and his wife, 761 shares owned by his wife and 564 shares in trust for his son. (13) All shares are owned individually by Walter C. Shannon, Jr. (14) Includes 18,540 shares which are owned by Michael A. Varet's wife and 18,546 shares which are owned by his children. Michael A. Varet has disclaimed beneficial ownership for all of these shares. Principal Shareholders of the Company Management is not aware of any person (including any "group" as that term is used in Section 13 (d)(3) of the Exchange Act) who owns beneficially more than 5% of the Company's Common Stock as of the Record Date. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company and the Bank have had, and expect to have in the future, transactions in the ordinary course of business with directors, officers, principal shareholders and their associates on substantially the same terms as those available for comparable transactions with others. John R. H. Blum is a member of the Board of Directors and an attorney engaged in the private practice of law. The Company has engaged Mr. Blum in past years and even though his services were not used in 2004, the Company may engage his services in 2005 in connection with certain legal matters. Walter C. Shannon, Jr. is a director of the Company and President Emeritus of Wagner McNeil, Inc. which serves as the insurance agent for many of the Company's insurance needs. Some of the directors and executive officers of the Company and the Bank, as well as firms and companies with which they are associated, are or have been customers of the Bank, and as such, have had banking transactions with the Bank. As a matter of policy, loans to directors and executive officers are made in the ordinary course of business on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features'. Since January 1, 2004, the highest aggregate outstanding principal amount of all loans extended by the Bank to its directors, executive officers and all associates of such persons as a group was $709,118, representing an aggregate principal amount equal to 1.71% of the equity capital accounts of the Bank. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 38 1. Audit Fees ---------- The aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements for the last two (2) fiscal years and the reviews of the financial statements included in the Company's Form 10-Q for the quarters of the fiscal years ended December 31, 2004 and December 31, 2003 were $86,980 and $76,625, respectively. 2. Audit-Related Fees ------------------ The aggregate fees billed for services rendered in each of the last two (2) years for assurance and related services by Shatswell, MacLeod & Company, P.C. that are reasonably related to regulatory audit requirements of the Trust Department were $17,942 for the fiscal year ended December 31, 2004 and $11,590 for the fiscal year ended December 31, 2003. 3. Tax Fees -------- The aggregate fees billed in each of the last two (2) years for professional services rendered by Shatswell, MacLeod & Company, P.C. for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2004 and December 31, 2003 were $8,100 each year. 4. All Other Fees -------------- There were no aggregate fees billed for services rendered by Shatswell, MacLeod & Company, P.C., other than the services covered above, for the fiscal years ended December 31, 2004 and December 31, 2003. Independence The Audit Committee of the Board of Directors of the Company has considered and determined that the provision of services rendered by Shatswell, MacLeod & Company, P.C. relating to matters 2 through 4 above, is compatible with maintaining the independence of such accountants. The Audit Committee's policy is to pre-approve all audit and non-audit services provided by the independent auditors, other than those listed under the de minimus exception. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to a particular service or category of services, and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expeditious delivery of services is necessary. The independent auditors and management are required to report to the full Audit Committee regarding the extent of services provided by independent auditors in accordance with this pre-approval, and the fees for the services performed to date. None of the audited-related fees, tax fees or other fees paid in 2004 and 2003 were approved per the Audit Committee's pre-approval policies. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report on Form l0-K. 39 1. Financial Statements: The financial statements filed as part of this report are listed in the index appearing at Item 8. 2. Financial Statement Schedules: Such schedules are omitted because they are inapplicable or the information is included in the consolidated financial statements or notes thereto. 3. Exhibits Required by Item 601 of Regulation S-K: Exhibit No. Description ----------- ----------- 3.1 Certificate of Incorporation of Salisbury Bancorp, Inc. (1) 3.2 Bylaws of Salisbury Bancorp, Inc., as amended (2) 10 Pension Supplement Agreement with John F. Perotti (3) 10.2 Form of Change in Control Agreement with Executive Officers (4) 10.3 Director Stock Retainer Plan (5) 11 Computation of Earnings per Share 21 Subsidiaries of the Company (6) 23.1 Consent of Independent Certified Public Accountants 31.1 Rule 13a-14(a)/15d-14(a) Certification 31.2 Rule 13a-14(a)/15d-14(a) Certification 32 Section 1350 Certifications (1) Exhibit was filed on April 23, 1998 as Exhibit 3.1 to Company's Registration Statement on Form S-4 (No. 333-50857) and is incorporated herein by reference. (2) Exhibit was filed on February 10, 2005 as Exhibit 3.2 to Company's Form 8-K/A and is incorporated herein by reference. (3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's Registration Statement on Form S-4 (No. 333-50857) and is incorporated herein by reference. (4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the Company's Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2002 and is incorporated herein by reference. (5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the Company's Annual Report on Form 10KSB for the fiscal year ended December 31, 2002 and is incorporated herein by reference. (6) Exhibit was filed on April 23, 1998 as Exhibit 21 to Company's Registration Statement on Form S-4 (No. 333-50857) and is incorporated herein by reference. 40 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Lakeville, Connecticut on March 28, 2005. SALISBURY BANCORP, INC. By: /s/ John F. Perotti --------------------------------- John F. Perotti Chairman and Chief Executive Officer By: /s/ John F. Foley --------------------------------- John F. Foley Chief Financial Officer and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date - --------- ----- ---- /s/ John F. Perotti Chairman, March 28, 2005 - -------------------------------- Chief Executive Officer (John F. Perotti) and Director /s/ Louis E. Allyn, II Director March 28, 2005 - -------------------------------- (Louis E. Allyn, II) /s/ Dana A. Bartholomew Director March 28, 2005 - -------------------------------- (Dana A. Bartholomew) /s/ John R. H. Blum Director March 28, 2005 - -------------------------------- (John R. H. Blum) /s/ Louise F. Brown Director March 28, 2005 - -------------------------------- (Louise F. Brown) /s/ Richard J. Cantele, Jr. Director March 28, 2005 - -------------------------------- (Richard J. Cantele, Jr.) /s/ Robert S. Drucker Director March 28, 2005 - -------------------------------- (Robert S. Drucker) /s/ Nancy F. Humphreys Director March 28, 2005 - -------------------------------- (Nancy F. Humphreys) /s/ Holly J. Nelson Director March 28, 2005 ------------------------------- (Holly J. Nelson) /s/ Walter C. Shannon, Jr. Director March 28, 2005 - -------------------------------- (Walter C. Shannon, Jr.) /s/ Michael A. Varet Director March 28, 2005 - -------------------------------- (Michael A. Varet) 41 EX-11 2 ex11.txt EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE The Company has computed and presented earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128. Reconciliation of the numerators and the denominators of the basic and diluted per share computation for net income are as follows:
(amounts in thousands, except per share data) (unaudited) Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Twelve months ended December 31, 2004 Basic EPS Net income and income available to common stockholders $4,019 1,503 $ 2.67 Effect of dilutive securities, options 0 ------ ------ Diluted EPS Income available to common stockholders and assumed conversions $4,019 1,503 $ 2.67 ====== ====== Twelve months ended December 31, 2003 Basic EPS Net income and income available to common stockholders $3,840 1,424 $ 2.70 Effect of dilutive securities, options 0 ------ ------ Diluted EPS Income available to common stockholders and assumed conversions $3,840 1,424 $ 2.70 ====== ====== (amounts in thousands, except per share data) (unaudited) Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ Three months ended December 31, 2004 Basic EPS Net income and income available to common stockholders $1,055 1,682 $ .63 Effect of dilutive securities, options 0 0 ------ ------ Diluted EPS Income available to common stockholders and assumed conversions $1,055 1,682 $ .63 ====== ====== Three months ended December 31, 2003 Basic EPS Net income and income available to common stockholders $ 795 1,424 $ .57 Effect of dilutive securities, options 0 0 ------ ------ Diluted EPS Income available to common stockholders and assumed conversions $ 795 1,424 $ .57 ====== ======
40 EX-21 3 ex21.txt Exhibit 21 ---------- Subsidiaries of the Company Percent owned Subsidiary State of Incorporation by Company - ---------- ---------------------- ---------- Salisbury Bank and Trust Company Connecticut 100% 44 EX-23.1 4 ex23-1.txt [LETTERHEAD SHATSWELL, MacLEOD & COMPANY, P.C.] Exhibit 23.1 ------------ Consent of Independent Registered Public Accounting Firm The Board of Directors Salisbury Bancorp, Inc. Lakeville, Connecticut We hereby consent to the use of our report dated January 27, 2005 in the Form 10-K of Salisbury Bancorp, Inc. and the reference to us in the section designated "Experts". /s/SHATSWELL, MacLEOD & COMPANY, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts March 15, 2005 45 EX-31.1 5 ex31-1.txt Exhibit 31.1 ------------ RULE 13a-14(a)/15d-14(a) CERTIFICATION -------------------------------------- I, John F. Perotti, certify that: 1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2005 By: /s/ John F. Perotti ------------------- Chairman and CEO 41 EX-31.2 6 ex31-2.txt Exhibit 31.2 ------------ RULE 13a-14(a)/15d-14(a) CERTIFICATION -------------------------------------- I, John F. Foley, certify that: 1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 28, 2005 By: /s/ John F. Foley ----------------- Chief Financial Officer and Treasurer 42 EX-32 7 ex32.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Salisbury Bancorp, Inc. (the "Company") on Form 10-K for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John F. Perotti, Chairman and Chief Executive Officer of the Company, and I, John F. Foley, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ John F. Perotti /s/ John F. Foley - ---------------------------------- --------------------------------- John F. Perotti John F. Foley Chairman and Chief Financial Officer Chief Executive Officer and Treasurer 43 -----END PRIVACY-ENHANCED MESSAGE-----