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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________to ______________
Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
- -------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common stock par value $.10 per share
Name of exchange on which registered: American Stock Exchange
Indicate by check mark whether the registrant: (1)has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
At March 3, 2000, the aggregate market value of the outstanding common stock,
exclusive of the shares held by affiliates of the registrant, was
$24,155,779.75.
The number of shares outstanding of the registrant's common stock, $.10 par
value, was 1,498,179 at March 3, 2000.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
Page
Part I
Item 1 - Business 3
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 8
Item 2 - Properties 13
Item 3 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 - Market for Registrant"s Common Equity and
Related Stockholder Matters 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
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 28
Item 8 - Financial Statements and Supplementary Data 28
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 30
Part III
Item 10 -Directors and Executive Officers of the Registrant 30
Item 11 -Executive Compensation 32
Item 12 -Security Ownership of Certain Beneficial Owners
and Management 34
Item 13-Certain Relationships and Related Transactions 35
Part IV
Item 14 - Exhibits, Financial Statements and Reports on Form 8-K 35
Signatures 37
2
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which
accounts for most of the Company"s net income. The Bank assumed its present name
in 1925 following the acquisition by the Robbins Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the successor to a private banking firm established in 1874. The
Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of Connecticut and its deposits are
insured by the Federal Deposit Insurance Corporation in accordance with the
Federal Deposit Insurance Act. The Bank"s main office is at 5 Bissell Street,
Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801.
The Bank serves its customers from its three (3) offices which are located in
Lakeville, Salisbury and Sharon, Connecticut. Substantially, all of the Bank"s
customers reside in or maintain their principal offices in Litchfield County,
Connecticut or in Dutchess County or Columbia County, New York or in Berkshire
County, Massachusetts.
(b) Financial Information about Industry Segments
The Company's products and services are all of the nature of commercial banking.
Lending
Lending is the principal business of the Bank and loans represent the largest
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. The Bank has also increased its lending activity through
home equity loans. 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 and are
completely serviced by the Bank.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in a position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
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. At December 31, 1999, it totaled
$78,715,000 which represents approximately 36.55% of total assets and it
produced interest and dividend income of $4,588,000 for the year 1999 as
compared with $3,432,138 for 1998.
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
2.60% to $157,454,000 during 1999.
The Bank is a member of the Federal Home Loan Bank of Boston. Borrowings totaled
$39,712,000 at December 31, 1999 as compared with $41,120,000 at December 31,
1998.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management"s Discussion and Analysis and
the accompanying Consolidated Financial Statements.
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, 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.
Through a contracted relationship with INVEST Financial Services, the Bank
assists individuals and business entities in achieving their financial
objectives through a no-cost financial planning process that analyses their
circumstances, identifies their goals and makes specific suggestions to
accomplish their goals. These suggestions may be implemented if clients so
choose, through a range of mutual funds, stocks, bonds, annuities, life
insurance and other investment products offered by INVEST.
All Others
The Company also offers safe deposit rentals, foreign exchange, a full menu of
elective fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company, (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Competition
The Bank encounters competition in all phases of its business. Several
competitive financial institutions have offices in the Salisbury, Connecticut
banking market. In addition, the Bank competes with banking institutions located
in Massachusetts and New York. A number of these institutions have higher
lending limits and greater resources than the Bank and provide certain services
that the Bank does not provide.
4
The banking business in the area served by the Bank is very competitive. Based
on information published by the Federal Reserve Bank of Boston in June 1998, the
Salisbury, Connecticut banking market consists of eight (8) commercial and
savings banks with a total of twelve (12) banking offices. The Bank has a 44.74
percent market share of deposits in the market.
SALISBURY, CONNECTICUT
ALL INSTITUTIONS, BY TOTAL DEPOSITS
Number of Dollars in Total Deposits
Branches Thousands (Percent)
-------- --------- ---------
l. Salisbury Bancorp, Lakeville .................... 2 $148,000 44.74%
(Salisbury Bank & Trust Company) (2) ($148,000) ---
2. Canaan National Bancorp, Canaan.................. 1 $ 48,000 14.47%
(Canaan National Bank) (1) ($48,000) ---
3. NewMil Bancorp, New Milford...................... 2 $ 33,000 9.84%
(New Milford Savings Bank) (2) ($ 33,000) ---
4. Iron Bancshares, Inc., Salisbury.................. 3 $ 29,000 8.85%
(National Iron Bank) (3) ($ 29,000) ---
5. Torrington Savings Bank........................... 1 $ 26,000 7.94%
6. People"s Mutual Holdings, Bridgeport............ 1 $ 20,000 6.12%
(Peoples Bank) (1) ($ 20,000) ---
7. Union Savings Bank............................... 1 $ 15,000 4.46%
8. Litchfield Bancorp................................ 1 $ 12,000 3.58%
- -- -- -------- ----
All Commercial Banking and Thrift Organizations 12 $331,000 100.00%
Herfindahl-Hirschman Index: 2,520
Three Firm Concentration Ratio: 69.05%
Note: The table is based on June 30, 1998 deposit data. It reflects all mergers
and bank holding company acquisitions completed by August 31, 1999.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Many non-bank competitors are not subject to the extensive
regulation described below under "LEGISLATION, REGULATION AND SUPERVISION" and
in certain respects may have a competitive advantage over banks in providing
certain services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks which allow the Bank to deliver certain
financial services to customers regardless of their proximity to the primary
service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions of and
mergers with Connecticut banks and bank holding companies with banks and bank
holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
5
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank"s future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the Bank Holding Company Act.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
Under the BHCA and the regulations of the Federal Reserve System promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined therein, without prior approval of the Federal Reserve Board. The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it wishes to acquire voting shares of any other bank, if after such
acquisition it would own or control more than 5% of the voting share of such
bank. The BHCA imposes limitations upon the Company as to the types of business
in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve months, is equal to 10% or more of the Company"s
consolidated net worth. For purposes of Regulation Y, "net consideration" is the
gross consideration paid by a company for all of its equity securities purchased
or redeemed during the period, minus the gross consideration received for all of
its equity securities sold during the period other than as part of a new issue.
However, a bank holding company need not obtain Federal Reserve Board approval
of any equity security redemption when:(i) the bank holding company"s capital
ratios exceed the threshold established for "well-capitalized" state member
banks before and immediately after the redemption; (ii) the bank holding company
is well-
6
managed; and (iii) the bank holding company is not the subject of any unresolved
supervisory issues.
After decades of debate, in November of 1999, Congress passed and President
Clinton signed legislation which repealed the restrictions that prohibited most
affiliations among banking, securities, and insurance firms. The new law, the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900),
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 FRB, in
addition to other regulatory agencies. Under the financial holding company
structure, bank holding companies will have a less-restricted 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 will
be permitted to purchase full-service banks.
As a general rule, the individual entities within a financial holding company
structure will be regulated according to the type of services
provided-functional regulation. Under this approach, a financial holding company
with banking, securities, and insurance subsidiaries will have to deal with
several regulatory agencies (e.g., appropriate banking agency, SEC, state
insurance commissioner). A financial holding company that is itself an insurance
provider will be subject to FRB oversight, as well as to regulation by the
appropriate state insurance commissioner. Broker/dealer and insurance firms
electing to become financial holding companies will be subject to FRB
regulation. In addition to permitting financial services providers to enter new
lines of business, the new law gives firms the freedom to streamline existing
operations and potentially reduce costs.
The impact that Gramm-Leach-Bliley Act is likely to have on the Bank and the
Company is difficult to predict. While the 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.
To qualify as a financial holding company, a bank holding company must certify
to the Federal Reserve System that it and its subsidiary banks satisfy the
requisite criteria of being "well-capitalized," "well-managed" and have a CRA
rating of "satisfactory" or better. The Company meets all of the criteria to
qualify as a financial holding company.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank"s internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required, among other things, to open branch
offices and to consummate merger transactions and other business combinations.
The Connecticut Banking Commissioner conducts periodic examinations of the Bank.
The Connecticut banking statutes also restrict the ability of the Bank to
declare cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed 15% of the Bank"s capital, surplus, undivided profits and loan reserves.
In addition, under Connecticut law, the beneficial ownership of more than 10% of
any class of voting securities of a bank may not be acquired by any person or
groups of persons acting in concert without the approval of the Connecticut
Banking Commissioner.
7
FDIC Regulation
The FDIC insures the Bank"s deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank"s
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution"s offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions" CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "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. Insurance companies, investment counseling firms and
other businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services.
Employees
The Company's current workforce at February 29, 2000 was 71 employees of whom 59
were full time and 12 were part time. The employees are not represented by a
collective bargaining unit.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.
8
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT,
INDUSTRY GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management"s Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, are presented on the following pages of this Report
on Form 10-K.
Page(s) of
Item of Guide 3 This Report
I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential 17
II. Investment Portfolio 9
III. Loan Portfolio 10
IV. Summary of Loan Loss Experience 11
V. Deposits 22
VI. Return on Equity and Assets 14
VII. Short-Term Borrowings 12
9
Investment Portfolio
As of December 1994, Salisbury Bank and Trust Company adopted Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 provides for the
categorization of investments into three groups and further provides for the
accounting and reporting treatment of each group. Investments may be classified
as held-to-maturity, available-for-sale, or trading. The Bank does not purchase
or hold any investment securities for the purpose of trading such investments.
The following tables sets forth the carrying amounts of the investment
securities as of December 31:
(dollars in thousands)
1999 1998 1997
---- ---- ----
Available-for-sale securities:
(at fair value)
Equity securities $ 137 $ 116 $ 123
U.S. Treasury securities and other
U.S. government corporations and agencies 33,290 43,578 33,175
Obligations of states and political subdivisions 12,379 9,553 6,983
Corporate securities 0 0 37
Mortgage-backed securities 29,347 25,408 7,193
------ ------ -----
$ 75,153 $ 78,655 $ 47,511
======== ======== ========
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ $ $
Obligations of states and political subdivisions 0 25 857
Mortgage-backed securities 489 554 915
---------------------------------
$ 489 579 $ 1,772
---------------------------------
Federal Home Loan Bank stock $ 2,102 $ 2,056 $ 833
=================================
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,
1999:
(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
Mortgage-backed
securities 489 6.40% 489
Available-for-sale
securities
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 2,500 5.58% $12,773 6.18% $ 6,549 6.71% $11,468 7.90% $33,290
Obligations of state and
political subdivisions 203 7.46% 2,865 7.58% 9,311 8.09% $12,379
Mortgage-backed
securities 1,521 7.50% 2,831 6.01% 24,995 6.35% $29,347
10
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
1999 1998 1997 1996 1995
---------------------------------------------------------------------------
Commercial, financial and $ 9,025 $ 10,692 $ 11,575 $ 12,047 $ 13,428
agricultural
Real Estate-construction and 3,382 3,392 4,203 4,839 5,065
land development
Real Estate - residential 86,680 80,451 77,336 75,756 71,283
Real Estate-commercial 15,324 14,909 13,355 13,607 13,948
Consumer 10,698 10,430 10,805 10,433 9,394
Other 364 535 655 743 139
---------------------------------------------------------------------------
125,473 120,409 117,929 117,425 113,257
Allowance for possible loan losses (1,160) (1,260) (1,226) (1,242) (1,160)
Unearned income 0 (6) (12) (34) (14)
---------------------------------------------------------------------------
Net loans $ 124,313 $ 119,143 $ 116,691 $ 116,149 $ 112,083
==========================================================================
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, 1999. Also provided are the amounts due after one
year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
year of less five years five
---------------------------------------
Commercial, financial,
agricultural and real estate commercial $5,215 $2,198 $16,936
Real estate-construction and land development 3,382 0 0
---------------------------------------
$8,597 $2,198 $16,936
Maturities after
One Year with:
Fixed interest rates $1,422 $ 5,984
Variable interest rates 776 10,952
$2,198 $16,936
11
Nonaccrual, Past Due and Restructured Loans
At December 31, 1999, approximately 78% of nonaccrual loans are secured by 1-4
family residential properties. There is one loan 90 days past due and still
accruing as it is scheduled to be brought current during the first quarter of
2000. There is only one restructured loan and it is secured by a 1-4 family
residential property. When a mortgage loan becomes 90 days past due, and there
is not sufficient collateral to cover the principal and accrued interest, the
Bank stops accruing interest unless there are unusual circumstances which
warrant an exception. Generally the only loan types that the Bank reclassifies
to nonaccrual are those secured by real estate. Other types of loans are
generally charged off if they become 90 days or more delinquent
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
1999 1998 1997 1996 1995
-------------------------------------------------------
Nonaccrual $ 473 $1,208 $1,328 $1,316 $1,793
90 days or more past due 10 109 279 49 8
Restructured loans 12 547 764 1,547 2,003
-------------------------------------------------------
Total nonperforming loans $ 495 $1,864 $2,371 $2,912 $3,804
======================================================
Total nonperforming loans as per-
centage of the total loan portfolio 0.39% 1.55% 2.01% 2.48% 3.36%
Allowance for credit losses as a per-
centage of nonperforming loans 234.34% 67.60% 51.71% 42.65% 30.49%
Information with respect to non-accrual and
restructured loans at December 31, 1999, 1998
and 1997 is as follows:
(dollars in thousands) Year Ended December 31
1999 1998 1997
-----------------------------
Interest income that would have been recorded under original terms $37 $83 $84
Gross interest recorded 11 8 7
Foregone interest $26 $75 $77
Summary of Loan Loss Experience
(dollars in thousands)
Year Ended December 31
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $1,260 $1,226 $1,242 $1,160 $1,309
--------------------------------------------------------------------------------
Charge-offs:
Commercial, financial and
agricultural 1 7 0 19 144
Real estate mortgage 243 53 38 160 262
Consumer 25 52 66 67 22
Total charge-offs 269 112 104 246 428
Recoveries:
Commercial, financial and
agricultural 0 0 11 27 2
Real estate mortgage 19 13 7 7 4
Consumer 30 13 20 19 23
Total recoveries 49 26 38 53 29
Net charge-offs 220 86 66 193 399
Provisions charges to operations 120 120 50 275 250
Balance at end of year $1,160 $1,260 $1,226 $1,242 $1,160
Ratio of net charge-offs to
average loans outstanding .18% .07% .06% .17% .36%
Ratio of allowance for loan losses
to year end loans .93% 1.05% 1.04% 1.07% 1.02%
12
Allocation of the Allowance for Loan Losses
(dollars in thousands)
December 31, 1999 December 31, 1998 December 31, 1997
--------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total
Loans
Commercial, financial and
agricultural $ 160 7.19% $ 182 8.88% $ 190 9.82%
Real estate construction 0 2.70% 0 2.82% 0 3.56%
and land development
Real estate mortgage 941 81.30% 982 79.20% 941 76.90%
Consumer 58 8.52% 95 8.66% 94 9.16%
Other loans 1 .29% 1 .44% 1 .56%
--------------------------------------------------------------------------------
Total allowance $1,160 100.00% $1,260 100.00% $1,226 100.00%
================================================================================
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 possible losses on the
collection of loans. The Bank records provisions for estimated loan losses,
which are charged against earnings, in the period they are established.
Short-Term Borrowings
(dollars in thousands) December 31
1999 1998 1997
Federal Home Loan Bank Advances
Average interest rate
At year end 5.19% 5.01% 6.37%
For the year 5.19% 6.02% 6.59%
Average amount outstanding during the year $35,954 $15,267 $5,191
Maximum amount outstanding at any month $42,038 $41,120 $6,000
Amount outstanding at year end $39,712 $41,120 $5,497
ITEM 2. PROPERTIES
The Company is not the owner or lessee of any properties. The Bank does not
lease any properties. The properties described below are owned by the Bank.
The Bank serves its customers from its three offices which are located in
Lakeville, Salisbury and Sharon, Connecticut. The Bank's trust department is
located in a separate building adjacent to the main office of the Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
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 1999 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT"S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low closing sales prices
of the Company's common stock. For the first and second quarters of 1998 and up
to August 24, 1998 which is when the Company's stock began trading on the AMEX,
the stock prices were reported by Smith Barney, Inc. and A. G. Edwards & Sons,
Inc. Beginning August 24, 1998, all stock prices for each quarterly period were
reported by the American Stock Exchange. Market information and dividends
reported have been adjusted to reflect the six for one stock exchange described
in Note 1 of the Consolidated Financial Statements.
1999 Quarters 1998 Quarters
-------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------------------------------------- ----------------------------------------
Range of Stock prices:
High $20.63 $20.00 $21.38 $22.13 $23.00 $21.75 $20.83 $16.67
Low $19.13 $18.88 $19.75 $19.75 $17.50 $19.00 $20.67 $15.00
(b) Holders
There were approximately 550 holders of stock as of March 3, 2000. This number
includes brokerage firms and other financial institutions which hold stock in
their name but which is actually owned by third parties. The Company is not
provided with the number or identities of these parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. 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, unless the certificate of incorporation permits
otherwise, the amount that would be needed, if the company were to be dissolved
at the time of the distribution, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights are superior to those
receiving the distribution. The following table presents cash dividends declared
per share for the last two years:
1999 Quarters 1998 Quarters
----------------------------------------- -----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------------------------------------- -----------------------------------------
Cash dividends
declared $ 0.34 $ 0.12 $ 0.12 $ 0.12 $ 0.27 $ 0.11 $ 0.11 $ 0.11
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 12 of the Consolidated Financial Statements on page F-19 for a description
of restrictions on the ability of the Bank to pay dividends to the Company.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF COMPANY
At or For the Years Ended December 31
1999 1998 1997 1996 1995
----------------------------- -------------------------------------------
Statement of Condition Data: [ dollars in thousands except per share data]
Loans, Net $124,313 $119,143 $116,691 $116,149 $112,083
Allowance For Possible Loan Losses 1,160 1,260 1,226 1,242 1,160
Investments 78,715 81,290 50,116 39,181 37,081
Total Assets 215,385 217,226 183,433 175,363 166,818
Deposits 154,358 153,147 156,169 150,143 148,640
Borrowings 39,712 41,120 5,497 4,527 0
Shareholders' Equity 19,895 21,555 20,483 18,789 17,605
Nonperforming Assets 570 2,044 2,297 3,269 4,467
Statement of Income Data:
Interest and Fees on Loans $9,621 $9,480 $9,459 $9,347 $8,418
Interest and Dividends on Securities
and Other Interest Income 4,903 3,881 3,165 2,727 2,549
Interest Expense 6,683 6,043 5,707 5,518 5,289
----------------------------- -------------- -------------- -------------
Net Interest Income 7,841 7,318 6,917 6,556 5,678
Provision for Possible Loan Losses 120 120 50 275 250
Trust Department Income 1,121 1,031 934 752 693
Other Income 860 735 553 668 450
Net Gain (Loss)on Sales of Securities 0 4 12 192
Other Expenses 5,523 5,347 4,766 4,547 4,213
----------------------------- -------------- -------------- -------------
Pre Tax Income 4,177 3,617 3,592 3,166 2,550
Income Taxes 1,484 1,299 1,402 1,052 990
----------------------------- -------------- -------------- -------------
Net Income $2,693 $2,318 $2,190 $2,114 $1,560
============================= ============== ============== =============
Per Share Data:*
Earnings per common share $1.78 $1.48 $1.41 $1.35 $0.98
Earnings per common share, assuming dilution $1.78 $1.47 $1.40 $1.35 $0.98
Cash Dividends Declared $0.70 $0.60 $0.52 $0.45 $0.33
Book Value (at year end) $13.23 $13.85 $13.06 $12.08 $11.12
Selected Statistical Data:
Return on Average Assets 1.25% 1.22% 1.24% 1.25% 0.97%
Return on Average Shareholders' Equity 12.96% 11.27% 11.10% 11.59% 9.16%
Dividend Payout Ratio 39.16% 40.13% 37.24% 33.27% %33.04%
Average Shareholders' Equity to Average Assets 9.67% 10.79% 11.13% 10.80% 10.54%
Net Interest Spread 3.07% 3.20% 3.33% 3.32% 2.99%
Net Interest Margin 3.93% 4.14% 4.21% 4.14% 3.77%
* Per share data for 1997, 1996 and 1995 has been restated to reflect the
six-for-one stock exchange described in Note 1 of the consolidated financial
statements.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF and Subsidiary
OPERATIONS
OVERVIEW
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole business is the Bank, which has three full
service offices including a Trust Department, located in the towns of Lakeville,
Salisbury and Sharon, Connecticut. The Company and the Bank were formed in 1998
and 1848, respectively. This discussion should be read in conjunction with the
Company's consolidated financial statements and the notes to the consolidated
financial statements that are presented as part of this Annual Report for the
three years ended December 31, 1999. All earnings per share and dividends per
share computations have been restated to reflect the six for one stock exchange
when the Company acquired all of the capital stock of the Bank on August 24,
1998.
The reported earnings for the Company were $2,693,000 in 1999, a 16.18% increase
over reported earnings in 1998 of $2,318,000. Earnings in 1997 were $2,190,000.
Earnings per diluted share increased 21.09% to $1.78 per share in 1999. This
compares to earnings per diluted share of $1.47 and $1.40 reported for 1998 and
1997 respectively.
This growth in net income and earnings per share during 1999 primarily reflects
an increase in average earning assets and noninterest income, the continuing
efforts of management to control operating expenses, and the reduced number of
shares outstanding as a result of stock repurchases. Management is pleased with
the continued growth of earnings and the improvements in the quality and
sustainability of the Company's earnings.
The quality of the Company's base of earning assets continued to improve during
1999. There were fewer nonperforming assets at the end of 1999 than a year ago.
Such assets, which consist of nonaccrual loans, loans restructured and other
real estate owned, totaled $570,000 or .26% of the total assets at year end
1999. This reflects a decrease of 72.11% when compared to year end 1998
nonperforming assets of $2,044,000. At December 31, 1999, the allowance for
possible loan losses was $1,160,000 and represented 234.34% of nonperforming
loans or .93% of total loans outstanding. This compares to a year end 1998
allowance of $1,260,000 which represented 67.60% of nonperforming loans or 1.05%
of total loans outstanding.
The Company's risk-based capital ratios at December 31, 1999, which includes the
risk-weighted assets and capital of Salisbury Bank and Trust Company, were
20.56% for Tier 1 capital and 21.71% for total capital. The leverage ratio was
9.95%. During 1999, the Company repurchased 55,015 shares of common stock.
As a result of the Company's financial performance, the Board of Directors
increased the dividends declared on the Company's common stock by 16.67% to $.70
per share in 1999. This compares to a $.60 per share dividend in 1998. A $.52
dividend per share was paid in 1997.
RESULTS OF OPERATIONS
COMPARISON BETWEEN 1999 AND 1998
NET INTEREST INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and the second is by
charging fees for services provided. The first involves functioning as a
financial intermediary. The Company accepts funds from depositors or borrows
funds and then either lends the funds to borrowers or invests those funds in
various types of securities. The second is fee income which is discussed in the
noninterest income section of this analysis.
16
Net interest income is the difference between the interest and fees earned on
loans and 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
1999 1998 1997
---------------------------------------------
Interest Income
(financial statements) $14,524 $13,361 $12,624
Tax Equivalent Adjustment 295 206 175
Interest Expense ( 6,683) ( 6,043) ( 5,707)
-------- -------- ---------
Net Interest Income-FTE $ 8,136 $ 7,524 $ 7,092
======= ======= =======
The Company's 1999 interest income-FTE of $14,819,000 was $1,252,000 or 9.23%
greater than 1998. This is primarily the result of an increase in average
earning assets of $25,069,000 or 13.80% to $206,794,000 during 1999. Interest
expense increased $640,000 or 10.59% to $6,683,000 in 1999. This is the result
of an increase in average Federal Home Loan Bank advances of $20,327,000 or
133.14% and an increase in average interest bearing deposits of .95% to
$127,430,000. Overall, net interest income-FTE increased 8.13% to $8,136,000 in
1999 compared to $7,524,000 in 1998.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate of
interest 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 1999 net
interest margin (FTE) of 3.93% was .21% lower than 1998's net interest margin of
4.14%. A decline in interest rates in late 1998 carried over into the year 1999
resulting in pressures on margins that actually reduced the net interest margin
to 3.83% during the first quarter of the year. A rising rate environment near
year end resulted in the net interest margin climbing to its year end level of
3.93%.
The following table reflects average balances, interest earned or paid and rates
for the three years ended December 31, 1999, 1998 and 1997. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges collected which are not
deemed to be material. Interest earned on tax exempt securities in the table is
presented on a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34%
was used in performing these calculations. Actual tax exempt income earned in
1999 was $572,000 with a yield of 4.93%. Actual tax exempt income in 1998 was
$400,000 with a yield of 5.05% and 1997 actual tax exempt income was $289,000
with a yield of 5.25%.
17
Average Balances, Interest Earned or Paid and Rates
Year Ended December 31
[dollars in thousands] 1999 1998 1997
---------------------------------------------------------------------------------------------------
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 $123,174 $ 9,621 7.81% $118,417 $ 9,480 8.01% $117,991 $ 9,459 8.02%
Taxable Securities 65,403 4,016 6.14% 46,903 3,032 6.46% 37,959 2,469 6.50%
Tax-Exempt Securities 11,614 867 7.47% 7,917 606 7.65% 5,505 464 8.43%
Federal Funds 6,156 295 4.79% 8,080 425 5.26% 6,601 384 5.82%
Other Interest Income 447 20 4.47% 408 24 5.88% 414 23 5.56%
------ ------ ----- ------- ------ ----- -------- -------- ------
Total interest earning 206,794 14,819 7.17% 181,725 13,567 7.47% 168,470 12,799 7.60%
-------- ------ ------
assets
Allowance for loan (1,190) (1,254) (1,218)
losses
Cash & due from
Banks 5,101 4,572 4,565
Premise, Equipment 2,498 2,901 2,999
Net unrealized
gain/loss on AFS Securities (754) 538 170
Other Assets 2,378 2,135 2,274
-------- -------- --------
Total Average Assets $214,827 $190,617 $177,260
======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
NOW/Money Market
deposits $ 53,182 $ 1,524 2.87% $ 50,373 $ 1,531 3.04% $ 51,050 $ 1,602 3.14%
Savings deposits 15,315 372 2.43% 14,547 355 2.44% 13,869 357 2.57%
Time deposits 58,933 2,939 4.99% 61,316 3,238 5.28% 63,431 3,406 5.37%
Borrowed funds 35,594 1,848 5.19% 15,267 919 6.02% 5,191 342 6.59%
-------- -------- -----
Total interest bearing
liabilities 163,024 6,683 4.10% 141,503 6,043 4.27% 133,541 5,707 4.27%
-------- ------- -------
Demand Deposits 30,024 27,234 23,118
Other Liabilities 999 1,308 880
Shareholders' Equity 20,780 20,572 19,721
-------- -------- ---------
Total Liabilities and
Equity $214,827 $190,617 $ 177,260
========= ========= ===========
Net Interest Income $ 8,136 $ 7,524 $ 7,092
========= ========= ==========
Net Interest Spread 3.07% 3.20% 3.33%
Net Interest Margin 3.93% 4.14% 4.21%
* Annualized
18
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 1999 over 1998 1998 over 1997
------------------------------------ ---------------------------------
Volume Rate Total Volume Rate Total
------------------------------------ ---------------------------------
Increase (decrease) in:
Interest income on:
Loans $ 381 $ (240) $ 141 $ 34 $ (13) $ 21
Taxable investment securities 1,195 (211) 984 581 (18) 563
Tax-exempt investment securities 282 (21) 261 203 (61) 142
Other interest income (100) (34) (134) 85 (43) 42
------- ------- ------- ------- ------- -------
Total interest income $ 1,758 $ (506) $ 1,252 $ 903 $ (135) $ 768
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 85 $ (92) $ (7) $ (21) $ (50) $ (71)
Savings deposits 19 (2) 17 17 (19) (2)
Time deposits (126) (173) (299) (113) (55) (168)
Borrowed funds 1,224 (295) 929 664 (87) 577
------- ------- ------- ------- ------- -------
Total interest expense $ 1,202 $ (562) $ 640 $ 547 $ (211) $ 336
------- ------- ------- ------- ------- -------
Net interest margin $ 556 $ 56 $ 612 $ 356 $ 76 $ 432
======= ======= ======= ======= ======= =======
NONINTEREST INCOME
Fees earned by the Trust Department remain the largest component of noninterest
income and amounted to $1,121,000 in 1999. This increase of $90,000 or 8.73% is
the result of continuing growth in the department. Other noninterest income
increased 17.05% to $860,000 in 1999. Growth in demand deposit and NOW accounts
generated an increase in transaction volumes resulting in increased fees. The
Company's VISA credit card program continues to grow, also contributing to the
increase in transaction fees. INVEST Financial Services, a new financial
planning service introduced during the latter part of 1998, has completed it's
first full year of existence and has contributed to noninterest income. The
Company continues to work on increasing noninterest income due to its importance
as a potential contributor to profitability.
NONINTEREST EXPENSE
Noninterest expense totaled $5,523,000 in 1999. This is an increase of $177,000
when compared to total noninterest expense of $5,346,000 in 1998. These expenses
are often calculated as a proportion of total assets as a means of comparing
this level with other financial institutions. As a percentage of average earning
assets, these expenses have remained generally consistent at 2.67% in 1999,
2.94% in 1998 and 2.83% in 1997. Salaries and employee benefits increased
$246,000 or 9.35%. This is primarily the result of salary increases and
increased costs of employee benefits. Occupancy and equipment expense increased
$25,000 when comparing 1999 to 1998. Data processing costs increased $70,000 or
27.89% to $321,000 in 1999. The Company remains committed to upgrading equipment
to handle increased transaction volumes and to maintain technological
competitiveness. This commitment to utilizing technology to facilitate the
personalized delivery of financial products and services is considered to be a
key component to the Company's continued success as a leading community based
financial institution. Increases and decreases in other operating expenses are
the result of normal operating activities and management's continuing efforts to
control costs.
INCOME TAXES
In 1999, the Company's tax expense was $1,484,000, an effective tax rate of
35.53%. This compares to income tax expenses of $1,299,000 in 1998, an effective
tax rate of 35.92%. This increase in tax expense reflects an increase in taxable
income.
19
COMPARISON BETWEEN 1998 AND 1997
OVERVIEW
Salisbury Bancorp, Inc.'s earned net income for 1998 was $2,318,000 or $1.47
diluted per share earnings. This represented a 5.84% increase over the
$2,190,000 earned in 1997. On an earnings per share basis, 1998 increased 5.00%
over the $1.40 diluted per share earnings for 1997. Growth in net income and
earnings per share during 1998 primarily reflected both an increase in earning
assets and the continuing efforts of management to control operating expenses.
The Company's risk-based capital ratios, which included the risk-weighted assets
and capital of Salisbury Bank and Trust Company, were 20.62% for Tier 1 capital
and 21.90% for total capital at December 31, 1998. These ratios substantially
exceeded the regulatory minimums for bank holding companies of 4% for Tier 1
capital and 8% for total capital.
Nonperforming assets, which included nonaccrual loans, loans restructured and
other real estate owned, were $2,044,000 or 0.94% of total assets outstanding at
year end 1998. This reflected a decrease of 11.01% when compared to year end
1997 nonperforming assets of $2,297,000 which were 1.25% of total assets. At
December 31, 1998, the allowance for loan losses was $1,260,000 or 1.05% of
total loans outstanding and 67.60% of nonperforming loans, which totaled
$1,864,000.
As a result of the Company's financial performance, the Board of Directors
increased the dividends declared on the Company's common stock by 15.39% during
1998 from $.52 per share in 1997 to $.60 per share in 1998. Despite the payment
of increased dividends, per share book value increased to $13.85 at December 31,
1998 compared to $13.06 at December 31, 1997.
NET INTEREST INCOME
In 1998, net interest income-FTE increased $432,000 or 6.09% over 1997. Net
interest margins decreased from 4.21% in 1997 to 4.14% in 1998. This was
primarily the result of pressures on margins created by competition for
business, coupled with a year in which there was a decline in interest rates. As
a result, however, total average earning assets increased $13,255,000 to
$181,725,000 or 7.87% during 1998. Average deposits increased slightly during
1998; however, lower rate trends resulted in a decrease in interest expense on
deposits of $241,000 or 4.50%. This overall increase in interest expense was the
result of the additional borrowings from the Federal Home Loan Bank.
NONINTEREST INCOME
The Company's income from noninterest revenue activities increased 18.44% in
1998 and represented 11.67% of total revenues compared to 10.56% in 1997. The
Trust Department continued to grow and as a result, trust income for 1998
increased 10.39% to $1,031,000 compared to income in 1997 of $934,000. Other
noninterest income increased 32.91% to $735,000 in 1998. This was primarily the
result of increased fees for insufficient funds and from an increase of 47.68%
in interchange fees from an increase in MasterMoney debit card transactions and
VISA credit card transactions. This compared to other noninterest income of
$553,000 for 1997.
NONINTEREST EXPENSE
Noninterest expense totaled $5,347,000 in 1998. Salaries and employee benefits
increased $233,000 or 9.71%. This was primarily the result of salary increases
and increased costs of employee benefits. Occupancy and equipment expense
increased $96,000 when comparing 1998 to 1997. During 1998, the Company incurred
some one time expenses that resulted in an increase in noninterest expenses for
the year. Several years earlier the Company purchased property in New York state
on which it intended to build a branch facility. However, impediments to
interstate de novo branching delayed the branch initiative and the property was
reclassified on the Company's books as other real estate owned ("OREO") property
and its carrying value written down. This resulted in an expense of $65,000. The
Company also recorded a profit from operation on other real estate owned of
$52,000 for 1998.
20
However, there was an OREO property on the Company's books
that was disposed of in 1998 at a cost of $170,000 and is reflected in the total
other expenses of $1,374,000.
INCOME TAXES
In 1998, the Company's tax expense was $1,299,000, an effective tax rate of
35.92%. This compares to income tax expense of $1,402,000 in 1997, an effective
tax rate of 39.03%. The decrease in the effective tax rate was primarily the
result of an increase in tax exempt income.
FINANCIAL CONDITION
COMPARISON OF DECEMBER 31, 1999 AND 1998
Total assets at December 31, 1999 were $215,385,000 compared to $217,226,000 at
December 31, 1998, a decrease of $1,841,000 or .85%. The Company classifies
nearly the entire investment securities portfolio as available-for-sale, the
value of which is adjusted quarterly to market value. Changes in the economic
climate during the year generated movement in interest rates. This movement
resulted in a decrease in the carrying value of the Company's securities
portfolio. The Company also used cash to repurchase 55,015 shares during 1999.
LENDING
Loans receivable, net of allowance for loan losses increased $5,170,000 to
$124,313,000 at December 31, 1999 or 4.34% compared to $119,143,000 at December
31, 1998. The Company's credit function is designed to insure adherence to a
high level of credit standards despite the aggressive pressures of competition
for loans in the Company's market area. Residential mortgages showed the largest
dollar growth during the year increasing 7.74% or $6,229,000 to $86,680,000 at
December 31, 1999 compared to $80,451,000 at December 31, 1998. The Company
offers a wide variety of loan types and terms to customers along with very
competitive pricing and we continue to develop new personalized financial
products and services to meet the needs of our customers.
ALLOWANCE FOR LOAN LOSSES
Credit risk is inherent in the business of extending loans. The Company
maintains an allowance or reserve for credit losses through charges to earnings.
The loan loss provisions for 1999 and 1998 were $120,000 each year. Specifically
identifiable and quantifiable losses are immediately charged off against the
allowance.
The Company formally determines the adequacy of the allowance on a monthly
basis. This determination is based on assessment of credit quality or "risk
rating" of loans by senior management which is submitted to the Board of
Directors for approval. Loans are initially risk rated when originated. If there
is a 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 ("SFAS 114").
These impaired loans receive individual evaluation of the allowance necessary on
a monthly basis. Impaired loans are defined in the Bank's Loan Policy as
residential real estate mortgages with balances of $300,000 or more and
commercial loans over $100,000 when it is probable that the bank will not be
able to collect all principal and interest due according to the terms of the
note.
These commercial loans and residential mortgage loans will then be considered
impaired under any one of the following circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
21
The individual allowance for each impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
The loss factor applied as a general allowance is determined by a periodic
analysis of the Allowance for Loan Losses. This analysis considers historical
loan losses and loan delinquency figures for the last three years. It also looks
at delinquency trends over the most recent quarter.
The credit card delinquency and loss history is evaluated separately and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Average net losses for the last three years by
loan type are examined as well as trends by type for the last three years. The
Bank's loan mix over that same period of time is analyzed.
A loan loss allocation is made for each type of loan and multiplied by the loan
mix percentage for each loan type to produce a weighted average factor.
At December 31, 1999, the allowance for loan losses totaled $1,160,000
representing 234.34% of nonperforming loans and .93% of total loans compared to
$1,260,000 representing 67.60% of nonperforming loans and 1.05% of total loans
at December 31, 1998. Management believes that the allowance for loan losses is
reasonable and adequate to cover any losses reasonably expected in the existing
loan portfolio. While management estimates loan losses using the best available
information, no assurances can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans and other factors, both within and outside of
management's control. Additionally, with expectations of the Company to grow its
existing loan portfolio, future additions to the allowance may be necessary to
maintain adequate coverage ratios.
SECURITIES PORTFOLIO
As of December 31, 1999, the securities portfolio, including Federal Home Loan
Bank of Boston stock, totaled $78,715,000. This represents a decrease of
$2,575,000 or 3.17% when compared to $81,290,000 at year end 1998. Federal funds
sold decreased $6,200,000 at year end 1999 compared to year end 1998. These
reductions were used primarily to fund loan growth and repay borrowings. 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 diversification to the Company's
assets. The securities portfolio also acts as collateral for the deposits of
public agencies. The primary component of the total portfolio is U.S. Government
sponsored agencies which accounted for 44.96% of the portfolio at December 31,
1999. The remaining portion of the portfolio primarily consists of U. S.
Treasury, State and Municipal obligations and mortgage-backed securities. At
December 31, 1999, securities totaling $76,124,000 were classified as
available-for-sale and securities totaling $489,000 were classified as
held-to-maturity. The Company continues to use arbitrage strategy by borrowing
funds and then investing them at a rate of return higher than the borrowing cost
in order to generate additional interest income.
The accumulated other comprehensive income on the available-for-sale portion of
the portfolio, net of tax effect decreased $2,192,000 to $(1,835,000) at year
end 1999 compared to $357,000 at year end 1998. This is primarily attributable
to an upward movement in interest rates and activity in the stock market during
the year.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year end 1999 totaled $154,358,000 compared to
$153,147,000 at year end 1998. 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 deposits, savings and money market
accounts which are lower cost core deposits. This resulted in a decrease in the
cost of the deposit base for 1999. This change in deposit mix that began in 1998
and continued into 1999 improves net interest margin to the extent that the
Company can continue growth in these core deposits.
22
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
1999 1998 1997
--------------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------------
Demand $ 30,024 $ 27,234 $ 23,118
NOW 16,400 2.03% 15,592 1.24% 15,690 1.47%
Money Market 36,782 3.67% 34,781 3.84% 35,360 3.88%
Savings 15,315 2.43% 14,547 2.44% 13,869 2.57%
Time 58,933 4.99% 61,316 5.28% 63,431 5.37%
---------- ---------- ----------
$157,454 3.07% $153,470 3.34% $151,468 3.54%
======== ======== ========
Maturities of time certificates of deposit of $100,000 or more outstanding at
December 31, 1999 are summarized as follows:
(dollars in thousands)
Year Ended December 31
1999 1998 1997
---------------------------------------
Three months or less $ 2,296 $ 6,920 $ 5,801
Over three months through six months 4,120 2,069 4,415
Over six months through one year 5,194 3,887 3,017
Over one year 3,294 2,508 1,091
--------- --------- ---------
Total $14,904 $15,384 $14,324
========= ========= =========
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.
These advances are made pursuant to various credit programs, each of which has
its own interest rate and range of maturities. At December 31, 1999, the Company
had $39,712,000 in outstanding advances from the Federal Home Loan Bank compared
to $41,120,000 at December 31, 1998. The decrease represents repayment of the
borrowings. Management expects that it will continue this strategy.
QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
There are several factors that impact the Company's market risk. They include
economic conditions, regulatory considerations and trends in the banking and
financial services industries.
From a national perspective, the most significant economic factors impacting the
Company have been the steady growth in the economy and the actions of the
Federal Reserve Board to manage the pace of that growth with movements in
interest rates. The economy in the Company's market area is also impacted as
market rates for loans, investments and deposits respond to these Federal
Reserve actions.
Changes in regulation can impact the Company. The Federal Reserve requires that
banks maintain reserves equal to a percentage of their transaction accounts. An
increase or decrease in this percentage impacts funds available to lend which
could either stimulate or slow economic activities.
23
Competition is aggressive in the Company's market area and comes from both
banking and non-banking entities. This competition can have a significant impact
on profitability.
The Company views the process of addressing the potential impacts of these
external factors as part of its management of risk. Due to the nature of its
business, the Company is subject to credit risk and interest rate risk that is
related to financial products. Credit risk relates to the possibility that a
loan may not be repaid to the Company.
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 the Company's 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.
In an attempt to manage its exposure to changes in interest rates, 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.
At December 31, 1999, the Company was slightly liability sensitive. Less than 1%
of short-term earnings are at risk in either a rising or falling rate
environment. This level of interest rate risk is well 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. This enhances the
liquidity position by providing a source of available borrowings.
At December 31, 1999, the Company had approximately $22,324,000 in loan
commitments outstanding. Management believes that the level of liquidity is
ample to meet the Company's needs for both the present and foreseeable future.
CAPITAL
Under current regulatory definitions, the Company is "well-capitalized", the
highest rating of the five categories defined under the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"). As a result, the Bank pays the
lowest deposit premium possible. The 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 more sensitive to the differences in risk associated with
various assets. It takes into account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low-risk
assets. At year end 1999, the Company had a risk-based capital ratio of 21.71%
compared to 21.90% a year ago. This slight decrease is primarily the result of
activity in the Company's stock buy back program during the year. During 1999,
the Company repurchased 55,015 shares or 3.66% of its outstanding common stock.
24
Capital management plays a significant role in the earnings per share growth of
the Company. Net income has provided $7,201,000 in capital in the last three
years, of this amount $2,800,000 or 38.89% was distributed in dividends.
Maintaining strong capital is essential to bank safety and soundness which
influences customer confidence, potential investors, regulators and
shareholders. However, the effective management of capital requires generating
attractive returns on equity to build value for shareholders while maintaining
appropriate levels of capital to fund growth, meeting regulatory requirements
and being consistent with prudent industry practices.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles 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 have a
greater impact on the Company's performance than do the effects of general
levels of inflation; although they do not necessarily move in the same direction
or with the same magnitude as the prices of goods and services. Inflation has
been minimal for the last several years and has had little impact on the
financial condition and results of operations of the Company during the periods
discussed in this report; however, it could impact earnings in future periods.
YEAR 2000
Disclosure relating to Ongoing "Year 2000 Issues"
"Year 2000 issues" refer to a wide variety of potential computer issues that may
arise from the ability of computer programs to properly process date-sensitive
information relating to the Year 2000, critical dates throughout the year and
thereafter.
The State of the Company's Readiness
The Year 2000 created risk for the Company from unforeseen problems in computer
systems and from Year 2000 issues with the Company"s vendors, service providers
and customers. A company-wide Year 2000 ("Y2K") program which included a formal
Y2K project plan continues to be utilized in addressing Y2K issues. Ensuring the
continuing integrity of all technical systems and business processes is a top
priority for the Company. Upgrades to all of the Company's business-critical
systems have been completed and all business-critical applications have tested
satisfactorily.
The Company completed the remediation of its network hardware, personal
computers and operating systems. The Company's mission critical service
providers and software vendors provided remediated products, allowing the
Company to complete the validation process.
The Company utilized several third-party service providers for its core
applications. The service providers have met their established goals for Year
2000 qualifications of their systems and related products utilized by the
Company.
The Risks of the Company's Year 2000 Issues
The Company recognized that a failure to resolve a material Year 2000 issue
could have resulted in the interruption in, or a failure of, certain normal
business activities or operations such as servicing depositors, processing
transactions or originating and servicing loans. The Company determined that a
company-wide business risk-assessment approach is most appropriate for
addressing and remediating Year 2000 problems. This included an assessment of
the information technology resources of each of the functional areas of the
Company, as well as separate assessments of information technology, vendors and
suppliers and non-information technology and facilities risks.
25
Management recognized and prepared for the liquidity risk stemming from the
potential withdrawal of significant deposits or other sources of funds as the
Year 2000 millennium date change approached. The Company did not experience any
changes in customer behavior and did not have to implement any of its
Contingency Plans.
The Costs to Address the Company's Year 2000 Issues
Costs to modify computer systems did not have a material impact on the Company's
financial results or condition. The Company's budget for Y2K related expenses in
1999 was $50,000, of which the Bank expended $47,391.
Although the Company does not specifically monitor the cost of internal
resources diverted to the Year 2000 project, these issues have consumed a
substantial amount of staff and management resources.
The Company's Contingency Plans
The Company has a business resumption plan that helps supplement the Company's
comprehensive Disaster Recovery Policy and Program as a part of the Company's
contingency planning. To further the Company's Disaster Recovery initiative, the
Company has an auxiliary power generator in one of its branch locations.
Management could use this location as a provisional operations center and could
re-deploy staff resources, if necessary to help assure manual completion of
critical operational activities.
The Company did not have to implement any portions of its business resumption
plan during the millennium date rollover. No disruptions were experienced by the
Company and the transition to the new year was accomplished without incident.
The Bank's Business Resumption Contingency Plan addresses the possibility that
one or more of the Bank"s mission critical systems or infrastructure components
might fail to operate as required on one or more of the "critical dates"
identified by the Company in its" Year 2000 Test Plan. While most "critical
dates" identified by the Company have already occurred without incident, the
Plan is fully capable of responding to other critical date contingencies.
FORWARD LOOKING STATEMENTS
This Form 10-K and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and 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
revenues and earnings for the Company and Bank through growth resulting from
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 Reform 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 operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business conditions in the banking industry generally and
in the specific markets in which the Bank operates; (b) changes in the
legislative and regulatory environment that negatively impact the Company and
Bank through increased operating expenses; (c) increased competition from other
financial and non-financial institutions; (d) the impact of technological
advances; and (e) other risks detailed from time to time in the Company's
filings with the Securities and Exchange Commission. The Company and Bank do not
undertake any obligation to update or revise any forward-looking statements
subsequent to the date on which they are made.
26
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for the integrity and objectivity of the financial
statements and other information appearing in this Annual Report. The financial
statements were prepared in accordance with generally accepted accounting
principles applying estimates and Management's best judgment as required. To
fulfill their responsibilities, Management establishes and maintains accounting
systems and practices adequately supported by internal accounting controls.
These controls include the selection and training of management and supervisory
personnel; an organization structure providing for delegation of authority and
establishment or responsibilities; communication of requirements for compliance
with approved accounting, control and business practices throughout the
organization; business planning and review; and a program of internal audit.
Management believes the internal accounting controls in use provide reasonable
assurance that assets are safeguarded, that transactions are executed in
accordance with Management's authorization and that the financial records are
reliable for the purpose of preparing financial statements.
27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk.
With regard to equity price risk the Company"s stock is traded on the American
Stock Exchange and as a result the value of its common stock may fluctuate or
respond to price movements relating to the banking industry or other indicia of
investment. A discussion of credit risk, interest rate risk and liquidity risk
can be found in Part II, Item 7 "Management"s Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page
Quarterly Summarized Financial Data (unaudited)............................ 29
Index to Consolidated Financial Statements
Report of Independent Auditors" January 24, 2000...........................F-1
Consolidated Balance Sheets at December 31, 1999 and 1998..................F-2
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997..........................................F-3
Consolidated Statements of Changes in Stockholders" Equity
for the Years Ended December 31, 1999, 1998 and 1997......................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997..........................................F-6
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1999, 1998 and 1997..............................F-8
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 1999.......................................F-23
Statement of Income for the Year Ended December 31, 1999 and
for the periodAugust 24, 1998 to December 31, 1998.......................F-24
Statement of Cash Flows for the Year Ended December 31, 1999
and for the period August 24, 1998 to December 31, 1998..................F-25
28
QUARTERLY SUMMARIZED FINANCIAL DATA (unaudited)
[dollars in thousands except per share data]
Quarters Ended
1999 1998
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
Statement of Condition Data:
Loans, Net $124,313 $123,651 $123,059 $120,514 $119,143 $117,562 $117,413 $116,402
Allowance For Possible Loan Losses 1,160 1,109 1,205 1,288 1,260 1,259 1,259 1,251
Investments 78,715 82,281 70,698 69,164 81,290 61,450 52,273 51,343
Total Assets 215,385 218,458 215,241 205,091 217,226 196,466 181,423 181,071
Deposits 154,358 155,130 163,809 152,453 153,147 149,979 148,301 149,506
Borrowings 39,712 42,038 30,358 30,741 41,120 23,492 10,857 9,236
Shareholders' Equity 19,895 20,207 20,244 20,693 21,555 21,581 21,181 20,816
Nonperforming Assets 570 1,270 1,839 1,915 2,044 2,148 2,064 2,377
Statement of Income Data:
Interest and Fees on Loans 2,457 2,433 2,394 2,337 2,368 2,367 2,374 2,371
Interest and Dividends on Securities
and Other Interest Income 1,306 1,293 1,154 1,150 1,102 1,001 883 895
Interest Expense 1,733 1,700 1,618 1,632 1,754 1,474 1,403 1,412
----------------------------------------------------------------------------------------------
Net Interest Income 2,030 2,026 1,930 1,855 1,716 1,894 1,854 1,854
Provision for Possible Loan Losses 30 30 30 30 30 30 30 30
Trust Department Income 318 242 261 300 268 246 269 248
Other Income 253 217 213 177 239 164 177 155
Net Loss on Sales of Securities 2 0 0 0 0 0 0 0
Other Expenses 1,591 1,310 1,308 1,315 1,493 1,298 1,293 1,263
----------------------------------------------------------------------------------------------
Pre Tax Income 978 1,145 1,066 987 700 976 977 964
Income Taxes 223 466 444 350 160 375 420 344
----------------------------------------------------------------------------------------------
Net Income $755 $679 $622 $637 $540 $601 $557 $620
==============================================================================================
Per Share Data:
Earnings diluted $0.50 $0.45 $0.41 $0.42 $0.34 $0.39 $0.35 $0.39
Cash Dividends Declared $0.34 $0.12 $0.12 $0.12 $0.27 $0.11 $0.11 $0.11
Dividend Payout Ratio 68.00% 26.67% 29.27% 28.57% 79.41% 28.21% 31.43% 28.21%
Book Value $13.23 $13.42 $13.41 $13.71 $13.85 $13.88 $13.52 $13.43
Market Price:
High $20.63 $20.00 $21.38 $22.13 $22.75 $21.75 $20.83 $20.83
Low $19.13 $18.88 $19.75 $19.75 $17.50 $18.89 $14.17 $14.17
Selected Statistical Data:
Return on Average Assets 1.38% 1.24% 1.18% 1.22% 1.07% 1.25% 1.22% 1.34%
Return on Average Shareholders' Equity 14.46% 13.32% 11.98% 12.08% 9.64% 12.26% 11.04% 12.14%
Average Shareholders' Equity
to Average Assets 9.39% 9.39% 9.81% 10.09% 10.61% 10.47% 11.03% 11.05%
Net Interest Margin 4.04% 3.98% 3.87% 3.83% 3.75% 4.04% 4.33% 4.44%
29
[LETTERHEAD SHATSWELL, MACLEOD & COMPANY, P.C]
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998 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, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/S/ SHATSWELL, MacLEOD & COMPANY, P.C.
--------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 24, 2000
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
- ------ ------------------------------------
Cash and due from banks $ 6,477,502 $ 5,525,258
Interest bearing demand deposits with other banks 267,696 409,344
Federal funds sold 6,200,000
Money market mutual funds 970,526
----------------
Cash and cash equivalents 7,715,724 12,134,602
Investments in available-for-sale securities (at fair value) 75,153,227 78,655,408
Investments in held-to-maturity securities (fair values of $478,185 as of
December 31, 1999 and $573,075 as of December 31, 1998) 489,340 579,078
Federal Home Loan Bank stock, at cost 2,102,000 2,056,000
Loans, net 124,312,781 119,142,785
Other real estate owned 75,000 180,000
Premises and equipment 2,248,711 2,399,607
Accrued interest receivable 1,575,524 1,383,349
Other assets 1,712,934 695,391
--------------- ----------------
Total assets $215,385,241 $217,226,220
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 28,317,523 $ 27,430,922
Interest-bearing 126,040,804
-------------
Total deposits 154,358,327 153,147,452
Federal Home Loan Bank advances 39,711,979 41,119,806
Other liabilities 1,420,184 1,403,524
--------------- ---------------
Total liabilities 195,490,490 195,670,782
------------- -------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,504,171 shares in 1999 and 1,556,286 shares in 1998 150,417 155,629
Paid-in capital 3,780,376 4,882,027
Retained earnings 17,798,981 16,160,547
Accumulated other comprehensive income (loss) (1,835,023) 357,235
--------------- ----------------
Total stockholders' equity 19,894,751 21,555,438
-------------- --------------
Total liabilities and stockholders' equity $215,385,241 $217,226,220
============ ============
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, 1999, 1998 and 1997
1999 1998 1997
---------------- ---------------- ----------------
Interest and dividend income:
Interest and fees on loans $ 9,621,177 $ 9,479,885 $ 9,459,235
Interest and dividends on securities:
Taxable 3,891,267 2,971,296 2,413,960
Tax-exempt 571,852 400,206 288,599
Dividends on equity securities 125,095 60,636 55,225
Other interest 314,957 449,329 407,263
-------------- -------------- --------------
Total interest and dividend income 14,524,348 13,361,352 12,624,282
------------ ------------ ------------
Interest expense:
Interest on deposits 4,835,337 5,124,335 5,364,746
Interest on Federal Home Loan Bank advances 1,847,811 919,336 341,811
------------- -------------- --------------
Total interest expense 6,683,148 6,043,671 5,706,557
------------- ------------- -------------
Net interest and dividend income 7,841,200 7,317,681 6,917,725
Provision for loan losses 120,000 120,000 50,000
-------------- -------------- ---------------
Net interest and dividend income after provision for
loan losses 7,721,200 7,197,681 6,867,725
------------- ------------- -------------
Other income:
Trust department income 1,120,978 1,031,255 934,163
Service charges on deposit accounts 337,828 347,188 251,733
Gain (loss) on sales of available-for-sale securities, net (1,942) 4,372
Other income 521,817 387,217 300,544
-------------- -------------- --------------
Total other income 1,978,681 1,765,660 1,490,812
------------- ------------- -------------
Other expense:
Salaries and employee benefits 2,878,290 2,631,604 2,399,275
Occupancy expense 246,614 242,099 206,432
Equipment expense 448,005 427,935 367,160
Data processing 321,199 251,175 257,301
Insurance 97,140 95,503 87,289
Other real estate owned writedowns 65,000
Net cost (profit) of operation of other real estate owned 15,177 (52,196) 12,231
Printing and stationery 142,377 137,889 137,698
Legal expense 87,162 173,279 141,303
Other expense 1,287,228 1,373,901 1,157,467
------------- ------------- -------------
Total other expense 5,523,192 5,346,189 4,766,156
------------- ------------- -------------
Income before income taxes 4,176,689 3,617,152 3,592,381
Income taxes 1,483,779 1,299,249 1,402,000
------------- ------------- -------------
Net income $ 2,692,910 $ 2,317,903 $ 2,190,381
============ ============ ============
Earnings per common share $ 1.78 $ 1.48 $ 1.41
============ ============ ============
Earnings per common share,
assuming dilution $ 1.78 $ 1.47 $ 1.40
============ ============ ============
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, 1999, 1998 and 1997
Accumulated
Number Other
of Comprehensive
Shares Common Paid-in Retained Treasury Income
Issued Stock Capital Earnings Stock (Loss) Total
----------- ------ ---------- ---------- --------------- ----------- ------------
Balance, December 31, 1996 263,967 $879,011 $4,683,401 $13,398,222 $ (254,831) $ 83,343 $18,789,146
Comprehensive income:
Net income 2,190,381
Net change in unrealized holding gain
on available-for-sale securities,
net of tax effect of $146,165 213,246
Comprehensive income 2,403,627
Repurchase of common stock (184,668) (184,668)
Transfer treasury stock to reduce shares
issued (7,602) (25,315) (414,184) 439,499
Sale of stock 499 1,662 25,113 26,775
Retirement of fractional shares (11) (41) (806) (847)
Dividends reinvested 2,256 7,512 153,774 161,286
Employee stock options exercised 2,289 7,622 95,967 103,589
Dividends declared ($0.52 per share) (815,798) (815,798)
------- ------- --------- ---------- ----------- ------- -----------
Balance, December 31, 1997 261,398 870,451 4,543,265 14,772,805 296,589 20,483,110
Comprehensive income:
Net income 2,317,903
Net change in unrealized holding gain
net of on available-for-sale securities,
tax effect 60,646
Comprehensive income 2,378,549
Stock options exercised 1,409 4,692 61,956 66,648
Formation of holding company, change in
par value 1,295,210 (707,185) 707,185
Repurchase of common stock
Transfer treasury stock to reduce (463,972) (463,972)
shares issued (6,466) (12,161) (451,811) 463,972
Retirement of fractional shares (199) (661) (17,202) (17,863)
Stock options exercised 4,934 493 38,634 39,127
Dividends declared ($.60 per share) (930,161) (930,161)
--------- ------- --------- ---------- ------- ----------
Balance, December 31, 1998 1,556,286 155,629 4,882,027 16,160,547 357,235 21,555,438
Comprehensive income:
Net income 2,692,910
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect (2,192,258)
Comprehensive income 500,652
Repurchase of common stock (1,106,863) (1,106,863)
Transfer treasury stock to reduce shares
issued (52,115) (5,212) (1,101,651) 1,106,863
Dividends declared ($.70 per share) (1,054,476) (1,054,476)
--------- -------- ---------- ----------- ----------- ------------ -----------
Balance, December 31, 1999 1,504,171 $150,417 $3,780,376 $17,798,981 $ $(1,835,023) $19,894,751
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
(continued)
Reclassification disclosure for the years ended December 31:
1999 1998
----------- --------
Net unrealized gains (losses) on available-for-sale securities $(3,599,259) $89,449
Less reclassification adjustment for realized losses in net income 1,942 0
----------- --------
Other comprehensive income (loss) before income tax effect (3,597,317) 89,449
Income tax (expense) benefit 1,405,059 (28,803)
----------- --------
Other comprehensive income (loss), net of tax $(2,192,258) $60,646
=========== =======
Accumulated other comprehensive income (loss) as of December 31, 1999, 1998 and
1997 consists of net unrealized holding gains (losses) on available-for-sale
securities, net of taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 2,692,910 $ 2,317,903 $ 2,190,381
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 120,000 120,000 50,000
Depreciation and amortization 268,770 249,396 263,999
(Accretion) amortization of securities, net (52,519) (23,117) 41,912
Deferred tax expense (benefit) (41,744) (92,332) 28,042
(Gain) loss on sales of available-for-sale securities, net 1,942 (4,372)
Increase in interest receivable (192,175) (84,163) (197,016)
Increase in interest payable 31,439 43,613 37,430
(Increase) decrease in cash surrender value of insurance
policies (24,837) 223,393 34,602
(Increase) decrease in prepaid expenses 607 (69,608) 15,491
Increase in accrued expenses 158,100 43,133 45,235
(Increase) decrease in other assets 14,823 (2,369) (2,362)
Increase (decrease) in other liabilities 3,430 (107) 1,563
Gain on donation of other real estate owned (70,000)
Donation of other real estate owned 170,000
Other real estate owned writedowns 65,000
Change in unearned income (6,425) (5,718) (22,372)
Loss on sales of other real estate owned, net 6,309 10,581 2,000
Increase (decrease) taxes payable 171,137 (99,352) 218,257
-------------- --------------- --------------
Net cash provided by operating activities 3,151,767 2,796,253 2,702,790
------------- ------------- -------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (46,000) (1,222,700) (62,300)
Purchases of available-for-sale securities (49,108,950) (55,125,378) (39,948,273)
Proceeds from sales of available-for-sale securities 3,236,440 13,911,038
Proceeds from maturities of available-for-sale securities 45,828,371 24,096,304 10,886,961
Proceeds from maturities of held-to-maturity securities 89,318 1,190,168 3,599,606
Net increase in loans (5,331,648) (2,787,950) (605,276)
Proceeds from sales of other real estate owned 98,691 184,419 195,800
Capital expenditures (117,874) (81,545) (353,888)
Recoveries of loans previously charged off 48,077 26,948 38,320
--------------- --------------- ---------------
Net cash used in investing activities (5,303,575) (33,719,734) (12,338,012)
------------- ------------ ------------
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(continued)
1999 1998 1997
---------------- ---------------- ----------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 5,652,392 (1,622,694) 5,829,047
Net increase (decrease) in time deposits (4,441,517) (1,399,145) 196,862
Advances from Federal Home Loan Bank 14,800,000 44,000,000 4,250,000
Principal payments on advances from Federal Home Loan Bank (16,207,827) (8,377,169) (3,279,883)
Dividends paid (963,255) (839,439) (779,691)
Issuance of common stock 105,775 264,875
Net repurchase of common stock (1,106,863) (463,972) (157,893)
Retirement of fractional shares (17,863) (847)
-------------------- --------------- -----------------
Net cash provided by (used in) financing activities (2,267,070) 31,385,493 6,322,470
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (4,418,878) 462,012 (3,312,752)
Cash and cash equivalents at beginning of year 12,134,602 11,672,590 14,985,342
------------ ------------ ------------
Cash and cash equivalents at end of year $ 7,715,724 $12,134,602 $11,672,590
============ =========== ===========
Supplemental disclosures:
Interest paid $6,651,709 $6,000,058 $5,669,127
Income taxes paid 1,354,386 1,490,933 1,155,701
Transfer of loans to other real estate owned 195,000 170,000
Loans originated from sales of other real estate owned 173,200
Premises transferred to other real estate owned 140,000
F-7
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
NOTE 1 - NATURE OF OPERATIONS
Salisbury Bancorp, Inc. (Company) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank & Trust Company (Bank) operates as its wholly-owned subsidiary.
On August 24, 1998, the Company acquired all of the capital stock of the Bank
pursuant to a plan of reorganization approved by the Bank's stockholders on June
27, 1998. The stockholders of the Bank became stockholders of the Company. Each
share of common stock of the Bank was exchanged for six shares of common stock
of the Company. The par value of the Bank's shares is $3.33 per share. The par
value of the Company's shares is $.10 per share.
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
three banking offices located in Connecticut. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in residential and commercial real estate, consumer and small business
loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to generally accepted accounting principles and predominant practices within the
banking industry. The consolidated financial statements were prepared using the
accrual basis of accounting. The significant accounting policies are summarized
below to assist the reader in better understanding the consolidated financial
statements and other data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank, and the Bank's
wholly-owned subsidiary, SBT Realty, Inc. SBT Realty, Inc. holds and
manages bank owned real estate situated in New York state. All
significant intercompany accounts and transactions have been eliminated
in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand
deposits with other banks, federal funds sold and money market mutual
funds.
Cash and due from banks as of December 31, 1999 includes $1,123,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
F-8
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the balance sheet. Unrealized holding gains and losses are
not included in earnings but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances reduced by any charge-offs, the allowance for loan losses and
any deferred fees or costs on originated loans or unamortized premiums
or discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the
related loan's yield. The Company is amortizing these amounts over the
contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations
and is decreased by loan losses, net of recoveries. The provision for
loan losses is based on management's evaluation of current and
anticipated economic conditions, changes in the character and size of
the loan portfolio, and other indicators.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the
loan agreement. The Company measures impaired loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the
fair value of the collateral if the loan is collateral dependent.
F-9
The Company considers for impairment all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Company considers
its residential real estate loans and consumer loans that are not
individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Company
reviews its loans for impairment on a loan-by-loan basis. The Company
does not apply impairment to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a loan
is not generally accrued when the loan becomes ninety or more days
overdue. The Company may place a loan on nonaccrual status but not
classify it as impaired, if (i) it is probable that the Company will
collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is an individually insignificant residential
mortgage loan or consumer loan. Impaired loans are charged-off when
management believes that the collectibility of the loan's principal is
remote. Substantially all of the Company's loans that have been
identified as impaired have been measured by the fair value of existing
collateral.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets and subsequent writedowns are included in other expense.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company
classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair value for its financial instruments. Fair value
methods and assumptions used by the Company in estimating its fair
value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair
values.
F-10
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 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 demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for 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.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
STOCK BASED COMPENSATION:
The Company recognizes stock-based compensation using the intrinsic
value approach set forth in APB Opinion No. 25 rather than the fair
value method introduced in SFAS No. 123. Entities electing to continue
to follow the provisions of APB No. 25 must make pro forma disclosure
of net income and earnings per share, as if the fair value method of
accounting defined in SFAS No. 123 had been applied. The Company has
made the pro forma disclosures required by SFAS No. 123.
EARNINGS PER SHARE:
Statement of Financial Accounting Standards No. 128 (SFAS No. 128),
"Earnings per Share" is effective for periods ending after December 15,
1997. SFAS No. 128 simplifies the standards of computing earnings per
share (EPS) previously found in APB Opinion No. 15. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
F-11
The Company has computed and presented EPS for the years ended December
31, 1999, 1998 and 1997 in accordance with SFAS No. 128. Basic EPS as
so computed does not differ materially from primary EPS that would have
resulted if APB Opinion No. 15 had been applied. Basic EPS so restated
does not differ from primary EPS previously presented under APB Opinion
No. 15.
Fully diluted EPS is presented for 1997 but would not have been
required if the APB Opinion No. 15 criteria had still been in effect.
NOTE 3 - INVESTMENTS IN SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows as of December 31:
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
--------------- ----------- ------------ ------------
Available-for-sale securities:
December 31, 1999:
Equity securities $ 12,333 $ 124,642 $ $ 136,975
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 34,345,096 1,054,693 33,290,403
Debt securities issued by states of the United States
and political subdivisions of the states 13,128,484 26,842 776,864 12,378,462
Money market mutual funds 970,526 970,526
Mortgage-backed securities 30,673,084 5,067 1,330,764 29,347,387
------------ ------------ ------------ ------------
79,129,523 156,551 3,162,321 76,123,753
Money market mutual funds included in cash and
cash equivalents (970,526) (970,526)
------------ ------------ ------------ ------------
$ 78,158,997 $ 156,551 $ 3,162,321 $ 75,153,227
============ ============ ============ ============
December 31, 1998:
Equity securities $ 12,331 $104,141 $ $ 116,472
Debt securities issued by the U.S. Treasury and other
U.S. government corporations and agencies 43,311,027 293,669 26,671 43,578,025
Debt securities issued by states of the United States
and political subdivisions of the states 9,292,443 296,179 35,505 9,553,117
Mortgage-backed securities 25,448,060 77,969 118,235 25,407,794
------------ ------------ ------------ ------------
$ 78,063,861 $ 771,958 $ 180,411 $ 78,655,408
============ ============ ============ ============
Held-to-maturity securities:
December 31, 1999:
Mortgage-backed securities $ 489,340 $ $ 11,155 $ 478,185
============ ============ ============ ============
December 31, 1998:
Debt securities issued by states of the United States
and political subdivisions of the states $ 25,000 $ 98 $ $ 25,098
Mortgage-backed securities 554,078 6,101 547,977
------------ ------------ ------------
$ 579,078 $ 98 $ 6,101 $ 573,075
============ ============ ============ ============
F-12
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
1999:
Held-to-maturity Available-for-sale
securities: securities:
--------------------- -----------------------------
Amortized Amortized
Cost Fair Cost Fair
Basis Value Basis Value
---------- ----------- -------------- ------------
Debt securities other than mortgage-backed securities:
Due within one year $ $ $ 2,502,087 $ 2,500,300
Due after one year through five years 13,198,871 12,976,440
Due after five years through ten years 9,868,978 9,413,927
Due after ten years 21,903,644 20,778,198
Mortgage-backed securities 489,340 478,185 30,673,084 29,347,387
--------- --------- ------------ ------------
$489,340 $478,185 $78,146,664 $75,016,252
======== ======== =========== ===========
During 1999, proceeds from sales of available-for-sale securities amounted to
$3,236,440. Gross realized gains and gross realized losses on those sales
amounted to $7,068 and $9,010, respectively. During 1998, there were no sales of
available-for-sale securities. During 1997, proceeds from sales of
available-for-sale securities amounted to $13,911,038. Gross realized gains and
gross realized losses on those sales amounted to $23,140 and $18,768,
respectively.
There were no issuers of securities whose carrying amount exceeded 10% of
stockholders' equity as of December 31, 1999.
Total carrying amounts of $8,910,735 and $5,941,061 of debt securities were
pledged to secure public deposits and for other purposes as required by law as
of December 31, 1999 and 1998, respectively.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
1999 1998
----------- -----------
(in thousands)
Commercial, financial and agricultural $ 9,025 $ 10,692
Real estate - construction and land development 3,382 3,392
Real estate - residential 86,680 80,451
Real estate - commercial 15,324 14,909
Consumer 10,698 10,430
Other 364 535
----------- -----------
125,473 120,409
Allowance for loan losses (1,160) (1,260)
Unearned income (6)
----------- ------------
Net loans $124,313 $119,143
======== ========
F-13
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 1999.
Total loans to such persons and their companies amounted to $1,616,529 as of
December 31, 1999. During 1999 advances of $621,125 were made and repayments
totaled $1,002,170.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
1999 1998 1997
---------- ---------- ----------
Balance at beginning of period $1,260,488 $1,225,819 $1,241,807
Provision for loan losses 120,000 120,000 50,000
Recoveries of loans previously charged off 48,077 26,948 38,320
Loans charged off (269,028) (112,279) (104,308)
---------- ---------- ----------
Balance at end of period $1,159,537 $1,260,488 $1,225,819
========== ========== ==========
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
1998 1999
--------------------------- ---------------------------
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 $ 291,057 $40,000 $1,565,531 $250,253
Loans for which there is no related allowance for credit losses 0 0 0
----------- ------- ---------- --------
Totals $ 291,057 $40,000 $1,565,531 $250,253
=========== ======= ========== ========
Average recorded investment in impaired loans during the
year ended December 31 $1,116,858 $1,611,963
========== ==========
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 67,895 $ 59,242
=========== ============
Amount recognized using a cash-basis method of
accounting $ 0 $ 0
=========== ============
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
1999 1998
----------- -----------
Land $ 293,194 $ 293,194
Buildings 2,021,088 1,989,981
Furniture and equipment 1,971,269 1,884,502
----------- -----------
4,285,551 4,167,677
Accumulated depreciation and amortization (2,036,840) (1,768,070)
----------- -----------
$2,248,711 $2,399,607
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 1999 and 1998 was $14,903,731 and $15,384,302,
respectively.
F-14
For time deposits as of December 31, 1999, the scheduled maturities for years
ended December 31 are:
2000 $44,100,749
2001 6,860,645
2002 1,538,440
2003 3,175,909
2004 713,663
--------------
$56,389,406
===========
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances for the five years ending after December 31, 1999 and
thereafter are summarized as follows:
INTEREST RATE RANGE AMOUNT
2000 5.68% - 6.58% $11,354,686
2001 5.38% - 6.58% 4,353,547
2002 5.68% - 6.58% 1,113,139
2003 5.68% - 6.58% 993,295
2004 5.68% - 6.45% 766,823
Thereafter 4.18% - 6.30% 21,130,489
------------
$39,711,979
===========
At December 31, 1999, $20,000,000 of advances from the FHLB were redeemable at
par at the option of the FHLB on dates ranging from March 21, 2000 through
December 15, 2003.
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.
Advances are secured by the Company's stock in that institution, its residential
real estate mortgage portfolio and the remaining U.S. government and agencies
obligation not otherwise pledged.
NOTE 8 - PENSION PLAN
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
F-15
The following tables set forth information about the plan as of December 31 and
the years then ended:
1999 1998
----------- ------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $2,407,714 $2,036,649
Actuarial (gain) loss (192,692) 188,421
Service cost 111,604 111,513
Interest cost 159,855 174,076
Benefits paid (481,848) (102,945)
----------- ------------
Benefit obligation at end of year 2,004,633 2,407,714
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,645,553 2,283,646
Actual return on plan assets 388,286 395,755
Employer contribution 15,243 69,097
Benefits paid (481,848) (102,945)
----------- ------------
Fair value of plan assets at end of year 2,567,234 2,645,553
----------- -----------
Funded status 562,601 237,839
Unrecognized net gain from actuarial experience (758,532) (372,400)
Unrecognized prior service cost 8,051 8,943
Unamortized net asset existing at date of adoption of
SFAS No. 87 58,364 66,095
----------- ------------
Accrued benefit cost included in other liabilities $ (129,516) $ (59,523)
=========== ============
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 6.0% for 1999, 1998 and 1997, respectively. The
weighted-average expected long-term rate of return on assets was 8.0% for 1999,
1998 and 1997.
Components of net periodic benefit cost:
1999 1998 1997
--------- -------- ---------
Service cost $111,604 $111,513 $ 90,327
Interest cost on benefit obligation 159,855 174,076 149,021
Expected return on assets (194,846) (181,249) (162,668)
Amortization of prior service cost 8,623 8,623 8,623
--------- -------- ---------
Net periodic benefit cost $ 85,236 $112,963 $ 85,303
========= ======== =========
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
1999 1998 1997
---------- ---------- ----------
Current:
Federal $1,170,254 $1,034,773 $1,008,406
State 355,269 356,808 365,552
---------- ---------- ----------
1,525,523 1,391,581 1,373,958
---------- ---------- ----------
Deferred:
Federal (38,359) (72,755) 6,794
State (3,385) (19,577) 21,248
---------- ---------- ----------
(41,744) (92,332) 28,042
---------- ---------- ----------
Total income tax expense $1,483,779 $1,299,249 $1,402,000
========== ========== ==========
F-16
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
1999 1998 1997
------- ------- -------
% 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 (4.1) (3.8) (2.7)
Other items (.5) .6
State tax, net of federal tax benefit 5.6 6.2 7.1
----- ----- -----
Effective tax rates 35.5% 35.9% 39.0%
==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
1999 1998
---------- ---------
Deferred tax assets:
Allowance for loan losses $255,197 $ 299,507
Interest on non-performing loans 12,302 3,483
Accrued deferred compensation 24,179 26,342
Post retirement benefits 10,128 8,279
Other real estate owned property writedown 25,509 25,938
Deferred organization costs 4,466 5,752
Accrued pensions 50,445 23,576
Net unrealized holding loss on available-for-sale securities 1,170,747
----------
Gross deferred tax assets 1,552,973 392,877
---------- ---------
Deferred tax liabilities:
Deferred state tax refund (14,781) (35,897)
Accelerated depreciation (356,648) (390,521)
Discount accretion (4,104) (1,510)
Net unrealized holding gain on available-for-sale securities (234,312)
---------- ---------
Gross deferred tax liabilities (375,533) (662,240)
---------- ---------
Net deferred tax assets (liabilities) $1,177,440 $(269,363)
========== =========
Deferred tax assets as of December 31, 1999 and 1998 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 1999, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
F-17
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
1999 1998
---------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------- -------------------------------
Financial assets:
Cash and cash equivalents $ 7,715,724 $ 7,715,724 $ 12,134,602 $ 12,134,602
Available-for-sale securities 75,153,227 75,153,227 78,655,408 78,655,408
Held-to-maturity securities 489,340 478,185 579,078 573,075
Federal Home Loan Bank stock 2,102,000 2,102,000 2,056,000 2,056,000
Loans 124,312,781 123,285,000 119,142,785 120,152,000
Accrued interest receivable 1,575,524 1,575,524 1,383,349 1,383,349
Financial liabilities:
Deposits 154,358,327 154,527,000 153,147,452 153,594,000
Federal Home Loan Bank advances 39,711,979 38,902,000 41,119,806 41,000,000
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
1999 1998
------------ -----------
Commitments to originate loans $ 4,546,884 $ 6,501,105
Standby letters of credit 30,000 30,000
Unadvanced portions of loans:
Home equity 6,550,744 6,322,988
Commercial lines of credit 6,594,189 5,830,971
Construction 641,184 1,433,789
Credit cards 3,960,781 3,737,896
------------ -----------
$22,323,782 $23,856,749
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 11 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located within the state.
There are no concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
F-18
NOTE 12 - REGULATORY MATTERS
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are also presented
in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 1999:
Total Capital (to Risk Weighted Assets)
Consolidated $22,946 21.71% $8,455 >8.0% N/A
-
Salisbury Bank & Trust Company 21,990 21.02 8,369 >8.0 $10,461 >10%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 21,730 20.56 4,227 >4.0 N/A
-
Salisbury Bank & Trust Company 20,774 19.86 4,184 >4.0 6,277 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 21,730 9.95 8,738 >4.0 N/A
-
Salisbury Bank & Trust Company 20,774 9.57 8,679 >4.0 10,849 >5.0
- -
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated 22,505 21.90 8,223 >8.0 N/A
-
Salisbury Bank & Trust Company 20,522 20.05 8,190 >8.0 $10,237 >10.0
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 21,198 20.62 4,111 >4.0 N/A
-
Salisbury Bank & Trust Company 19,215 18.77 4,095 >4.0 6,142 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 21,198 10.42 8,138 >4.0 N/A
-
Salisbury Bank & Trust Company 19,215 9.54 8,056 >4.0 10,071 >5.0
- -
F-19
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 1999 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $12,095,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 13 - STOCK COMPENSATION PLAN
The Company had a fixed option, stock-based compensation plan, which is
described below. The Plan was terminated effective December 31, 1997. The
Company applied APB Opinion 25 and related Interpretations in accounting for its
plan. Compensation expense, as measured by APB Opinion 25, was immaterial for
each of the three years in the three year period ended December 31, 1999. Had
compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method of FASB Statement 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
---------- ----------- -----------
Net income As reported $2,692,910 $2,317,903 $2,190,381
Pro forma $2,692,910 $2,317,903 $2,176,163
Earnings per common share As reported $1.78 $1.48 $1.41
Pro forma $1.78 $1.48 $1.40
Earnings per common share,
assuming dilution As reported $1.78 $1.47 $1.40
Pro forma $1.78 $1.47 $1.39
Under the Employee Stock Purchase Plan, the Company granted options to its
eligible employees for up to 25,000 shares of common stock. Each employee of the
Company was eligible to become a participant in the Plan following the
completion of one year of service.
The fair value of each option grant in 1997 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 4 percent; expected volatility of 10 percent;
risk-free interest rate of 5.62 percent; expected life of 1 year and estimated
forfeiture rate of 55 percent.
F-20
A summary of the status of the Company's fixed stock option plan as of December
31, 1999, 1998 and 1997 and changes during the years ending on those dates is
presented below:
1999 1998 1997
--------------------------- --------------------------- ------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise
------ -------------- ------ -------------- ------ --------
Price
Outstanding at beginning
of year 4,420 $7.93 26,850 $7.68 39,660 $7.03
Granted 21,420 7.93
Exercised (13,388) 7.85 (13,734) 7.34
Forfeited 4,420 7.93 (9,042) 7.31 (20,496) (6.92)
----- -------- ------
Outstanding at end of year 0 4,420 $7.93 26,850 $7.68
======== ======== ======
Options exercisable at
year-end 0 4,420 26,850
Weighted-average fair value
of options granted during
the year N/A N/A $1.48
NOTE 14 - EARNINGS PER SHARE (EPS)
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net income are as follows:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year ended December 31, 1999
Basic EPS
Net income and income available to common stockholders $2,692,910 1,512,253 $1.78
Effect of dilutive securities, options 0
---------- ----------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,692,910 1,512,253 $1.78
========== =========
Year ended December 31, 1998
Basic EPS
Net income and income available to common stockholders $2,317,903 1,570,445 $1.48
Effect of dilutive securities, options 7,937
---------- ----------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,317,903 1,578,382 $1.47
========== =========
Year ended December 31, 1997
Basic EPS
Net income and income available to common stockholders $2,190,381 1,556,010 $1.41
Effect of dilutive securities, options 11,496
---------- ----------
Diluted EPS
Income available to common stockholders and assumed
conversions $2,190,381 1,567,506 $1.40
========== =========
F-21
NOTE 15 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
F-22
SALISBURY BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 1999 and 1998
ASSETS 1999 1998
- ------ ----------- -----------
Cash in bank $ $ 57,288
Money market mutual funds 970,526
-----------
Cash and cash equivalents 970,526 57,288
Investments in available-for-sale securities (at fair value) 500,002 2,341,425
Investment in subsidiary 18,939,257 19,571,849
Other assets 4,466 5,660
----------- -----------
Total assets $20,414,251 $21,976,222
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 511,418 $ 420,197
Other liabilities 8,082 587
----------- ------------
Total liabilities 519,500 420,784
----------- -----------
Total stockholders' equity 19,894,751 21,555,438
----------- -----------
Total liabilities and stockholders' equity $20,414,251 $21,976,222
=========== ===========
F-23
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
Year Ended December 31, 1999 and For the Period August 24, 1998
to December 31, 1998
For the
Period Ended
Year Ended August 24, 1998 to
December 31, 1999 December 31, 1998
----------------- -----------------
Dividend income from subsidiary $1,120,000 $2,725,000
Taxable interest on securities 56,258 19,110
---------- -----------
1,176,258 2,744,110
---------- -----------
Legal expense 70,816
Formation expense 51,320
Supplies and printing 15,715 4,349
Other expense 18,380 23,462
---------- -----------
34,095 149,947
---------- -----------
Income before income tax (benefit) expense and equity in
undistributed net income (loss) of subsidiary 1,142,163 2,594,163
Income tax (benefit) expense 8,779 (5,164)
---------- -----------
Income before equity in undistributed net income (loss) of subsidiary 1,133,384 2,599,327
Equity in undistributed net income (loss) of subsidiary 1,559,526 (2,091,533)
---------- -----------
Net income $2,692,910 $ 507,794
========== ===========
F-24
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 and For the Period August 24, 1998
to December 31, 1998
For the
Period Ended
Year Ended August 24, 1998 to
December 31, 1999 December 31, 1998
----------------- -----------------
Cash flows from operating activities:
Net income $2,692,910 $ 507,794
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed (income) loss of subsidiary (1,559,526) 2,091,533
Deferred tax (benefit) expense 1,286 (5,751)
Accretion of securities (28,862) (19,110)
Increase in taxes payable 7,495 587
----------- ------------
Net cash provided by operating activities 1,113,303 2,575,053
----------- -----------
Cash flows from investing activities:
Purchases of available-for-sale securities (2,141,461) (2,322,083)
Proceeds from sales of available-for-sale securities 1,663,514
Proceeds from maturities of available-for-sale securities 2,348,000
-----------
Net cash provided by (used in) investing activities 1,870,053 (2,322,083)
----------- -----------
Cash flows from financing activities:
Issuance of common stock 39,127
Net repurchase of common stock (1,106,863) (63,800)
Dividends paid (963,255) (171,009)
----------- ------------
Net cash used in financing activities (2,070,118) (195,682)
----------- ------------
Net increase in cash and cash equivalents 913,238 57,288
Cash and cash equivalents at beginning of year 57,288
----------- ------------
Cash and cash equivalents at end of year $ 970,526 $ 57,288
=========== ============
F-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two most recent fiscal years, the Company and the Bank have had no
changes in or disagreements with its independent accountants on accounting and
financial disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
The following table sets forth the name and age of each Executive Officer, his
principal occupation for the last five years and the year in which he was first
appointed an Executive Officer of the Company.
EXECUTIVE
OFFICE OF THE
NAME AGE POSITION COMPANY SINCE:
John F. Perotti 53 President and Chief 1998 (1)
Executive Officer
Craig E. Toensing 62 Secretary 1998 (2)
John F. Foley 49 Chief Financial Officer 1998 (3)
(1) Mr. Perotti is the President and Chief Executive Officer of the Bank and
has been an Executive Officer of the Bank since 1982.
(2) Mr. Toensing is the Senior Vice President and Trust Officer of the Bank and
has been an Executive Officer of the Bank since 1982.
(3) Mr. Foley is Vice President, Comptroller and Principal Financial Officer of
the Bank and has been an Executive Officer of the Bank since 1986.
Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide for a Board
of Directors of not less than seven (7) members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors of the Company
is divided into three (3) classes. Classes of directors serve for staggered
three (3) year terms. A successor class is to be elected at each annual meeting
of shareholders. When the terms of office of the members of one class expire
vacant directorships may be filled, until the expiration of the term of the
vacated directorship, by the vote of a majority of the directors then in office.
The Company does not have a nominating committee but has a prescribed procedure
for shareholders to make a nomination set forth in the Company"s Bylaws.
The following table sets forth certain information, as of March 3, 2000 with
respect to the directors of the Company.
30
NOMINEES FOR ELECTION
---------------------
Position Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- ----- --------
Gordon C. Johnson 65 Director 1998 2000
Holly J. Nelson 46 Director 1998 2000
John E. Rogers 70 Director 1998 2000
Walter C. Shannon, Jr. 64 Director 1998 2000
CONTINUING DIRECTORS
--------------------
John F. Perotti 53 President, CEO, 1998 2001
and Director
Craig E. Toensing 62 Secretary and 1998 2001
Director
Michael A. Varet 58 Director 1998 2001
John R. H. Blum 70 Director 1998 2002
Louise F. Brown 56 Director 1998 2002
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the positions
described for at least five (5) years.
John R. H. Blum is an attorney in private practice and former Commissioner of
Agriculture for the State of Connecticut. He has been a director of the Bank
since 1995 and was elected Chairman of the Board of Directors of the Company and
the Bank in 1998.
Louise F. Brown has been a director of the Bank since 1992 and is a partner at
the Sharon office in the law firm of Gager & Peterson.
Gordon C. Johnson has been a director of the Bank since 1994 and is a Doctor of
Veterinary Medicine.
Holly J. Nelson has been a director of the Bank since 1995 and is a partner in
Oblong Books and Music, LLC, a book and music store.
John E. Rogers has been a director of the Bank since 1964 and retired as
Chairman of the Board of the Bank in 1984. He also served as President of the
Bank from 1969 to 1981.
Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and
President of William J. Cole Agency, Inc. He has been a director of the Bank
since 1993.
John F. Perotti is President and Chief Executive Officer of the Company and the
Bank. Prior to that he served as Executive Vice President and Chief Operating
Office of the Bank, and prior to that he was Vice President and Treasurer of the
Bank. He has been a director of the Bank since 1985.
Craig E. Toensing has been a director of the Bank since 1995 and is Senior Vice
President and Trust Officer of the Bank.
31
Michael A. Varet has been a partner in the law firm of Piper Marbury Rudnick &
Wolfe LLP since 1995. Prior to 1995, Mr. Varet was a member and Chairman of
Varet & Fink P.C., formerly Milgrim, Thomajan & Lee, P.C. Mr. Varet has been a
director of the Bank since 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company"s executive officers, directors and persons who own more than ten
percent (10%) of the Company"s Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of ownership and changes in ownership of
the Company"s Common Stock. Executive officers, directors and any shareholders
owning greater than ten percent (10%) of the Company"s Common Stock are required
by the SEC"s regulations to furnish the Company with copies of all such reports
that they file.
Based solely on a review of copies of reports filed with the SEC since January
1, 1999 and certain representations by executive officers and directors, all
persons subject to the reporting requirements of Section 16(a) filed the
required reports on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
Fees
During 1999, directors received $500 for each Board of Directors meeting
attended and $200 for each committee meeting attended. Beginning January 1999,
each director received an annual retainer of $2,000. Directors' Perotti and
Toensing received no additional compensation for their services as directors or
members of any board committee during 1999.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company for services rendered in all
capacities during the fiscal years ended December 31, 1999, 1998 and 1997. No
other current executive officer of the Company or the Bank received cash
compensation in excess of $100,000. All compensation expense was paid by the
Bank.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
Securities Underlying
Options/ All Other
Name and Principal SAR"s Compensation
Position Year Salary($) Bonus($) (#) (1) ($) (2)
- -------------------------------------------------------------------------------------------------------
John F. Perotti 1999 $163,200 $30,243 ----- -----
President and 1998 141,984 19,700 ----- $4,500(3)
Chief Executive Officer 1997 135,864 25,092 1,710 6,000(3)
of the Company and the Bank
Craig E. Toensing 1999 $122,808 $24,641 ----- -----
Secretary of the Company 1998 104,856 15,249 ----- $4,500(3)
Senior Vice President 1997 100,320 19,297 1,266 5,700(3)
and Trust Officer of the Bank
- -------------------------
(1) The number of shares presented represent options to acquire shares of
common stock of the Company.
(2) Compensation above does not include accrual of benefits under the Bank"s
defined pension plan or supplemental arrangements described below.
(3) Directors fees paid.
32
Insurance
In addition to the cash compensation paid to the executive officers of the
Company and the Bank, the executive officers receive group life, health,
hospitalization and medical insurance coverage. However, these plans do not
discriminate in scope, terms or operation, in favor of officers or directors of
the Company and the Bank and are available generally to all full-time employees.
Pension Plan
The Company maintains a non-contributory defined pension plan for officers and
other salaried employees of the Bank who become participants after attaining age
21 and completing one year of service. Pension benefits are based upon average
base salary (determined as of each January 1st) during the highest five
consecutive years of service prior to attaining normal retirement date. The
amount of annual benefit is fifty percent (50%) of average base salary less
fifty percent (50%) of the primary Social Security benefit, pro rated for less
than 25 years of service, plus one-half of one percent (.5%) of average base
salary for each of up to ten additional years of service. This benefit formula
may be modified to conform with recent changes in the pension laws.
The present average base salary and years of service to date of Messrs. Perotti
and Toensing are: Mr. Perotti: $156,236; 27 years; Mr. Toensing: $116,689; 19
years. The following table shows estimated annual retirement benefits payable at
normal retirement date as a straight life annuity for various average base
salary and service categories before the offset of a portion of the primary
Social Security benefit.
Average
Base Salary Estimated Annual Retirement Benefit With
at Retirement Years of Service at Retirement Indicated
- ------------- ----------------------------------------
10 Years 20 Years 25 Years 35 Years
$100,000 $20,000 $40,000 $50,000 $ 55,000
110,000 22,000 44,000 55,000 60,500
120,000 24,000 48,000 60,000 66,000
130,000 26,000 52,000 65,000 71,500
140,000 28,000 56,000 70,000 77,000
150,000 30,000 60,000 75,000 82,500
160,000 32,000 64,000 80,000 88,000
170,000 34,000 68,000 85,000 93,500
180,000 36,000 72,000 90,000 99,000
$190,000 $38,000 $76,000 $95,000 $104,500
Supplemental Retirement Arrangements
In 1994, the Bank entered into a supplemental retirement arrangement (the
"Supplemental Retirement Agreement") with John F. Perotti. Following disability
or retirement at the earlier of the age of 65, or after thirty (30) years of
service to the Bank, Mr. Perotti will receive monthly payments of $1,250
(increased by 5% per year or greater to reflect increases in the cost of living
index) for a period of ten (10) years. These payments are in addition to any
payments under the Bank"s retirement plan. The Supplemental Retirement Agreement
includes provisions which would prevent Mr. Perotti from working for a
competitor in the proximity of the Bank.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 3, 2000 regarding
the number of shares of Common Stock beneficially owned by each director and
officer and by all directors and officers as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,336 (3) 1.02%
Louise F. Brown 4,224 (4) .28%
John F. Foley 3,696 (5) .25%
Gordon C. Johnson 1,502 (6) .10%
Holly J. Nelson 848 (7) .06%
John F. Perotti 10,839 (8) .72%
John E. Rogers 28,595 (9) 1.91%
Walter C. Shannon, Jr. 3,604 (10) .24%
Craig E. Toensing 3,000 (11) .20%
Michael A. Varet 65,646 (12) 4.38%
All Directors and Officers 137,290 9.16%
as a group of (10 persons)
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director"s spouse and/or his children or grandchildren, and
in which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 1,498,179 shares of the Bank"s Common
Stock outstanding and entitled to vote on March 3, 2000. The definition
of beneficial owner includes any person who, directly or indirectly,
through any contract, agreement or understanding, relationship or
otherwise has or shares voting power or investment power with respect
to such security.
(3) Includes 2,100 shares owned by John R. H. Blum"s wife.
(4) Includes 2,136 shares owned by Louise F. Brown as custodian for her
children.
(5) Includes 1,518 shares owned jointly by John F. Foley and his wife and
66 shares owned by John F. Foley as custodian for his children.
(6) Includes 660 shares owned by Gordon C. Johnson"s wife and for which Mr.
Johnson has disclaimed beneficial ownership.
(7) Includes 6 shares owned by Holly J. Nelson as guardian for a minor
child.
(8) Includes 9,514 shares owned jointly by John F. Perotti and his wife,
761 shares owned by his wife and 564 shares in trust for his son.
(9) Includes 11,370 shares owned by John E. Rogers" wife.
34
(10) All shares are owned individually by Walter C. Shannon, Jr.
(11) Includes 42 shares owned by Craig E. Toensing as custodian for his son.
(12) Includes 18,540 shares owned by Michael A. Varet"s wife, 6,186 shares
owned by his son, 6,180 shares owned by his daughter and 6,180 shares
owned by Michael A. Varet as custodian for his son. Michael A. Varet
has disclaimed beneficial ownership for all of these shares.
Principal Shareholders of the Company
As of March 3, 2000, management was not aware of any person (including any
"group" as that term is used in Section 13 (d)(3) of the Exchange Act) who owns
beneficially more than 5% of the Company"s Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law who represented the Company during 1999 and whom the
Company proposes to engage in 2000 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Gager & Peterson, which represented the Company during 1999 and which the
Company proposes to engage in 2000 in connection with certain legal matters.
Walter C. Shannon, Jr. is a director of the Company and the President Emeritus
of Wagner McNeil, Inc. which serves as the insurance agent for many of the
Company"s insurance needs.
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, principal shareholders
of the Company, and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others and such loans did not involve more than the
normal risk of collectability or present other unfavorable features. Since
January 1, 1999, the highest aggregate outstanding principal amount of all loans
extended by the Bank to the Company"s directors, executive officers and all
associates of such persons as a group was $2,475,686 or an aggregate principal
amount equal to 12.44% of the equity capital accounts of the Bank.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form
l0-K.
1. Financial Statements:
The financial statements filed as part of this report are listed in
the index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or the
information is included in the consolidated financial statements or
notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
3.2 Bylaws of Salisbury Bancorp, Inc. (2)
10. Pension Supplement Agreement with John F. Perotti. (3)
35
21. Subsidiaries of the Company, (4)
27. Financial Data Schedule
(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 April 23, 1998 as Exhibit 3.2 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(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 April 23, 1998 as Exhibit 21 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(b) CURRENT REPORTS: The following reports on Form 8-K were filed
during the fourth quarter of the 1999 fiscal year:
1. On November 24, 1999 the Company filed a Form 8-K reporting the
declaration of an $.12 per share quarterly cash dividend and a $ .22
per share special cash dividend.
36
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 20, 2000
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
-------------------
John F. Perotti
President and
Chief Executive Officer
By: /s/ John F. Foley
-----------------
John F. Foley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ John F. Perotti President, March 20, 2000
--------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ John R. H. Blum Director March 20, 2000
---------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 20, 2000
---------------------------
(Louise F. Brown)
/s/ Gordon C. Johnson Director March 20, 2000
---------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 20, 2000
---------------------------
(Holly J. Nelson)
/s/ John E. Rogers Director March 20, 2000
---------------------------
(John E. Rogers)
/s/ Walter C. Shannon, Jr. Director March 20, 2000
---------------------------
(Walter C. Shannon, Jr.)
/s/ Craig E. Toensing Director March 20, 2000
---------------------------
(Craig E. Toensing)
/s/ Michael A. Varet Director March 20, 2000
---------------------------
(Michael A. Varet)