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, 2002
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-24751
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SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
5 Bissell Street, Lakeville, CT 06039
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: Common stock par value $.10 per share
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Name of exchange on which registered: American Stock Exchange
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer.
Yes | | No |X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act). On March 7, 2003: $36,783,264
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,423,238 shares outstanding as of March 7, 2003.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
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Page
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Part I
Item 1 - Business 3
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 7
Item 2 - Properties 12
Item 3 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Part II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters 13
(a) Market Information 13
(b) Holders 13
(c) Dividends 13
(d) Securities Authorized for Issuance Under Equity Compensation Plans 13
Item 6 - Selected Financial Data 14
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 29
Item 8 - Financial Statements and Supplementary Data 29
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 and Related Stockholder Matters 35
Item 13 -Certain Relationships and Related Transactions 36
Item 14 -Controls and Procedures 36
Part IV
Item 15 -Exhibits, Financial Statements and Reports on Form 8-K 37
Signatures 38
Consent of Independent Certified Public Accountants 39
Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 40
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 four (4) offices which are located in
Canaan, 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 a nature of commercial bank and
trust company.
Lending
Lending is a principal business of the Bank and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers as well as commercial loans which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2002, it totaled $138,435,000 which represents
approximately 47.23% of total assets and it produced interest and dividend
income of $6,480,000 for the year 2002 as compared with $5,746,000 for 2001 and
$6,016,000 for 2000 respectively.
3
Deposits and Borrowings
The Bank's primary sources of funds are deposits, borrowings and principal
payments on loans. Although competition for funds from non-banking institutions
remains aggressive, the Bank continues its efforts to build multiple account
relationships with its customers. As a result, average daily deposits increased
2.60% to $205,120,000 during 2002.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $51,891,000 at December 31, 2002 as compared with
$53,004,000 at December 31, 2001.
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 and estate planning and estate settlement. Another
service is that of serving as Guardian or Conservator of estates and managing
the financial position of Guardianships or Conservatorships. Self directed IRAs
and Pension plans are also offered.
All Others
The Company also offers safe deposit rentals, foreign exchange, a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates 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 Company and the Bank encounter competition in all phases of their business.
There are numerous financial institutions that have offices in the areas in
which the Company and Bank compete in Northwestern Connecticut, Western
Massachusetts and proximate areas of New York State.
The banking business in the area served by the Bank is very competitive. Based
on information published by the Federal Reserve Bank of Boston, using June 30,
2001 deposit data, the Salisbury, Connecticut banking market is served by seven
(7) commercial banks and savings banks. The Bank has a 51.86% market share of
deposits in such Salisbury banking market, which includes Salisbury and the four
(4) Connecticut towns which are contiguous with Salisbury (Sharon, Cornwell,
Canaan and North Canaan). When compared with all of the banking institutions
which maintain an aggregate of 83 offices within Litchfield County, the Bank is
the seventh (7th) largest of 19 institutions and the Bank has a market share
representing approximately 6.1% of the total deposits within Litchfield County.
4
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Insurance companies, investment counseling firms and other
businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services. Many non-bank
competitors are not subject to the extensive regulation described below under
"LEGISLATION, REGULATION AND SUPERVISION" and in certain respects may have a
competitive advantage over banks in providing certain services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions and
mergers of Connecticut banks and bank holding companies or of with banks and
bank holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank's future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
5
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 five percent (5%) of the voting
share of such bank. The BHCA imposes limitations upon the Company as to the
types of business in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:(i)
the bank holding company's capital ratios exceed the threshold established for
"well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
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 to, among other things, open
6
branch offices and consummate merger transactions and other business
combinations. The Connecticut Banking Commissioner conducts periodic
examinations of the Bank. The Connecticut banking statutes also restrict the
ability of the Bank to declare cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank"s
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions" CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach- Bliley Act.
Employees
The Company's current workforce at February 14, 2003 was 81 employees of whom 76
were full time and 5 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.
7
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
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I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential 17
II. Investment Portfolio 9 III. Loan Portfolio 10
IV. Summary of Loan Loss Experience 11 V. Deposits 23
VI. Return on Equity and Assets 10
VII. Short-Term Borrowings 12
8
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables sets forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands)
2002 2001 2000
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Available-for-sale securities:
(at fair value)
Equity securities $ 4,269 $ 135 $ 179
U.S. Treasury securities and other
U.S. government corporations and agencies 41,635 38,701 46,761
Obligations of states and political subdivisions 42,792 30,273 14,170
Mortgage-backed securities 46,473 33,139 27,472
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$ 135,169 $ 102,248 $ 88,582
====================================
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 0 0
Mortgage-backed securities 321 400 410
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$ 321 $ 400 $ 410
================================
Federal Home Loan Bank stock $2,945 $2,945 $2,930
================================
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,
2002:
(dollars in thousands)
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
-----------------------------------------------------------------------------------------
Held-to-maturity
- ----------------
securities
- ----------
(at amortized cost)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 0 $ 0 $ 0
Obligations of state and
political subdivisions 0 0 0 0 0
Mortgage-backed
securities 0 0 0 321 5.36% 321
------- ------- ------- -------- -------
$ 0 $ 0 $ 0 $ 321 $ 321
======= ======= ======= ======== =======
Available-for-sale
- ------------------
Securities
- ----------
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $17,741 4.13% $ 23,894 6.37% $ 41,635
Obligations of state and
political subdivisions $ 0 $ 379 4.78% $ 1,014 4.79% $ 41,399 5.88% $ 42,792
Mortgage-backed
securities $ 80 5.94% $ 266 5.08% $ 217 4.71% $ 45,910 4.49% $ 46,473
------- ------- ------- -------- --------
$ 80 $ 645 $18,972 $111,203 $130,900
======= ======= ======= ======== ========
9
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Commercial, financial and $ 10,127 $ 10,797 $ 8,592 $ 9,025 $ 10,692
agricultural
Real Estate-construction and 6,027 3,935 6,275 3,382 3,392
land development
Real Estate - residential 93,636 102,201 98,312 86,680 80,451
Real Estate-commercial 18,002 17,423 15,463 15,324 14,909
Consumer 9,007 10,030 10,673 10,698 10,430
Other 291 125 247 364 535
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137,090 144,511 139,562 125,473 120,409
Allowance for possible loan losses (1,458) (1,445) (1,292) (1,160) (1,260)
Unearned income 0 (0) (0) (0) (6)
Net loans $ 135,632 $ 143,066 $ 138,270 $ 124,313 $ 119,143
=====================================================================
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, 2002. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
year or less five years five years
---------------------------------------------------------------
Commercial, financial,
agricultural and real estate commercial $24,171 $3,789 $ 169
Real estate-construction and land development 6,027 0 0
---------------------------------------------------------------
$30,198 $3,789 $ 169
===============================================================
Maturities after
One Year with:
Fixed interest rates $1,865 $ 169
Variable interest rates 1,924 0
-----------------------------------
$3,789 $ 169
===================================
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
Year ended December 31,
2002 2001 2000
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.13% 1.14% 1.24%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 12.63% 12.25% 13.64%
Dividend payout ratio
(total declared dividends divided by net income) 39.11% 41.34% 39.72%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 8.92% 9.27% 8.98%
10
Nonaccrual, Past Due and Restructured Loans
At December 31, 2002, there were ten (10) nonaccrual loans in the Bank's
portfolio all of which were secured by real estate. When a mortgage loan becomes
90 days past due, and there is not sufficient collateral to cover the principal
and accrued interest, the Bank generally stops accruing interest unless there
are unusual circumstances which warrant an exception. Generally the only loan
types that the Bank reclassifies to nonaccrual are those secured by real estate.
Other types of loans are generally charged off if they become 90 days or more
delinquent. However, exception is warranted with the $124,000 in loans that are
presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2002 2001 2000 1999 1998
------------------------------------------------------------
Nonaccrual $ 855 $372 $186 $473 $1,208
90 days or more past due 124 215 323 10 109
Restructured loans 271 0 12 12 547
------------------------------------------------------------
Total nonperforming loans $1,250 $587 $521 $495 $1,864
============================================================
Total nonperforming loans as per-
centage of the total loan portfolio 0.92% 0.41% 0.37% 0.39% 1.55%
Allowance for loan losses as a per-
centage of nonperforming loans 116.64% 246.17% 247.99% 234.34% 67.60%
Information with respect to non-accrual and
restructured loans at December 31,
2002, 2001 and 2000 is as follows:
(dollars in thousands) Year Ended December 31
2002 2001 2000
---------------------------------------
Interest income that would have been recorded under original terms $ 68 $ 38 $ 12
Gross interest recorded 49 28 1
---------------------------------------
Foregone interest $ 19 $ 10 $ 11
=======================================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2002 2001 2000 1999 1998
------------------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 1,445 $ 1,292 $ 1,160 $ 1,260 $ 1,226
------------------------------------------------------------------
Charge-offs:
Commercial, financial and
agricultural 60 0 0 1 7
Real estate mortgage 46 13 21 243 53
Consumer 146 88 50 25 52
------------------------------------------------------------------
Total charge-offs 252 101 71 269 112
------------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 2 0 0 0 0
Real estate mortgage 1 87 6 19 13
Consumer 26 17 17 30 13
------------------------------------------------------------------
Total recoveries 29 104 23 49 26
------------------------------------------------------------------
Net charge-offs 223 (3) 48 220 86
Provisions charged to operations 300 150 180 120 120
Transfer of allowance for loan
losses to other liabilities (64) 0 0 0 0
------------------------------------------------------------------
Balance at end of year $ 1,458 $ 1,445 $1,292 $1,160 $1,260
==================================================================
Ratio of net charge-offs to
average loans outstanding .02% (.002%) .04% .18% .07%
Ratio of allowance for loan losses
to year end loans 1.07% 1.01% .93% .93% 1.05%
11
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2002 2001 2000 1999 1998
--------------- ---------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 316 7.39% $ 120 7.47% $ 160 6.16% $ 160 7.19% $ 182 8.90%
Real estate construction
and land development 50 4.40% 24 2.72% 0 4.500 0 2.70% 0 3.01%
Real estate mortgage 840 81.43% 1,200 82.78% 1,066 81.51% 941 81.30% 982 78.50%
Consumer 244 6.57% 100 6.94% 65 7.65% 58 8.52% 95 8.96%
Other loans 8 .21% 1 .09% 1 .18% 1 .29% 1 .54%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,458 100.00% $1,445 100.00% $1,292 100.00% $1,160 100.00% $1,260 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for possible loan losses are charged to operating
expenses and are based on past experience, current economic conditions and
management's judgement of the amount necessary to cover losses inherent in the
portfolio. The Bank records provisions for estimated loan losses, which are
charged against earnings, in the period they are established.
Short-Term Borrowings
(dollars in thousands) December 31
2002 2001 2000
---------------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 5.35% 5.95% 5.93%
For the year 5.45% 5.62% 5.81%
Average amount outstanding during the year $52,438 $53,407 $49,291
Maximum amount outstanding at any month $59,125 $56,766 $58,605
Amount outstanding at year end $51,891 $53,004 $47,357
ITEM 2. DESCRIPTION OF PROPERTIES
The holding 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 four (4) offices which are located in
Canaan, 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
Canaan Office 94 Main Street Owned
Canaan, Connecticut
12
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 2002 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 sales prices of the
Company's common stock.
2002 Quarters 2001 Quarters
--------------------------------------- --------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Range of Stock prices:
High $28.01 $25.25 $26.75 $25.25 $23.60 $24.25 $20.00 $19.00
Low $25.00 $22.51 $24.10 $21.25 $20.79 $19.70 $19.00 $18.00
(b) Holders
There were approximately 519 holders of record of the common stock of the
Company as of March 7, 2003. This number includes brokerage firms and other
financial institutions which hold stock in their name but which is actually
owned by third parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. During the year 2002, the Company declared
a cash dividend each quarter of $.22 per share. Dividends for the year 2002
totaled $.88 per share which compared to total dividends of $.84 that were
declared in the year 2001. At their February 28, 2003 meeting, the Directors of
the Company declared a cash dividend of $.23 per share for the first quarter of
2003. The dividend will be paid on April 25, 2003 to shareholders of record as
of March 31, 2003. Payment of all dividends are dependent upon the condition and
earnings of the Company. The Company's ability to pay dividends is limited by
the prudent banking principles applicable to all bank holding companies and by
the provisions of Connecticut Corporate law, which provide that no distribution
may be made by a company if, after giving it effect: (1) the company would not
be able to pay its debts as they become due in the usual course of business or
(2) the company's total assets would be less than the sum of its total
liabilities plus amounts needed to satisfy any preferred stock rights. The
following table presents cash dividends declared per share for the last two
years:
2002 Quarters 2001 Quarters
--------------------------------------- --------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Cash dividends
declared $0.22 $0.22 $0.22 $0.22 $0.21 $0.21 $0.21 $0.21
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 for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
[dollars in thousands except per share data]
Statement of Condition Data:
Loans, Net $135,632 $143,066 $138,270 $124,313 $119,143
Allowance For Loan Losses 1,458 1,445 1,292 1,160 1,260
Investments 138,435 105,593 91,922 77,745 81,290
Total Assets 293,107 283,602 249,054 215,385 217,226
Deposits 211,037 201,351 166,436 154,358 153,147
Borrowings 51,891 53,004 47,357 39,712 41,120
Shareholders' Equity 27,345 23,363 22,460 19,895 21,555
Nonperforming Assets 1,400 587 521 495 2,044
Statement of Income Data:
Interest and Fees on Loans $ 9,677 $ 11,344 $ 10,494 $ 9,621 $ 9,480
Interest and Dividends on Securities
and Other Interest Income 6,481 5,746 6,015 4,903 3,881
Interest Expense 6,898 8,301 8,284 6,683 6,043
-------- -------- -------- -------- --------
Net Interest Income 9,260 8,789 8,225 7,841 7,318
Provision for Loan Losses 300 150 180 120 120
Trust Department Income 1,100 1,070 1,108 1,121 1,031
Other Income 1,388 1,187 914 860 735
Net Gain (Loss) on Sales of Securities 634 130 -64 -2 0
Other Expenses 7,775 6,755 5,797 5,523 5,347
-------- -------- -------- -------- --------
Pre Tax Income 4,307 4,271 4,206 4,177 3,617
Income Taxes 1,108 1,370 1,357 1,484 1,299
-------- -------- -------- -------- --------
Net Income $ 3,199 $ 2,901 $ 2,849 $ 2,693 $ 2,318
======== ======== ======== ======== ========
Per Share Data:
Earnings per common share $ 2.25 $ 2.03 $ 1.92 $ 1.78 $ 1.48
Earnings per common share, assuming dilution $ 2.25 $ 2.03 $ 1.92 $ 1.78 $ 1.47
Cash Dividends Declared per share $ 0.88 $ 0.84 $ 0.77 $ 0.70 $ 0.60
Book Value (at year end) $ 19.21 $ 16.43 $ 15.40 $ 13.23 $ 13.85
Selected Statistical Data:
Return on Average Assets 1.13% 1.14% 1.23% 1.25% 1.22%
Return on Average Shareholders' Equity 12.63% 12.25% 13.64% 12.96% 11.27%
Dividend Payout Ratio 39.11% 41.38% 39.72% 39.16% 40.13%
Average Shareholders' Equity to Average Assets 8.92% 9.27% 8.98% 9.67% 10.79%
Net Interest Spread 3.13% 2.99% 2.83% 3.07% 3.20%
Net Interest Margin 3.72% 3.79% 3.79% 3.93% 4.14%
14
Salisbury Bancorp, Inc.
and Subsidiary
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
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 subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, 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 on Form 10-K.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 2002 AND 2001
OVERVIEW
The reported earnings for the Company were $3,199,000 in 2002, an increase of
$298,000 or 10.27% over year 2001 earnings of $2,901,000. Earnings in 2000 were
$2,849,000. As a result, earnings per share increased $.22 or 10.83% to $2.25 in
2002. This compares to earnings per share of $2.03 in 2001 and $1.92 in 2000.
The improvement in net income is primarily the result of growth in earning
assets that has produced an increase in total net interest income coupled with
an increase in other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2002, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 16.05% for Tier 1 capital and 17.21% for
total capital. The Company's leverage ratio was 7.80% at December 31, 2002. This
compares to a Tier 1 capital ratio at December 31, 2001 of 15.09%, a total
capital ratio of 16.21%, and a Company leverage ratio was 7.61%.
As a result of the Company's financial performance, the Board of Directors
increased total dividends declared on the Company's common stock to $.88 per
share in 2002. This compares to an $.84 per share dividend paid in 2001 and a
$.77 per share dividend that was paid in 2000.
NET INTEREST AND DIVIDEND INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and the second is by
charging fees for services provided. The first source involves functioning as a
financial intermediary. The Company accepts funds from depositors or borrows
funds and either lends the funds to borrowers or invests those funds in various
types of securities. The second source is fee income, which is discussed in the
noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
15
(dollars in thousands) December 31,
2002 2001 2000
---------------------------------
Interest and Dividend Income
(financial statements) $ 16,157 $ 17,089 $ 16,510
Tax Equivalent Adjustment 1,028 504 335
------- -------- -------
Total Interest Income (on an FTE basis) 17,185 17,593 16,845
Interest Expense (6,898) (8,300) (8,284)
------- ------- -------
Net Interest Income-FTE $ 10,287 $ 9,293 $ 8,561
======= ======= ========
The Company's 2002 total interest and dividend income on an FTE basis of
$17,185,000 was $408,000 or 2.32% less than the total interest and dividend on
an FTE basis of $17,593,000 in 2001. Although there is an increase in earning
assets, this decrease in interest and dividend income is primarily the result of
an economic environment with lower interest rates. A change in the mix of
earning assets which reflects an increase in tax exempt securities has resulted
in a significant increase in the tax equivalent adjustment of $1,028,000 for
2002 as compared to $504,000 for 2001. This is an increase of approximately
104%. Total interest and dividend income on an FTE basis for 2000 totaled
$16,845,000.
Interest expense on deposits in 2002 decreased $1,263,000 or 23.82% and totaled
$4,039,000. This compares to $5,302,000 for the corresponding period in 2001 and
$5,421,000 in 2000 respectively. Although deposits increased, primarily as the
result of the Canaan Branch acquisition during the fourth quarter of 2001,
generally lower interest rates resulted in the decrease in interest expense.
Interest expense for Federal Home Loan Bank advances decreased $141,000 to
$2,858,000 in 2002. This compares to interest expense of $2,999,000 in 2001 and
is primarily the result of a decrease in borrowings. Although interest margins
continue to be pressured by generally lower interest rates and by aggressive
competition, net interest income on an FTE basis increased $994,000 or 10.70%
and totaled $10,287,000 at December 31, 2002. This compared to total net
interest income on an FTE basis of $9,293,000 at December 31, 2001.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship between
interest earned and paid. The Company's 2002 net interest margin on an FTE basis
was 3.72%. This compares to a net interest margin of 3.79% for the corresponding
period in 2001. The following table reflects average balances, interest earned
or paid and rates for the three years ended December 31, 2002, 2001 and 2000.
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 that are not deemed to be material. Interest earned on tax exempt
securities in the table is presented on a fully taxable-equivalent basis
("FTE"). A federal tax rate of 34% was used in performing these calculations.
Actual tax exempt income earned in 2002 was $1,995,000 with a yield of 4.83%.
Actual tax exempt income in 2001 totaled $977,000 with a yield of 4.88% and in
2000 actual tax exempt income was $651,000 with a yield of 4.95%.
16
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2002 2001 2000
-------------------------------------------------------------------------------------------------------
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 $ 139,582 $ 9,677 6.93% $ 145,502 $ 11,344 7.80% $ 129,972 $ 10,494 8.07%
Taxable Securities $ 81,715 $ 4,144 5.07% $ 68,921 $ 4,422 6.42% $ 73,958 $ 4,810 6.50%
Tax-Exempt Securities * $ 41,347 $ 3,023 7.31% $ 20,030 $ 1,481 7.39% $ 13,160 $ 987 7.50%
Federal Funds $ 7,214 $ 111 1.54% $ 9,986 $ 310 3.10% $ 8,382 $ 533 6.36%
Other Interest Income $ 549 $ 11 2.00% $ 809 $ 36 4.45% $ 332 $ 21 6.33%
--------------------- ----------------------- -----------------------
Total Interest Earning $ 270,407 $16,966 6.27% $ 245,248 $ 17,593 7.17% $ 225,804 $ 16,845 7.46%
------- --------- ---------
Assets
Alowance for Loan
Losses ($ 1,403) ($ 1,412) ($ 1,187)
Cash & due from
Banks $ 5,923 $ 5,138 $ 5,040
Premises,Equipment $ 2,810 $ 2,676 $ 2,425
Net unrealized gain/loss
on AFS Securities $ 1,083 $ 500 ($ 2,803)
Other Assets $ 5,263 $ 3,312 $ 3,281
--------- --------- ---------
Total Average Assets $ 284,083 $ 255,462 $ 232,560
========= ========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $ 62,756 $ 807 1.29% $ 67,516 $ 1,901 2.82% $ 60,221 $ 2,245 3.73%
Savings Deposits $ 37,629 $ 743 1.97% $ 16,674 $ 396 2.37% $ 15,691 $ 382 2.43%
Time Deposits $ 67,157 $ 2,490 3.71% $ 60,854 $ 3,004 4.94% $ 53,781 $ 2,794 5.20%
Borrowed Funds $ 51,966 $ 2,858 5.50% $ 53,407 $ 2,999 5.62% $ 49,291 $ 2,863 5.81%
--------------------- ----------------------- -----------------------
Total Interest Bearing
Liabilities $ 219,508 $ 6,898 3.14% $ 198,451 $ 8,300 4.18% $ 178,984 $ 8,284 4.63%
------- --------- ---------
Demand Deposits $ 37,578 $ 31,497 $ 31,522
Other Liabilities $ 1,660 $ 1,829 $ 1,167
Shareholders' Equity $ 25,337 $ 23,685 $ 20,887
--------- --------- ---------
Total Liabilities and
Equity $ 284,083 $ 255,462 $ 232,560
========= ========= =========
Net Interest Income $ 10,068 $ 9,293 $ 8,561
======== ========= =========
Net Interest Spread 3.13% 2.99% 2.83%
Net Interest Margin 3.72% 3.79% 3.79%
* Presented on a fully taxable equivalent ("FTE") basis
17
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(Dollars in thousands) 2002 over 2001 2001 over 2000
------------------------------- --------------------------
Volume Rate Total Volume Rate Total
Increase (decrease) in:
Interest income on:
Loans $ (462) $(1,205) $(1,667) $ 1,253 $(403) $ 850
Taxable investment securities 821 (1,099) (278) (327) (61) (388)
Tax-exempt investment securities 1,575 (33) 1,542 515 (21) 494
Other interest income (97) (127) (224) 132 (340) (208)
Total interest income $ 1,837 $(2,464) $ (627) $ 1,573 $(825) $ 748
------- ------- ------- ------- ----- -----
Interest expense on:
NOW/Money Market deposits $ (134) $ (960) $(1,094) $ 272 $(616) $(344)
Savings deposits 496 (149) 347 24 (10) 14
Time deposits 311 (825) (514) 368 (158) 210
Borrowed funds (81) (60) (141) 239 (103) 136
------- ------- ------- ------- ----- -----
Total interest expense $ 592 $(1,994) $(1,402) $ 903 $(887) $ 16
------- ------- ------- ------- ----- -----
Net interest margin $ 1,245 $ (470) $ 775 $ 670 $ 62 $ 732
======= ======= ======= ======= ===== =====
NONINTEREST INCOME
Noninterest income totaled $3,122,000 for the year ended December 31, 2002 as
compared to $2,387,000 for the year ended December 31, 2001. Trust Department
income increased slightly to $1,100,000 from $1,070,000. This is primarily the
result of the efforts of new business development. Service charges remained
consistent at $472,000 for 2002 and 2001, respectively. Gains on sales of
available-for-sale securities totaled $634,000 in 2002. This represents an
increase of $504,000 or 388% when comparing total gains on sales of
available-for-sale securities of $130,000 in 2001. Movement in the markets has
presented opportunities for the Company to enhance the return from the
securities portfolio which has resulted in this increase. Other income,
including gain on sale of loan held-for-sale, increased $200,000 or 27.97% to
$915,000 in 2002. This compares to total other income, including gain on sale of
loan held-for-sale, of $715,000 in 2001. This increase is primarily the result
of increased fees generated from the refinancing activities in the secondary
market as well as an increase in transaction fees generated from activity of
deposit accounts. The Company continues to seek to increase noninterest income
due to its importance as a potential contributor to profitability.
NONINTEREST EXPENSE
Noninterest expense increased 15.10% to $7,775,000 for the year ended December
31, 2002 as compared to $6,755,000 for the corresponding period in 2001.
Salaries and employee benefits totaled $4,235,000 for the twelve months ended
December 31, 2002 compared to $3,834,000 for the same period in 2001. This is an
increase of $401,000 or 10.46% and is primarily the result of the addition of
staff for the Canaan Branch that was opened in September 2001 coupled with the
additional staff that was also hired to service the increase in new business at
the Bank's other facilities. Annual pay raises and the increasing costs of
employee benefits have also contributed to the increased expense. Occupancy and
equipment expenses increased $142,000 or 19.37% to $875,000. This compares to
total occupancy and equipment expense of $733,000 for the same period in 2001.
The increase is primarily the result of expenses associated with having an
additional office to maintain. The Company has also incurred some one time
equipment costs relating to unscheduled system upgrades. Data processing
expenses increased $39,000 or 7.79% for the year ended December 31, 2002 and
totaled $533,000. Data processing expenses for the same period in 2001 totaled
$495,000. Insurance expenses for the year 2002, which do not include insurance
benefits associated with employees, increased $22,000 or 23.69% and totaled
$114,000. This compares to insurance expense that totaled $92,000 for the year
ended December 31, 2001. Printing and stationery costs and legal expenses
remained very consistent when comparing 2002 to 2001. Amortization expense of
the "Core Deposit Intangible" assets associated with the Canaan Branch
acquisition totaled $68,000 for the year ended December 31, 2002. This expense
for 2002 represents a full year of amortization while the total expense of
$48,000 represents only three and one half months of the year 2001 because the
acquisition was completed in September 2001. Other operating expenses totaled
$1,699,000 for the year ended December 31, 2002 compared to other operating
18
expenses totaling $1,317,000 for the corresponding period in 2001. This increase
of $382,000 or 29.01% is primarily the result of additional expenses relating to
the operation of the Canaan Branch acquired last year coupled with increased
expenses relating to Trust operations as well as normal increases in expenses
associated with the operation of the Company.
INCOME TAXES
In 2002, the Company's income tax provision totaled $1,108,000, an effective tax
rate of 25.72%. This compares to an income tax provision of $1,370,000 in 2001,
reflecting an effective tax rate of 32.08%. This decrease is primarily the
result of the impact of an increase in tax exempt interest earned from the
securities portfolio.
NET INCOME
Overall, net income totaled $3,199,000 for the year ended December 31, 2002,
compared to net income of $2,901,000 for the year 2001. This was an increase of
$298,000 or 10.27% and reflects earnings of $2.25 per share for the year. This
compared to earnings per share of $2.03 for the same period in 2001.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 2001 AND 2000
OVERVIEW
Salisbury Bancorp, Inc.'s earned net income amounted to $2,901,000 in 2001, a
1.83% increase over year 2000 earnings of $2,849,000. Earnings per share
increased 5.73% to $2.03 per share for 2001 compared to a $1.92 for 2000.
The improvement in net income and earnings per share during 2001 reflected 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.
The Company's risk-based capital ratios at December 31, 2001, which included the
risk-weighted assets and capital of the Salisbury Bank and Trust Company were
15.09% for Tier 1 capital and 16.21% for total capital. The Company's leverage
ratio was 7.61% at December 31, 2001.
As a result of the Company's financial performance, the Board of Directors
increased the dividends declared on the Company's common stock to $.84 per share
in 2001, compared to $.77 per share in 2000.
NET INTEREST INCOME
The Company's 2001 total interest income on a fully taxable-equivalent basis of
$17,593,000 was $748,000 or 4.44% greater than the 2000 total of $16,845,000.
This was primarily the result of an increase in average earning assets of
$19,444,000 or 8.61% during 2001. Interest expense increased $16,000 to
$8,300,000 in 2001. Although average deposits increased $15,441,000 or 11.91%
and average advances from the Federal Home Loan Bank increased $4,116,000 or
8.35%, an environment of generally lower rates resulted in the minimal increase
in interest expense for the year 2001. Overall, net interest income on a fully
taxable-equivalent basis increased 8.55% to $9,293,000 in 2001. This compared to
$8,561,000 for the corresponding period in 2000.
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 net
interest margin (FTE) was 3.79% for both 2001 and 2000.
19
NONINTEREST INCOME
Fees earned by the Trust Department are the largest component of noninterest
income and totaled $1,070,000 in 2001. This compared to $1,108,000 for the
corresponding period in 2000. A significant portion of trust fee income is based
upon the value of assets under management, and, as such, the calculation of fees
is influenced by the value of the markets at the time of assessment. During the
year 2001, as a result of this decline in stock market values, trust fee income
decreased from year 2000 levels. Estate settlement fees also contribute to trust
department income. Although the timing of the receipt of the fee is difficult to
predict, the overall volume of business for 2001 and 2000 was very comparable.
Other noninterest income increased $467,000 to $1,317,000 for the year ended
December 31, 2001 compared to $850,000 for the same period in 2000. Service
charges on deposit accounts increased $78,000 or 23.08% to $416,000 which
compared to $338,000 for the same period in 2001. Growth in demand deposit and
NOW accounts generated an increase in transaction volumes resulting in increased
fees. As a result of investment activities in the securities portfolio during
the year the Company recorded gains on sales of available-for-sale securities of
$130,000. This compared to recorded losses of ($64,000) for the year ended
December 31, 2000. This represents an increase of $194,000 when comparing the
two years. An economic environment of generally lower interest rates resulted in
significant activity in mortgage refinancing and was the primary result of the
increase in fees generated from the sale of loans held-for-sale to $184,000 for
the year ended December 31, 2001. This is an increase of $111,000 or 152.05%
over a total of $73,000 earned for the year ended December 31, 2000. Other
noninterest income increased $84,000 or 16.70% to $587,000 from $503,000 for the
year ended December 31, 2001 as compared to the same period in 2000. The
Company's VISA credit card program and Master Money Debit Card program grew
during 2001, resulting in increased transaction fees. The Company continues to
seek to increase noninterest income due to its importance as a potential
contributor to profitability.
NONINTEREST EXPENSE
Noninterest expense totaled $6,755,000 in 2001. This was an increase of $958,000
when compared to total noninterest expense of $5,797,000 in 2000. However, as a
percentage of total average earning assets, these expenses have remained
generally consistent at 2.75% in 2001 and 2.57% in 2000. Salaries and employee
benefits increased $439,000 or 12.92%. This is primarily the result of the
additional staff hired to service the increase in new business coupled with
annual pay increases and increasing costs of employee benefits. Occupancy and
equipment expenses increased 12.54% or $82,000 to $733,000 from $651,000 when
comparing 2001 to 2000. These increases in expenses were costs primarily
associated with the acquisition of the new Canaan branch as mentioned
previously. During 2001 data processing expenses decreased 14.34% to $247,000
from $288,000 as a result of the renegotiation of various data processing
agreements with vendors. Insurance expenses for the year 2001, which do not
include insurance benefits associated with employees, decreased $14,000 or
13.21% to $92,000 from $106,000, as a result of the Company's claim experience
and management's renegotiation of various renewal premiums on policies. Printing
and stationery costs increased $29,000 or 19.33% to $179,000 for the year ended
December 31, 2001 compared to $150,000 for the year 2000. This was the result of
the need for new forms and documentation relating primarily to either new
regulatory requirements or the new office in Canaan. Amortization of intangible
assets from branch acquisitions was a new expense to the Company that was
associated with the Canaan branch acquisition. For the year ended December 31,
2001 the expense totaled $48,000. Other operating expenses increased $423,000 or
37.07% to $1,564,000 from $1,141,000 when comparing the two years. This is
primarily the result of additional costs related to the Canaan branch.
INCOME TAXES
In 2001, the Company's tax expense totaled $1,370,000 with an effective tax rate
of 32.08%. This compared to income tax expense of $1,357,000 in 2000, which
reflected an effective tax rate of 32.26%. This decrease was primarily the
result of the impact of an increase in tax-exempt interest income earned from
the securities portfolio.
NET INCOME
Overall, net income totaled $2,901,000 for the year ended December 31, 2001,
compared to net income of $2,849,000 for the year 2000. This was an increase of
$52,000 or 1.83% and reflected earnings of $2.03 per share for the year,
compared to earnings per share of $1.92 for the same period in 2000.
20
FINANCIAL CONDITION
Comparison of December 31, 2002 and 2001
Total assets at December 31, 2002 were $293,107,000 compared to $283,602,000 at
December 31, 2001, an increase of $9,505,000 or 3.35%
SECURITIES PORTFOLIO
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The Company continues to use arbitrage strategy by borrowing funds and
investing them at a rate of return higher than the borrowing cost in order to
generate additional interest income from the securities portfolio. The
securities portfolio also acts as collateral for deposits of public agencies. As
of December 31, 2002, the securities portfolio, including Federal Home Loan Bank
of Boston stock, totaled $138,435,000. This represents an increase of
$32,842,000 or 31.10% when comparing the portfolio total of $105,593,000 at
year-end 2001. There are several contributing elements that account for the
increase in the portfolio. As reported in previous quarters of 2002, the asset
mix continues to change when compared with the balance sheet of December 31,
2001. At December 31, 2001, Federal Funds sold totaled $18,150,000. This was
primarily the cash that was received as the result of the acquisition of the
Canaan branch in September 2001 and is now invested in the securities portfolio.
The increase has also been the result of an economic environment of low interest
rates that has created refinancing opportunities to longer term fixed rate
products that are offered by the secondary mortgage market. This has resulted in
a decrease in total net loans, thus resulting in available cash to invest in the
securities portfolio. New business development has resulted in an increase in
deposits during 2002. A slow down in non-residential loan demand has resulted in
these funds also being invested in the securities portfolio, as securities
available-for-sale.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states. At December 31,
2002, securities totaling $135,169,000 were classified as available-for-sale and
securities totaling $321,000 were classified as held-to-maturity.
Securities are classified in the portfolio as either
Securities-Available-for-Sale and Securities-Held-to-Maturity. The securities
reported as available-for-sale are stated at fair value in the financial
statements of the Company. Unrealized holding gains and losses (accumulated
other comprehensive income/loss) are not included in earnings, but are reported
as a net amount (less expected tax) in a separate component of capital until
realized. At December 31, 2002, the unrealized gain net of tax was $1,734,000.
This compares to an unrealized loss net of tax of $279,000 at December 31, 2001.
The securities reported as securities-held-to-maturity are stated at amortized
cost.
FEDERAL FUNDS SOLD
The balance of federal funds sold totaled $1,750,000 at December 31, 2002. This
compares to $18,150,000 at December 31, 2001. Cash received with the acquisition
of the Canaan branch in September 2002 was invested in federal funds sold at
December 31, 2001 and was reinvested primarily in the securities portfolio
during 2002.
LENDING
Loans receivable, net of allowance for loan losses decreased $7,435,000 to
$135,632,000 at December 31, 2002 or 5.20% compared to $143,066,000 at December
31, 2001. The Company offers a wide variety of loan types and terms along with
competitive pricing to customers. The largest dollar volumes of loan activity
continue to be in the residential mortgage area. The Company's credit function
is designed to ensure adherence to prudent credit standards despite competition
for loans in the Company's market area. A continuing economic environment of
generally lower interest rates that targets refinancing opportunities to longer
term fixed rate products primarily offered by the secondary market has resulted
in the decrease in total net loans.
21
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
Total gross loans at December 31, 2002 were $137,090,000, which compares to
total loans of $144,511,000 at December 31, 2001. This is a decrease of
$7,421,000 or 5.14%. At December 31, 2002 approximately 86% of the Bank's loan
portfolio was related to real estate products and although the portfolio
decreased during the year 2002, the concentration remained consistent as
approximately 86% of the portfolio was related to real estate at December 31,
2001. There were no material changes in the composition of the loan portfolio
during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or other compromise the Company's objectives. Because of this risk
associated with extending loans the Company maintains an allowance or reserve
for credit losses through charges to earnings. The loan loss provision for the
year 2002 was $300,000 as compared to $150,000 for the year ended December 31,
2001. This is the result of the increases in charged off loans during the year
2002 and a decrease in recoveries of loans previously charged off, as well as an
increase in nonperfomring loans. While the overall level of nonperforming loans
remains low as a percentage of total loans, the increase of $813,000 in
nonperforming loans from December 31, 2001 to December 31, 2002 is being closely
monitored by management in order to determine whether such event is evidence of
any trend within the economy or loan portfolio.
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
used in making this determination during the year ended December 31, 2002. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which is submitted to the Board of Directors for
approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
residential real estate mortgages with balances of $300,000 or more and
commercial loans of $100,000 or more. Such loans are considered impaired when it
is probable that the Bank will not be able to collect all principal and interest
due according to the terms of the note. Any such commercial loans and
residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
years ended December 31, 2002 and 2001.
At December 31, 2002 the allowance for loan losses totaled $1,458,000,
representing 104.14% of nonperforming loans, which totaled $1,400,000, and 1.06%
of total loans of $137,090,000. This compared to $1,445,000 representing 246.17%
of nonperforming loans, which totaled $587,000 and 1.00% of total loans of
$144,511,000 at December 31, 2001. A total
22
of $251,000 in loans were charged off during the year 2002, as compared to
$101,000 during 2001. A total of $29,000 of previously charged off loans was
recovered during the year ended December 31, 2002. Recoveries for the year 2001
totaled $104,000. When comparing the two years, net charge-offs were $222,000
for the year 2002 and during the year 2001 net recoveries exceeded charge offs
by $3,000. Management believes that the allowance for loan losses is adequate.
While management estimates loan losses using the best available information, no
assurances can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans or other factors. Additionally, with expectations of
the Company to grow its existing portfolio, future additions to the allowance
may be necessary to maintain adequate coverage ratios.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2002 totaled $211,037,000 compared to
$201,351,000 at year-end 2001. This increase of $9,686,000 or 4.81% can be
primarily attributed to the ongoing efforts of the Company to competitively
price products and develop and maintain relationship banking with its customers.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and the aggressive
competition from nonbanking entities. During the year, there was an increase in
demand, NOW and savings accounts which are lower cost core deposits.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
(dollars in thousands)
Year ended December 31
2002 2001 2000
--------------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------------
Demand $ 36,586 $ 31,497 $ 31,522
NOW 18,514 .88% 17,185 1.07% 16,246 1.06%
Money Market 42,923 1.50% 50,331 3.41% 43,975 4.71%
Savings 37,518 1.98% 16,674 2.37% 15,691 2.43%
Time 68,485 3.64% 60,854 4.94% 53,781 5.20%
-------- -------- --------
$204,026 2.41% $176,541 3.00% $161,215 3.36%
======== ======== ========
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 are summarized as follows:
(dollars in thousands)
Year Ended December 31
2002 2001 2000
---------------------------
Three months or less $ 3,454 $ 3,895 $ 3,355
Over three months through six months 3,630 4,161 4,351
Over six months through one year 7,913 4,398 7,105
Over one year 8,050 5,708 2,088
------- ------- -------
Total $23,047 $18,162 $16,899
======= ======= =======
23
BORROWINGS
As part of its operating strategy, the Company utilizes advances from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At December 31, 2002, the Company had $51,891,000 in
outstanding advances from the Federal Home Loan Bank compared to $53,004,000 at
December 31, 2001. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
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 assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At December
31, 2002, the Company was slightly asset sensitive (positive gap). This would
suggest that the during a period of rising interest rates the Company would be
in a better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at December 31, 2002 is within the limits approved by the
Board of Directors.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston. This enhances the
liquidity position by providing a source of available borrowings.
At December 31, 2002, the Company had approximately $33,212,000 in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the Company's needs for both the present and foreseeable
future.
24
CAPITAL
At December 31, 2002, the Company had $27,345,000 in shareholder equity compared
to $23,363,000 at December 31, 2001. This represents an increase of $3,982,000
or 17.04%. Several components contributed to the change since December 2001.
Earnings for the year totaled $3,199,000. Market conditions have resulted in a
positive adjustment to unrealized comprehensive income of $2,013,000. The
Company declared dividends in 2002 resulting in a decrease in capital of
$1,252,000. The Company issued 880 new shares of common stock under the terms of
the Director Stock Retainer Plan during the second quarter of 2002 which
resulted in an increase in capital of $22,000. Under current regulatory
definitions, the Company and the Bank are considered to be "well capitalized"
for capital adequacy purposes. As a result, the Bank pays the lowest federal
deposit insurance deposit premiums possible. One primary measure of capital
adequacy for regulatory purposes is based on the ratio of risk-based capital to
risk weighted assets. This method of measuring capital adequacy helps to
establish capital requirements that are more sensitive to the differences in
risk associated with various assets. It takes in account off-balance sheet
exposure in assessing capital adequacy and it minimizes disincentives to holding
liquid, low risk assets. At year-end 2002, the Company had a risk-based capital
ratio of 17.21% compared to 16.21% at December 31, 2001. Maintaining strong
capital is essential to bank safety and soundness. However, the effective
management of capital resources requires generating attractive returns on equity
to build value for shareholders while maintaining appropriate levels of capital
to fund growth, meet regulatory requirements and be consistent with prudent
industry practices. Management believes that the capital ratios of the Company
and Bank are adequate to continue to meet the foreseeable capital needs of the
institution.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money, over time, due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result, interest rates tend to have a greater impact on the Company's
performance than do the effects of general levels of inflation; although they do
not necessarily move in the same direction or with the same magnitude as the
prices of goods and services. Although not an influence in recent years,
inflation could impact earnings in future periods.
IMPACT OF NEW ACCOUNTING STANDARDS
FASB has issued SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement replaces
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and rescinds SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No. 140
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure provisions
are effective for fiscal years ending after December 15, 2000. In management's
opinion, the adoption of SFAS No. 140 did not have a material effect on the
Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 141 improves the consistency of
the accounting and reporting for business combinations by requiring that all
business combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method is no longer permitted. Statement
No. 141 requires that the purchase method be used for business combinations
initiated after June 30, 2001. The impact of adopting this Statement on the
consolidated financial statements was not material.
Statement of Financial Accounting Standards No. 142 requires that goodwill no
longer be amortized to earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement, which for most
companies, was January 1, 2002. The impact of adopting this Statement on the
consolidated financial statements was not material.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No.
9. SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" and FASB Interpretation No. 9 "Applying APB Opinions No. 16 and 17
When a Savings and Loan
25
Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method" provided interpretive guidance on the
application of the purchase method to acquisitions of financial institutions.
Except for transactions between two or more mutual enterprises, SFAS No. 147
removes acquisitions of financial institutions from the scope of both Statement
72 and Interpretation 9 and requires that those transactions be accounted for in
accordance with SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and
Other Intangible Assets". Thus, the requirement in paragraph 5 of Statement 72
to recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147 amends
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" to
include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those intangible
assets are subject to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions that SFAS No. 144
requires for other long-lived assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the purchase
method of accounting, is effective for acquisitions for which the date of
acquisition is on or after October 1, 2002. The provisions in paragraph 6
related to accounting for the impairment or disposal of certain long-term
customer -relationship intangible assets are effective on October 1, 2002.
Transition provisions for previously recognized unidentifiable intangible assets
in paragraphs 8-14 are effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 its recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the nine-months ended
September 30, 2002 do not reflect amortization in the amount of $71,572 that
would have been recorded if SFAS No. 147 had not been issued.
SFAS No. 147 requires that the Company's reclassified goodwill be tested for
impairment as of January 1, 2002 and that such test is completed by December 31,
2002.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
The Company has no goodwill other than reclassified goodwill. The test for
impairment of the reclassified goodwill was completed December 31, 2002.
The effect of the Company's adoption of SFAS No. 147 was to increase net income
for the nine and three months periods ended September 30, 2002 by $43,692 and
$14,564, respectively.
The Company's amortization expense related to reclassified goodwill was $3,974
and $3,974 for the nine and three month periods ended September 30, 2001,
respectively.
FORWARD LOOKING STATEMENTS
This Form 10-K and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
26
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
27
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 accounting principles generally
accepted in the United States of America applying estimates and management's
best judgement 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 financial records are reliable for the purpose of
preparing financial statements.
28
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 under the symbol "SAL". As a result, the value of its common
stock may fluctuate or respond to price movements relating to the banking
industry or other indicia of investment. A discussion of credit risk, interest
rate risk and liquidity risk can be found in Part II, Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors' January 27, 2003....................... F-1
Consolidated Balance Sheets at December 31, 2002 and 2001.............. F-2
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000...................................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2002, 2001 and 2000.................. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000...................................... F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2002, 2001 and 2000.......................... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet for the Years Ended December 31, 2002 and 2001......... F-23
Statement of Income for the Years Ended
December 31, 2002, 2001 and 2002.................................... F-24
Statement of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.................................... F-25
Quarterly Results of Operations (unaudited)........................... F-26
29
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, 2002 and 2001 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, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 27, 2003
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
------------ -------------
Cash and due from banks $ 7,885,319 $ 7,330,679
Interest bearing demand deposits with other banks 447,627 258,097
Money market mutual funds 536,982 470,905
Federal funds sold 1,750,000 18,150,000
------------ -------------
Cash and cash equivalents 10,619,928 26,209,681
Investments in available-for-sale securities (at fair value) 135,168,536 102,248,029
Investments in held-to-maturity securities (fair values of $331,544 as of
December 31, 2002 and $401,403 as of December 31, 2001) 321,287 399,989
Federal Home Loan Bank stock, at cost 2,945,200 2,945,200
Loans, less allowance for loan losses of $1,458,359 and $1,444,504 as of
December 31, 2002 and 2001, respectively 135,631,604 143,066,109
Investment in real estate 75,000 75,000
Premises and equipment 2,805,477 2,683,487
Other real estate owned 75,000
Unidentifiable intangible assets on branch acquisition 2,357,884
Goodwill 2,357,884
Core deposit intangible 800,316 868,670
Accrued interest receivable 1,933,616 1,681,268
Other assets 372,934 1,067,143
------------ -------------
Total assets $293,106,782 $ 283,602,460
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 38,929,897 $ 37,702,153
Interest-bearing 172,107,507 163,649,335
------------ -------------
Total deposits 211,037,404 201,351,488
Federal Home Loan Bank advances 51,890,607 53,003,746
Due to broker 4,203,808
Other liabilities 2,833,825 1,680,272
------------ -------------
Total liabilities 265,761,836 260,239,314
------------ -------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,423,238 shares in 2002 and 1,422,358 shares in 2001 142,324 142,236
Paid-in capital 2,303,547 2,281,415
Retained earnings 23,164,693 21,218,155
Accumulated other comprehensive income (loss) 1,734,382 (278,660)
------------ -------------
Total stockholders' equity 27,344,946 23,363,146
------------ -------------
Total liabilities and stockholders' equity $293,106,782 $ 283,602,460
============ =============
The accompanying notes are an integral part of these
consolidated financial statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- ------------
Interest and dividend income:
Interest and fees on loans $ 9,677,332 $11,343,508 $ 10,494,181
Interest and dividends on securities:
Taxable 4,143,851 4,204,364 4,564,319
Tax-exempt 1,995,114 977,487 651,386
Dividends on equity securities 219,245 203,806 200,784
Other interest 121,891 360,226 599,072
----------- ----------- ------------
Total interest and dividend income 16,157,433 17,089,391 16,509,742
----------- ----------- ------------
Interest expense:
Interest on deposits 4,039,427 5,301,623 5,421,144
Interest on Federal Home Loan Bank advances 2,858,310 2,999,174 2,863,277
----------- ----------- ------------
Total interest expense 6,897,737 8,300,797 8,284,421
----------- ----------- ------------
Net interest and dividend income 9,259,696 8,788,594 8,225,321
Provision for loan losses 300,000 150,000 180,000
----------- ----------- ------------
Net interest and dividend income after provision for
loan losses 8,959,696 8,638,594 8,045,321
----------- ----------- ------------
Other income:
Trust department income 1,100,160 1,070,017 1,108,249
Service charges on deposit accounts 472,201 472,120 391,844
Gains (losses) on sales of available-for-sale securities, net 634,080 130,117 (63,976)
Gain on sale of loans held-for-sale 227,244 183,618 72,719
Other income 688,128 531,265 448,857
----------- ----------- ------------
Total other income 3,121,813 2,387,137 1,957,693
----------- ----------- ------------
Other expense:
Salaries and employee benefits 4,235,122 3,833,838 3,395,161
Occupancy expense 306,486 246,549 233,107
Equipment expense 568,422 486,393 418,146
Data processing 533,405 494,856 492,060
Insurance 114,184 92,323 105,613
Net cost of operation of other real estate owned 2,305 1,559 1,762
Printing and stationery 187,021 178,624 149,988
Legal expense 60,561 56,286 64,192
Amortization of core deposit intangible 68,354 19,936
Amortization of unidentifiable intangible assets from branch
acquisition 27,831
Other expense 1,699,084 1,316,659 936,967
----------- ----------- ------------
Total other expense 7,774,944 6,754,854 5,796,996
----------- ----------- ------------
Income before income taxes 4,306,565 4,270,877 4,206,018
Income taxes 1,107,770 1,369,674 1,356,994
----------- ----------- ------------
Net income $ 3,198,795 $ 2,901,203 $ 2,849,024
=========== =========== ============
Earnings per common share $ 2.25 $ 2.03 $ 1.92
=========== =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Number
of
Shares Common Paid-in Retained Treasury
Issued Stock Capital Earnings Stock
--------- --------- ---------- ------------ -----------
Balance, December 31, 1999 1,504,171 $ 150,417 $3,780,376 $ 17,798,981 $
Comprehensive income:
Net income 2,849,024
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Repurchase of common stock, 45,805 shares (816,062)
Transfer treasury stock to reduce shares
issued (45,805) (4,580) (811,482) 816,062
Dividends declared ($.77 per share) (1,131,591)
--------- --------- ---------- ------------ -----------
Balance, December 31, 2000 1,458,366 145,837 2,968,894 19,516,414
Comprehensive income:
Net income 2,901,203
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Repurchase of common stock, 36,008 shares (691,080)
Transfer treasury stock to reduce shares
issued (36,008) (3,601) (687,479) 691,080
Dividends declared ($.84 per share) (1,199,462)
--------- --------- ---------- ------------ -----------
Balance, December 31, 2001 1,422,358 142,236 2,281,415 21,218,155
Comprehensive income:
Net income 3,198,795
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Issuance of 880 shares for Director's fees 880 88 22,132
Dividends declared ($.88 per share) (1,252,257)
--------- --------- ---------- ------------ ----------
Balance, December 31, 2002 1,423,238 $ 142,324 $2,303,547 $ 23,164,693 $
========= ========= ========== ============ ===========
Accumulated
Other
Comprehensive
Income (Loss) Total
------------ ------------
Balance, December 31, 1999 $ (1,835,023) $ 19,894,751
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect 1,664,134
Comprehensive income 4,513,158
Repurchase of common stock, 45,805 shares (816,062)
Transfer treasury stock to reduce shares
issued
Dividends declared ($.77 per share) (1,131,591)
------------ ------------
Balance, December 31, 2000 (170,889) 22,460,256
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect (107,771)
Comprehensive income 2,793,432
Repurchase of common stock, 36,008 shares (691,080)
Transfer treasury stock to reduce shares
issued
Dividends declared ($.84 per share) (1,199,462)
------------ ------------
Balance, December 31, 2001 (278,660) 23,363,146
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect 2,013,042
Comprehensive income 5,211,837
Issuance of 880 shares for Director's fees 22,220
Dividends declared ($.88 per share) (1,252,257)
------------ ------------
Balance, December 31, 2002 $ 1,734,382 $ 27,344,946
============ ============
Reclassification disclosure for the years ended December 31:
2002 2001 2000
----------- ----------- -----------
Net unrealized gains (losses) on available-for-sale securities $ 3,931,446 $ (46,411) $ 2,661,877
Reclassification adjustment for realized (gains) losses in net income (634,080) (130,117) 63,976
----------- ----------- -----------
Other comprehensive income (loss) before income tax effect 3,297,366 (176,528) 2,725,853
Income tax (expense) benefit (1,284,324) 68,757 (1,061,719)
----------- ----------- -----------
Other comprehensive income (loss), net of tax $ 2,013,042 $ (107,771) $ 1,664,134
=========== =========== ===========
Accumulated other comprehensive income (loss) as of December 31, 2002, 2001 and
2000 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.
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 3,198,795 $ 2,901,203 $ 2,849,024
Adjustments to reconcile net income to net cash provided by
operating activities:
(Accretion) amortization of securities, net 454,034 (49,133) (65,908)
(Gain) loss on sales of available-for-sale securities, net (634,080) (130,117) 63,976
Provision for loan losses 300,000 150,000 180,000
Depreciation and amortization 378,204 345,544 323,215
Amortization of intangible assets from branch acquisition 27,831
Amortization of core deposit intangible 68,354 19,936
Accretion of fair value adjustment on deposits (100,484) (136,287)
(Increase) decrease in interest receivable (252,348) 108,960 (214,704)
Deferred tax expense (benefit) 14,647 (24,072) (139,532)
(Increase) decrease in prepaid expenses 94,379 (84,167) (10,377)
Increase in cash surrender value of insurance
policies (13,342) (16,811) (14,564)
Increase in income tax receivable (20,977) (43,254)
(Increase) decrease in other assets (11,058) 2,717 95,778
Decrease in taxes payable (8,081)
Increase in accrued expenses 166,703 176,341 236,033
Increase (decrease) in interest payable (30,825) (39,979) 106,596
Decrease in other liabilities (1,026) (7,275) (1,502)
Issuance of shares for Directors fees 22,220
------------- ------------- -------------
Net cash provided by operating activities 3,633,196 3,201,437 3,399,954
------------- ------------- -------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (14,900) (828,300)
Purchases of available-for-sale securities (104,324,117) (88,096,807) (21,958,344)
Proceeds from sales of available-for-sale securities 41,970,330 19,419,941 6,225,720
Proceeds from maturities of available-for-sale securities 28,715,141 48,212,964 16,036,879
Proceeds from maturities of held-to-maturity securities 70,445 10,032 78,479
Loan purchases (1,017,677) (2,800,000) (715,000)
Loan originations and principal collections, net 8,112,107 (2,128,114) (13,444,992)
Recoveries of loans previously charged off 29,148 103,658 22,543
Capital expenditures (393,809) (329,877) (578,957)
Premiums paid on insurance policies (12,381) (12,381) (12,381)
Life insurance policy proceeds 192,443
------------- ------------- -------------
Net cash used in investing activities (26,658,370) (25,635,484) (15,174,353)
------------- ------------- -------------
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
(continued)
2002 2001 2000
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 6,479,009 18,060,288 14,653,988
Net increase (decrease) in time deposits 3,307,391 (9,573,854) (2,576,311)
Assumption of net deposits on branch acquisitions 22,897,443
Advances from Federal Home Loan Bank 20,000,000 29,000,000
Principal payments on advances from Federal Home Loan Bank (1,113,139) (14,353,547) (21,354,686)
Dividends paid (1,237,840) (1,454,946) (1,088,830)
Net repurchase of common stock (691,080) (816,062)
------------ ------------ ------------
Net cash provided by financing activities 7,435,421 34,884,304 17,818,099
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (15,589,753) 12,450,257 6,043,700
Cash and cash equivalents at beginning of year 26,209,681 13,759,424 7,715,724
------------ ------------ ------------
Cash and cash equivalents at end of year $ 10,619,928 $ 26,209,681 $ 13,759,424
============ ============ ============
Supplemental disclosures:
Interest paid $ 7,029,046 $ 8,477,063 $ 8,177,825
Income taxes paid 1,114,100 1,437,000 1,504,607
Transfer of allowance for loan losses to other liabilities 64,073
Loan transferred to other real estate owned 75,000
Branch office acquisition:
Deposits assumed $ 26,565,337
Loans acquired (121,423)
Fixed assets acquired (272,150)
------------
Net liabilities assumed 26,171,764
Cash received (22,897,443)
------------
Intangible assets $ 3,274,321
============
The accompanying notes are an integral part of these
consolidated financial statements.
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000
NOTE 1 - NATURE OF OPERATIONS
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank & Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp
and the Bank are referred to together as the (Company)).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut. 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 accounting policies generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated financial
statements were prepared using the accrual basis of accounting. The significant
accounting policies are summarized below to assist the reader in better
understanding the consolidated financial statements and other data contained
herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of 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, money market mutual funds and federal funds sold.
Cash and due from banks as of December 31, 2002 includes $1,781,000 which
is subject to withdrawals and usage restrictions to satisfy the reserve
requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts. Gains or losses on sales of investment
securities are computed on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This security
classification may be modified after acquisition only under certain
specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the consolidated balance 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
consolidated 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
consolidated balance sheet. Unrealized holding gains and
losses for trading securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
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.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line in the process
of foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 10 to 40 years for buildings and 2 to 25
years for furniture and equipment.
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.
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair value for its financial instruments. Fair value methods and
assumptions used by the Company in estimating its fair value disclosures
are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
STOCK BASED COMPENSATION:
The Company has a stock-based plan to compensate non-employee directors
for their services. This plan is more fully described in Note 13.
Compensation cost for these services is reflected in net income in an
amount equal to the fair value of the shares of company common stock
payable to the directors.
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. 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.
RECENT ACCOUNTING PRONOUNCEMENTS:
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". This Statement
replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" and rescinds SFAS
Statement No. 127, "Deferral of the Effective Date of Certain Provisions
of FASB Statement No. 125". SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure
provisions are effective for fiscal years ending after December 15, 2000.
The adoption of this Statement did not have a material impact on the
Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This
Statement addresses financial accounting and reporting for business
combinations and supercedes APB Opinion No. 16, "Business Combinations",
and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises". Under Opinion 16, business combinations were accounted for
using one of two methods, the pooling-of-interests method or the purchase
method. All business combinations in the scope of SFAS No. 141 are to be
accounted for using one method - the purchase method. The provisions of
SFAS No. 141 apply to all business combinations initiated after June 30,
2001 and to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later.
On September 14, 2001 the Company acquired a bank branch. The acquisition
is described on the following page. The results of operations of the
acquired bank branch are included in the consolidated income statement of
the Company for the period from September 15, 2001 to December 31, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This Statement addresses financial accounting and reporting for
required goodwill and other intangible assets and supercedes APB Opinion
No. 17, "Intangible Assets". The initial recognition and measurement
provisions of SFAS No. 142 apply to intangible assets which are defined as
assets (not including financial assets) that lack physical substance. The
term "intangible assets" is used in SFAS No. 142 to refer to intangible
assets other than goodwill. The accounting for a recognized intangible
asset is based on its useful life. An intangible asset with a finite
useful life is amortized; an intangible asset with an indefinite useful
life is not amortized. An intangible asset that is subject to amortization
shall be reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is
defined as the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed. SFAS No.
142 further provides that goodwill shall be tested for impairment at a
level of reporting referred to as a reporting unit. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its
implied fair value.
SFAS No. 142 was effective as follows:
All of the provisions of SFAS No. 142 were applied in fiscal years
beginning after December 15, 2001, to all goodwill and intangible
assets recognized in the Company's statement of financial position
at the beginning of that fiscal year, regardless of when those
previously recognized assets were initially recognized.
The Company had intangible assets as of December 31, 2001 in the amount of
$3,226,554 that arose from the Company's purchase of certain assets and
its assumption of certain liabilities of a bank branch in Canaan,
Connecticut on September 14, 2001. The fair value of the liabilities
assumed exceeded the fair value of the assets acquired. Included in the
intangible assets acquired was an identified intangible asset (a core
deposit intangible) in the amount of $888,606 which is being amortized to
expense over 13 years on the straight-line method. The Company classified
the remainder of the intangible assets acquired, in the amount of
$2,385,715, as an unidentifiable intangible asset and through December 31,
2001 amortized it to expense over 25 years on the straight-line method.
Accumulated amortization of the intangible assets was $47,767 as of
December 31, 2001. This accounting was in accordance with SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions"
and did not change because SFAS No. 142 did not change the essential parts
of SFAS No. 72. However, the intangible asset was subject to the
impairment review requirements of SFAS No. 121.
The gross carrying amount of the core deposit intangible at December 31,
2002 and 2001 was $888,606. Accumulated amortization on such intangible
asset was $88,290 and $19,936 on December 31, 2002 and 2001, respectively.
The estimated amortizable expense on the core deposit intangible for each
of the five years succeeding 2002 is $68,354.
On October 10, 2001 the Financial Accounting Standards Board (Board)
affirmed that paragraph 5 of SFAS Statement No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, applies to all
acquisitions of financial institutions (or branches thereof) whether
"troubled" or not, in which the fair value of the liabilities assumed
exceeds the fair value of tangible and intangible assets acquired. The
Board decided to reconsider the guidance in paragraphs 5-7 of Statement 72
as part of its consideration of combinations of mutual enterprises within
the scope of the project on combinations of not-for-profit organizations.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying
APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by
the Purchase Method" provided interpretive guidance on the application of
the purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, SFAS Statement No.
147 removes acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with SFAS Statements No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". Thus,
the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed
over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS Statement No. 147. In addition, FASB
Statement No. 147 amends SFAS Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial
institutions such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets. Consequently, those
intangible assets are subject to the same undiscounted cash flow
recoverability test and impairment loss recognition and measurement
provisions that SFAS Statement No. 144 requires for other long-lived
assets that are held and used. Paragraph 5 of SFAS Statement No. 147,
which relates to the application of the purchase method of accounting, was
effective for acquisitions for which the date of acquisition was on or
after October 1, 2002. The provisions in paragraph 6 related to accounting
for the impairment or disposal of certain long-term customer-relationship
intangible assets were effective on October 1, 2002. Transition provisions
for previously recognized unidentifiable intangible assets in paragraphs
8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS Statement No. 147, the Company, has
reclassified, as of September 30, 2002 its recognized unidentifiable
intangible asset related to branch acquisition(s). This asset was
reclassified as goodwill (reclassified goodwill). The amount reclassified
was $2,357,884, the carrying amount as of January 1, 2002. The
reclassified goodwill is being accounted for and reported prospectively as
goodwill under SFAS Statement No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended
December 31, 2002 do not reflect amortization in the amount of $95,429
that would have been recorded if SFAS Statement No. 147 had not been
issued. In accordance with SFAS Statement No. 147 the Company tested its
reclassified goodwill for impairment as of January 1, 2002 and December
31, 2002. The Company determined that its reclassified goodwill as of
those dates was not impaired.
Also in accordance with paragraph 9 of SFAS Statement No. 147, as of
September 30, 2002, the Company reclassified its core deposit intangible
asset and accounted for it as an asset apart from the unidentifiable
intangible asset and not as goodwill.
The Company's amortization expense related to reclassified goodwill was
$27,831 for the year ended December 31, 2001.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supercedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," but retains the basic recognition and measurement model for
assets held for use and held for sale. The provisions of SFAS No. 144 are
required to be adopted starting with fiscal years beginning after December
15, 2001. This Statement did not have a material impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. Management does not anticipate that
this Statement will have any material impact on the Company's consolidated
financial statements.
NOTE 3 - INVESTMENTS IN SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows as of December 31:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2002:
Equity securities $ 3,031 $ 86,154 $ $ 89,185
U.S. government agencies preferred stock 4,047,250 131,930 4,179,180
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 41,294,731 383,557 (43,163) 41,635,125
Debt securities issued by states of the
United States and political subdivisions
of the states 41,564,707 1,234,464 (6,855) 42,792,316
Money market mutual funds 536,982 536,982
Mortgage-backed securities 45,417,896 1,091,525 (36,691) 46,472,730
------------- ------------- ------------- -------------
132,864,597 2,927,630 (86,709) 135,705,518
Money market mutual funds included in
cash and cash equivalents (536,982) (536,982)
------------- ------------- ------------- -------------
$ 132,327,615 $ 2,927,630 $ (86,709) $ 135,168,536
============= ============= ============= =============
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
Value
December 31, 2001:
Equity securities $ 3,031 $ 131,978 $ $ 135,009
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies 38,459,596 278,375 (37,178) 38,700,793
Debt securities issued by states of the
United States and political subdivisions
of the states 30,927,212 151,015 (804,544) 30,273,683
Money market mutual funds 470,905 470,905
Mortgage-backed securities 33,314,635 171,006 (347,097) 33,138,544
------------- ------------- ------------- -------------
103,175,379 732,374 (1,188,819) 102,718,934
Money market mutual funds included in
cash and cash equivalents (470,905) (470,905)
------------- ------------- ------------- -------------
$ 102,704,474 $ 732,374 $ (1,188,819) $ 102,248,029
============= ============= ============= =============
Gross Gross
Net Unrecognized Unrecognized
Carrying Holding Holding Fair
Amount Gains Loss Value
------------- ------------- ------------- -------------
Held-to-maturity securities:
December 31, 2002:
Mortgage-backed securities $321,287 $ 10,257 $ $331,544
======== ======== ======== ========
December 31, 2001:
Mortgage-backed securities $399,989 $ 1,414 $ $401,403
======== ======== ======== ========
The scheduled maturities of securities (other than equity securities) were as
follows as of December 31, 2002:
Available-For-Sale Held-To-Maturity
------------------ -----------------------------
Fair Net Carrying Fair
Value Amount Value
------------ ------------ ------------
Due after one year through five years $ 378,996 $ $
Due after five years through ten years 18,755,925
Due after ten years 65,292,520
Mortgage-backed securities 46,472,730 321,287 331,544
------------ ------------ ------------
$130,900,171 $ 321,287 $ 331,544
============ ============ ============
During 2002, proceeds from sales of available-for-sale securities amounted to
$41,970,330. Gross realized gains and gross realized losses on those sales
amounted to $634,705 and $625, respectively. During 2001, proceeds from sales of
available-for-sale securities amounted to $19,419,941. Gross realized gains on
those sales amounted to $130,117. During 2000, proceeds from sales of
available-for-sale securities amounted to $6,225,720. Gross realized gains and
gross realized losses on those sales amounted to $145 and $64,121, respectively.
The tax (expense) benefit applicable to these net realized gains and losses
amounted to $(246,974), $(50,681) and $24,919, respectively.
There were no issuers of securities whose carrying amount exceeded 10% of
stockholders' equity as of December 31, 2002.
Total carrying amounts of $4,629,082 and $6,199,068 of debt securities were
pledged to secure public deposits, treasury tax and loan and for other purposes
as required by law as of December 31, 2002 and 2001, respectively.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
2002 2001
--------- ----------
(in thousands)
Commercial, financial and agricultural $ 10,127 $ 10,797
Real estate - construction and land development 6,027 3,935
Real estate - residential 93,636 102,201
Real estate - commercial 18,002 17,423
Consumer 9,007 10,030
Other 291 125
--------- ---------
137,090 144,511
Allowance for loan losses (1,458) (1,445)
--------- ---------
Net loans $ 135,632 $ 143,066
========= =========
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2002.
Total loans to such persons and their companies amounted to $1,042,812 as of
December 31, 2002. During 2002 advances of $153,254 were made and repayments
totaled $496,760.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2002 2001 2000
----------- ----------- -----------
Balance at beginning of period $ 1,444,504 $ 1,291,502 $ 1,159,537
Provision for loan losses 300,000 150,000 180,000
Recoveries of loans previously charged off 29,148 103,658 22,543
Loans charged off (251,220) (100,656) (70,578)
Transfer to liability account for estimated losses
on loan commitments (64,073)
----------- ----------- -----------
Balance at end of period $ 1,458,359 $ 1,444,504 $ 1,291,502
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2002 2001
---- ----
(in thousands)
Total nonaccrual loans $855 $372
==== ====
Accruing loans which are 90 days or more overdue $124 $215
==== ====
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:
2002 2001
--------------------------- ----------------------------
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 $511,063 $ 81,899 $277,415 $ 41,612
Loans for which there is no related allowance for credit losses
Totals $511,063 $ 81,899 $277,415 $ 41,612
======== ======== ======== ========
Average recorded investment in impaired loans during the
year ended December 31 $397,162 $281,803
======== ========
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 18,156 $ 18,429
======== ========
Amount recognized using a cash-basis method of
accounting $ 930 $
======== ========
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2002 2001
----------- -----------
Land $ 350,644 $ 350,644
Buildings 2,681,394 2,514,603
Furniture and equipment 1,781,712 1,622,527
----------- -----------
4,813,750 4,487,774
Accumulated depreciation and amortization (2,008,273) (1,804,287)
----------- -----------
$ 2,805,477 $ 2,683,487
=========== ===========
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2002 and 2001 was $23,047,271 and $18,161,373,
respectively.
For time deposits as of December 31, 2002, the scheduled maturities for years
ended December 31 are:
2003 $47,953,968
2004 7,048,565
2005 3,384,138
2006 6,583,601
2007 4,554,465
-----------
$69,524,737
===========
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank. Total
deposits to such persons and their companies amounted to $745,840 as of December
31, 2002 and $727,850 as of December 31, 2001.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2002 and thereafter are summarized as follows:
AMOUNT
------
2003 $10,993,295
2004 766,823
2005 263,339
2006 188,605
2007 200,582
Thereafter 39,477,963
-----------
$51,890,607
===========
The advances due after December 31, 2007 include $39,000,000 of advances that
are redeemable at par at the option of the FHLB. An advance of $10,000,000 is
redeemable on December 15, 2003 and callable quarterly thereafter, an advance of
$19,000,000 is redeemable on January 27, 2003 and callable quarterly thereafter
and an advance of $10,000,000 is redeemable on February 26, 2004.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2002, the interest rates on FHLB advances ranged from 4.81
percent to 6.58 percent. At December 31, 2002, the weighted average interest
rate on FHLB advances was 5.37 percent.
NOTE 8 - EMPLOYEE BENEFITS
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
The following tables set forth information about the plan as of December 31 and
the years then ended:
2002 2001
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,345,618 $ 2,174,561
Actuarial (gain) loss 67,008 (1,540)
Service cost 124,322 141,721
Interest cost 189,459 168,343
Benefits paid (707,380) (137,467)
----------- -----------
Benefit obligation at end of year 2,019,027 2,345,618
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,171,193 2,296,344
Actual return on plan assets (244,376) (45,501)
Contributions 177,274 57,817
Benefits paid (707,380) (137,467)
----------- -----------
Fair value of plan assets at end of year 1,396,711 2,171,193
----------- -----------
Funded status (622,316) (174,425)
Unrecognized net (gain) loss from actuarial experience 177,951 (301,286)
Unrecognized prior service cost 94,544 95,436
Unamortized net asset existing at date of adoption of
SFAS No. 87 58,364 58,364
----------- -----------
Accrued benefit cost included in other liabilities $ (291,457) $ (321,911)
=========== ===========
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 2002 and 2001, respectively. The
weighted-average expected long-term rate of return on assets was 8.0% for 2002
and 2001.
Components of net periodic cost:
2002 2001 2000
--------- --------- ---------
Service cost $ 124,322 $ 141,721 $ 131,006
Interest cost on benefit obligation 189,459 168,343 163,061
Expected return on assets (176,526) (180,290) (192,757)
Amortization of prior service cost 9,564 9,564 9,564
--------- --------- ---------
Net periodic cost $ 146,819 $ 139,338 $ 110,874
========= ========= =========
The Company adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute up to fifteen percent of their pay. The Company may
make discretionary contributions to the Plan. The Company's contribution in the
years ended December 31, 2002, 2001 and 2000 amounted to $53,000, $48,000 and
$44,000, respectively. Discretionary contributions vest in full after five
years.
Five of the Company's executives have a change in control agreement (agreement)
with the Company. Under the agreements, if the executive officer's employment is
terminated within twelve months subsequent to a change in control as defined in
the agreements, then the officer is entitled to a lump sum amount equal to the
executive's annual compensation, as defined in the agreements, less amounts
previously paid the executive from the date of the change in control.
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
2002 2001 2000
----------- ----------- -----------
Current:
Federal $ 790,590 $ 1,073,942 $ 1,172,814
State 302,533 319,804 323,712
----------- ----------- -----------
1,093,123 1,393,746 1,496,526
----------- ----------- -----------
Deferred:
Federal 4,143 (19,437) (113,530)
State 10,504 (4,635) (26,002)
----------- ----------- -----------
14,647 (24,072) (139,532)
----------- ----------- -----------
Total income tax expense $ 1,107,770 $ 1,369,674 $ 1,356,994
=========== =========== ===========
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:
2002 2001 2000
------- ------- -------
% 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 (16.8) (7.8) (5.3)
Other items 3.5 1.0 (1.0)
State tax, net of federal tax benefit 5.0 4.9 4.6
---- ---- ----
Effective tax rates 25.7% 32.1% 32.3%
==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2002 2001
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 396,543 $ 365,020
Interest on non-performing loans 20,197 10,283
Accrued deferred compensation 18,721 20,602
Post retirement benefits 24,149 19,475
Other real estate owned property writedown 25,317 25,317
Deferred organization costs 1,000 2,193
Accrued pensions 113,523 125,385
Net unrealized holding loss on available-for-sale securities 177,785
Alternative minimum tax 65,433
----------- -----------
Gross deferred tax assets 664,883 746,060
----------- -----------
Deferred tax liabilities:
Core deposit intangible asset (151,839) (60,672)
Accelerated depreciation (337,585) (323,737)
Discount accretion (19,809) (13,569)
Net unrealized holding gain on available-for-sale securities (1,106,539)
----------- -----------
Gross deferred tax liabilities (1,615,772) (397,978)
----------- -----------
Net deferred tax assets (liabilities) $ (950,889) $ 348,082
=========== ===========
Deferred tax assets as of December 31, 2002 and 2001 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, 2002, 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.
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:
2002 2001
------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 10,619,928 $ 10,619,928 $ 26,209,681 $ 26,209,681
Available-for-sale securities 135,168,536 135,168,536 102,248,029 102,248,029
Held-to-maturity securities 321,287 331,544 399,989 401,403
Federal Home Loan Bank stock 2,945,200 2,945,200 2,945,200 2,945,200
Loans, net 135,631,604 137,453,000 143,066,109 143,680,000
Accrued interest receivable 1,933,616 1,933,616 1,681,268 1,681,268
Financial liabilities:
Deposits 211,037,404 212,283,000 201,351,488 201,601,000
FHLB advances 51,890,607 53,173,000 53,003,746 53,974,000
Due to broker 4,203,808 4,203,808
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:
2002 2001
----------- -----------
Commitments to originate loans $10,421,946 $ 6,692,798
Standby letters of credit 20,000 20,000
Unadvanced portions of loans:
Home equity 8,893,908 8,631,632
Commercial lines of credit 6,383,820 5,260,748
Construction 1,754,774 881,951
Consumer 5,737,646 5,744,632
----------- -----------
$33,212,094 $27,231,761
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 11 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in northwestern
Connecticut and bordering New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 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,
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2002, 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, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $24,073 17.21% $11,199 >/=8.0% N/A
Salisbury Bank & Trust Company 23,838 17.06 11,194 >/=8.0 $13,992 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 22,453 16.05 5,600 >/=4.0 N/A
Salisbury Bank & Trust Company 22,218 15.90 5,597 >/=4.0 8,395 >/=6.0
Tier 1 Capital (to Average Assets)
Consolidated 22,453 7.80 11,513 >/=4.0 N/A
Salisbury Bank & Trust Company 22,218 7.73 11,497 >/=4.0 14,371 >/=5.0
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)
Consolidated $21,919 16.21% $10,820 >/=8.0% N/A
Salisbury Bank & Trust Company 21,739 16.09 10,812 >/=8.0 $13,515 >/=10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 20,415 15.09 5,410 >/=4.0 N/A
Salisbury Bank & Trust Company 20,235 14.97 5,406 >/=4.0 8,109 >/=6.0
Tier 1 Capital (to Average Assets)
Consolidated 20,415 7.61 10,730 >/=4.0 N/A
Salisbury Bank & Trust Company 20,235 7.56 10,713 >/=4.0 13,515 >/=5.0
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 2002 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $10,721,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 13 - DIRECTORS STOCK RETAINER PLAN
At the 2001 annual meeting the stockholders of the Company voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan
provides non-employee directors of the Company with shares of restricted stock
of the Company as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the plan is
15,000. The first grant date under this plan preceded the 2002 annual meeting of
stockholders. Each director whose term of office begins with or continues after
the date the Plan was approved by the stockholders is issued an "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock of
the Company. In 2002, 880 shares were issued under the Plan and the related
compensation expense amounted to $22,220.
NOTE 14 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 15 - 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.
SALISBURY BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
----------- -----------
Checking account in Salisbury Bank & Trust Company $ 185 $ 335
Money market mutual funds 536,982 470,905
Investment in subsidiary 27,110,438 23,182,570
Due from subsidiary 9,453 5,838
Other assets 1,000 2,193
----------- -----------
Total assets $27,658,058 $23,661,841
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 313,112 $ 298,695
----------- -----------
Total liabilities 313,112 298,695
----------- -----------
Total stockholders' equity 27,344,946 23,363,146
----------- -----------
Total liabilities and stockholders' equity $27,658,058 $23,661,841
=========== ===========
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Dividend income from subsidiary $ 1,300,000 $ 1,740,000 $ 1,330,000
Taxable interest on securities 5,616 14,442 44,555
----------- ----------- -----------
1,305,616 1,754,442 1,374,555
----------- ----------- -----------
Legal expense 6,909 8,596 9,906
Supplies and printing 4,407 6,211 12,828
Other expense 18,591 13,297 18,063
----------- ----------- -----------
29,907 28,104 40,797
----------- ----------- -----------
Income before income tax (benefit) expense
and equity in undistributed net income of subsidiary 1,275,709 1,726,338 1,333,758
Income tax (benefit) expense (8,260) (4,645) 1,464
----------- ----------- -----------
Income before equity in undistributed net income of subsidiary 1,283,969 1,730,983 1,332,294
Equity in undistributed net income of subsidiary 1,914,826 1,170,220 1,516,730
----------- ----------- -----------
Net income $ 3,198,795 $ 2,901,203 $ 2,849,024
=========== =========== ===========
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
Cash flows from operating activities:
Net income $3,198,795 $ 2,901,203 $ 2,849,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary (1,914,826) (1,170,220) (1,516,730)
Deferred tax expense 1,193 1,193 1,080
Accretion of securities (22,262)
Decrease in taxes payable (8,081)
(Increase) decrease in due from subsidiary (3,615) (6,222) 384
Issuance of shares for Director's fees 22,220
----------- ----------- -----------
Net cash provided by operating activities 1,303,767 1,725,954 1,303,415
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 292,263
Maturities of available-for-sale securities 230,000
----------- ----------- -----------
Net cash provided by investing activities 230,000 292,263
----------- ----------- -----------
Cash flows from financing activities:
Net repurchase of common stock (691,080) (816,062)
Dividends paid (1,237,840) (1,454,946) (1,088,830)
----------- ----------- -----------
Net cash used in financing activities (1,237,840) (2,146,026) (1,904,892)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 65,927 (190,072) (309,214)
Cash and cash equivalents at beginning of year 471,240 661,312 970,526
----------- ----------- -----------
Cash and cash equivalents at end of year $ 537,167 $ 471,240 $ 661,312
=========== =========== ===========
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2002 and 2001 follows:
(In thousands, except earnings per share)
2002 Quarters Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $4,061 $4,063 $4,048 $3,985
Interest expense 1,798 1,763 1,727 1,609
------ ------ ------ ------
Net interest and dividend income 2,263 2,300 2,321 2,376
Provision for loan losses 37 38 37 188
Other income 564 782 902 874
Other expense 1,815 1,984 1,880 2,096
------ ------ ------ ------
Income before income taxes 975 1,060 1,306 966
Income tax expense 253 310 328 217
------ ------ ------ ------
Net income $ 722 $ 750 $ 978 $ 749
====== ====== ====== ======
Basic earnings per common share $ .51 $ .53 $ .69 $ .52
====== ====== ====== ======
(In thousands, except earnings per share)
2001 Quarters Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $4,299 $4,215 $4,310 $4,265
Interest expense 2,204 2,076 2,054 1,966
------ ------ ------ ------
Net interest and dividend income 2,095 2,139 2,256 2,299
Provision for loan losses 37 38 37 38
Other income 525 610 600 652
Other expense 1,612 1,622 1,641 1,880
------ ------ ------ ------
Income before income taxes 971 1,089 1,178 1,033
Income tax expense 329 354 384 303
------ ------ ------ ------
Net income $ 642 $ 735 $ 794 $ 730
====== ====== ====== ======
Basic earnings per common share $ .44 $ .51 $ .56 $ .52
====== ====== ====== ======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two (2) most recent fiscal years, the Company and the Bank have had
no changes in or disagreements with its independent accountants on accounting
and financial disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
The following table sets forth the name and age of each Executive Officer, his
principal occupation for the last five (5) years and the year in which he was
first appointed an Executive Officer of the Company.
Executive Officer
Name Age Position of the Company since:
---- --- -------- ---------------------
John F. Perotti 56 President and 1998 (1)
Chief Executive Officer
Richard J. Cantele, Jr. 43 Secretary 2001 (2)
John F. Foley 52 Chief Financial Officer 1998 (3)
(1) Mr. Perotti is also the President and Chief Executive Officer of the Bank
and has been an Executive Officer of the Bank since 1982.
(2) Mr. Cantele is also the Executive Vice President, Treasurer and Chief
Operating Officer of the Bank and has been an Executive Officer of the
Bank since 1989.
(3) Mr. Foley is also the Senior 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 has set the
number of directorships at eight (8). The Board of Directors of the Company is
divided into three (3) classes as nearly equal in number as possible. Classes of
directors serve for staggered three (3) year terms. A successor class is to be
elected at each annual meeting of shareholders when the terms of office of the
members of one class expire. Vacant directorships may be filled, until the
expiration of the term of the vacated directorship, by the vote of a majority of
the directors then in office.
30
The following table sets forth certain information, as of March 7, 2003, with
respect to the directors of the Company.
NOMINEES FOR ELECTION AT THE 2003 ANNUAL MEETING TO BE HELD ON APRIL 26, 2003
Positions Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- -------- --------
Gordon C. Johnson, DVM 68 Director 1998 2003
Holly J. Nelson 49 Director 1998 2003
Walter C. Shannon, Jr. 67 Director 1998 2003
CONTINUING DIRECTORS
--------------------
John F. Perotti 56 President, 1998 2004
Chief Executive Officer
and Director
Michael A. Varet 60 Director 1998 2004
John R. H. Blum 73 Chairman 1998 2005
Louise F. Brown 59 Director 1998 2005
Nancy F. Humphreys 61 Director 2001 2005
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the position described
for at least five (5) years.
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 in
the law firm of Ackerly Brown, LLP. Prior to being a partner in Ackerly Brown,
LLP, Ms. Brown was a partner in the law firm of Gager & Peterson, LLP.
Nancy F. Humphreys has been a director of the Bank since 2001. She retired from
Citigroup New York, Citibank in February of 2000, as Managing Director and
Treasurer of Global Corporate Investment Bank North America.
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. She is a member of
Horses North, LLC, a tour operator, and is a member in Oblong Property
Management, LLC.
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
Officer of the Bank and prior to that, he was Vice President and Treasurer of
the Bank. He has been a director of the Bank since 1985.
Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and
President of William J. Cole Agency, Inc. He has been a director of the Bank
since 1993.
Michael A. Varet is a partner in the law firm of Piper Rudnick LLP. Mr. Varet
has been a director of the Bank since 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent (10%) of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of ownership and changes in ownership of
the Company's Common Stock. Executive officers, directors and any shareholders
owning greater than ten percent (10%) of the Company's Common Stock are required
by the SEC's regulations to furnish the Company with copies of all such reports
that they file.
31
Based solely on a review of copies of reports filed with the SEC since January
1, 2002 and of written representations by certain executive officers and
directors, all persons subject to the reporting requirements of Section 16(a)
are believed by management to have filed the required reports on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
Fees
During 2002, each director received an annual retainer of $2,000. In addition,
directors received $500 for each Board of Directors meeting attended and $200
for each committee meeting attended. Director Perotti received no additional
compensation for his service as director or member of any board committee during
2002. During 2001, the Board of Directors and Shareholders approved a Directors
Stock Retainer Plan which, beginning in 2002, provides each non-employee
director with up to 120 shares of restricted common stock as a component of
their compensation. The Plan is described in more detail on page 13 of this
Proxy.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company and the Bank for services rendered
in all capacities during the fiscal years ended December 31, 2002, 2001, and
2000. No other current executive officer of the Company or the Bank received
cash compensation in excess of $100,000 during the year ended December 31, 2002.
All compensation expense was paid by the Bank.
Summary Compensation Table
Annual
Name and Principal Compensation All Other
Position Year Salary($) Bonus($) Compensation($)
John F. Perotti 2002 $187,816 $32,092 $4,000(4)
President and 2001 179,920 25,949 3,400(3)
Chief Executive Officer 2000 172,992 38,515 3,400(2)
of the Company and the Bank
Richard J. Cantele, Jr. 2002 $109,434 $18,332 $2,553(4)
Secretary of the Company 2001 93,652 17,063 2,145(3)
Executive Vice President, Treasurer 2000 87,504 17,700 2,145(2)
and Chief Operating Officer of the Bank
Todd M. Clinton 2002 $ 84,762 $17,392 $2,041(4)
Sr. Vice President, Compliance 2001 73,150 12,379 1,713(3)
& Operations Officer of the Bank 2000 71,760 12,466 1,685(2)
Diane E. R. Johnstone 2002 $109,321 $16,690 $2,522(4)
Sr. Vice President & Trust Officer 2001 81,530 9,900 1,832(3)
of the Bank 2000 75,000 10,281 1,706(2)
William C. Lambert (5) 2002 $110,522 000 $2,200(4)
Vice President & Trust Officer 2001 29,159
of the Bank 2000
(1) Compensation above does not include accrual of benefits under the Bank's
defined pension plan or supplemental retirement arrangements described
below.
(2) The Bank's matching contribution to the 401(k) plan for 2000.
(3) The Bank's matching contribution to the 401(k) plan for 2001.
(4) The Bank's matching contribution to the 401(k) plan for 2002.
(5) William C. Lambert was hired on September 17, 2001.
Insurance
In addition to the cash compensation paid to the executive officers of the
Company and the Bank, the executive officers receive group life, health,
hospitalization and medical insurance coverage. However, these plans do not
discriminate in scope, term, or operation, in favor of officers or directors of
the Company and the Bank and are available generally to all full-time employees.
32
Pension Plan
The Bank maintains a non-contributory defined pension plan for officers and
other salaried employees of the Bank who become participants after attaining age
21 and completing one (1) year of service.
PENSION PLAN TABLE
======================================================================================================================
ESTIMATED ANNUAL RETIREMENT BENEFIT WITH
======================================================================================================================
======================================================================================================================
YEARS OF SERVICE AT RETIREMENT
======================================================================================================================
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Average Base
Salary at
Retirement 15 20 25 30 35
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$ 75,000 $18,654 $24,871 $31,089 $32,964 $ 34,839
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$100,000 $26,154 $34,871 $43,589 $46,089 $ 48,589
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$125,000 $33,654 $44,871 $56,089 $59,214 $ 62,339
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$150,000 $41,154 $54,871 $68,589 $72,339 $ 76,089
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$175,000 $48,654 $64,871 $81,089 $85,464 $ 89,839
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
$200,000 $56,154 $74,871 $93,589 $98,589 $ 103,589
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
Pension benefits are based upon average salary (determined as of each January
1st) during the highest five (5) consecutive years of services prior to
attaining normal retirement age. The amount of the annual benefit is 2% of
Average Salary offset by .65% of Social Security wage base as provided under the
1994 Act per year of service (to a maximum of 25 years) plus one-half of 1% of
Average Salary for each year of service over 25 years (to a maximum of ten
years). This benefit formula may be modified to conform with changes in the
pension laws.
The present average salary (using last five years of salary only) and years of
service to date of Messrs. Perotti, Cantele, Clinton and Ms. Johnstone are: Mr.
Perotti: $190,900 with; 30 years of service; Mr. Cantele: $100,642 with; 21
years of service; Mr. Clinton: $81,550 with; 16 years of service; and Ms.
Johnstone: $85,385 with; 15 years of service. The above table shows estimated
annual retirement benefits payable at normal retirement date as a straight life
annuity for various average salary and service categories. The offset of social
security was included in the table based on a participant being 65 years of age
in 2002.
Supplemental Retirement Arrangement
In 1994, the Bank entered into a supplemental retirement arrangement (the
"Supplemental Retirement Agreement") with John F. Perotti. Following disability
or retirement at the earlier of the age of 65, or after thirty (30) years of
service to the Bank, Mr. Perotti will receive monthly payments of $1,250
(adjusted annually to reflect the lesser of a five percent (5%) increase or "The
Monthly Consumer Price Index for All Urban Consumers, United States City
Average, All Items" published by the Bureau of Labor Statistics) for a period of
ten (10) years. These payments are in addition to any payments under the Bank's
retirement plan. The Supplemental Retirement Agreement includes provisions which
would prevent Mr. Perotti from working for a competitor in the proximity of the
Bank.
Directors Stock Retainer Plan
The shareholders of the Company voted to approve the "Directors Stock Retainer
Plan of Salisbury Bancorp, Inc." (the "Plan") at the 2001 Annual Meeting of
Shareholders. The Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their compensation
for services as non-employee directors. The maximum number of shares of stock
that may be issued pursuant to the Plan shall not exceed 15,000. The first grant
date under the plan was April 26, 2002. The "annual stock retainer" consisted of
120 shares of restricted common stock for each non-employee director who served
for twelve months and a prorated number of shares to reflect the number of
months served for any new non-employee director. The total number of restricted
shares issued was 880. The next grant date under this plan will immediately
precede the 2003 Annual Meeting of Shareholders.
33
Change in Control Agreements
The Bank entered into change in control agreements in 2001 with the following
Executive Officers of the Bank: John F. Perotti, Richard J. Cantele, Jr., John
F. Foley, Todd M. Clinton and Diane E. R. Johnstone. The agreements provide
that, in the event of a change in control of the Company or Bank, each Executive
Officer will be entitled to a lump sum payment equal to his or her annual
compensation based upon the most recent aggregate base salary paid to the
Executive Officer in the twelve (12) month period immediately preceding the date
of change in control. In no event shall such payments be made in an amount which
would cause them to be deemed non-deductible to the Bank by reason of the
operation of Section 280G of the Internal Revenue Code.
401(k) Plan
The Bank offers a 401(k) profit sharing plan. This plan began in the year 2000.
Each Plan Year, the Bank will announce the amount of the matching contributions,
if any. The amount of the matching contributions is directly related to the
employees' 401(k) salary deferral contribution. For the Plan Year that began
January 1, 2002, all eligible participants received a matching contribution
equal to fifty percent (50%) of their 401(k) salary deferral contribution to the
Plan; however, it is limited to two percent (2%) of the plan compensation not to
exceed $4,000. The Plan expense was $45,809 for 2002.
- ----------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------------------------
- ------------------------------- ----------------------- ----------------------- --------------------------------------
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance under
exercise of outstanding options, equity compensation plans (excluding
outstanding options, warrants and rights securities reflected in column (a)
warrants and rights
(a) (b) (c)
- ------------------------------- ----------------------- ----------------------- --------------------------------------
Equity compensation plans None None 14,120 (1)
approved by security holders
- ------------------------------- ----------------------- ----------------------- --------------------------------------
Equity compensation plans not
approved by security holders None None None
- ------------------------------- ----------------------- ----------------------- --------------------------------------
Total None None 14,120
- ------------------------------- ----------------------- ----------------------- --------------------------------------
(1) At the 2001 annual meeting the shareholders of the Company voted to
approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the
"Plan"). This Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their
compensation for services as directors. The maximum number of shares of
stock that may be issued pursuant to the Plan is 15,000. The first grant
date under this Plan preceded the 2002 annual meeting of shareholders.
Each director whose term of office begins with or continues after the date
the Plan was approved by the shareholders is issued a "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock
of the Company. In 2002, 880 shares were issued under the Plan and the
related compensation expense amounted to $22,220.
34
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth certain information as of March 7, 2003 regarding
the number of shares of Common Stock beneficially owned by each director and
executive officer of the Company and by all directors and executive officers of
the Company as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,456 (3) 1.09%
Louise F. Brown 3,276 (4) .23%
Richard J. Cantele, Jr. 2,883 (5) .20%
John F. Foley 3,696 (6) .26%
Nancy F. Humphreys 1,120 (7) .08%
Gordon C. Johnson, DVM 1,622 (8) .11%
Holly J. Nelson 1,168 (9) .08%
John F. Perotti 10,839 (10) .76%
Walter C. Shannon, Jr. 3,724 (11) .26%
Michael A. Varet 65,766 (12) 4.62%
- ------------------------------ --------------------- -----------------------
(All Directors and Executive 109,550 7.69%
Officers of the Company
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 children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 1,423,238 shares of the Company's Common
Stock outstanding and entitled to vote on March 7, 2003. 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 1,068 shares owned by Louise F. Brown's daughter.
(5) Includes 1,197 shares owned jointly by Richard J. Cantele, Jr. and his
wife and 6 shares owned by Richard J. Cantele, Jr. as custodian for his
daughter.
(6) 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.
(7) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her husband.
(8) Includes 660 shares which are owned by Gordon C. Johnson's wife and for
which Mr. Johnson has disclaimed beneficial ownership.
(9) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(10) 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.
(11) All shares are owned individually by Walter C. Shannon, Jr.
(12) Includes 18,540 shares which are owned by Michael A. Varet's wife, 12,366
shares which are owned by his sons and 6,180 shares owned by his daughter.
Michael A. Varet has disclaimed beneficial ownership for all of these
shares.
Principal Shareholders of the Company
As of March 7, 2003, 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.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with directors, officers,
principal shareholders and their associates on substantially the same terms as
those available for comparable transactions with others.
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law. The Company has engaged Mr. Blum in past years and
even though his services were not used in 2002, the Company may engage his
services in 2003 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Ackerly Brown, LLP. The Company has engaged Ms. Brown in past years but her
services were not used in 2002.
Walter C. Shannon, Jr. is a director of the Company and President Emeritus of
Wagner McNeil, Inc. which serves as the insurance agent for many of the
Company's insurance needs.
Some of the directors and executive officers of the Company and the Bank, as
well as firms and companies with which they are associated, are or have been
customers of the Bank and as such have had banking transactions with the Bank.
As a matter of policy, loans to directors and executive officers are made in the
ordinary course of business on substantially the same terms, including interest
rates, collateral and repayment terms, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features.
Since January 1, 2002, the highest aggregate outstanding principal amount of all
loans extended by the Bank to its directors, executive officers and all
associates of such persons as a group was $1,345,868 representing an aggregate
principal amount equal to 4.96% of the equity capital accounts of the Bank.
ITEM 14. CONTROLS AND PROCEDURES
Based upon an evaluation within the 90 days prior to the filing date of this
report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the date of the evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
36
PART IV
ITEM 15. 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., as amended (2)
10. Pension Supplement Agreement with John F. Perotti (3)
10.2 Form of Change in Control Agreement with Executive Officers (4)
10.3 Director Stock Retainer Plan (5)
23.1 Consent of Independent Certified Public Accountants
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(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 March 30, 2001 as Exhibit 3.2 to Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
2001 and is incorporated herein by reference.
(3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is
incorporated herein by reference.
(4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the
Company's Annual Report on Form 10-KSB/A for the fiscal year ended
December 31, 2002 and is incorporated herein by reference.
(5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the
Company's Annual Report on Form 10KSB/A for the fiscal year ended
December 31, 2002 and is incorporated herein by reference.
(6) Exhibit was filed on April 23, 1998 as Exhibit 21 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is
incorporated herein by reference.
(b) CURRENT REPORTS: The following reports on Form 8-K were filed
during the fourth quarter of the 2002 fiscal year:
1. On December 10, 2002 the Company filed a Form 8-K reporting the
declaration of an $.22 per share quarterly cash dividend for the
fourth quarter.
37
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Lakeville, Connecticut
on March 28, 2003
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 28, 2003
- --------------------------------
(John F. Perotti) Chief Executive Officer
and Director
/s/ John R. H. Blum Director March 28, 2003
- -----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 28, 2003
- ------------------------------
(Louise F. Brown)
/s/ Nancy F. Humphreys Director March 28, 2003
- --------------------------------
(Nancy F. Humphreys)
/s/ Gordon C. Johnson Director March 28, 2003
- --------------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 28, 2003
- ---------------------------------
(Holly J. Nelson)
/s/ Walter C. Shannon, Jr. Director March 28, 2003
- ----------------------------
(Walter C. Shannon, Jr.)
/s/ Michael A. Varet Director March 28, 2003
- --------------------------
(Michael A. Varet)
38
LETTERHEAD FOR SHATSWELL, MacLEOD & COMPANY, P.C.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
We hereby consent to the use of our report dated January 27, 2003 in
the Form 10-K of Salisbury Bancorp, Inc. and the reference to us in the section
designated "Experts".
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
-------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 27, 2003
CERTIFICATIONS
I, John F. Perotti, certify that:
1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ John F. Perotti
-------------------
President and CEO
39
CERTIFICATIONS
I, John F. Foley, certify that:
1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ John F. Foley
-----------------
Chief Financial Officer
40
Exhibit 21
Percent owned
Subsidiary State of Incorporation by Company
--------- ---------------------- -------------
Salisbury Bank and
Trust Company Connecticut 100%
41
Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Salisbury Bancorp, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John F. Perotti, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ John F. Perotti
- ---------------------
John F. Perotti
Chief Executive Officer
March 28, 2003
42
Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Salisbury Bancorp, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John F. Foley, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ John F. Foley
- -------------------
John F. Foley
Chief Financial Officer
March 28, 2003