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, 2005
[ ] 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
SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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:
Common stock par value $.10 per share
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Securities registered pursuant to Section 12 (g) of the Act: None
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Name of exchange on which registered: American Stock Exchange
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Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
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. Yes [_] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company. Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: June 30, 2005: $56,680,863.
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 1,683,341 shares outstanding as of March 3, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference in Part III of this Form 10-K are portions of the
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 10, 2006.
TABLE OF CONTENTS
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Part I
Item 1 - Business 1
(a) General Development of the Business 1
(b) Financial Information about Industry Segments 1
(c) Narrative Description of Business 2
(d) Financial Information about Foreign and Domestic Operations and Export
Sales 6
Item 1A - Risk Factors 10
Item 1B - Unresolved Staff Comments 13
Item 2 - Description of Properties 13
Item 3 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Part II
Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
(d) Securities Authorized for Issuance Under Equity Compensation Plans 14
Item 6 - Selected Financial Data 15
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 16
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 29
Item 8 - Financial Statements and Supplementary Data 30
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 31
Item 9A - Controls and Procedures 31
Item 9B - Other Information 31
Part III
Item 10 - Directors and Executive Officers of the Registrant 31
Item 11 - Executive Compensation 31
Item 12 - Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 31
Item 13 - Certain Relationships and Related Transactions 31
i
Item 14 - Principal Accountant Fees and Services 32
Part IV
Item 15 - Exhibits and Financial Statement Schedules 32
Signatures 33
ii
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,
and its website address is: www.salisbury-bank.com. The Company makes available
free of charge on the Bank's website a link to its Annual Reports on Form 10-K,
Quarterly Reports on Forms 10-Q and Current Reports on Form 8-K, promptly after
filing such reports with the SEC.
On September 10, 2004 the Company completed the acquisition of Canaan National
Bancorp, Inc. and the merger with and into the Company. Following the merger,
the Bank operated five (5) full service offices which are located in Canaan,
Lakeville, Salisbury and Sharon, Connecticut and South Egremont, Massachusetts.
In addition, a branch in Sheffield, Massachusetts opened in March 2005. Most of
the Bank's business is derived from customers located in Litchfield County,
Connecticut, Dutchess County and Columbia County, New York and Berkshire County,
Massachusetts.
(b) Financial Information about Industry Segments
The Company's products and services are all of a nature of a commercial bank and
trust company.
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company, and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2005, the portfolio totaled $151,168,000 which
represents approximately 37.52% of total assets, and it produced interest and
dividend income of $7,427,000 for the year 2005 as compared with $6,905,000 for
2004 and $6,385,000 for 2003, respectively.
1
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 account
relationships with its customers. Average daily deposits totaled $293,453,000
during 2005.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $71,016,000 at December 31, 2005 as compared with
$79,213,000 at December 31, 2004.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations and the accompanying Consolidated
Financial Statements, and Notes thereto.
Fiduciary
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts, estate planning and estate settlement. Another
service is that of serving as Guardian or Conservator of estates and managing
the financial position of Guardianships or Conservatorships. Self directed IRAs
and Pension plans are also offered.
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 include a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates two subsidiaries, SBT Realty, Inc., which is incorporated under the
laws of the State of New York, and SBT Mortgage Service Corporation, which is
incorporated under the laws of the State of Connecticut. SBT Realty, Inc. holds
and manages bank owned real estate situated in New York state. SBT Mortgage
Service Corporation, a Passive Investment Company ("PIC") was formed to take
advantage of favorable Connecticut corporate tax benefits which results when a
Bank transfers a portion of its mortgage portfolio to a PIC. In general, the PIC
will earn mortgage interest income and may dividend funds to the Bank. In turn,
those funds will be exempt from the Connecticut corporate business tax.
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 offices of the Bank are located in the northwest corner of Litchfield
County, Connecticut and South Berkshire County, Massachusetts. The Bank
maintains six (6) banking offices within these two counties and also attracts
customers from nearby Columbia County and Dutchess County, New York. The Bank's
market area within the four counties is served by 45 commercial banks and
savings banks.
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
2
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 that liberalizes banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking and Branching Act permits
acquisitions and mergers of Connecticut banks and bank holding companies with
banks and bank holding companies in other states. Accordingly, it is possible
for large super-regional organizations to enter many new markets, including the
market served by the Bank. Certain of these competitors, by virtue of their size
and resources, may enjoy certain efficiencies and competitive advantages over
the Bank in the pricing, delivery, and marketing of their products and services.
It is possible that such legislative authority will increase the number or the
size of financial institutions competing with the Bank for deposits and loans in
its market place, although it is impossible to predict the effect upon
competition of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation,
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank's future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets, including the market served by the
Bank, although it is impossible to assess what impact this will have on the
Company or the Bank.
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.
3
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 (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." The Company qualified and registered as a financial holding
company on May 3, 2000. Financial holding companies are 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, that are financial in nature or
that engage in activities incidental or complementary to a financial activity.
Additionally, pursuant to the GLBA, securities and insurance firms are permitted
to purchase full-service banks. While the GLBA 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.
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirements; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
o Disclosure of all material off-balance sheet transactions and relationship
that may have a material effect upon the financial status of an issuer; and
o The presentation of pro forma financial information in a manner that is not
misleading, and which is reconcilable with the financial condition of the
issuer under generally accepted accounting principles.
4
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by Company's auditor. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. In 2001, President Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"). On March 10,
2006, the President signed legislation making permanent certain provisions of
the Patriot Act.
Part of the Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of a bank to declare cash
dividends to its stockholders.
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
5
The FDIC currently insures the Bank's deposit accounts in an amount up to
$100,000 for each insured depositor. In addition, effective April 1, 2006, the
federal deposit insurance limits on certain retirement accounts will be
increased so that such retirement accounts will be separately insured up to
$250,000. FDIC insurance of deposits may be terminated by the FDIC, after notice
and a hearing, upon a finding by the FDIC that the insured institution has
engaged in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule or
order of, or condition imposed by, the FDIC. A bank's failure to meet the
minimum capital and risk-based capital guidelines discussed below would be
considered to be unsafe and unsound banking practices. The Bank, as a
Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many of the
areas also regulated by the Connecticut Banking Commissioner. The FDIC also
conducts its own periodic examinations of the Bank, and the
Bank is required to submit financial and other reports to the FDIC on a
quarterly and annual basis, or as otherwise required by the FDIC.
FDIC-insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from engaging in certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
Employees
The Company's current workforce at March 3, 2006 consists of 125 employees of
whom 111 were full time and 14 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.
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, are presented on the following pages of this Report on Form 10-K.
Page(s) of
Item of Guide 3 This Report
- --------------- -----------
I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential 18
II. Investment Portfolio 7
III. Loan Portfolio 8
IV. Summary of Loan Loss Experience 9
V. Deposits 25
VI. Return on Equity and Assets 8
VII. Short-Term Borrowings 10
6
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables set forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands) 2005 2004 2003
------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 148 $ 146 $ 136
U.S. government agencies preferred stock 12,446 12,209 7,610
U.S. Treasury securities and other
U.S. government corporations and agencies 50,516 53,416 51,979
Obligations of states and political subdivisions 41,332 58,452 45,988
Mortgage-backed securities 41,166 54,432 37,307
------------------------------
$145,608 $178,655 $143,020
==============================
Held-to-maturity securities
(at amortized cost)
Mortgage-backed securities $ 147 $ 218 $ 229
==============================
Federal Home Loan Bank stock $ 5,413 $ 5,413 $ 3,771
==============================
For the following table, yields are not calculated and presented on a fully
taxable-equivalent ("FTE") basis.
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
2005:
(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)
Mortgage-backed
securities $ 0 $ 0 $ 0 $ 147 4.38% $ 147
======== ======== ======== ======== ========
Available-for-sale
- ------------------
securities
- ----------
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 17,384 4.91% $ 33,132 5.96% $ 50,516
Obligations of states and
political subdivisions 0 0 171 3.50% 41,161 4.41% 41,332
Mortgage-backed
securities 0 774 6.65% 434 7.58% 39,958 5.33% 41,166
-------- -------- -------- -------- --------
$ 0 $ 774 $ 17,989 $114,251 $133,014
======== ======== ======== ======== ========
7
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2005 2004 2003 2002 2001
-------------------------------------------------------------
Commercial, financial and
agricultural $ 15,354 $ 15,127 $ 9,149 $ 10,127 $ 10,797
Real Estate-construction and
land development 18,814 14,290 15,307 6,027 3,935
Real Estate - residential 135,619 130,414 90,807 93,636 102,201
Real Estate-commercial 40,889 35,487 19,199 18,002 17,423
Consumer 7,900 9,122 6,692 9,007 10,030
Other 47 69 73 291 125
-------------------------------------------------------------
218,623 204,509 141,227 137,090 144,511
Allowance for loan losses (2,626) (2,512) (1,664) (1,458) (1,445)
Unearned income (8) (19) (0) (0) (0)
-------------------------------------------------------------
Net loans $ 215,989 $ 201,978 $ 139,563 $ 135,632 $ 143,066
=============================================================
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, 2005. 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
(dollars in thousands) year or less five years five years
------------------------------------------
Commercial, financial,
agricultural and real estate commercial $ 1,341 $ 10,297 $ 44,605
Real estate-construction and land development 18,814 0 0
------------------------------------------
$ 20,155 $ 10,297 $ 44,605
==========================================
Maturities after one year with:
Fixed interest rates $ 6,850 $ 7,475
Variable interest rates 3,447 37,130
------------------------------------------
$ 10,297 $ 44,605
==========================================
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
At or for the
-------------
Year ended December 31,
-----------------------
2005 2004 2003
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.12% 1.14% 1.24%
Return on average stockholders' equity
(net income divided by average stockholders' equity) 10.81% 12.34% 13.41%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 36.90% 35.96% 34.07%
Equity to assets ratio
(average stockholders' equity as a percentage of
average total assets) 10.38% 9.20% 9.26%
8
Nonaccrual, Past Due and Restructured Loans
At December 31, 2005, there were seven (7) nonaccrual loans in the Bank's
portfolio six of which were secured by real estate. In the month following the
month in which a mortgage loan becomes 90 days past due, the Bank generally
stops accruing interest unless there are unusual circumstances which warrant an
exception. Generally the only loan types that the Bank reclassifies to
nonaccrual are those secured by real estate or large commercial loans on which
substantial collateral exists. Other types of loans are generally charged off
when they become 120 days or more delinquent. However, exceptions may be made as
warranted.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2005 2004 2003 2002 2001
----------------------------------------------
Nonaccrual $ 694 $1,739 $ 75 $ 855 $ 372
90 days or more past due 79 528 535 124 215
Restructured loans 0 0 0 271 0
----------------------------------------------
Total nonperforming loans $ 773 $2,267 $ 610 $1,250 $ 587
==============================================
Total nonperforming loans as per-
centage of the loan portfolio 0.35% 1.11% 0.43% 0.92% 0.41%
Allowance for loan losses as a per-
centage of nonperforming loans 339.72% 110.81% 272.79% 116.64% 246.17%
Information with respect to nonaccrual and restructured loans
at December 31, 2005, 2004 and 2003 is as follows:
(dollars in thousands) Year Ended December 31
2005 2004 2003
------------------------
Interest income that would have been recorded under original terms $ 157 $ 100 $ 4
Less gross interest recorded 133 72 0
------------------------
Foregone interest $ 24 $ 28 $ 4
========================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2005 2004 2003 2002 2001
----------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 2,512 $ 1,664 $ 1,458 $ 1,445 $ 1,292
Charge-offs:
Commercial, financial and
agricultural 7 0 71 60 0
Real estate mortgage 0 0 0 46 13
Consumer 128 70 84 146 88
----------------------------------------------------
Total charge-offs 135 70 155 252 101
----------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 0 0 25 2 0
Real estate mortgage 0 0 0 1 87
Consumer 39 28 24 26 17
----------------------------------------------------
Total recoveries 39 28 49 29 104
----------------------------------------------------
Net charge-offs (recoveries) 96 42 106 223 (3)
Provisions charged to operations 210 250 312 300 150
Balance acquired from CNB 0 640 0 0 0
Transfer of allowance for loan
losses to other liabilities 0 0 0 (64) 0
----------------------------------------------------
Balance at end of year $ 2,626 $ 2,512 $ 1,664 $ 1,458 $ 1,445
====================================================
Ratio of net charge-offs (recoveries)
to average loans outstanding .05% .03% .07% .02% (.002%)
Ratio of allowance for loan losses
to year end loans 1.20% 1.23% 1.18% 1.07% 1.01%
9
Allocation of the Allowance for Loan Losses
(dollars in thousands)
December 31
2005 2004 2003 2002 2001
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----------------- ----------------- ----------------- ----------------- -----------------
Commercial, financial and
agricultural $ 495 7.02% $ 613 7.40% $ 441 6.47% $ 316 7.39% $ 120 7.47%
Real estate construction
and land development 95 8.61% 83 6.99% 112 10.82% 50 4.40% 24 2.72%
Real estate mortgage 1,761 80.74% 1,614 81.12% 749 77.94% 840 81.43% 1,200 82.78%
Consumer 247 3.61% 198 4.46% 357 4.72% 244 6.57% 100 6.94%
Other loans 28 .02% 4 .03% 5 .05% 8 .21% 1 .09%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,626 100.00% $2,512 100.00% $1,664 100.00% $1,458 100.00% $1,445 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for 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
2005 2004 2003
--------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.90% 4.29% 4.06%
For the year 4.69% 3.90% 4.21%
Average amount outstanding during the year $ 67,793 $ 74,954 $ 65,282
Maximum amount outstanding at any month $ 75,536 $100,680 $ 74,705
Amount outstanding at year end $ 71,016 $ 79,213 $ 60,897
ITEM 1A. RISK FACTORS
In addition to the other information contained in this report, the following
risks may affect the Company. If any of these risks occurs, the Company's
business, financial condition or operating results could be adversely affected.
The Company's business and financial condition is directly affected by the
Bank's business and financial condition and, thus, is subject to certain risks
of the Bank.
Changes in economic conditions could materially hurt the Company's
business.
The business of the Company and the Bank is directly affected by factors such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond the Company's control. The Bank
is particularly affected by economic conditions in Litchfield County,
Connecticut, Berkshire County, Massachusetts, and Colombia and Dutchess Counties
in New York. Deterioration in economic conditions could result in the following
consequences, any of which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows:
o problem assets and foreclosures may increase;
o demand for the Bank's products and services may decline;
o low cost or non-interest bearing deposits may decrease; and,
o collateral for loans made by the Bank, especially real estate, may
decline in value, in turn reducing customers' borrowing power, and
reducing the value of assets and collateral associated with the Bank's
existing loans.
In view of the geographic concentration of the Bank's operations and the
collateral securing the Bank's loan portfolio, the Company may be particularly
susceptible to the adverse effects of any of these consequences, any of which
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
10
The Company is dependent on key personnel and the loss of one or more of
those key personnel may materially and adversely affect the Company's prospects.
Competition for qualified employees and personnel in the banking industry is
intense and there are a limited number of qualified persons with knowledge of,
and experience in, the banking industry within the communities the Bank serves.
The Company's and the Bank's success depends to a significant degree upon the
ability to attract and retain qualified management, loan origination, finance,
administrative, marketing and technical personnel and upon the continued
contributions of management and personnel. The loss of the services of the
senior executive management team members or other key executives could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Bank's business is subject to interest rate risk.
A substantial portion of the Company's income is derived from the differential
or "spread" between the Bank's interest earned on loans, securities and other
interest earning assets, and interest paid on deposits, borrowings and other
interest bearing liabilities. Because of the differences in the maturities and
repricing characteristics of interest earning assets and interest bearing
liabilities, changes in interest rates do not produce equivalent changes in
interest income earned on interest earning assets and interest paid on interest
bearing liabilities. Accordingly, fluctuations in interest rates could adversely
affect the interest rate spread and, in turn, the Company's profitability. In
addition, loan origination volumes are affected by market interest rates. Rising
interest rates, generally, are associated with a lower volume of loan
originations while lower interest rates are usually associated with higher loan
originations. Conversely, in rising interest rate environments, loan repayment
rates may decline and in falling interest rate environments, loan repayment
rates may increase. Falling interest rate environments may cause additional
refinancing of commercial real estate and 1-4 family residence loans, which may
depress the Company's loan volumes or cause rates on loans to decline. In
addition, an increase in the general level of short-term interest rates on
variable rate loans may adversely affect the ability of certain borrowers to pay
the interest on and principal of their obligations or reduce the amount they
wish to borrow. As short-term rates continue to rise, retention of existing
deposit customers and the attraction of new deposit customers may require the
Company to increase rates it pays on deposit accounts. Changes in levels of
market interest rates could materially and adversely affect net interest spread,
asset quality, loan origination volume, business, financial condition, results
of operations and cash flows.
Certain types of loans have a higher degree of risk.
A downturn in the Company's real estate markets could hurt the Company's
business because most of the Bank's loans are secured by real estate. Real
estate values and real estate markets are generally affected by changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loans to potential purchasers, changes in tax laws and
other governmental statutes, regulations and policies and acts of nature. If
real estate prices decline, the value of real estate collateral securing the
Bank's loans could be reduced. The Bank's ability to recover on defaulted loans
by foreclosing and selling the real estate collateral would then be diminished
and the Company would be more likely to suffer losses on defaulted loans. If
there is a significant decline in real estate values, especially in the
Company's market area, the collateral for the Bank's loans will provide less
security. Any such downturn could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
The ability to attract deposits may effect Bank's growth.
The Company's ability to increase its assets depends in large part on the Bank's
ability to attract additional deposits at favorable rates. The Bank anticipates
seeking additional deposits by offering deposit products that are competitive
with those offered by other financial institutions in the Company's markets and
by establishing personal relationships with the Bank's customers. The Bank's
ability to attract additional deposits at competitive rates could have a
material effect on the Company's business, financial condition, results of
operations and cash flows.
In the business of banking, the allowance for loan and lease losses is an
estimate and may not be adequate to cover all future actual losses.
A source of risk arises from the possibility that losses could be sustained
because borrowers, guarantors, and related parties may fail to perform in
accordance with the terms of their loans and leases. The underwriting and credit
monitoring policies and procedures that the Company has adopted to address this
risk may not prevent unexpected losses that could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows. Unexpected losses may arise from a
11
wide variety of specific or systemic factors, many of which are beyond the
Company's ability to predict, influence or control.
Like all banking institutions, the Bank maintains an allowance for loan and
lease losses to provide for loan and lease defaults and non-performance. The
allowance for loan and lease losses reflects the Bank's estimate of the probable
losses in the Bank's loan and lease portfolio at the relevant balance sheet
date. The Bank's allowance for loan and lease losses is based on prior
experience, as well as an evaluation of the known risks in the current
portfolio, composition and growth of the loan and lease portfolio and economic
factors. The determination of an appropriate level of loan and lease loss
allowance is an inherently difficult process and is based on numerous
assumptions. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control and these losses may exceed current estimates. Federal
and state regulatory agencies, as an integral part of their examination process,
review the Bank's loans and leases and allowance for loan and lease losses.
Banks rely on communications, information, operating and financial control
systems technology from third-party service providers, and banks may suffer an
interruption in those systems that may result in lost business and banks may not
be able to obtain substitute providers on terms that are as favorable if a
bank's relationships with bank's existing service providers are interrupted.
The Bank relies on certain third-party service providers for much of the Bank's
communications, information, operating and financial control systems technology.
Any failure or interruption or breach in security of these systems could result
in failures or interruptions in the Bank's customer relationship management,
general ledger, deposit, servicing and/or loan origination systems. The Bank
cannot be certain that such failures or interruptions will not occur or, if they
do occur, that they will be adequately addressed by the Bank or the third
parties on which the Bank relies. The occurrence of any failures or
interruptions could have a material adverse effect on the Bank's business,
financial condition, results of operations and cash flows. If any of the Bank's
third-party service providers experience financial, operational or technological
difficulties, or if there is any other disruption in the Bank's relationships
with them, the Bank may be required to locate alternative sources of such
services, and the Company cannot be certain that the Bank could negotiate terms
that are as favorable to the Company, or could obtain services with similar
functionality as found in the Bank's existing systems without the need to expend
substantial resources, if at all. Any of these circumstances could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Bank faces strong competition from financial service companies and
other companies that offer banking services.
Increased competition in the Bank's markets may result in reduced loans and
deposits. Ultimately, the Bank may not be able to compete successfully against
current and future competitors. Many competitors offer the banking services that
the Bank offers in its service areas. These competitors include national banks,
regional banks and other community banks. The Bank also faces competition from
many other types of financial institutions, including savings and loan
associations, finance companies, brokerage firms, insurance companies, credit
unions, mortgage banks and other financial intermediaries. In particular, the
Bank's competitors include several major financial companies whose greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous locations and mount extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization
and financial intermediaries not subject to bank regulatory restrictions may
have larger lending limits, which would allow them to serve the credit needs of
larger customers. Areas of competition include interest rates for loans and
deposits, efforts to obtain loan and deposit customers and a range in quality of
products and services provided, including new technology-driven products and
services. Technological innovation continues to contribute to greater
competition in domestic and international financial services markets as
technological advances enable more companies to provide financial services. The
Bank also faces competition from out-of-state financial intermediaries that
solicit deposits in the Bank's market areas. If the Bank is unable to attract
and retain banking customers, it may be unable to continue the Bank's loan and
deposit growth and the Company's business, financial condition, results of
operations and cash flows may be adversely affected.
The Company and the Bank are subject to extensive government regulation.
The operations of the Company and the Bank are subject to extensive regulation
by federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of the operations of the Company and the Bank.
Because the Company's and the Bank's business is highly regulated, the
applicable laws, rules and regulations are subject to regular modification and
change. The Company cannot be certain that laws, rules and regulations will not
be adopted in the future, which could make compliance much more difficult or
expensive, or
12
otherwise adversely affect the Company's and the Bank's business, financial
condition, results of operations or cash flows.
The Company may be exposed to risk of environmental liabilities with
respect to properties to which the Bank takes title.
In the course of the Bank's business, the Bank may foreclose and take title to
real estate, and could subject the Company to environmental liabilities with
respect to these properties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company is not the owner or lessee of any properties. The Bank leases two
(2) properties; a branch office at 51 Main Street, South Egremont, Massachusetts
and a branch at 73 Main Street, Sheffield, Massachusetts which opened in March
2005.
The Bank serves its customers from its six (6) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield and South
Egremont, Massachusetts. The Bank's trust department is located in a separate
building adjacent to the main office of the Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Operations 94 Main Street Owned
Canaan, Connecticut
Canaan Office 100 Main Street Owned
Canaan, Connecticut
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 2005 fiscal year.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2005 Quarters 2004 Quarters
---------------------------------- ----------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
---------------------------------- ----------------------------------
Range of Stock prices:
High $40.20 $40.70 $40.80 $43.50 $45.55 $43.05 $38.80 $41.55
Low $37.90 $35.60 $36.50 $39.00 $43.00 $36.00 $36.25 $38.50
(b) Holders
There were approximately 743 holders of record of the common stock of the
Company as of March 3, 2006. 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 2005, the Company declared
a cash dividend each quarter of $.25 per share. Dividends for the year 2005
totaled $1.00 per share which compared to total dividends of $.96 that were
declared in the year 2004. At their March 6, 2006 meeting, the Directors of the
Company declared a cash dividend of $.26 per share for the first quarter of
2006. The dividend will be paid on April 28, 2006 to stockholders of record as
of March 31, 2006. Payments of all dividends are dependent upon the condition
and earnings of the Company. The Company's ability to pay dividends is limited
by the prudent banking principles applicable to all bank holding companies and
by the provisions of Connecticut Corporate law, which provide that no
distribution may be made by a company if, after giving it effect: (1) the
company would not be able to pay its debts as they become due in the usual
course of business or (2) the company's total assets would be less than the sum
of its total liabilities plus amounts needed to satisfy any preferred stock
rights. The following table presents cash dividends declared per share for the
last two years:
2005 Quarters 2004 Quarters
----------------------------- -----------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------------------------- -----------------------------
Cash dividends
declared $0.25 $0.25 $0.25 $0.25 $0.24 $0.24 $0.24 $0.24
The dividends paid to stockholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 13 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $215,989 $201,978 $139,563 $135,632 $143,066
Allowance For Loan Losses 2,626 2,512 1,664 1,458 1,445
Investments 151,168 184,286 147,021 138,435 105,593
Total Assets 402,922 423,101 311,100 293,107 283,602
Deposits 287,271 298,842 218,457 211,037 201,351
Borrowings 71,016 79,213 60,897 51,891 53,004
Stockholders' Equity 41,442 40,700 28,850 27,345 23,363
Nonperforming Assets 773 2,267 685 1,400 587
Statement of Income Data:
Interest and Fees on Loans $ 13,320 $ 9,592 $ 9,226 $ 9,677 $ 11,344
Interest and Dividends on Securities
and Other Interest Income 7,496 6,959 6,423 6,481 5,746
Interest Expense 7,352 5,659 5,613 6,898 8,301
-------- -------- -------- -------- --------
Net Interest and Dividend Income 13,464 10,892 10,036 9,260 8,789
Provision for Loan Losses 210 250 312 300 150
Trust Department Income 1,571 1,411 1,252 1,100 1,070
Other Noninterest Income 2,084 1,854 1,674 1,388 1,187
Net Gain on Sales and writedown
of Securities 1,210 1,490 1,058 634 130
Noninterst Expenses 12,444 10,603 8,600 7,775 6,755
-------- -------- -------- -------- --------
Pre Tax Income 5,675 4,794 5,108 4,307 4,271
Income Taxes 1,114 775 1,268 1,108 1,370
-------- -------- -------- -------- --------
Net Income $ 4,561 $ 4,019 $ 3,840 $ 3,199 $ 2,901
======== ======== ======== ======== ========
Per Share Data:
Earnings per common share $ 2.71 $ 2.67 $ 2.70 $ 2.25 $ 2.03
Earnings per common share, assuming dilution $ 2.71 $ 2.67 $ 2.70 $ 2.25 $ 2.03
Cash Dividends Declared per share $ 1.00 $ 0.96 $ 0.92 $ 0.88 $ 0.84
Book Value (at year end) $ 24.62 $ 24.19 $ 20.26 $ 19.21 $ 16.43
Selected Statistical Data:
Return on Average Assets 1.12% 1.14% 1.24% 1.13% 1.14%
Return on Average Stockholders' Equity 10.81% 12.34% 13.41% 12.63% 12.25%
Dividend Payout Ratio 36.90% 35.96% 34.07% 39.11% 41.38%
Average Stockholders' Equity to Average Assets 10.38% 9.20% 9.26% 8.92% 9.27%
Net Interest Spread 3.35% 3.22% 3.37% 3.21% 2.91%
Net Interest Margin 3.89% 3.63% 3.80% 3.80% 3.71%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiary
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has six (6) full
service offices including a Trust and Investment Services Division located in
the towns of North Canaan, Lakeville, Salisbury and Sharon, Connecticut and
South Egremont and Sheffield, Massachusetts. The Company and the Bank were
formed in 1998 and 1848, respectively. In order to provide a foundation for
building stockholder value and servicing customers, the Company remains
committed to investing in the technological and human resources necessary to
developing new personalized financial products and services to meet the needs of
customers. This discussion should be read inconjunction 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 31, 2005 and 2004
- --------------------------------------------------------
Overview
- --------
The reported earnings for the Company totaled $4,561,000 in 2005, an increase of
$542,000 or 13.49% over year 2004 earnings of $4,019,000. Earnings per average
share outstanding totaled $2.71 in 2005. This compares to earnings per average
share outstanding of $2.67 in 2004 and $2.70 in 2003. The increase in earnings
per share is primarily the result of the increased base of earnings assets
following the merger with Canaan National Bancorp, Inc. on September 10, 2004.
The Company's assets at December 31, 2005 totaled $402,922,000 compared to total
assets of $423,101,000 at December 31, 2004. The decrease is primarily
attributable to a reduction in the securities portfolio. During the year 2005,
net loans outstanding increased $14,011,000 or 6.94% and total $215,989,000.
This compares to net loans outstanding of $201,978,000 at December 31, 2004. The
Bank continues to monitor the quality of the loan portfolio to ensure that loan
quality will not be sacrificed for growth or otherwise compromise the Company's
objectives. Nonperforming loans totaled $773,000 at December 31, 2005 as
compared to nonperforming loans totaling $2,267,000 at December 31, 2004. This
represents a decrease of $1,494,000 or 65.90%. Deposits at December 31, 2005
totaled $287,271,000 as compared to total deposits of $298,842,000 at December
31, 2004, representing a decrease of $11,571,000.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2005, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 14.58% for Tier 1 capital and 15.76% for
total capital. The Company's leverage ratio was 8.27% at December 31, 2005. This
compares to a Tier 1 capital ratio at December 31, 2004 of 11.12%, a total
capital ratio of 12.13% and a Company leverage ratio of 7.22%. As a result of
the Company's financial performance, the Board of Directors increased total
dividends declared on the Company's common stock to $1.00 per share in 2005.
This compares to a $.96 per share dividend declared in 2004 and a $.92 per share
dividend that was declared in 2003.
Critical Accounting Estimates
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
changed conditions, which could have an adverse impact on reported earnings in
the future. (See "Provisions and Allowance for Loan Losses".)
Net Interest and Dividend Income
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors and
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.
16
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest-earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2005 2004 2003
--------------------------------
Interest and Dividend Income
(financial statements) $ 20,816 $ 16,551 $ 15,650
Tax Equivalent Adjustment 1,200 1,182 1,075
-------- -------- --------
Total Interest and Dividend
Income (on an FTE basis) 22,016 17,733 16,725
Interest Expense (7,352) (5,659) (5,613)
-------- -------- --------
Net Interest and Dividend Income-FTE $ 14,664 $ 12,074 $ 11,112
======== ======== ========
The Company's 2005 total interest and dividend income on an FTE basis for the
period ended December 31, 2005 increased $4,283,000 or 24.15% when compared to
the same period in 2004. The increase is primarily attributable to an increase
in earning assets as well an economic environment experiencing a slow increase
in interest rates.
Interest expense on deposits in 2005 increased $1,432,000 or 52.28% to
$4,171,000 compared to $2,739,000 for the corresponding period in 2004 and
$2,866,000 in 2003. Interest expense for Federal Home Loan Bank advances
increased $261,000 to $3,181,000 in 2005 compared to $2,920,000 in 2004 and
$2,747,000 in 2003. The increase was primarily the result of an increase in
advances during the year. Although competition remains aggressive and interest
margins continue to be pressured, net interest and dividend income on an FTE
basis increased $2,590,000 or 21.45% over 2004 and totaled $14,664,000 for the
year ended December 31, 2005 compared to net interest and dividend income on an
FTE basis of $12,074,000 for the year ended December 31, 2004 and $11,112,000
for the year ended 2003.
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 2005 net interest margin on an FTE basis
was 3.89%. This compares to a net interest margin of 3.63% for 2004. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2005, 2004 and 2003. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material. Interest earned on tax exempt securities in the table is presented on
a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing these calculations. Actual tax exempt income earned in 2005 was
$2,329,000 with a yield of 4.44%. Actual tax exempt income in 2004 totaled
$2,294,000 with a yield of 4.68% and in 2003 actual tax exempt income was
$2,086,000 with a yield of 4.78%.
17
YIELD ANALYSIS
-------------------------------------------------------------------------------------------------
Average Balances, Interest Earned/Paid and Rates
Year Ended December 31
-------------------------------------------------------------------------------------------------
(dollars in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------
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 $ 208,786 $ 13,320 6.38% $ 160,382 $ 9,592 5.98% $ 142,752 $ 9,226 6.46%
Taxable Securities $ 112,746 $ 5,097 4.52% $ 117,535 $ 4,613 3.92% $ 101,931 $ 4,299 4.22%
Tax-Exempt Securities* $ 52,435 $ 3,529 6.73% $ 49,017 $ 3,475 7.09% $ 43,603 $ 3,161 7.25%
Federal Funds $ 1,840 $ 48 2.61% $ 3,455 $ 39 1.13% $ 3,125 $ 29 0.93%
Other Interest-Earning $ 1,096 $ 22 2.01% $ 1,809 $ 14 0.77% $ 1,359 $ 10 0.74%
---------------------- ---------------------- ----------------------
Total Interest-Earning
Assets $ 376,903 $ 22,016 5.84% $ 332,198 $ 17,733 5.34% $ 292,770 $ 16,725 5.71%
--------- --------- ---------
Allowance for Loan
Losses ($ 2,652) ($ 1,952) ($ 1,468)
Cash & Due From
Banks $ 8,189 $ 7,987 $ 6,425
Premises, Equipment $ 6,432 $ 3,865 $ 3,000
Net unrealized (loss)gain
on AFS Securities ($ 2,127) ($ 412) $ 2,316
Other Assets $ 19,707 $ 12,330 $ 6,403
--------- --------- ---------
Total Average Assets $ 406,452 $ 354,016 $ 309,446
========= ========= =========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW/Money Market
Deposits $ 81,602 $ 1,229 1.51% $ 62,681 $ 382 0.61% $ 59,521 $ 363 0.61%
Savings Deposits $ 59,466 $ 456 0.77% $ 54,596 $ 373 0.68% $ 45,975 $ 450 0.98%
Time Deposits $ 86,794 $ 2,486 2.86% $ 75,241 $ 1,984 2.64% $ 68,898 $ 2,054 2.98%
Borrowed Funds $ 67,793 $ 3,181 4.69% $ 74,954 $ 2,920 3.90% $ 65,282 $ 2,746 4.21%
---------------------- ---------------------- ----------------------
Total Interest-Bearing
Liabilities $ 295,655 $ 7,352 2.49% $ 267,472 $ 5,659 2.12% $ 239,676 $ 5,613 2.34%
--------- --------- ---------
Demand Deposits $ 65,591 $ 51,649 $ 38,998
Other Liabilities $ 3,008 $ 2,329 $ 2,130
Stockholders' Equity $ 42,198 $ 32,566 $ 28,642
--------- --------- ---------
Total Liabilities and
Stockholders' Equity $ 406,452 $ 354,016 $ 309,446
========= ========= =========
Net Interest Income $ 14,664 $ 12,074 $ 11,112
========= ========= =========
Net Interest Spread 3.35% 3.22% 3.37%
Net Interest Margin 3.89% 3.63% 3.80%
* Presented on a fully taxable equivalent ("FTE") basis
18
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2005 over 2004 2004 over 2003
----------------------------- ----------------------------
Volume Rate Total Volume Rate Total
----------------------------- ----------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 2,895 $ 833 $ 3,728 $ 1,139 $ (773) $ 366
Taxable investment securities (188) 672 484 658 (344) 314
Tax-exempt investment securities 242 (188) 54 393 (79) 314
Other interest earning (23) 40 17 6 8 14
------- ------- ------- ------- ------- -------
Total interest and dividend income $ 2,926 $ 1,357 $ 4,283 $ 2,196 $(1,188) $ 1,008
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 115 $ 732 $ 847 $ 19 $ 0 $ 19
Savings deposits 33 50 83 84 (161) (77)
Time deposits 305 197 502 189 (259) (70)
Borrowed funds (279) 540 261 407 (233) 174
------- ------- ------- ------- ------- -------
Total interest expense $ 174 $ 1,519 $ 1,693 $ 699 $ (653) $ 46
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 2,752 $ (162) $ 2,590 $ 1,497 $ (535) $ 962
======= ======= ======= ======= ======= =======
Noninterest Income
- ------------------
Noninterest income increased $110,000 or 2.31% and totaled $4,865,000 for the
year ended December 31, 2005 as compared to $4,755,000 for the year ended
December 31, 2004. Trust Department income increased from $160,000 to $1,571,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $642,000 for 2005. This is an increase of
$21,000 or 3.38% when compared to total service charges of $621,000 in 2004. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales and writedowns of available-for-sale securities, net totaled $1,210,000
in 2005 representing a decrease of $280,000 or 18.79% compared to $1,490,000 in
2004. This decrease reflects a writedown of approximately $182,000, however, is
primarily attributable to movements in the markets which resulted in fewer
opportunities for the Company to enhance the return from the securities
portfolio and at the same time realize gains on sales of available-for-sale
securities. Mortgage refinancing remained active during 2005 as rates remained
attractive to consumers. Competition in the secondary mortgage market continues
to be very aggressive. Gains on sales of loans held-for-sale totaled $270,000 in
2005 compared to $304,000 in 2004, representing a decrease of 11.18%. Other
income and loan commissions however, increased $243,000 or 26.16% to $1,172,000
in 2005 compared to $929,000 in 2004. This increase is primarily attributable to
the increase in fees earned from activity in the secondary mortgage market due
to the change of investors.
Noninterest Expense
- -------------------
Noninterest expense increased 17.36% for the year ended December 31, 2005 as
compared to the corresponding period in 2004. The increases in the noninterest
expenses listed below are primarily attributable to the Company's growth as a
result of the merger with Canaan National Bancorp, Inc. with the exception of
Trust department expense, which reflects additional costs associated with the
continuing growth of new accounts in the department. The decrease in other
expense is a reflection of non-recurring expenses in 2004 relating to the
conversion of the Company's core processing system. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
2005 2004 $ Change % Change
------------------------------------------------------------------------------
Salaries and employee benefits $ 7,355 $ 5,971 $ 1,384 23.18
Occupancy expense 728 436 292 66.97
Equipment expense 777 600 177 29.50
Trust department expense 398 339 59 17.40
Data processing 783 711 72 10.13
Insurance 148 122 26 21.31
Printing and stationery 252 254 (2) (.79)
Professional fees 301 272 29 10.66
Legal expense 174 106 68 64.15
Amortization of core deposit intangible 164 101 63 62.38
Other expense 1,364 1,691 (327) (19.34)
------- ------- -------
Total noninterest expense $12,444 $10,603 $ 1,841 17.36
======= ======= =======
19
Income Taxes
- ------------
In 2005, the Company's income tax provision totaled $1,114,000 that reflects an
effective tax rate of 19.63%. This compares to an income tax provision of
$775,000 and an effective tax rate of 16.16% for the same period in 2004. This
increase is primarily attributable to an increase in taxable income.
Net Income
- ----------
Overall, net income totaled $4,561,000 for the year ended December 31, 2005.
This compares to net income of $4,019,000 for the year ended December 31, 2004.
This is an increase of $542,000 or 13.49% and represents earnings per average
share outstanding of $2.71. Earnings per average share outstanding for the year
ended December 31, 2004 was $2.67. The increase in net income is primarily the
result of an increase in earning assets resulting from the merger with Canaan
National Bancorp, Inc.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------
Overview
- --------
The earnings for the Company were $4,019,000 in 2004, an increase of $179,000 or
4.66% over year 2003 earnings of $3,840,000. Earnings per average share
outstanding were $2.67 in 2004. This compared to earnings per average share
outstanding of $2.70 in 2003 and $2.25 in 2002. The decrease in earnings per
average share for 2004 was primarily the result of issuing 257,483 new shares of
Company stock, in connection with the acquisition of Canaan National Bancorp,
Inc. that closed in September of 2004.
The Company's assets at December 31, 2004 were $423,101,000 and represented
growth of $112,001,000 or 36.00% from December 31, 2003. This increase was
primarily attributable to the Bank's acquisition of Canaan National Bancorp,
Inc., which was completed during September 2004. In connection with this
transaction, the Bank received approximately $54,000,000 in loans, a securities
portfolio totaling approximately $44,000,000 and recorded goodwill of
approximately $7.1 million. Canaan National Bancorp, Inc.'s fixed assets and
bank premises were also included in the merger. Non-performing loans totaled
$2,267,000 at December 31, 2004. This compared to non-performing loans totaling
$610,000 for the corresponding period in 2003. Deposits at December 31, 2004
totaled $298,842,000 and compared to total deposits of $218,457,000 at December
31, 2003. The increase was primarily attributable to the approximately
$76,000,000 in deposits that were assumed in the merger with Canaan National
Bancorp, Inc.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2004, which included the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 11.12% for Tier 1 capital and 12.13% for
total capital. The Company's leverage ratio was 7.22% at December 31, 2004. This
compared to a Tier 1 capital ratio at December 31, 2003 of 15.35%, a total
capital ratio of 16.44%, and a Company leverage ratio of 8.05%.
The Board of Directors increased total dividends declared on the Company's
common stock to $.96 per share in 2004. This compared to a $.92 per share
dividend declared in 2003 and a $.88 per share dividend that was declared in
2002.
20
Net Interest and Dividend Income
- --------------------------------
For this discussion, net interest and dividend income is presented on a fully
taxable-equivalent ("FTE") basis. FTE interest and dividend income restates
reported interest income on tax exempt loans and securities as if such interest
were taxed at the applicable State and Federal income tax rates for all periods
presented.
(dollars in thousands) December 31,
2004 2003 2002
---------------------------------
Interest and Dividend Income
(financial statements) $ 16,551 $ 15,650 $ 16,157
Tax Equivalent Adjustment 1,182 1,075 1,028
-------- -------- --------
Total Interest and Dividend
Income (on an FTE basis) 17,733 16,725 17,185
Interest Expense (5,659) (5,613) (6,898)
-------- -------- --------
Net Interest and Dividend Income-FTE $ 12,074 $ 11,112 $ 10,287
======== ======== ========
The Company's 2004 total interest and dividend income on an FTE basis of
$17,733,000 was $1,008,000 or 6.03% more than the total interest and dividend on
an FTE basis of $16,725,000 in 2003. The increase was primarily attributable to
an increase in earning assets as well as an economic environment experiencing an
increase in interest rates. A change in the mix of earning assets during 2004
resulted in an increase of tax exempt securities in the securities portfolio
which resulted in an increase in the tax equivalent adjustment of $1,182,000 in
2004 and $1,075,000 in 2003 when compared to the tax equivalent adjustment of
$1,028,000 in 2002.
Interest expense on deposits in 2004 decreased $127,000 or 4.43% to $2,739,000
compared to $2,866,000 for the corresponding period in 2003 and $4,039,000 in
2002. Interest expense for Federal Home Loan Bank advances increased $173,000 to
$2,920,000 in 2004 compared to $2,747,000 in 2003 and $2,858,000 in 2002. The
increase was primarily the result of an increase in advances during the year.
Although competition remains aggressive and interest margins continue to be
pressured, net interest and dividend income on an FTE basis increased $962,000
or 8.66% over 2003 and totaled $12,074,000 at December 31, 2004, compared to net
interest and dividend income on an FTE basis of $11,112,000 at December 31, 2003
and $10,287,000 in 2002.
The Company's 2004 net interest margin on an FTE basis was 3.63%. This compared
to a net interest margin of 3.80% for 2003. Actual tax exempt income in 2004 was
$2,294,000 with a yeild of 4.68%. Actual tax exempt income in 2003 totaled
$2,086,000 with a yield of 4.78% and in 2002 actual tax exempt income was
$1,995,000 with a yield of 4.83%.
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2004 over 2003 2003 over 2002
---------------------------- -----------------------------
Volume Rate Total Volume Rate Total
---------------------------- -----------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 1,139 $ (773) $ 366 $ 220 $ (671) $ (451)
Taxable investment securities 658 (344) 314 1,025 (1,294) (269)
Tax-exempt investment securities 393 (79) 314 165 (27) 138
Other interest earning 6 8 14 (51) (33) (84)
------- ------- ------- ------- ------- -------
Total interest and dividend income $ 2,196 $(1,188) $ 1,008 $ 1,359 $(2,025) $ (666)
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 19 $ 0 $ 19 $ (42) $ (402) $ (444)
Savings deposits 84 (161) (77) (164) (129) (293)
Time deposits 189 (259) (70) 65 (502) (437)
Borrowed funds 407 (233) 174 732 (843) (111)
------- ------- ------- ------- ------- -------
Total interest expense $ 699 $ (653) $ 46 $ 591 $(1,876) $(1,285)
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 1,497 $ (535) $ 962 $ 768 $ (149) $ 619
======= ======= ======= ======= ======= =======
21
Noninterest Income
Noninterest income increased $771,000 or 19.35% and totaled $4,755,000 for the
year ended December 31, 2004 as compared to $3,984,000 for the year ended
December 31, 2003. Trust Department income increased $159,000 to $1,411,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $621,000 for 2004. This was an increase of
$61,000 or 10.89% when compared to total service charges of $560,000 in 2003.
The increase was attributed to an increase in deposit account transactions.
Gains on sales and writedowns of available-for-sale securities, net totaled
$1,490,000 in 2004 and represented an increase of $432,000 or 40.83% when
compared to $1,058,000 in 2003. This increase was primarily attributable to
movements in the markets which resulted in opportunities for the Company to
enhance the return from the securities portfolio and at the same time realize
gains on sales of available-for-sale securities. Mortgage refinancing was very
active during 2004 as rates remained attractive to consumers. Competition in the
secondary mortgage market was very aggressive. Gains on sales of loans
held-for-sale increased $43,000 or 16.48% to $304,000 in 2004 compared to
$261,000 in 2003. Other income and loan commissions increased 9.04% to $929,000
in 2004 compared to $852,000 in 2003. This increase was primarily attributable
to the increase in fees earned from activity in the secondary mortgage market
due to the change of investors. Historically the Company has few instances in
which it forecloses on properties and therefore has a low volume of OREO
properties. The Company sold one OREO property during 2003. There were no OREO
property sales in 2004.
Noninterest Expense
- -------------------
Noninterest expense increased 23.29% for the year ended December 31, 2004 as
compared to the corresponding period in 2003. The components of noninterest
expense and the changes in the period were as follows (amounts in thousands):
2004 2003 Change %Change
- --------------------------------------------------------------------------------
Salaries and employee benefits $ 5,971 $ 4,834 $ 1,137 23.52
Occupancy expense 436 359 77 21.45
Equipment expense 600 579 21 3.63
Trust department expense 339 409 (70) (17.11)
Data processing 711 576 135 23.44
Insurance 122 115 7 6.09
Printing and stationery 254 184 70 38.04
Professional fees 272 300 (28) (9.33)
Legal expense 106 128 (22) (17.19)
Amortization of core deposit intangible 101 68 33 48.53
Other expense 1,691 1,048 643 61.36
------- ------- -------
Total noninterest expense $10,603 $ 8,600 $ 2,003 23.29
======= ======= =======
The increase in salary and employee benefits was primarily due to an increase in
staff attributable to the merger with Canaan National Bancorp, Inc. and the
required employee time needed to make the system changes relating to the
conversion of the core processing system, along with salary increases and the
increase in the cost of employee benefits. The increase in occupancy expense was
also directly related to the merger. The decrease in Trust department expenses
was the result of management's efforts to control operating expenses. The
increase in data processing costs were attributable to the changes made in the
core processing system during the third quarter coupled with additional costs
related to the merger. Conversion expenses were various nonrecurring expenses
related to the conversion and the enhancement of the core account processing
system. The increase in the core deposit intangible amortization was primarily
the result of the fair market adjustment of the assets and liabilities acquired
from Canaan National Bancorp, Inc. at merger. Other expense increases were
primarily attributable to costs associated with the merger as previously
mentioned.
Income Taxes
- ------------
In 2004, the Company's income tax provision was $775,000 which reflected an
effective tax rate of 16.16%. This compared to an income tax provision of
$1,268,000 and an effective tax rate of 24.82% for the same period in 2003. This
decrease was primarily attributable to a decrease in taxable income. In
addition, the Company formed a passive investment company to operate a
significant component of the Bank's residential mortgage lending activity. A
passive investment company's structure is such that income earned results in a
reduction of tax liability for the Company.
22
Net Income
- ----------
Overall, net income was $4,019,000 for the year ended December 31, 2004. This
compared to net income of $3,840,000 for the year ended December 31, 2003. This
was an increase of $179,000 or 4.66% and represented earnings per average share
outstanding of $2.67. Earnings per average share outstanding for the year ended
December 31, 2003 was $2.70. The decrease in the earnings per average share
outstanding was primarily the result of issuing an additional 257,483 shares in
connection with the acquisition of Canaan National Bancorp, Inc.
FINANCIAL CONDITION
- -------------------
Comparison of December 31, 2005 and 2004
- ----------------------------------------
Total assets at December 31, 2005 were $402,922,000 compared to $423,101,000 at
December 31, 2004. This is a decrease of $20,179,000 or 4.77%. The decrease
primarily reflects a reduction in the securities portfolio.
Securities Portfolio
- --------------------
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2005, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $151,168,000. This represents a decrease
of $33,118,000 or 17.97% over year-end 2004. The decrease is attributable to
portfolio securities being sold and called during the period with the proceeds
being used to fund loan growth and reduce total advances outstanding at the
Federal Home Loan Bank of Boston.
Securities are classified in the portfolio as either
securities-available-for-sale or securities-held-to-maturity. Securities for
which the Company has the ability and positive intent to hold until maturity are
reported as held-to-maturity. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Securities that are held
for indefinite periods of time and which management intends to use as part of
its asset/liability management strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, increases in capital
requirements or other similar factors, are classified as available-for-sale.
These securities are stated at fair value in the financial statements of the
Company. Temporary differences between available-for-sale securities' amortized
cost and fair market value (accumulated other comprehensive income or loss when
net of tax) are not included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized. The cost basis
of individual securities is written down to estimated fair value through a
charge to earnings when decreases in value below amortized cost are considered
to be other than temporary. This other than temporary impairment is charged to
securities gain on the Company's financial statements. .At December 31, 2005,
the unrealized loss (accumulated other comprehensive loss) net of tax was
$2,895,000. This compares to an unrealized loss net of tax of $723,000 at
December 31, 2004. The Company monitors the market value fluctuations of its
securities portfolio on a monthly basis as well as associated credit ratings to
determine potential impairment of a security.
Federal Funds Sold
- ------------------
There were no federal funds sold at December 31, 2005. This compares to
$2,271,000 at December 31, 2004. This represents a normal operating range of
funds for daily cash needs.
Lending
- -------
New business development during the year coupled with the loans acquired as part
of the previously described merger resulted in an increase in net loans
outstanding to $215,989,000 at December 31, 2005, as compared to $201,978,000 at
December 31, 2004. This is an increase of $14,011,000 or 6.94%. Although the
largest dollar volumes of loan activity continues to be in the residential
mortgage area, the Company offers a wide variety of loan types and terms along
with competitive pricing to customers. The Company's credit function is designed
to ensure adherence to prudent credit standards despite competition for loans in
the Company's market area.
23
The following table represents the composition of the loan portfolio comparing
December 31, 2005 to December 31, 2004:
December 31, 2005 December 31, 2004
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 15,354 $ 15,127
Real Estate-construction and land development 18,814 14,290
Real Estate-residential 135,619 130,414
Real Estate-commercial 40,889 35,487
Consumer 7,900 9,122
Other 47 69
--------- ---------
218,623 204,509
Unearned income (8) (19)
Allowance for loan losses (2,626) (2,512)
--------- ---------
Loans, net $ 215,989 $ 201,978
========= =========
Provisions and Allowance for Loan Losses
- ----------------------------------------
Gross loans outstanding as of December 31, 2005 totaled $218,623,000 as compared
to total gross loans of $204,509,000 as of December 31, 2004. This represented
an increase of $14,114,000 or 6.90%. Approximately 90% of the Company's loan
portfolio is real estate secured and reflected a slight increase from the 88%
real estate secured figure as of December 31, 2004. The increase in total gross
loans was primarily the result of increases in residential and commercial real
estate loans which included construction.
Credit risk is inherent in the business of extending loans. The Company monitors
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Because of the risk associated
with extending loans the Company maintains an allowance or reserve for loan and
lease losses through charges to earnings. The loan loss provision expense for
the year 2005 was $210,000 as compared to $250,000 for the year ended December
31, 2004. 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 ending December 31,
2005. Such evaluations are based on assessments of credit quality and "risk
rating" of loans by senior management, which is reviewed by the Company's Loan
Committee on a regular basis. Loans are initially risk rated when originated. If
there is deterioration in the credit quality, the risk rating is adjusted
accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Company's Loan Policy
as commercial loans with balances outstanding of $100,000 or more and
residential real estate mortgages with balances of $300,000 or more. Such loans
are considered impaired when it is probable that the Company will not be able to
collect all principal and interest due according to the terms of the note.
Any such commercial loan and/or residential mortgage 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;
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
as part of the periodic analysis of the Allowance for Loan and Lease Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
balances as well as recent delinquent percentage trends.
24
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.
Nonperforming loans, which include all loans that are on a non-accrual status
along with loans that are 90 days or more past due and still accruing are
closely monitored by management. These nonperforming loans totaled $773,000 or
0.35% of total loans outstanding as of December 31, 2005 and compares favorably
to the December 31, 2004 figures which totaled $2,267,000 or 1.11% of total
loans outstanding at that time. Accordingly, the overall quality of the Bank's
loan portfolio is considered to be excellent.
The Allowance for Loan and Lease Losses (ALLL) at December 31, 2005 totaled
$2,626,000, representing 339.72% of the previously mentioned nonperforming loans
of $773,000 and 1.20% of total loans outstanding of $218,623,000. This compares
to an ALLL of $2,512,000 which represented 110.81% of nonperforming loans of
$2,267,000 and 1.23 % of total loans outstanding of $204,509,000 as of December
31, 2004. The Allowance for Off Balance Sheet Commitments for December 31, 2005
totaled $134,000. The December 31, 2004 balance of the Allowance for Off Balance
Sheet Commitments was $127,000. A total of $135,000 in loans were charged-off
during the 2005 year compared to $70,000 during 2004. A total of $39,000 of
previously charged-off loans were recovered during the year ended December 31,
2005 compared to $28,000 in recoveries for the 2004 year. 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, identification of
additional problem loans or other factors. Additionally, despite the excellent
overall quality of the loan portfolio and with expectations of the Company to
continue to grow its existing portfolio, future additions to the allowance may
be necessary to maintain adequate reserve coverage. Management is of the opinion
that the ALLL is adequate as of December 31, 2005.
Deposits
- --------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2005 totaled $287,271,000 compared to
$298,842,000 at year-end 2004. The Company continues its efforts to
competitively price products and develop and maintain relationship banking with
its customers. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and the aggressive competition from nonbanking entities. During the year, there
was an increase in demand, NOW and savings accounts that 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
2005 2004 2003
--------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------------------------------------------------------------
Demand $ 65,591 $ 51,649 $ 38,998
NOW 27,767 .25% 23,797 .01% 20,030 31%
Money Market 53,835 2.15% 38,884 .83% 39,491 76%
Savings 59,466 .77% 54,596 .68% 45,975 98%
Time 86,794 2.86% 75,241 2.64% 68,898 2.98%
-------- -------- --------
$293,453 1.42% $244,167 1.12% $213,392 1.34%
======== ======== ========
25
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31 are summarized as follows:
(dollars in thousands) December 31
2005 2004 2003
---------------------------
Three months or less $ 9,763 $ 9,540 $ 5,575
Over three months through six months 1,057 1,011 1,343
Over six months through one year 8,774 7,517 5,591
Over one year 8,069 14,887 11,080
------- ------- -------
Total $27,663 $32,955 $23,589
======= ======= =======
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, 2005, the Company had $71,016,000 in
outstanding advances from the Federal Home Loan Bank compared to $79,213,000 at
December 31, 2004. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
Interest Rate Risk
- ------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's 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, 2005, 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, 2005 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 that provides a
source of available borrowings for liquidity.
At December 31, 2005, the Company had approximately $47,966,000 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.
26
Capital
- -------
At December 31, 2005, the Company had $41,442,000 in stockholders' equity
compared to $40,700,000 at December 31, 2004. This represents an increase of
$742,000 or 1.82%. Several components contributed to the change since December
2004. Earnings for the year totaled $4,561,000. Securities in the portfolio that
are classified as available-for-sale are adjusted to fair value monthly and the
unrealized losses or gains are not included in earnings, but are reported as a
net amount (less expected tax) as a separate component of capital until
realized. Then it is included in earnings. Market fluctuations of fair value at
December 31, 2005 resulted in an accumulated other comprehensive loss totaling
$2,895,000.The Company declared dividends in 2005 resulting in a decrease in
capital of $1,683,000. The Company issued 940 new shares of common stock under
the terms of the Director Stock Retainer Plan during the second quarter of 2005
which resulted in an increase in capital of $36,000. Under current regulatory
definitions, the Company and the Bank are considered to be "well capitalized"
for capital adequacy purposes. As a result, the Bank pays the lowest federal
deposit insurance deposit premiums possible. One primary measure of capital
adequacy for regulatory purposes is based on the ratio of risk-based capital to
risk weighted assets. This method of measuring capital adequacy helps to
establish capital requirements that are sensitive to the differences in risk
associated with various assets. It takes in account off-balance sheet exposure
in assessing capital adequacy and it minimizes disincentives to holding liquid,
low risk assets. At year-end 2005, the Company had a risk-based capital ratio of
15.76% compared to 12.13% at December 31, 2004. 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 stockholders 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
interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services, inflation could impact earnings
in future periods.
Recent Accounting Pronouncements
- --------------------------------
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
in an effort to expand upon and strengthen existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. In December 2003, the FASB revised
Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)").
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that, by
requiring a variable interest entity to be consolidated by a company only if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. The Company is required to apply FIN 46, as revised,
to all entities subject to it no later than the end of the first reporting
period ending after March 15, 2004. However, prior to the required application
of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those
entities that are considered to be special-purpose entities as of the end of the
first fiscal year or interim period ending after December 15, 2003. The adoption
of this interpretation did not have an impact on the Company's consolidated
financial statements as the Company did not have any financial interests in
variable interest entities at December 31, 2005.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain
Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires loans
acquired through a transfer, such as a business combination, where there are
differences in expected cash flows and contractual cash flows due in part to
credit quality be recognized at their fair value. The excess of contractual cash
flows over expected cash flows is not to be recognized as an adjustment of
yield, loss accrual, or valuation allowance. Valuation allowances cannot be
created nor "carried over" in the initial accounting for loans acquired in a
transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment
of a Loan." This SOP is effective for loans acquired in fiscal years beginning
after December 15, 2004, with early adoption encouraged. The adoption
27
of SOP 03-3 did not have an impact on the Company's financial position or
results of operations since the Company acquired no loans subject to SFAS 114
since the effective date of SOP 03-3.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. It
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions with
employees except for equity instruments held by employee share ownership plans.
This Statement is effective for the Company as of the beginning of the first
annual reporting period that begins after December 15, 2005. The adoption of
this Statement is not anticipated to have a material impact on the Company's
financial position or results of operations as there is no share-based payment
arrangements with employees and the compensation expense related to the
Directors Stock Retainer Plan is not anticipated to be material.
Off-Balance Sheet Arrangements
- ------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. In the
opinion of management, these off-balance sheet arrangements are not likely to
have a material effect on the Company's financial condition, results of
operations, or liquidity. (See Note 11 to the Financial Statements).
Forward Looking Statements
- --------------------------
This Annual Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and the Bank, may include forward-looking
statements relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may 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.
Statement of Management's Responsibility
- ----------------------------------------
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization
28
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. Shatswell, MacLeod and Company, P.C. has been
engaged to provide an independent opinion on the fairness of the consolidated
financial statements. Their report appears in this Annual Report on Form 10-K.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
- -------------------------------------------------------------------
The main components of market risk for the Company are credit risk, interest
rate risk and liquidity risk. The Company manages interest rate risk and
liquidity risk through an ALCO Committee comprised of outside Directors and
senior management. The committee monitors compliance with the Bank's
Asset/Liability Policy which establishes guidelines to meet various applicable
regulatory rules and statutes, measures the various risks facing the bank on a
consistent basis and coordinates the management of the bank's financial
position. Model simulation is used to measure earnings volatility under both
rising and falling interest rate scenarios. The Company's interest rate risk and
liquidity position has not significantly changed from year-end 2005.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
- ------------------------------------------
Report of Independent Registered Public
Accounting Firm, January 19, 2006 .................................... F-1
Consolidated Balance Sheets at December 31, 2005 and 2004 .............. F-2
Consolidated Statements of Income for the Years Ended
December 31, 2005, 2004 and 2003 ...................................... F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003 .................. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 ...................................... F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2005, 2004 and 2003 .......................... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 2005 and 2004 ........................... F-27
Statements of Income for the Years Ended
December 31, 2005, 2004 and 2003 .................................... F-27
Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 .................................... F-28
Quarterly Results of Operations (unaudited) ............................ F-29
30
SHATSWELL, MACLEOD & COMPANY, P.C.
----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2005 and 2004 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, 2005.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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, 2005 and 2004, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.
/S/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 19, 2006
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2005 and 2004
--------------------------
ASSETS 2005 2004
------------- -------------
Cash and due from banks $ 8,431,844 $ 7,283,667
Interest bearing demand deposits with other banks 652,807 1,180,937
Money market mutual funds 1,119,724 941,890
Federal funds sold 2,271,000
------------- -------------
Cash and cash equivalents 10,204,375 11,677,494
Investments in available-for-sale securities (at fair value) 145,608,297 178,654,748
Investments in held-to-maturity securities (fair values of $147,202 as of
December 31, 2005 and $219,623 as of December 31, 2004) 146,856 218,374
Federal Home Loan Bank stock, at cost 5,413,200 5,413,200
Loans held-for-sale 375,000
Loans, less allowance for loan losses of $2,626,170 and $2,511,546 as of
December 31, 2005 and 2004, respectively 215,989,149 201,978,499
Investment in real estate 75,000 75,000
Premises and equipment 6,451,979 5,933,978
Goodwill 9,509,305 9,509,305
Core deposit intangible 1,657,715 1,822,131
Accrued interest receivable 2,362,924 2,256,499
Cash surrender value of life insurance policies 3,424,186 3,293,548
Other assets 2,079,307 1,893,029
------------- -------------
Total assets $ 402,922,293 $ 423,100,805
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 63,995,665 $ 65,017,207
Interest-bearing 223,275,537 233,824,639
------------- -------------
Total deposits 287,271,202 298,841,846
Federal Home Loan Bank advances 71,015,614 79,213,283
Due to broker 1,083,331
Other liabilities 3,193,154 3,262,745
------------- -------------
Total liabilities 361,479,970 382,401,205
------------- -------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,683,341 shares in 2005 and 1,682,401 shares in 2004 168,334 168,240
Paid-in capital 13,068,045 13,031,573
Retained earnings 31,100,702 28,222,466
Accumulated other comprehensive loss (2,894,758) (722,679)
------------- -------------
Total stockholders' equity 41,442,323 40,699,600
------------- -------------
Total liabilities and stockholders' equity $ 402,922,293 $ 423,100,805
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
2005 2004 2003
----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $13,319,930 $ 9,592,478 $ 9,226,484
Interest on debt securities:
Taxable 4,814,993 4,499,725 4,186,368
Tax-exempt 2,329,414 2,293,706 2,086,134
Dividends on equity securities 282,534 112,008 112,340
Other interest 69,512 53,101 38,496
----------- ----------- -----------
Total interest and dividend income 20,816,383 16,551,018 15,649,822
----------- ----------- -----------
Interest expense:
Interest on deposits 4,171,360 2,738,680 2,866,495
Interest on Federal Home Loan Bank advances 3,180,591 2,920,316 2,746,975
----------- ----------- -----------
Total interest expense 7,351,951 5,658,996 5,613,470
----------- ----------- -----------
Net interest and dividend income 13,464,432 10,892,022 10,036,352
Provision for loan losses 210,000 250,000 312,500
----------- ----------- -----------
Net interest and dividend income after provision for
loan losses 13,254,432 10,642,022 9,723,852
----------- ----------- -----------
Noninterest income:
Trust department income 1,571,311 1,410,814 1,252,000
Loan commissions 260,997 239,139 225,958
Service charges on deposit accounts 642,268 620,771 560,291
Gain on sales and writedown of available-for-sale securities, net 1,209,724 1,489,905 1,058,140
Gain on sales of loans held-for-sale 270,061 304,354 261,418
Other income 910,743 690,198 626,292
----------- ----------- -----------
Total noninterest income 4,865,104 4,755,181 3,984,099
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 7,355,316 5,970,639 4,833,913
Occupancy expense 728,302 435,983 359,458
Equipment expense 776,729 600,127 579,395
Trust department expense 398,130 339,069 408,433
Data processing 782,556 710,950 575,441
Conversion expense 464,484 1,139
Insurance 148,317 121,959 114,806
Printing and stationery 251,882 253,725 183,970
Professional fees 301,239 272,426 300,209
Legal expense 173,761 106,134 127,772
Amortization of core deposit intangible 164,416 101,109 68,355
Other expense 1,363,134 1,226,708 1,047,008
----------- ----------- -----------
Total noninterest expense 12,443,782 10,603,313 8,599,899
----------- ----------- -----------
Income before income taxes 5,675,754 4,793,890 5,108,052
Income taxes 1,114,413 774,948 1,267,950
----------- ----------- -----------
Net income $ 4,561,341 $ 4,018,942 $ 3,840,102
=========== =========== ===========
Earnings per common share $ 2.71 $ 2.67 $ 2.70
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings (Loss) Income Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 1,423,238 $ 142,324 $ 2,303,547 $ 23,164,693 $ 1,734,382 $ 27,344,946
Comprehensive income:
Net income 3,840,102
Other comprehensive loss, net of tax
effect (1,048,565)
Comprehensive income 2,791,537
Issuance of 840 shares for Directors' fees 840 84 23,604 23,688
Dividends declared ($.92 per share) (1,309,959) (1,309,959)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 1,424,078 142,408 2,327,151 25,694,836 685,817 28,850,212
Comprehensive income:
Net income 4,018,942
Other comprehensive loss, net of tax
effect (1,408,496)
Comprehensive income 2,610,446
Shares issued for merger 257,483 25,748 10,672,670 10,698,418
Issuance of 840 shares for Directors' fees 840 84 31,752 31,836
Dividends declared ($.96 per share) (1,491,312) (1,491,312)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 1,682,401 168,240 13,031,573 28,222,466 (722,679) 40,699,600
Comprehensive income:
Net income 4,561,341
Other comprehensive loss, net of tax
effect (2,172,079)
Comprehensive income 2,389,262
Issuance of 940 shares for Directors' fees 940 94 36,472 36,566
Dividends declared ($1.00 per share) (1,683,105) (1,683,105)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 1,683,341 $ 168,334 $ 13,068,045 $ 31,100,702 $ (2,894,758) $ 41,442,323
============ ============ ============ ============ ============ ============
Reclassification disclosure for the years ended December 31:
2005 2004 2003
----------- ----------- -----------
Unrealized holding losses on available-for-sale securities
Net unrealized holding losses on available-for-sale securities $(1,547,214) $(1,106,610) $ (370,016)
Reclassification adjustment for net realized gains in net income (1,209,724) (1,489,905) (1,058,140)
----------- ----------- -----------
(2,756,938) (2,596,515) (1,428,156)
Income tax benefit 878,763 1,011,343 556,267
----------- ----------- -----------
Unrealized holding losses on available-for-sale securities, net of tax (1,878,175) (1,585,172) (871,889)
----------- ----------- -----------
Minimum pension liability adjustment (445,309) 289,396 (289,396)
Income tax benefit (expense) 151,405 (112,720) 112,720
----------- ----------- -----------
Minimum pension liability, net of tax (293,904) 176,676 (176,676)
----------- ----------- -----------
Other comprehensive loss, net of tax $(2,172,079) $(1,408,496) $(1,048,565)
=========== =========== ===========
Accumulated other comprehensive (loss) income consists of the following
as of December 31:
2005 2004 2003
----------- ----------- -----------
Net unrealized holding (losses) gains on available-for-sale securities,
net of taxes $(2,600,854) $ (722,679) $ 862,493
Minimum pension liability adjustment, net of taxes (293,904) (176,676)
----------- ----------- -----------
Accumulated other comprehensive (loss) income $(2,894,758) $ (722,679) $ 685,817
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
2005 2004 2003
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 4,561,341 $ 4,018,942 $ 3,840,102
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 302,781 289,214 395,030
Gain on sales and writedown of available-for-sale securities, net (1,209,724) (1,489,905) (1,058,140)
Gain on sales of other real estate owned (52,151)
Provision for loan losses 210,000 250,000 312,500
Change in loans held-for-sale 375,000 (100,000) (275,000)
(Decrease) increase in unearned income on loans (10,473) 18,529
Net decrease (increase) in mortgage servicing rights 83,471 (41,253) (67,250)
Write-off of equipment 9,399
Depreciation and amortization 529,238 357,645 335,672
Amortization of core deposit intangible 164,416 101,109 68,355
Amortization of fair value adjustment on loans 184,256 266,986
Accretion of fair value adjustments on deposits and borrowings (154,287) (51,429) (11,450)
(Increase) decrease in interest receivable (110,482) 84,056 57,668
Deferred tax expense 67,273 143,691 137,341
Decrease (increase) in prepaid expenses 14,242 270,965 (124,330)
Increase in cash surrender value of insurance policies (130,638) (139,607) (49,585)
Decrease (increase) in income tax receivable 336,288 (53,889) (154,792)
Increase in other assets (53,742) (71,917) (205,831)
(Decrease) increase in accrued expenses (268,051) (750,246) 197,428
Increase (decrease) in interest payable 42,822 57,465 (80,151)
Increase in other liabilities 59,445 367,956 20,000
Issuance of shares for Directors' fees 36,566 31,836 23,688
------------- ------------- -------------
Net cash provided by operating activities 5,029,742 3,569,547 3,309,104
------------- ------------- -------------
Cash flows from investing activities:
Redemption of Federal Reserve Bank stock 56,300
Purchases of Federal Home Loan Bank stock (351,000) (825,800)
Purchases of available-for-sale securities (87,783,193) (124,520,785) (89,014,647)
Proceeds from sales of available-for-sale securities 83,572,466 98,347,353 49,353,780
Proceeds from maturities of available-for-sale securities 34,328,155 32,998,864 31,044,359
Proceeds from maturities of held-to-maturity securities 71,272 10,968 91,497
Loan originations and principal collections, net (12,432,343) (8,191,577) (4,157,060)
Purchases of loans (2,001,184)
Recoveries of loans previously charged off 39,094 28,302 48,508
Other real estate owned - expenditures capitalized (8,511)
Capital expenditures (1,017,056) (1,003,263) (475,024)
Proceeds from sale of equipment 436
Purchase of life insurance policies (3,000,000)
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc. net of expenses paid of $309,419 2,487,705
Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163)
------------- ------------- -------------
Net cash provided by (used in) investing activities 14,777,211 (6,156,860) (16,942,898)
------------- ------------- -------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
(continued)
-----------
2005 2004 2003
------------- ------------- -------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and
savings accounts (8,516,596) 6,920,818 9,642,776
Net decrease in time deposits (3,029,964) (2,141,902) (2,211,280)
Federal Home Loan Bank advances 10,000,000 5,000,000
Principal payments on advances from Federal Home Loan Bank (1,346,521) (6,140,973) (10,993,296)
Net change in short-term advances from Federal Home Loan Bank (16,720,945) 20,000,000
Decrease in other borrowed funds (86,863)
Dividends paid (1,666,046) (1,415,074) (1,295,533)
------------- ------------- -------------
Net cash (used in) provided by financing activities (21,280,072) 2,136,006 15,142,667
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (1,473,119) (451,307) 1,508,873
Cash and cash equivalents at beginning of year 11,677,494 12,128,801 10,619,928
------------- ------------- -------------
Cash and cash equivalents at end of year $ 10,204,375 $ 11,677,494 $ 12,128,801
============= ============= =============
Supplemental disclosures:
Interest paid $ 7,463,416 $ 5,652,960 $ 5,705,071
Income taxes paid 710,852 685,000 1,285,401
Transfer from equipment to other assets 2,815
Canaan National Bancorp, Inc. merger:
Cash and cash equivalents acquired $ 2,797,124
Available-for-sale securities 42,776,284
Federal Home Loan Bank stock 1,291,200
Federal Reserve Bank stock 56,300
Net loans acquired 54,787,421
Fixed assets acquired 2,355,970
Accrued interest receivable 460,550
Other assets acquired 1,173,549
Core deposit intangible 1,191,279
-------------
106,889,677
Deposits assumed 75,613,508
Federal Home Loan Bank borrowings assumed 19,500,346
Other borrowings assumed 86,863
Other liabilities assumed 1,812,381
-------------
97,013,098
Net assets acquired 9,876,579
Merger costs 17,028,000
-------------
Goodwill $ 7,151,421
=============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank and Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp
and the Bank are referred to together as the (Company).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut and two banking offices located in
Massachusetts. The Bank is engaged principally in the business of attracting
deposits from the general public and investing those deposits in residential and
commercial real estate, consumer and small business loans. The Bank also offers
a full complement of trust and investment services.
As described in Note 15, on September 10, 2004 Canaan National Bancorp, Inc.
merged with and into the Company.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and predominant
practices within the banking industry. The consolidated financial statements
were prepared using the accrual basis of accounting. The significant accounting
policies are summarized below to assist the reader in better understanding the
consolidated financial statements and other data contained herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of Bancorp and
its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiaries, SBT Realty, Inc., SBT Mortgage Service Corporation (the
"PIC"), and CNB Insurance Agency, Inc. SBT Realty, Inc. holds and manages
bank owned real estate situated in New York state. The PIC operates as a
passive investment company and services residential mortgages. CNB
Insurance Agency, Inc. was formed to sell insurance and was dissolved in
April 2005. 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, 2005 and 2004 includes $649,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
F-7
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts so as to approximate the interest method. Gains
or losses on sales of investment securities are computed on a specific
identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These security
classifications may be modified after acquisition only under certain
specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability to
hold them to maturity. Trading securities are defined as those bought and
held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Held-to-maturity securities are carried at amortized cost in the
consolidated balance sheets. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and losses
are not included in earnings but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the consolidated
balance sheets. Unrealized holding gains and losses for trading
securities are included in earnings. During the three years ended
December 31, 2005 the Company did not classify any securities as
trading.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. Any equity line 90
days past due or in the process of foreclosure is placed on nonaccrual
status. Secured consumer loans are written down to realizable value and
unsecured consumer loans are charged-off upon reaching 120 or 180 days past
due depending on the type of loan. Commercial real estate loans and
commercial business loans and leases which are 90 days or more past due are
generally placed on nonaccrual status, unless secured by sufficient cash or
other assets immediately convertible to cash. When a loan has been placed
on nonaccrual status, previously accrued and uncollected interest is
reversed against interest on loans. A loan can be returned to accrual
status when collectibility of principal is reasonably assured and the loan
has performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an impaired
loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to reduce
the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
F-8
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of are
removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated principally
on the straight-line method over the estimated useful lives of the assets.
Estimated lives are 3 to 99 years for buildings and 2 to 20 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
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets and subsequent writedowns are included in
other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," the Bank classifies loans as in-substance repossessed or
foreclosed if the Bank or its subsidiaries receives physical possession of
the debtor's assets regardless of whether formal foreclosure proceedings
take place. As of December 31, 2005 and December 31, 2004, the Company does
not have any other real estate owned.
ADVERTISING:
The Bank directly expenses costs associated with advertising as they are
incurred.
F-9
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis of
the Company's assets and liabilities at enacted tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair value for its financial
instruments. Fair value methods and assumptions used by the Company in
estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are based
on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the reporting
date.
STOCK BASED COMPENSATION:
Bancorp has a stock-based plan to compensate non-employee directors for
their services. This plan is more fully described in Note 14. Compensation
cost for these services is reflected in net income in an amount equal to
the fair value of the shares of Bancorp common stock payable to the
directors.
F-10
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Weighted average common shares outstanding were
1,683,031 in 2005, 1,503,373 in 2004 and 1,423,815 in 2003. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is not presented because there were no
common stock equivalents in the three year period ended December 31, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN
46"), in an effort to expand upon and strengthen existing accounting
guidance that addresses when a company should include in its financial
statements the assets, liabilities and activities of another entity. In
December 2003, the FASB revised Interpretation No. 46, also referred to as
Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation
is not to restrict the use of variable interest entities but to improve
financial reporting by companies involved with variable interest entities.
Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is
subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's
residual returns or both. The Company is required to apply FIN 46, as
revised, to all entities subject to it no later than the end of the first
reporting period ending after March 15, 2004. However, prior to the
required application of FIN 46, as revised, the Company shall apply FIN 46
or FIN 46 (R) to those entities that are considered to be special-purpose
entities as of the end of the first fiscal year or interim period ending
after December 15, 2003. The adoption of this interpretation did not have
an impact on the Company's consolidated financial statements as the Company
did not have any financial interests in variable interest entities at
December 31, 2005.
In December 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for
Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 requires
loans acquired through a transfer, such as a business combination, where
there are differences in expected cash flows and contractual cash flows due
in part to credit quality be recognized at their fair value. The excess of
contractual cash flows over expected cash flows is not to be recognized as
an adjustment of yield, loss accrual, or valuation allowance. Valuation
allowances cannot be created nor "carried over" in the initial accounting
for loans acquired in a transfer on loans subject to SFAS 114, "Accounting
by Creditors for Impairment of a Loan." This SOP is effective for loans
acquired in fiscal years beginning after December 15, 2004, with early
adoption encouraged. The adoption of SOP 03-3 did not have an impact on the
Company's financial position or results of operations since the Company
acquired no loans subject to SFAS 114 since the effective date of SOP 03-3.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock Based Compensation" and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
implementation guidance. SFAS 123R requires that the cost resulting from
all share-based payment transactions be recognized in the consolidated
financial statements. It establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires
all entities to apply a fair-value based measurement method in accounting
for share-based payment transactions with employees except for equity
instruments held by employee share ownership plans. This Statement is
effective for the Company as of the beginning of the first annual reporting
period that begins after December 15, 2005. The adoption of this Statement
is not anticipated to have a material impact on the Company's financial
position or results of operations as there is no share-based payment
arrangements with employees and the compensation expense related to the
Directors Stock Retainer Plan is not anticipated to be material.
F-11
NOTE 3 - INVESTMENTS IN SECURITIES
- ----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2005:
Equity securities $ 3,031 $ 145,058 $ $ 148,089
U.S. government agencies preferred stock 13,292,628 99,660 946,300 12,445,988
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 52,390,332 1,874,694 50,515,638
Debt securities issued by states of the
United States and political subdivisions
of the states 41,550,010 75,980 293,765 41,332,225
Money market mutual funds 1,119,724 1,119,724
Mortgage-backed securities 42,312,984 15,325 1,161,952 41,166,357
------------- ------------- ------------- -------------
150,668,709 336,023 4,276,711 146,728,021
Money market mutual funds included in
cash and cash equivalents (1,119,724) (1,119,724)
------------- ------------- ------------- -------------
$ 149,548,985 $ 336,023 $ 4,276,711 $ 145,608,297
============= ============= ============= =============
December 31, 2004:
Equity securities $ 3,031 $ 142,727 $ $ 145,758
U.S. government agencies preferred stock 13,488,364 1,490 1,280,752 12,209,102
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 53,771,554 53,170 408,766 53,415,958
Debt securities issued by states of the
United States and political subdivisions
of the states 58,052,206 630,317 230,178 58,452,345
Money market mutual funds 941,890 941,890
Mortgage-backed securities 54,523,343 209,599 301,357 54,431,585
------------- ------------- ------------- -------------
180,780,388 1,037,303 2,221,053 179,596,638
Money market mutual funds included in
cash and cash equivalents (941,890) (941,890)
------------- ------------- ------------- -------------
$ 179,838,498 $ 1,037,303 $ 2,221,053 $ 178,654,748
============= ============= ============= =============
Held-to-maturity securities:
December 31, 2005:
Mortgage-backed securities $ 146,856 $ 346 $ $ 147,202
============= ============= ============= =============
December 31, 2004:
Mortgage-backed securities $ 218,374 $ 1,249 $ $ 219,623
============= ============= ============= =============
F-12
The scheduled maturities of debt securities were as follows as of December 31,
2005:
Available-For-Sale Held-To-Maturity
------------------ ---------------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ ------------ ------------
Due after five years through ten years $ 17,555,100 $ $
Due after ten years 74,292,763
Mortgage-backed securities 41,166,357 146,856 147,202
------------ ------------ ------------
$133,014,220 $ 146,856 $ 147,202
============ ============ ============
During 2005, proceeds from sales of available-for-sale securities amounted to
$83,572,466. Gross realized gains and gross realized losses on those sales
amounted to $1,427,881 and $35,657, respectively. During 2004, proceeds from
sales of available-for-sale securities amounted to $98,347,353. Gross realized
gains and gross realized losses on those sales amounted to $1,577,110 and
$87,205, respectively. During 2003, proceeds from sales of available-for-sale
securities amounted to $49,353,780. Gross realized gains and gross realized
losses on those sales amounted to $1,136,732 and $78,592, respectively. The tax
provision applicable to these net realized gains amounted to $473,356, $580,318
and $412,146, respectively. In 2005, a writedown of $182,500 was recorded on an
available-for-sale security.
The amortized cost basis and fair value of securities of issuers which exceeded
10% of stockholders' equity were as follows as of December 31, 2005:
Amortized
Cost Fair
Basis Value
---------- ----------
Federal National Mortgage Association Preferred Stock $5,759,052 $5,603,706
Federal Home Loan Mortgage Corporation Preferred Stock 7,533,576 6,842,282
Total carrying amounts of $38,612,787 and $4,712,905 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, treasury tax
and loan and for other purposes as required by law as of December 31, 2005 and
2004, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are temporarily impaired, are as follows as of December 31,
2005:
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agencies preferred
stock $ $ $ 9,983,488 $ 946,300 $ 9,983,488 $ 946,300
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 30,132,339 1,192,830 20,383,299 681,864 50,515,638 1,874,694
Debt securities issued by states of the
United States and political
subdivisions of the states 17,931,437 245,720 2,774,361 48,045 20,705,798 293,765
Mortgage-backed securities 23,808,282 605,473 13,416,890 556,479 37,225,172 1,161,952
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired securities $ 71,872,058 $ 2,044,023 $ 46,558,038 $ 2,232,688 $118,430,096 $ 4,276,711
============ ============ ============ ============ ============ ============
F-13
Securities exhibiting unrealized losses are analyzed to determine that the
impairments are not other-than-temporary and the following information is
considered. U.S. Government securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S. Government agencies
securities, which have a significant impact in financial markets, have minimal
credit risk. All investments maintain a credit rating of at least investment
grade by one of the nationally recognized rating agencies. Mortgage-backed
securities are issued by federal government agencies or by private issuers with
minimum security ratings of AAA.
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of December 31:
2005 2004
------------- -------------
Commercial, financial and agricultural $ 15,354,328 $ 15,126,711
Real estate - construction and land development 18,814,408 14,289,715
Real estate - residential 135,618,937 130,414,119
Real estate - commercial 40,889,007 35,486,897
Consumer 7,899,912 9,121,747
Other 46,783 69,385
------------- -------------
218,623,375 204,508,574
Unearned income (8,056) (18,529)
Allowance for loan losses (2,626,170) (2,511,546)
------------- -------------
Net loans $ 215,989,149 $ 201,978,499
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2005.
Total loans to such persons and their companies amounted to $735,130 as of
December 31, 2005. During 2005, principal advances of $528,868 were made and
repayments totaled $605,027.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2005 2004 2003
----------- ----------- -----------
Balance at beginning of period $ 2,511,546 $ 1,664,274 $ 1,458,359
Provision for loan losses 210,000 250,000 312,500
Recoveries of loans previously charged off 39,094 28,302 48,508
Loans charged off (134,470) (69,742) (155,093)
Allowance related to business combination 638,712
----------- ----------- -----------
Balance at end of period $ 2,626,170 $ 2,511,546 $ 1,664,274
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2005 2004
------ ------
(in thousands)
Total nonaccrual loans $ 694 $1,739
====== ======
Accruing loans which are 90 days or more overdue $ 79 $ 528
====== ======
F-14
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:
2005 2004
--------------------------- ---------------------------
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 $ 0 $ 0 $ 183,317 $ 0
Loans for which there is no related allowance for credit losses
------------ ------------ ------------ ------------
Totals $ 0 $ 0 $ 183,317 $ 0
============ ============ ============ ============
Average recorded investment in impaired loans during the
year ended December 31 $ 73,133 $ 73,327
============ ============
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 6,665 $ 5,843
============ ============
Amount recognized using a cash-basis method of
accounting $ 6,665 $ 5,843
============ ============
In 2005, 2004 and 2003 the Bank capitalized mortgage servicing rights totaling
$73,849, $112,187 and $69,844, respectively, and amortized $164,178, $66,019 and
$1,924, respectively. The balance of capitalized mortgage servicing rights
included in other assets at December 31, 2005 and 2004 was $414,900 and
$498,371, respectively. On September 10, 2004 the Bank acquired mortgage
servicing rights of $392,256, exclusive of $2,388 in valuation allowance,
through the acquisition of Canaan National Bancorp, Inc.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:
2005 2004
-------- --------
Balance, beginning of year $ 7,973 $ 670
Additions 16,077 5,621
Valuation allowance from business combination 2,388
Reductions (22,935) (706)
-------- --------
Balance, end of year $ 1,115 $ 7,973
======== ========
The fair value of the mortgage servicing rights was $525,209 and $516,322 as of
December 31, 2005 and 2004, respectively.
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage and other loans
serviced for others was $49,567,721 and $49,026,331 at December 31, 2005 and
2004, respectively.
F-15
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
2005 2004
----------- -----------
Land $ 775,844 $ 483,344
Buildings 5,629,513 5,338,726
Furniture and equipment 2,696,510 2,364,380
----------- -----------
9,101,867 8,186,450
Accumulated depreciation and amortization (2,649,888) (2,252,472)
----------- -----------
$ 6,451,979 $ 5,933,978
NOTE 6 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2005 and 2004 was $27,662,727 and $32,955,388,
respectively.
For time deposits as of December 31, 2005, the scheduled maturities for years
ended December 31 are as follows:
2006 $59,576,491
2007 19,944,040
2008 3,196,204
2009 2,358,793
2010 3,328,339
Fair value adjustment 4,014
-----------
$88,407,881
===========
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2005. Total deposits of such persons and their companies amounted to $1,739,823
and $1,672,885 as of December 31, 2005 and 2004, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2005, and thereafter, are summarized as follows:
2006 $ 9,942,009
2007 1,589,044
2008 11,577,699
2009 1,320,213
2010 22,202,309
Thereafter 23,939,479
Fair value adjustment 444,861
-----------
$71,015,614
===========
F-16
As of December 31, 2005, the following advances from the FHLB were redeemable at
par at the option of the FHLB:
MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT
- ------------- ------------------------ -----------
4/27/2009 1/26/2006 and quarterly thereafter $ 500,000
4/27/2009 1/26/2006 and quarterly thereafter 500,000
1/25/2010 1/25/2006 and quarterly thereafter 19,000,000
2/8/2010 2/7/2006 and quarterly thereafter 600,000
12/15/2010 3/15/2006 and quarterly thereafter 800,000
12/20/2010 3/20/2006 and quarterly thereafter 500,000
12/27/2010 3/27/2006 and quarterly thereafter 1,000,000
1/24/2011 1/23/2006 and quarterly thereafter 1,000,000
2/28/2011 2/27/2006 and quarterly thereafter 10,000,000
2/28/2011 2/27/2006 and quarterly thereafter 850,000
3/1/2011 3/1/2006 and quarterly thereafter 500,000
3/7/2011 3/6/2006 and quarterly thereafter 1,000,000
12/16/2013 3/15/2006 and quarterly thereafter 10,000,000
The advances also include $400,000 borrowed in 2002 at 4.37% which is a
Knock-out Advance with a Strike Rate of 7%. If the three month LIBOR rate
exceeds the Strike Rate of 7% on January 9, 2006 and quarterly thereafter, the
FHLB will require that this borrowing become due immediately upon the Strike
Date as defined in the Contract. As of December 31, 2005, the three month LIBOR
was 4.54%. The maturity date is April 9, 2007.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2005, the interest rates on FHLB advances ranged from 1.55
percent to 6.30 percent. At December 31, 2005, the weighted average interest
rate on FHLB advances was 4.90 percent.
NOTE 8 - EMPLOYEE BENEFITS
- --------------------------
The Bank has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.
F-17
The following tables set forth information about the plan as of December 31 and
the years then ended, using a measurement date of December 31:
2005 2004 2003
----------- ----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 4,108,971 $ 2,762,015 $ 2,019,027
Adjustment 960,236
Actuarial loss (gain) 783,390 (12,650) 489,531
Service cost 466,570 259,513 188,104
Interest cost 290,825 220,533 148,033
Benefits paid (154,050) (80,676) (82,680)
----------- ----------- -----------
Benefit obligation at end of year 5,495,706 4,108,971 2,762,015
----------- ----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,839,515 1,787,563 1,396,711
Actual return on plan assets 94,489 140,306 205,463
Contributions 591,000 992,322 268,069
Benefits paid (154,050) (80,676) (82,680)
----------- ----------- -----------
Fair value of plan assets at end of year 3,370,954 2,839,515 1,787,563
----------- ----------- -----------
Funded status (2,124,752) (1,269,456) (974,452)
Unrecognized net loss 2,330,482 1,503,149 560,356
Unrecognized prior service cost 2,696 3,589 93,653
Unamortized net obligation existing at date of adoption of
SFAS No. 87 2,771 58,364
Additional minimum liability (448,005)
----------- ----------- -----------
(Accrued) prepaid benefit cost included in the
balance sheet $ (239,579) $ 240,053 $ (262,079)
=========== =========== ===========
The $960,236 adjustment made to the 2004 beginning of year projected benefit
obligation is a result of a change in calculation methodology from the prior
actuary to the current actuary, hired by the Bank in April 2004, including the
effect of reflecting salary increases in the determination of liabilities. The
adjustment also includes liability gains and losses due to demographic
experience. Net periodic cost for the year ended December 31, 2004 of $490,190
includes additional amortization of the transition obligation and additional
amortization of prior service cost in the amounts of $46,921 and $89,172,
respectively, as a result of this adjustment. Net income for the year ended
December 31, 2004 was reduced by $83,085, net of tax benefit of $53,008, related
to this adjustment.
Amounts recognized in the balance sheets as of December 31, 2005 and 2004
consist of:
2005 2004
------------ ------------
(Accrued) prepaid benefit cost $ (239,579) $ 240,053
Additional minimum liability (448,005)
Intangible asset 2,696
Accumulated other comprehensive loss 445,309
------------ ------------
Net amount recognized $ (239,579) $ 240,053
============ ============
The accumulated benefit obligation for the Bank's defined benefit pension plan
was $3,610,533 and $2,824,624 at December 31, 2005 and 2004, respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2005 and 2004. The rate of increase in
future compensation levels was based on the following graded table for 2005 and
2004:
AGE RATE
--- ----
25 4.75%
35 4.25
45 3.75
55 3.25
65 3.00
F-18
Components of net periodic cost are as follows for the years ended December 31:
2005 2004 2003
--------- --------- ---------
Service cost $ 466,570 $ 259,513 $ 188,104
Interest cost on benefit obligation 290,825 220,533 148,033
Expected return on assets (236,062) (196,448) (107,010)
Amortization of transition obligation 2,771 55,593 8,672
Amortization of prior service cost 893 90,064 892
Amortization of net loss 97,630 60,935
--------- --------- ---------
Net periodic cost $ 622,627 $ 490,190 $ 238,691
========= ========= =========
The discount rate used to determine the net periodic cost was 6.00% for 2005,
2004 and 2003; and the expected return on plan assets was 7.50% for 2005 and
7.25% for 2004 and 2003.
The graded table was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2005 and 2004 and no rate of
increase was used in 2003.
Pension expense is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on pension plan assets of 7.50%
for 2005. In developing the expected long-term rate of return assumption, asset
class return expectations were evaluated as well as long-term inflation
assumptions, and historical returns based on the current target asset
allocations of 60% equity and 40% fixed income. The Bank regularly reviews the
asset allocations and periodically rebalances investments when considered
appropriate. While all future forecasting contains some level of estimation
error, the Bank believes that 7.50% falls within a range of reasonable long-term
rate of return expectations for pension plan assets. The Bank will continue to
evaluate the actuarial assumptions, including expected rate of return, at least
annually, and will adjust as necessary.
Plan Assets
The pension plan investments are managed by the Trust Department of the Bank.
The investments in the plan are reviewed and approved by the Trust Committee.
The asset allocation of the plan is a balanced allocation. Debt securities are
timed to mature when employees are due to retire. Debt securities are laddered
for coupon and maturity. Equities are put in the plan to achieve a balanced
allocation and to provide growth of the principal portion of the plan and to
provide diversification. The Trust Committee reviews the policies of the plan.
The prudent investor rule and applicable ERISA regulations apply to the
management of the funds and investment selections.
The Bank's pension plan asset allocations by asset category are as follows:
December 31, 2005 December 31, 2004
----------------------- -----------------------
Asset Category Fair Value Percent Fair Value Percent
- ---------------------------------------------- ---------- ---------- ---------- ----------
Equity securities $ 987,888 29.4% $1,054,531 37.1%
U.S. Government treasury and agency securities 1,319,226 39.1 991,537 34.9
Corporate bonds 23,632 .7 24,032 .9
Mutual funds 583,354 17.3 462,875 16.3
Money market mutual funds 344,620 10.2 306,540 10.8
Certificates of deposit 112,234 3.3
---------- ---------- ---------- ----------
Total $3,370,954 100.0% $2,839,515 100.0%
========== ========== ========== ==========
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2005 and 2004.
F-19
Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate, the five years
thereafter:
2006 $ 119,000
2007 167,000
2008 88,000
2009 126,000
2010 193,000
2011 - 2015 3,685,000
The Bank contributed $671,000 to its pension plan in January of 2006 for the
2005 plan year and does not expect to make other contributions in 2006.
The Bank adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute a percentage of their pay, subject to IRS
limitations. The Bank may make discretionary contributions to the Plan. The
Bank's contribution expense in the years ended December 31, 2005, 2004 and 2003
amounted to approximately $91,212, $60,000 and $46,000, respectively.
Discretionary contributions vest in full after five years.
Fourteen of the Company's executives have a change in control agreement
("agreement") with the Company. The agreements provide that if following a
"change-in-control" of the Company or Bank, an Executive Officer is terminated
under certain defined circumstances, or is reassigned, within a period of twelve
(12) months following the change in control, such Executive Officer will be
entitled to a lump sum payment equal to six or 12 months of his or her
compensation based upon the most recent aggregate base salary paid to the
Executive Officer in the twelve (12) month period immediately preceding the date
of change in control.
NOTE 9 - INCOME TAXES
- ---------------------
The components of income tax expense are as follows for the years ended December
31:
2005 2004 2003
---------- ---------- ----------
Current:
Federal $ 986,976 $ 631,007 $ 708,089
State 60,164 250 422,520
---------- ---------- ----------
1,047,140 631,257 1,130,609
---------- ---------- ----------
Deferred:
Federal 12,873 131,788 126,996
State 11,903 10,345
Change in valuation allowance 54,400
---------- ---------- ----------
67,273 143,691 137,341
---------- ---------- ----------
Total income tax expense $1,114,413 $ 774,948 $1,267,950
========== ========== ==========
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended
December 31:
2005 2004 2003
---- ---- ----
% 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 (15.8) (18.2) (15.8)
Other items (.3) .2 1.0
State tax, net of federal tax benefit .7 .2 5.6
Change in valuation allowance 1.0
---- ---- ----
Effective tax rates 19.6% 16.2% 24.8%
==== ==== ====
F-20
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2005 2004
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 704,341 $ 662,814
Interest on non-performing loans 8,385 24,611
Accrued deferred compensation 22,429 18,810
Post-retirement benefits 27,880 27,880
Other real estate owned property writedown 22,101 22,101
Capital loss carryforward 89,250 27,200
Mark to market purchase accounting adjustments 323,515 318,244
Preferred stock amortization 3,991 3,991
Minimum pension liability 151,405
Net unrealized holding loss on available-for-sale securities 1,339,834 461,071
----------- -----------
Gross deferred tax assets 2,693,131 1,566,722
Valuation allowance (81,600) (27,200)
----------- -----------
2,611,531 1,539,522
Deferred tax liabilities:
Core deposit intangible asset (633,725) (621,035)
Accelerated depreciation (998,515) (1,030,994)
Discount accretion (189) (5,299)
Mortgage servicing rights (141,067) (169,446)
Prepaid pension (244,011) (81,619)
----------- -----------
Gross deferred tax liabilities (2,017,507) (1,908,393)
----------- -----------
Net deferred tax asset (liability) $ 594,024 $ (368,871)
=========== ===========
Included in the net deferred tax liabilities activity during the year ending
December 31, 2004 is a $704,560 deferred tax liability recorded related to the
Canaan National Bancorp, Inc. merger.
As of December 31, 2005, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The Bank entered into an agreement with a third party in which the third party
is to provide the Bank with account processing services and other miscellaneous
services. Under the agreement, the Bank is obligated to pay monthly processing
fees through August 5, 2010. In the event the Bank chooses to cancel the
agreement prior to the end of the contract term a lump sum termination fee will
have to be paid. The fee shall be calculated as the average monthly billing,
exclusive of pass through costs for the past twelve months, multiplied by the
number of months and any portion of a month remaining in the contract term.
NOTE 11 - FINANCIAL INSTRUMENTS
- -------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
F-21
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant
and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2005 and 2004, the
maximum potential amount of the Bank's obligation was $21,900 and $31,900,
respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Bank may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows as of December
31:
2005 2004
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 10,204,375 $ 10,204,375 $ 11,677,494 $ 11,677,494
Available-for-sale securities 145,608,297 145,608,297 178,654,748 178,654,748
Held-to-maturity securities 146,856 147,202 218,374 219,623
Federal Home Loan Bank stock 5,413,200 5,413,200 5,413,200 5,413,200
Loans held-for-sale 375,000 381,347
Loans, net 215,989,149 215,652,000 201,978,499 201,271,000
Accrued interest receivable 2,362,924 2,362,924 2,256,499 2,256,499
Financial liabilities:
Deposits 287,271,202 287,598,000 298,841,846 299,977,000
FHLB advances 71,015,614 71,362,000 79,213,283 79,167,886
Due to broker 1,083,331 1,083,331
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2005 2004
----------- -----------
Commitments to originate loans $ 3,242,137 $ 7,681,700
Standby letters of credit 21,900 31,900
Unadvanced portions of loans:
Home equity 24,847,998 23,085,518
Commercial lines of credit 8,495,283 9,136,426
Construction 4,521,483 4,913,228
Consumer 6,837,017 7,260,206
----------- -----------
$47,965,818 $52,108,978
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
F-22
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
- ---------------------------------------------------------
Most of the Bank's business activity is with customers located in northwestern
Connecticut and bordering New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
- ----------------------------
Bancorp and its subsidiary the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Their capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2005, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2005, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2005:
Total Capital (to Risk Weighted Assets)
Consolidated $34,058 15.76% $17,801 >8.0% N/A
-
Salisbury Bank and Trust Company 34,492 15.53 17,771 >8.0 $22,213 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 32,432 14.58 8,900 >4.0 N/A
-
Salisbury Bank and Trust Company 31,732 14.29 8,885 >4.0 13,328 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 32,432 8.27 15,687 >4.0 N/A
-
Salisbury Bank and Trust Company 31,732 8.11 15,649 >4.0 19,562 >5.0
- -
F-23
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2004:
Total Capital (to Risk Weighted Assets)
Consolidated $31,579 12.13% $20,825 >8.0% N/A
-
Salisbury Bank and Trust Company 31,008 11.90 20,840 >8.0 $26,050 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 28,940 11.12 10,412 >4.0 N/A
-
Salisbury Bank and Trust Company 28,369 10.89 10,420 >4.0 15,630 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 28,940 7.22 16,042 >4.0 N/A
-
Salisbury Bank and Trust Company 28,369 7.09 16,016 >4.0 20,020 >5.0
- -
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of Bancorp will be entitled to dividends only when,
and if, declared by the Bancorp's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
Under Connecticut law, the Bank may pay dividends only out of net profits. The
Connecticut Banking Commissioner's approval is required for dividend payments
which exceed the current year's net profits and retained net profits from the
preceding two years. As of December 31, 2005, the Bank is restricted from
declaring dividends to Bancorp in an amount greater than $1,682,846.
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
- ---------------------------------------
At the 2001 annual meeting the stockholders of Bancorp voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan
provides non-employee directors of the Company with shares of restricted stock
of Bancorp as a component of their compensation for services as directors. The
maximum number of shares of stock that may be issued pursuant to the plan is
15,000. The first grant date under this plan preceded the 2002 annual meeting of
stockholders. Each director whose term of office begins with or continues after
the date the Plan was approved by the stockholders is issued an "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock of
Bancorp. In 2005, 2004 and 2003, 940, 840 and 840 shares, respectively, were
issued under the Plan and the related compensation expense amounted to $36,566,
$31,836 and $23,688, respectively.
NOTE 15 - MERGER
- ----------------
On September 10, 2004, Canaan National Bancorp, Inc. ("Canaan National") merged
(the "Merger") with and into the Company. Under the terms of the Merger, the
shareholders of Canaan National received a total of $6,020,163 in cash and
257,483 shares of Bancorp common stock in exchange for all shares of Canaan
National Bancorp, Inc. stock. The value of the 257,483 shares issued was
$10,698,418 and was determined based on the September 10, 2004 closing market
price of $41.55 of Bancorp's common stock.
F-24
The Merger was accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded by
the Company at their fair values at the consummation date. During the appraisal
process, an identifiable intangible asset of $1,191,279 was calculated and is
being amortized to expense over a period of 12 years. Goodwill recorded totaled
$7,151,421 and will be analyzed for impairment on at least an annual basis.
Financial statement amounts for Canaan National are included in the Company's
consolidated financial statements beginning on the acquisition date. A summary
of net assets acquired is included in the supplemental disclosures in the cash
flow statement.
The following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisition of Canaan National had occurred at January 1,
2003:
Year Ended December 31,
-------------------------------
2004 2003
----------- -----------
Gross revenues $25,291,875 $26,027,000
Net income $ 4,870,000 $ 4,683,000
Net income per share $ 2.89 $ 2.78
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
- ----------------------------------------
The Company's assets as of December 31, 2005 and 2004 include goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001. In 2004 the
Company recorded $7,151,421 of additional goodwill from the merger with Canaan
National Bancorp, Inc. Goodwill recognized in the 2004 merger is not deductible
for tax purposes.
The Company evaluated its goodwill as of December 31, 2005 and 2004 and found no
impairment.
A summary of acquired amortized intangible assets is as follows:
As of December 31, 2005
------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 293,354 $ 595,252
Core deposit intangible-Canaan National merger 1,191,279 128,816 1,062,463
---------- ---------- ----------
Total $2,079,885 $ 422,170 $1,657,715
========== ========== ==========
As of December 31, 2004
------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 225,000 $ 663,606
Core deposit intangible-Canaan National merger 1,191,279 32,754 1,158,525
---------- ---------- ----------
Total $2,079,885 $ 257,754 $1,822,131
========== ========== ==========
Aggregate amortization expense was $164,416, $101,109 and $68,355 in 2005, 2004
and 2003, respectively. Amortization is being calculated on a straight-line
basis.
F-25
Estimated amortization expense for each of the five years succeeding 2005 is as
follows:
2006 $164,216
2007 164,216
2008 164,216
2009 164,216
2010 164,216
--------
$821,080
========
NOTE 17 - RECLASSIFICATION
- --------------------------
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
- --------------------------------------------------
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
F-26
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
BALANCE SHEETS
--------------
December 31, 2005 and 2004
--------------------------
ASSETS 2005 2004
- ------ ----------- -----------
Checking account in Salisbury Bank and Trust Company $ $ 630
Money market mutual funds 1,119,724 941,890
----------- -----------
Cash and cash equivalents 1,119,724 942,520
Investment in subsidiary 40,741,857 40,129,049
Other assets 1,577 35,484
----------- -----------
Total assets $41,863,158 $41,107,053
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 420,835 $ 403,776
Other liabilities 3,677
----------- -----------
Total liabilities 420,835 407,453
Total stockholders' equity 41,442,323 40,699,600
----------- -----------
Total liabilities and stockholders' equity $41,863,158 $41,107,053
=========== ===========
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
2005 2004 2003
----------- ----------- -----------
Dividend income from subsidiary $ 1,780,000 $ 7,510,000 $ 1,540,000
Taxable interest on securities 24,068 4,375 2,873
----------- ----------- -----------
1,804,068 7,514,375 1,542,873
----------- ----------- -----------
Legal expense 10,500 26,823
Supplies and printing 1,632 2,042 6,873
Other expense 27,559 24,167 63,405
----------- ----------- -----------
29,191 36,709 97,101
----------- ----------- -----------
Income before income tax benefit and equity in undistributed
(distributed) net income of subsidiary 1,774,877 7,477,666 1,445,772
Income tax benefit (1,577) (5,647) (32,000)
----------- ----------- -----------
Income before equity in undistributed (distributed) net
income of subsidiary 1,776,454 7,483,313 1,477,772
Equity in undistributed (distributed) net income of subsidiary 2,784,887 (3,464,371) 2,362,330
----------- ----------- -----------
Net income $ 4,561,341 $ 4,018,942 $ 3,840,102
=========== =========== ===========
F-27
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2005, 2004 and 2003
--------------------------------------------
2005 2004 2003
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 4,561,341 $ 4,018,942 $ 3,840,102
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in (undistributed) distributed net income of subsidiary (2,784,887) 3,464,371 (2,362,330)
Deferred tax expense 1,000
Decrease (increase) in taxes receivable 4,070 (5,647)
Decrease (increase) in due from subsidiary 33,000 (23,547)
Decrease (increase) in other assets 29,837 189,807 (219,644)
Decrease in other liabilities (3,677) (78,323)
Issuance of shares for Director's fees 36,566 31,836 23,688
----------- ----------- -----------
Net cash provided by operating activities 1,843,250 7,653,986 1,259,269
----------- ----------- -----------
Cash flows from investing activities:
Cash paid to Canaan National Bancorp, Inc. shareholders (6,020,163)
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc., net of expenses paid of $309,419 222,868
----------- ----------- -----------
Net cash used in investing activities (5,797,295)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,666,046) (1,415,074) (1,295,533)
----------- ----------- -----------
Net cash used in financing activities (1,666,046) (1,415,074) (1,295,533)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 177,204 441,617 (36,264)
Cash and cash equivalents at beginning of year 942,520 500,903 537,167
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,119,724 $ 942,520 $ 500,903
=========== =========== ===========
Supplemental disclosure:
Liability assumed in merger with Canaan National Bancorp, Inc. $ 82,000
F-28
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
- -----------------------------------------------------
Summarized quarterly financial data for 2005 and 2004 follows:
(In thousands, except earnings per share)
2005 Quarters Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 5,034 $ 5,069 $ 5,272 $ 5,441
Interest expense 1,645 1,744 1,906 2,057
-------- -------- -------- --------
Net interest and dividend income 3,389 3,325 3,366 3,384
Provision (benefit) for loan losses 90 90 90 (60)
Other income 1,389 1,226 1,275 975
Other expense 3,026 2,965 3,068 3,385
-------- -------- -------- --------
Income before income taxes 1,662 1,496 1,483 1,034
Income tax expense 333 188 352 241
-------- -------- -------- --------
Net income $ 1,329 $ 1,308 $ 1,131 $ 793
======== ======== ======== ========
Earnings per common share $ .79 $ .78 $ .67 $ 47
======== ======== ======== ========
(In thousands, except earnings per share)
2004 Quarters Ended
---------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 3,755 $ 3,815 $ 4,105 $ 4,876
Interest expense 1,269 1,273 1,390 1,727
-------- -------- -------- --------
Net interest and dividend income 2,486 2,542 2,715 3,149
Provision for loan losses 60 60 60 70
Other income 1,092 1,122 1,124 1,417
Other expense 2,077 2,260 2,985 3,281
-------- -------- -------- --------
Income before income taxes 1,441 1,344 794 1,215
Income tax expense (benefit) 369 248 (2) 160
-------- -------- -------- --------
Net income $ 1,072 $ 1,096 $ 796 $ 1,055
======== ======== ======== ========
Earnings per common share $ .74 $ .77 $ .54 $ 63
======== ======== ======== ========
F-29
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 independent accountants on accounting and
financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of December 31, 2005, the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. During the year
ended December 31, 2005, there were no changes in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors and Executive Officers of the Registrant is
omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 10, 2006 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, and the information included therein is incorporated
by reference.
Code of Ethics
- --------------
The Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer and Chief Financial Officer. A copy of such Code of Ethics is
available upon request to any person, without charge, by writing to John F.
Foley, Chief Financial Officer, Salisbury Bancorp, Inc., 5 Bissell Street, P. O.
Box 1868, Lakeville, CT 06039.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding Executive Compensation is omitted from this report on Form
10-K and is contained in the Company's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 10, 2006 to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K, and the information
included therein is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information regarding Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters is omitted from this report on Form
10-K and is contained in the Company's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 10, 2006 to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K, and the information
included therein is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding Certain Relationships and Related Transactions is omitted
from this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 10, 2006 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, and the information included therein is incorporated by reference.
31
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding Principal Accountant Fees and Services is omitted from
this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on May 10, 2006 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, and the information included therein is incorporated by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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)
11 Computation of Earnings per Share
21 Subsidiaries of the Company
31.1 Rule 13a-15(e) Certification
31.2 Rule 13a-15(e) Certification
32 Section 1350 Certifications
(1) Exhibit was filed on April 23, 1998 as Exhibit 3.1 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(2) Exhibit was filed on February 10, 2005 as Exhibit 3.2 to Company's Form
8-K/A and is incorporated herein by reference. (3) Exhibit was filed on
April 23, 1998 as Exhibit 10 to Company's Registration Statement on Form
S-4 (No. 333-50857) and is
incorporated herein by reference.
(4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the Company's Annual
Report on Form 10-KSB/A for the fiscal year ended December 31, 2002 and is
incorporated herein by reference.
(5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the Company's Annual
Report on Form 10KSB for the fiscal year ended December 31, 2002 and is
incorporated herein by reference.
32
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 27, 2006.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
-----------------------
John F. Perotti
Chairman and
Chief Executive Officer
By: /s/ John F. Foley
-----------------------
John F. Foley
Chief Financial Officer
and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ John F. Perotti Chairman, March 27, 2006
- ---------------------------- Chief Executive Officer
(John F. Perotti)
and Director
/s/ Louis E. Allyn, II Director March 27, 2006
- ----------------------------
(Louis E. Allyn, II)
/s/ John R. H. Blum Director March 27, 2006
- ----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 27, 2006
- ----------------------------
(Louise F. Brown)
/s/ Richard J. Cantele, Jr. Director March 27, 2006
- ----------------------------
(Richard J. Cantele, Jr.)
/s/ Robert S. Drucker Director March 27, 2006
- ----------------------------
(Robert S. Drucker)
/s/ Nancy F. Humphreys Director March 27, 2006
- ----------------------------
(Nancy F. Humphreys)
/s/ Holly J. Nelson Director March 27, 2006
- ----------------------------
(Holly J. Nelson)
/s/ Michael A. Varet Director March 27, 2006
- ----------------------------
(Michael A. Varet)
33