UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities and Exchange Act of 1934 (Amendment No. __)
Filed by the Registrant [X]
Filed by a party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under ss. 240.14a-12
Salisbury Bancorp, Inc.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
-------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------
SALISBURY BANCORP, INC.
5 BISSELL STREET
P.O. BOX 1868
LAKEVILLE, CONNECTICUT 06039
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MARCH 10, 2009
To the Shareholders of Salisbury Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Salisbury
Bancorp, Inc. (The "Company") will be held at 10:00 a.m., local time, on
Tuesday, March 10, 2009 at The Interlaken Inn, 74 Interlaken Road, Route 112,
Lakeville, Connecticut for the following purposes:
1. To approve an amendment to the Company's Certificate of
Incorporation to authorize a class of 25,000 shares of preferred
stock, par value $0.01 per share; and
2. To transact such other business as may properly be brought before
the Special Meeting or any adjournment(s) thereof.
Only those shareholders of record at the close of business on February 4,
2009 are entitled to notice of, and to vote at, this Special Meeting or any
adjournment thereof.
In order that you may be represented at the Special Meeting, please
complete, date, sign and mail promptly the enclosed proxy for which a
postage-prepaid return envelope is provided.
BY ORDER OF THE BOARD OF DIRECTORS
OF SALISBURY BANCORP, INC.
February 12, 2009 John F. Foley
Lakeville, Connecticut Secretary
SHAREHOLDERS ARE REQUESTED TO MARK, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS
SOON AS POSSIBLE REGARDLESS OF WHETHER THEY PLAN TO ATTEND THE MEETING. ANY
PROXY GIVEN BY A SHAREHOLDER WHO EXECUTES AND RETURNS A PROXY AND WHO ATTENDS
THE SPECIAL MEETING MAY WITHDRAW THE PROXY AT TIME BEFORE IT IS VOTED AND VOTE
HIS OR HER SHARES IN PERSON. A PROXY MAY ALSO BE REVOKED BY GIVING NOTICE TO
JOHN F. FOLEY, SECRETARY OF THE COMPANY, 5 BISSELL STREET, P.O. BOX 1868,
LAKEVILLE, CT 06039, IN WRITING PRIOR TO THE TAKING OF A VOTE.
SALISBURY BANCORP, INC.
5 BISSELL STREET
LAKEVILLE, CT 06039
860-435-9801
-------------------------------------------------------------------
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
MARCH 10, 2009
-------------------------------------------------------------------
INTRODUCTION
The enclosed proxy card (the "Proxy") is solicited by the Board of
Directors (the "Board of Directors") of Salisbury Bancorp, Inc. (the "Company"),
for use at the Special Meeting of Shareholders (the "Special Meeting") to be
held on Tuesday, March 10, 2009, at 10:00 a.m., at The Interlaken Inn, 74
Interlaken Road, Route 112, Lakeville, Connecticut 06039, and at any and all
adjournments thereof. Any Proxy given may be revoked at any time before it is
actually voted on any matter in accordance with the procedures set forth on the
Notice of Special Meeting. This Proxy Statement and the enclosed form of Proxy
are being mailed to shareholders (the "Shareholders") on or about February 12,
2009. The cost of preparing, assembling and mailing this Proxy Statement and the
material enclosed herewith is being borne by the Company. In addition, proxies
may be solicited by Directors, officers and employees of the Company and
Salisbury Bank and Trust Company (the "Bank") personally by telephone or other
means. The Company will reimburse banks, brokers, and other custodians,
nominees, and fiduciaries for their reasonable and actual costs in sending the
proxy materials to the beneficial owners of the Company's common stock (the
"Common Stock"). The Company has engaged Morrow & Co., LLC to assist in the
solicitation of proxies at a fee of $7,500 plus expenses.
If your shares are in a brokerage or fiduciary account, your broker or
bank will send you a voting instruction form instead of a Proxy. Please follow
the instructions on such form to instruct your broker or bank how to vote your
shares. If you wish to attend the Special Meeting and vote your shares in
person, you must follow the instructions on the voting instructions form to
obtain a legal proxy from your broker or bank.
OUTSTANDING STOCK AND VOTING RIGHTS
The Board of Directors has fixed the close of business on February 4, 2009
as the record date (the "Record Date") for the determination of Shareholders
entitled to notice of and to vote at the Special Meeting. As of the Record Date,
1,685,861 shares of the Company's Common Stock (par value $.10 per share) were
outstanding and entitled to vote and held of record by approximately 1,500
shareholders of Record. Each share of Common Stock is entitled to one vote on
all matters to be presented at the Special Meeting. Votes withheld, abstentions
and broker non-votes are counted only for purposes of determining whether a
quorum is present at the Special Meeting but will the effect of a vote against
Proposal 1.
A Proxy card is enclosed for your use. YOU ARE SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS TO COMPLETE, DATE, SIGN AND RETURN THE PROXY CARD IN THE
ACCOMPANYING ENVELOPE, which is postage-prepaid if mailed in the United States.
If the enclosed form of Proxy is properly executed and received by the
Company in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed, but unmarked proxies will be voted "FOR" Proposal 1 discussed in this
Proxy Statement.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Proxy Statement 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 Salisbury Bank and Trust Company (the "Bank") do
business; and
(b) expectations for revenues and earnings for the Company and Bank.
Such forward-looking statements are based on assumptions rather than
historical or current facts and, therefore, are inherently uncertain and subject
to risk. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Act of 1995.
The Company notes that a variety of factors could cause the actual results
or experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking
industry generally and in the specific markets in which the Bank
operates;
(b) changes in the legislative and regulatory environment that
negatively impacts 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.
2
PROPOSAL 1
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
Description of the Proposal
The Board of Directors has adopted an amendment to the Company's
Certificate of Incorporation to authorize a class of 25,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock"). The full text of the
proposed amendment to the Company's Certificate of Incorporation is set forth in
Exhibit A to this proxy statement. The Company's Certificate of Incorporation
currently authorizes only the issuance of Common Stock. The proposed amendment
will vest in the Board of Directors the authority to determine by resolution the
terms of one or more series of Preferred Stock, including the preferences,
rights and limitations of each series. Provisions in a company's certificate of
incorporation authorizing preferred stock in this manner are often referred to
as "blank check" provisions, as they give a board of directors the flexibility,
at any time or from time to time, without further shareholder approval (except
as may be required by applicable laws, regulatory authorities or the rules of
any stock exchange on which a company's securities are then listed), to create
one or more series of preferred stock and to determine by resolution the terms
of each such series. The Board of Directors believes that authorization of the
Preferred Stock in the manner proposed will provide the Company with greater
flexibility in meeting future capital requirements by creating series of
Preferred Stock customized to meet the needs of particular transactions and then
prevailing market conditions. Series of Preferred Stock would also be available
for issuance from time to time for any other proper corporate purposes,
including in connection with the redemption of the Preferred Stock described
below, strategic alliances, joint ventures, or acquisitions.
The Board of Directors does not have any plans calling for the issuance of
shares of Preferred Stock at the present time, other than the possible issuance
of Preferred Stock to the U.S. Department of the Treasury (the "Treasury") in
connection with the Treasury's recently announced Troubled Asset Relief Program
("TARP") Capital Purchase Program described below.
Terms of the Capital Purchase Program
On October 14, 2008, the Treasury announced the TARP Capital Purchase
Program. This program encourages U.S. financial institutions to build capital to
increase the flow of financing to U.S. businesses and consumers and to support
the U.S. economy. Under the program, the Treasury will purchase senior preferred
shares from banks, bank holding companies, and other financial institutions. The
senior preferred shares will qualify as Tier 1 capital for regulatory purposes
and will rank senior to common stock and at an equal level in the capital
structure with any existing preferred shares other than preferred shares which
by their terms rank junior to any other existing preferred shares. The senior
preferred shares purchased by the Treasury will pay a cumulative dividend rate
of 5 percent per annum for the first five years they are outstanding and
thereafter at a rate of 9 percent per annum. The senior preferred shares will be
non-voting, other than voting rights on matters that could adversely affect the
shares. The shares will be callable at one hundred percent of their issue price
plus any accrued and unpaid dividends after three years.
3
Prior to the end of three years, the senior preferred shares may be redeemed
with the proceeds from a qualifying equity offering of any Tier 1 perpetual
preferred or common stock.
If dividends on the senior preferred shares are not paid in full for six
dividend periods, whether or not consecutive, the senior preferred shares will
have the right to elect two directors. The right to elect directors will end
when full dividends have been paid for four consecutive dividend periods.
The Treasury will receive warrants to purchase a number of shares of
common stock having an aggregate market price equal to 15% of the senior
preferred shares on the date of investment, subject to reduction as set forth
below. The initial exercise price for the warrants, and the market price for
determining the number of shares of common stock subject to the warrants, will
be the market price for the common stock on the date of the preliminary approval
of the application (calculated on a 20-trading day trailing average), subject to
customary anti-dilution adjustments. The warrants will have a term of ten years.
The warrants will be immediately exercisable, in whole or in part. The warrants
will not be subject to any contractual restrictions on transfer, provided that
the Treasury may only transfer or exercise an aggregate of one-half of the
warrants prior to the earlier of (i) the date on which the issuer has received
aggregate gross proceeds of not less than 100% of the issue price of the senior
preferred shares from one or more Qualified Equity Offerings (the sale by the
issuer after the date of the sale of the senior preferred shares of Tier 1
qualifying perpetual preferred stock or common stock for cash) and (ii) December
31, 2009. In the event that the issuer receives aggregate gross proceeds of not
less than 100% of the issue price of the senior preferred shares from one or
more Qualified Equity Offerings on or prior to December 31, 2009, the number of
shares of common stock underlying the warrants then held by the Treasury will be
reduced by a number of shares equal to the product of (i) the number of shares
originally underlying the warrants (taking into account all adjustments) and
(ii) 0.5.
An issuer participating in the Capital Purchase Program will be required
to file a shelf registration statement with the Securities and Exchange
Commission for the purpose of registering the senior preferred shares, the
warrants and the common stock underlying the warrants as promptly as practicable
after the date of the sale of the senior preferred shares and will take all
action required to cause the shelf registration statement to be declared
effective as soon as possible and maintain the effectiveness of the registration
statement. The issuer will be required to apply for the listing on the national
exchange on which the issuer's common stock is traded of the common stock
underlying the warrants and will take such other steps as may be reasonably
requested to facilitate the transfer of the warrants or the common stock.
The Treasury will agree not to exercise voting power with respect to any
shares of common stock of the issuer issued to it upon exercise of the warrants.
The Treasury's consent also will be required for any increase in common
stock dividends per share or certain repurchases of common stock until the third
anniversary of the date of the investment unless prior to the third anniversary
that the senior preferred shares are issued are redeemed in whole or the
Treasury has transferred all of the senior preferred shares to third parties.
4
Banks and bank holding companies participating in the Capital Purchase
Program also must modify or terminate all benefit plans, arrangements and
agreements (including golden parachute agreements) to the extent necessary to be
in compliance with the executive compensation and corporate governance
requirements of Section 111 of the Emergency Economic Stabilization Act of 2008
and any guidance or regulations issued by the Secretary of the Treasury for the
period during which the Treasury holds equity issued under the Capital Purchase
Program. These standards include: (i) ensuring that incentive compensation for
specified senior executive officers does not encourage unnecessary and excessive
risks that threaten the value of the Company; (ii) requiring a clawback of any
bonus or incentive compensation paid to a specified senior executive officer
based on statements of earnings, gains or other criteria that are later proven
to be materially inaccurate; (iii) prohibiting the Company from making any
golden parachute payment to a specified senior executive officer based on
applicable Internal Revenue Code provisions; and (iv) agreeing not to deduct for
tax purposes executive compensation in excess of $500,000 for each specified
senior officer executive.
The Company has reviewed its executive compensation arrangements and does
not anticipate that it will be necessary to modify any existing employee plans
or contracts to comply with the applicable limits on executive compensation
described above.
See Exhibit B for the Summary of Senior Preferred Terms and Summary of
Warrant Terms as published by the Treasury.
Company Participation in the Capital Purchase Program
The Company received preliminary approval on January 7, 2009 from the
Treasury to issue and sell up to 8,816 shares of the Preferred Stock and a
warrant to purchase approximately 57,671 shares of Common Stock (the "Warrant")
at an estimated exercise price of $22.93 per share for aggregate consideration
of $8,816,000. Each share of Preferred Stock issued to the Treasury will have a
liquidation preference of $1,000. If the Company sells the maximum amount of
Preferred Stock authorized under the Capital Purchase Program, the Company
estimates that the ownership percentage of the current shareholders would be
diluted by approximately 3.3% if the Warrant were fully exercised.
At September 30, 2008, the Company had capital ratios in excess of those
required to be considered well-capitalized under banking regulations. The Board
of Directors believes it is prudent for the Company to apply for capital
available under the Capital Purchase Program because (i) the Company believes
that the cost of capital under the Capital Purchase Program may be significantly
lower than the cost of capital otherwise available to the Company at this time,
and (ii) despite being well-capitalized, additional capital obtained under the
capital Purchase Program would provide the Company additional flexibility to
meet future capital needs that may arise.
5
The Board of Directors believes that the flexibility to issue shares of
Preferred Stock other than under the Capital Purchase Program can enhance the
Board of Director's arm's-length bargaining capability on behalf of the
Company's shareholders in a takeover situation. However, under some
circumstances, the ability to designate the rights of, and issue, Preferred
Stock could be used by the Board of Directors to make a change in control of the
Company more difficult.
The rights of the holders of the Company's Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future, including that issued under the Capital
Purchase Program. To the extent that dividends will be payable on any issued
shares of Preferred Stock, the result would be to reduce the amount otherwise
available for payment of dividends on outstanding shares of the Company's Common
Stock and there might be restrictions placed on the Company's ability to declare
dividends on the Common Stock or to repurchase shares of Common Stock. The
issuance of any Preferred Stock having voting rights would dilute the voting
power of the holders of Common Stock. To the extent that any Preferred Stock is
made convertible into shares of Common Stock, the effect, upon such conversion,
would also be to dilute the voting power and ownership percentage of the holders
of Common Stock. In addition, holders of Preferred Stock would normally receive
superior rights in the event of any dissolution, liquidation, or winding up of
the Company, thereby diminishing the rights of the holders of Common Stock to
distribution of the Company's assets. Shares of Preferred Stock of any series
would not entitle the holder to any pre-emptive right to purchase or subscribe
for any shares of that or any other class.
The Company has not made a final determination as to whether it will
participate in the Capital Purchase Program. If it does participate, it intends
to participate in the amount of $8,816,000, the maximum amount for which it has
received preliminary approval. Assuming that the amendment to the Certificate of
Incorporation is approved by shareholders, the Board will make a final decision
near to the time of the closing of the sale to the Treasury, which is currently
scheduled to occur on March 13, 2009. Among the factors the Board will consider
are the then-current economic conditions nationally, regionally and locally, the
performance of the Bank at that time, especially of the loan portfolio, the
capital and liquidity positions of the Company and the Bank at that time, and
any restrictions on the use of the proceeds or corporate governance matters
imposed by Congress, the Treasury or bank regulatory authorities between the
date of this Proxy statement and the date that the Board makes the final
determination or are anticipated to be imposed in the future. There can be no
assurance that the Company will participate in the Capital Purchase Program. If
the amendment to the Certificate of Incorporation is approved by shareholders
and the Company does not participate in the Capital Purchase Program, the
Preferred Stock authorized will remain available for future issuance as
described above.
6
Use of Proceeds
Subject to limitations on use of proceeds that may be specified by the
Treasury, the Company intends to invest all of the proceeds from the issuance of
the Preferred Stock to the Treasury as equity in the Bank, its wholly-owned
banking subsidiary. Initially, the Bank intends to use the funds to reduce
borrowings. In the longer-term, the Bank has identified the following priorities
for the use of the funds: (i) increase, where possible and prudent, additional
consumer and commercial lending to stimulate economic activity in the Bank's
local and regional markets; (ii) strengthen the Bank in the face of an uncertain
and potentially prolonged economic downturn, which could have severe negative
effects upon the national and regional economy and which could provoke credit or
other than temporary impairment losses at the Bank at levels outside historical
norms and (iii) possibly facilitate appropriate acquisitions of bank branches,
or entire banks, whose capacity to flourish or even survive in the current
economy has become suspect.
Pro Forma Effect on the Company's Financial Statements
The following discusses the pro forma effect of participation in the
Capital Purchase Program on the Company's financial statements. As indicated
above, the Company was notified on January 7, 2009 that the Treasury had
preliminarily approved the Company's application to participate in the Capital
Purchase Program in the amount of $8,816,000. This discussion assumes that the
Company receives $8,816,000, the maximum amount for which it has received
preliminary approval, which is the intention of the Company if it participates
in the Capital Purchase Program.
The pro forma effect of the receipt of $8,816,000 under the Capital
Purchase Program as of September 30, 2008 is as follows:
----------------------- ----------------------- ---------------------
Pro Forma Minimum For
As Reported as of Regulatory
September 30, 2008 September 30, 2008 "Well-Capitalized"
(dollars in thousands) (dollars in thousands) Designation (1)
Capital Purchase Program Investment 0 $ 8,816
Total Tier 1 Capital $35,358 $44,174
Total Tier 2 Capital $ 3,140 $ 3,140
Total Capital (Tier 1 & 2) $38,498 $47,314
========================================== ======================= ======================= =====================
Leverage Ratio 7.54% 9.43% 5.00%
Tier 1 Ratio 12.08% 15.09% 6.00%
Total Capital Ratio 13.15% 16.16% 10.00%
----------------------- ----------------------- ---------------------
(1) Minimum regulatory percentages for banks. All other numbers and
percentages are calculated based on the Company's financial statements.
7
The following unaudited pro forma financial information of the Company for
the fiscal year ended December 31, 2007 and the nine-month period ended
September 30, 2008 show the effect of the receipt of $8,816,000 from the
Treasury pursuant to the Capital Purchase Program upon the issuance of Preferred
Stock and the Warrant. The pro forma financial data is not necessarily
indicative of the financial results that would have resulted had the proceeds of
the Capital Purchase Program been received for the above periods and is not
necessarily indicative of the results that the Company will achieve in the
future. The Company can provide no assurance that the pro forma results will be
achieved.
The Company has included the following unaudited pro forma financial
information solely for the purpose of providing shareholders with information
that may be useful for purposes of considering and evaluating the proposal to
amend the Company's Certificate of Incorporation. The Company's future results
are subject to prevailing economic, industry specific conditions, financial,
business and other known and unknown risks, and uncertainties, certain of which
are beyond the Company's control. These factors include, without limitation,
those described in this Proxy Statement under "Cautionary Statement Concerning
Forward-Looking Statements" and those described in the Company's Annual Report
on Form 10-K for the year ended December 31, 2007 and Quarterly Report on Form
10-Q for the quarter ended September 30, 2008, which are specifically
incorporated by reference in this Proxy Statement.
8
Pro Forma Effect - Balance Sheet
Pro Forma Condensed Consolidated Balance Sheet
September 30, 2008
(dollars in thousands)
(Unaudited)
As of
09/30/08 Pro Forma Adjustments Pro Forma
--------- --------------------- ---------------------
Balance Sheet Data:
ASSETS
Cash and due from banks $ 12,741 $ 0 $ 12,741
Securities available for sale, at fair value 144,482 0 144,482
Loans, net of allowance for loan losses 293,740 0 293,740
Other Assets 34,687 0 34,687
--------- --------- ---------
TOTAL ASSETS $ 485,650 $ 0 $ 485,650
========= ========= =========
LIABILITIES
Total deposits $ 344,608 0 $ 344,608
Borrowings (1) 98,861 8,816 90,045
Other Liabilities 3,461 0 3,461
--------- --------- ---------
TOTAL LIABILITIES 446,930 8,816 438,114
--------- --------- ---------
SHAREHOLDERS' EQUITY
Preferred Stock (1) (2) $ 0 $ 8,816 $ 8,816
Capital Stock 169 0 169
Warrants (2) (4) 0 112 112
Discount on Preferred Stock (2) (3) 0 (112) ) (112
Surplus 13,158 0 13,158
Retained Earnings 34,037 0 34,037
Accumulated other comprehensive (loss)
income (8,644) 0 ) (8,644
--------- --------- ---------
TOTAL SHAREHOLDERS'
EQUITY 38,720 8,816 47,536
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 485,650 $ 8,816 $ 485,650
========= ========= =========
(1) Pro forma amounts are based on the investment by the Treasury pursuant to
the Capital Purchase Program of the maximum amount of $8,816,000 for which the
Company has received preliminary approval. The Company expects ultimately to
utilize the proceeds to (i) increase, where prudent, consumer and commercial
lending; (ii) strengthen the Bank and (iii) when appropriate, facilitate the
acquisition of bank branches or entire banks. Prior to such deployment, the
proceeds may be used to reduce borrowings. Expenses related to the issuance of
the Preferred Stock and the Warrant to the Treasury are expected to be
immaterial and have not been deducted from the sale proceeds.
9
(2) The proceeds from the sale of the securities to the Treasury would be
allocated between the Preferred Stock and the Warrant based on their relative
fair values on the issue date. The fair value of the Warrant would be determined
using the Black-Scholes model, which includes assumptions regarding the price of
the Common Stock (assumed to be $22.93), dividend yield (assumed to be 4.88%)
and stock price volatility (assumed to be 15.1%), as well as assumptions
regarding the risk-free interest rate (assumed to be 2.16%). The fair value of
the Preferred Stock issued to the Treasury would be determined based on
assumptions regarding the discount rate (market rate) on the Preferred Stock,
which is currently estimated at 12%.
(3) The discount on the Preferred Stock issued to the Treasury would be
determined based on the value that is allocated to the Warrant upon issuance and
would be accreted back to the value of the Preferred Stock over a five-year
period, which is the expected life of the Preferred Stock upon issuance, using
the constant effective yield method (approximately 5.30%).
(4) Assuming participation in the Capital Purchase Program in the maximum amount
of $8,816,000 for which the Company has received preliminary approval, based on
an exercise price of $22.93 per share for the Warrant, the Company estimates
that the Warrant would give the Treasury the right to purchase approximately
57,671 shares of Common Stock.
Pro Forma Effect - Income Statements
Pro Forma Condensed Consolidated Statements of Income
Pro Forma Impact of Maximum Estimated Proceeds
$8,816,000 Preferred and Warrants for 57,671 shares
For the Year Ended December 31, 2007
(in thousands, except per share data)
Pro Forma
Historical 12 Months
12 Months Ended
Ended Adjustments 12/31/07
12/31/07 (unaudited) (unaudited)
------------ ------------ ------------
Net Interest Income $ 13,720 $ 426(1) $ 14,146
Loan Loss Provision 0 0
------------ ------------ ------------
Net Interest Income after Provision 13,720 426 14,146
Noninterest Income 4,465 4,465
Noninterest Expense 13,514 13,514
------------ ------------ ------------
Income/(Loss) Before Taxes 4,671 426 5,097
Provision for Income Taxes 870 94(2) 964
------------ ------------ ------------
Income before Preferred Dividends 3,801 332 4,133
Less: Preferred Dividends and Preferred Accretion 0 461(3) 461
------------ ------------ ------------
Income available to common shareholders $ 3,801 $ (129) $ 3,672
============ ============ ============
Basic Earnings Per Share $ 2.26 $ 0 $ 2.18
============ ============ ============
Diluted Earnings Per Share $ 2.26 $ 0 $ 2.16
============ ============ ============
Weighted Average Shares Outstanding:
Basic 1,684,699 0 1,684,699
Diluted 1,684,699 19,484(4) 1,704,183
(1) Assumes maximum Capital Purchase Program proceeds of $8,816,000 are used to
decrease borrowings carrying an assumed average annualized yield of
approximately 4.83%. The actual impact to net interest income could be different
as the Company expects ultimately to utilize a portion of the proceeds to (i)
increase, where prudent, consumer and commercial lending; (ii) strengthen the
Bank and (iii) when appropriate facilitate the acquisition of bank branches or
entire banks. Expenses related to the issuance of the Preferred Stock and the
Warrant to the
10
Treasury are expected to be immaterial and have not been deducted from the sale
proceeds.
(2) Additional income tax expense is attributable to additional net interest
income as described in Note (1).
(3) Consists of dividends on the Preferred Stock at a 5% annual rate in the
amount of $440,800 as well as accretion on discount on the Preferred Stock upon
issuance in the amount of $20,100. The discount is determined based on the value
that is allocated to the Warrant upon issuance. The discount is accreted back to
par value on a constant effective yield method (approximately 5.30%) over a
five-year term, which is the expected life of the Preferred Stock upon issuance.
The estimated accretion is based on a number of assumptions, which are subject
to change. These assumptions include the discount (market rate at issuance) rate
on the Preferred Stock and assumptions underlying the value of the Warrant. The
estimated proceeds are allocated based on the relative fair value of the Warrant
as compared to the fair value of the Preferred Stock. The fair value of the
Warrant is determined under a Black-Scholes model. The model includes
assumptions regarding the price of the Common Stock (assumed to be $22.93),
dividend yield (assumed to be 4.88%), stock price volatility (assumed to be
15.1%), as well as assumptions regarding the risk-free interest rate (assumed to
be 2.16%). The lower the value of the Warrant, the lower is the negative impact
on net income and earnings per share available to common shareholders. The fair
value of the Preferred Stock is determined based on assumptions regarding the
discount rate (market rate) on the Preferred Stock, which is currently estimated
at 12%. The lower the discount rate, the less the negative impact on net income
and earnings per share available to common shareholders.
(4) Assuming participation in the Capital Purchase Program in the maximum amount
of $8,816,000 for which the Company has received preliminary approval, based on
an exercise price of $22.93 per share for the Warrant, the Company estimates
that the Warrant would give the Treasury the right to purchase approximately
57,671 shares of Common Stock. The pro forma adjustment shows the increase in
diluted shares outstanding assuming that the Warrants had been issued on January
1, 2007 at the strike price of $22.93 and remained outstanding for the entire
period presented. The treasury stock method was utilized to determine dilution
of the Warrant for the period presented.
Pro Forma Condensed Consolidated Statements of Income
Pro Forma Impact of Maximum Estimated Proceeds
$8,816,000 Preferred and Warrants for 57,671 shares
For the Nine Months Ended September 30, 2008
(in thousands, except per share data)
(unaudited)
Historical Pro Forma
9 Months 9 Months
Ended Adjustments Ended
09/30/08 09/30/08
------------- ------------- -------------
$ 11,666 $ 308(1) $ 11,974
Net Interest Income
Loan Loss Provision 690 690
------------- ------------- -------------
Net Interest Income after Provision 10,976 308 11,284
Noninterest Income 1,241 1,241
Noninterest Expense 11,183 11,183
------------- ------------- -------------
Income/(Loss) Before Taxes 1,034 308 1,342
Provision for Income Taxes 882 68(2) 950
------------- ------------- -------------
Income before Preferred Dividends 152 240 392
Less: Preferred Dividends and Preferred Accretion 0 346(3) 346
------------- ------------- -------------
Income available to common shareholders $ 152 ($106) $ 46
============= ============= =============
Basic Earnings Per Share $ 0.09 $ 0 $ 0.03
============= ============= =============
Diluted Earnings Per Share $ 0.09 $ 0 $ 0.03
============= ============= =============
Weighted Average Shares Outstanding:
Basic 1,685,444 1,685,444
Diluted 1,685,444 14,708(4) 1,700,152
11
(1) Assumes maximum Capital Purchase Program proceeds of $8,816,000 are used to
decrease borrowings carrying an assumed average annualized yield of
approximately 4.66%. The actual impact to net interest income could be different
as the Company expects ultimately to utilize a portion of the proceeds to (i)
increase, where prudent, consumer and commercial lending; (ii) strengthen the
Bank and (iii) when appropriate facilitate the acquisition of bank branches or
entire banks. Expenses related to the issuance of the Preferred Stock and the
Warrant to the Treasury are expected to be immaterial and have not been deducted
from the sale proceeds.
(2) Additional income tax expense is attributable to additional net interest
income as described in Note (1).
(3) Consists of dividends on the Preferred Stock at a 5% annual rate in the
amount of $330,600 as well as accretion on discount on the Preferred Stock upon
issuance in the amount of $15,800. The discount is determined based on the value
that is allocated to the Warrant upon issuance. The discount is accreted back to
par value on a constant effective yield method (approximately 5.30%) over a
five-year term, which is the expected life of the Preferred Stock upon issuance.
The estimated accretion is based on a number of assumptions, which are subject
to change. These assumptions include the discount (market rate at issuance) rate
on the Preferred Stock and assumptions underlying the value of the Warrant. The
estimated proceeds are allocated based on the relative fair value of the Warrant
as compared to the fair value of the Preferred Stock. The fair value of the
Warrant is determined under a Black-Scholes model. The model includes
assumptions regarding the price of the Common Stock (assumed to be $22.93),
dividend yield (assumed to be 4.88%), stock price volatility (assumed to be
15.1%), as well as assumptions regarding the risk-free interest rate (assumed to
be 2.16%). The lower the value of the Warrant, the lower is the negative impact
on net income and earnings per share available to common shareholders. The fair
value of the Preferred Stock is determined based on assumptions regarding the
discount rate (market rate) on the Preferred Stock, which is currently estimated
at 12%. The lower the discount rate, the less the negative impact on net income
and earnings per share available to common shareholders.
(4) Assuming participation in the Capital Purchase Program in the maximum amount
of $8,816,000 for which the Company has received preliminary approval, based on
an exercise price of $22.93 per share for the Warrant, the Company estimates
that the Warrant would give the Treasury the right to purchase approximately
57,671 shares of Common Stock. The pro forma adjustment shows the increase in
diluted shares outstanding assuming that the Warrants had been issued on January
1, 2008 at the strike price of $22.93 and remained outstanding for the entire
period presented. The treasury stock method was utilized to determine dilution
of the Warrant for the period presented.
COMPANY FINANCIAL STATEMENTS
The following financial statements and other information of the Company as
reported in its Annual Report on Form 10-K for the fiscal year ended December
31, 2007 as filed with the SEC (the "Form 10-K") and the Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2008 as filed with the
SEC (the "Form 10-Q") are provided with this Proxy Statement and are a part
hereof:
o The audited consolidated financial statements and notes thereto as
of and for the fiscal year ended December 31, 2007, the opinion of
the independent registered public accounting firm relating thereto
and Management's Discussion and Analysis of Financial Condition and
Results of Operations; and
o The unaudited condensed consolidated financial statements and notes
thereto as of and for the three and nine months ended September 30,
2008 and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
12
Since January 1, 2006, the Company and the Bank have had no changes in or
disagreements with independent accountants on accounting and financial
disclosure matters.
The Form 10-K and the Form 10-Q and the Company's other filings with the
SEC are available on the Company's website at
www.salisburybank.com/shareholder_relations.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We do not anticipate that representatives from Shatswell, MacLeod &
Company, P.C. will be present and available to respond to questions or make a
statement at the Special Meeting.
Approval Requirement and Board of Directors Recommendation
Approval of the proposed amendment to the Company's Certificate of
Incorporation requires the approval of at least a majority of the votes entitled
to be cast at the meeting.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE PROPOSAL TO AMEND
THE COMPANY'S CERTIFICATE OF INCORPORATION.
13
OTHER BUSINESS
The Company is not aware of any business to be acted upon at the Special
Meeting other than that which is discussed in this Proxy Statement. In the event
that any other business requiring a vote of the Shareholders is properly
presented at the Special Meeting, the holders of the Proxies will vote your
shares in accordance with their best judgment and the recommendations of a
majority of the Board of Directors.
You are encouraged to exercise your right to vote by marking the
appropriate boxes and dating and signing the enclosed Proxy card. The Proxy card
may be returned in the enclosed envelope, postage-prepaid if mailed in the
United States. In the event that you are later able to attend the Special
Meeting, you may revoke your Proxy and vote your shares in person. A prompt
response will be helpful and your cooperation is appreciated.
SECURITY OWNERSHIP OF MANAGEMENT AND SHAREHOLDERS
The following table sets forth certain information as of December 31, 2008
regarding the number of shares of Common Stock beneficially owned by each
Director and Executive Officer of the Company and by all Directors and Executive
Officers of the Company as a group. Management is not aware of any person
(including any "group" as defined in Rule 13(d)(3) of the Securities and
Exchange Commission (the "SEC")) who owns beneficially more than 5% of the
Common Stock as of December 31, 2008.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership (1) Percent of Class (2)
------------------------ ------------------------ --------------------
Louis E. Allyn, II 1,481 .09%
John R. H. Blum 16,365 (3) .97%
Louise F. Brown 2,928 .17%
Richard J. Cantele, Jr. 3,006 (4) .18%
Robert S. Drucker 8,468 (5) .50%
John F. Foley 7,443 (6) .44%
Nancy F. Humphreys 1,840 (7) .11%
Holly J. Nelson 1,888 (8) .11%
John F. Perotti 11,454 (9) .68%
Michael A. Varet 66,486 (10) 3.94%
------------ --------
_________________________ 121,359 7.20%
(All Directors and Executive
Officers of the Company as a
group of ten (10) persons)
_______________________
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director's spouse and/or children or grandchildren, and in
which all beneficial interest has been disclaimed by the Director or has
the right to acquire such security within sixty (60) days of December 31,
2008.
14
(2) Percentages are based upon the 1,685,861 shares of the Company's Common
Stock outstanding and entitled to vote on December 31, 2008. The
definition of beneficial owner includes any person who, directly or
indirectly, through any contract, agreement or understanding, relationship
or otherwise, has or shares voting power or investment power with respect
to such security.
(3) Includes 2,100 shares owned by John R. H. Blum's spouse.
(4) Includes 1,320 shares owned jointly by Richard J. Cantele, Jr. and his
spouse and 6 shares owned by Richard J. Cantele, Jr. as custodian for his
daughter.
(5) Includes 1,500 shares owned by Robert S. Drucker's spouse.
(6) Includes 3,322 shares owned jointly by John F. Foley and his spouse, 1,543
owned by his spouse and 100 shares owned by John F. Foley as custodian for
his children.
(7) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her spouse.
(8) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(9) Includes 9,514 shares owned jointly by John F. Perotti and his spouse,
1,100 shares owned by his spouse and 564 shares owned by his son, of which
shares owned by his spouse and son, John F. Perotti has disclaimed
beneficial ownership.
(10) Includes 18,540 shares which are owned by his spouse and 18,546 shares
which are owned by his children, of which shares Michael A. Varet has
disclaimed beneficial ownership.
IMPORTANT NOTICE REGARDING THE AVAILABILTY OF PROXY MATERIALS FOR THE SPECIAL
SHAREHOLDER MEETING TO BE HELD ON MARCH 10, 2009
This Notice and Proxy Statement are available at www.cfpproxy.com/4607sm
Directions to the Interlaken Inn, 74 Interlaken Road, Route 112,
Lakeville, Connecticut, may be obtained by writing to John F. Foley, Secretary,
Salisbury Bancorp, Inc. 5 Bissell Street, PO Box 1868, Lakeville, CT 06039-1868,
by calling 1-860-435-9801 or toll-free at 1-800-222-9801.
15
DEADLINE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any proposal that a Company shareholder wishes to have included in the
Company's Proxy Statement and form of Proxy relating to the Company's 2009
Annual Meeting of Shareholders under Rule 14a-8 of the SEC must have been
received by the Company's Secretary by December 8, 2008.
In addition, under the Company's Bylaws, shareholders who wish to nominate
a director or bring other business before an annual meeting must comply with the
following:
o You must be a shareholder of record and must have given notice in writing
to the Secretary of the Company (a) not less than twenty (20) days nor
more than one hundred thirty (130) days prior to the meeting with respect
to matters other than the nomination of directors and (b) not less than
thirty (30) days nor more than fifty (50) days prior to the meeting with
respect to the nomination of directors.
o Your notice must contain specific information required in the Company's
Bylaws.
Nominations and proposals should be addressed to John F. Foley, Secretary,
Salisbury Bancorp, Inc., 5 Bissell Street, PO Box 1868, Lakeville, CT
06039-1868.
By order of the Board of Directors
John F. Foley
Secretary
Lakeville, Connecticut
February 12, 2009
16
Exhibit A
-----------
PROPOSED AMENDMENT TO
CERTIFICATE OF INCORPORATION
OF
SALISBURY BANCORP, INC.
Article THIRD shall be amended and restated in its entirety as follows:
THIRD: Capital Stock. The amount of the capital stock of the Corporation
hereby authorized is three million (3,000,000) shares of Common Stock, par
value $0.10 per share and twenty-five thousand (25,000) shares of
Preferred Stock, par value $0.01 per share.
A. Common Stock.
Each holder of shares of Common Stock shall be entitled to one vote
for each share held by such holder. There shall be no cumulative
voting rights in the election of directors. Each share of Common
Stock shall have the same relative rights as and be identical in all
respects with all other shares of Common Stock. The voting, dividend
and liquidation rights of the Common stock are subject to and
qualified by the rights of the holders of the Preferred Stock of any
series as may be determined by the Board of Directors before the
issuance of any series of Preferred Stock.
B. Preferred Stock.
(1) General. Preferred Stock may be issued from time to time in one
or more series, each to have such terms as are set forth herein and
in the resolutions of the Board of Directors authorizing the issue
of such series. Any shares of Preferred Stock which may be redeemed,
purchased or otherwise acquired by the Bank may be reissued.
Different series of Preferred Stock shall not be construed to
constitute different classes of shares for the purposes of voting by
classes unless expressly so provided.
(2) Authority of Board of Directors. The Board of Directors may from
time to time issue the Preferred Stock in one or more series. The
Board of Directors may, in connection with the creation of any such
series, determine the preferences, limitations and relative rights
of each such series before the issuance of such series. Without
limiting the foregoing, the Board of Directors may fix the voting
powers, dividend rights, conversion rights, redemption privileges
and liquidation preferences, all as the Board of Directors deems
appropriate, to the full extent now or hereafter permitted by the
Connecticut Business Corporation Act.
A-1
The resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally
or be junior to the Preferred Stock of any other series to the
extent permitted by law. Except as otherwise provided in this
Certificate of Incorporation, no vote of the holders of the
Preferred Stock or Common Stock shall be a prerequisite to the
designation or issuance of shares of any series of the Preferred
Stock authorized by and complying with the conditions of this
Certificate of Incorporation and the Connecticut Business
Corporation Act.
C. No shareholder of the Corporation shall by reason of his holding
shares of capital stock of the Corporation have any preemptive or
preferential rights to purchase or subscribe to any share of any
class of stock of the Corporation, now or hereafter to be
authorized, or to any notes, debentures, bonds or other securities
(whether or not convertible into or carrying options or warrants to
purchase shares of any class of capital stock) now or hereafter to
be authorized, excepting only such preemptive or preferential
rights, warrants or options as the Board of Directors in its
discretion may grant from time to time; and the Board of Directors
may issue shares of any class of stock of the Corporation, or any
notes, debentures, bonds or other securities (whether or not
convertible into or carrying rights, options or warrants to purchase
shares of any class of capital stock) without offering any such
shares to the existing Shareholders of the Corporation.
A-2
Exhibit B
----------
TARP Capital Purchase Program
Senior Preferred Stock and Warrants
Summary of Senior Preferred Terms
Issuer: Qualifying Financial Institution ("QFI") means (i) any U.S. bank or U.S.
savings association not controlled by a Bank Holding Company ("BHC")or Savings
and Loan Holding Company ("SLHC"); (ii) any U.S. BHC, or any U.S. SLHC which
engages only in activities permitted for financial holdings companies under
Section 4(k) of the Bank Holding Company Act, and any U.S. bank or U.S. savings
association controlled by such a qualifying U.S. BHC or U.S. SLHC; and (iii) any
U.S. BHC or U.S. SLHC whose U.S. depository institution subsidiaries are the
subject of an application under Section 4(c)(8) of the Bank Holding Company Act;
except that QFI shall not mean any BHC, SLHC, bank or savings association that
is controlled by a foreign bank or company. For purposes of this program, "U.S.
bank", "U.S. savings association", "U.S. BHC" and "U.S. SLHC" means a bank,
savings association, BHC or SLHC organized under the laws of the United States
or any State of the United States, the District of Columbia, any territory or
possession of the United States, Puerto Rico, Northern Mariana Islands, Guam,
American Samoa, or the Virgin Islands. The United States Department of the
Treasury will determine eligibility and allocation for QFIs after consultation
with the appropriate Federal banking agency.
Initial Holder: United States Department of the Treasury (the "UST").
Size: QFIs may sell preferred to the UST subject to the limits and terms
described below.
Each QFI may issue an amount of Senior Preferred equal to not less than 1% of
its risk-weighted assets and not more than the lesser of (i) $25 billion and
(ii) 3% of its risk-weighted assets.
Security: Senior Preferred, liquidation preference $1,000 per share. (Depending
upon the QFI's available authorized preferred shares, the UST may agree to
purchase Senior Preferred with a higher liquidation preference per share, in
which case the UST may require the QFI to appoint a depositary to hold the
Senior Preferred and issue depositary receipts.)
Ranking: Senior to common stock and pari passu with existing preferred shares
other than preferred shares which by their terms rank junior to any existing
preferred shares.
Regulatory Capital Status: Tier 1.
Term: Perpetual life.
Dividend: The Senior Preferred will pay cumulative dividends at a rate of 5% per
annum until the fifth anniversary of the date of this investment and thereafter
at a rate of 9% per annum.
B-1
For Senior Preferred issued by banks which are not subsidiaries of holding
companies, the Senior Preferred will pay non-cumulative dividends at a rate of
5% per annum until the fifth anniversary of the date of this investment and
thereafter at a rate of 9% per annum. Dividends will be payable quarterly in
arrears on February 15, May 15, August 15 and November 15 of each year.
Redemption: Senior Preferred may not be redeemed for a period of three years
from the date of this investment, except with the proceeds from a Qualified
Equity Offering (as defined below) which results in aggregate gross proceeds to
the QFI of not less than 25% of the issue price of the Senior Preferred. After
the third anniversary of the date of this investment, the Senior Preferred may
be redeemed, in whole or in part, at any time and from time to time, at the
option of the QFI. All redemptions of the Senior Preferred shall be at 100% of
its issue price, plus (i) in the case of cumulative Senior Preferred, any
accrued and unpaid dividends and (ii) in the case of noncumulative Senior
Preferred, accrued and unpaid dividends for the then current dividend period
(regardless of whether any dividends are actually declared for such dividend
period), and shall be subject to the approval of the QFI's primary federal bank
regulator.
"Qualified Equity Offering" shall mean the sale by the QFI after the date of
this investment of Tier 1 qualifying perpetual preferred stock or common stock
for cash.
Following the redemption in whole of the Senior Preferred held by the UST, the
QFI shall have the right to repurchase any other equity security of the QFI held
by the UST at fair market value.
Restrictions on Dividends: For as long as any Senior Preferred is outstanding,
no dividends may be declared or paid on junior preferred shares, preferred
shares ranking pari passu with the Senior Preferred, or common shares (other
than in the case of pari passu preferred shares, dividends on a pro rata basis
with the Senior Preferred), nor may the QFI repurchase or redeem any junior
preferred shares, preferred shares ranking pari passu with the Senior Preferred
or common shares, unless (i) in the case of cumulative Senior Preferred all
accrued and unpaid dividends for all past dividend periods on the Senior
Preferred are fully paid or (ii) in the case of non-cumulative Senior Preferred
the full dividend for the latest completed dividend period has been declared and
paid in full.
Common dividends: The UST's consent shall be required for any increase in common
dividends per share until the third anniversary of the date of this investment
unless prior to such third anniversary the Senior Preferred is redeemed in whole
or the UST has transferred all of the Senior Preferred to third parties.
Repurchases: The UST's consent shall be required for any share repurchases
(other than (i) repurchases of the Senior Preferred and (ii) repurchases of
junior preferred shares or common shares in connection with any benefit plan in
the ordinary course of business consistent with past practice) until the third
anniversary of the date of this investment unless prior to such third
anniversary the Senior Preferred is redeemed in whole or the UST has transferred
all of the Senior Preferred to third parties. In addition, there shall be no
share repurchases of junior preferred shares, preferred shares ranking pari
passu with the Senior Preferred, or common shares if prohibited as described
above under "Restrictions on Dividends".
B-2
Voting rights: The Senior Preferred shall be non-voting, other than class voting
rights on (i) any authorization or issuance of shares ranking senior to the
Senior Preferred, (ii) any amendment to the rights of Senior Preferred, or (iii)
any merger, exchange or similar transaction which would adversely affect the
rights of the Senior Preferred. If dividends on the Senior Preferred are not
paid in full for six dividend periods, whether or not consecutive, the Senior
Preferred will have the right to elect 2 directors. The right to elect directors
will end when full dividends have been paid for four consecutive dividend
periods.
Transferability: The Senior Preferred will not be subject to any contractual
restrictions on transfer. The QFI will file a shelf registration statement
covering the Senior Preferred as promptly as practicable after the date of this
investment and, if necessary, shall take all action required to cause such shelf
registration statement to be declared effective as soon as possible. The QFI
will also grant to the UST piggyback registration rights for the Senior
Preferred and will take such other steps as may be reasonably requested to
facilitate the transfer of the Senior Preferred including, if requested by the
UST, using reasonable efforts to list the Senior Preferred on a national
securities exchange. If requested by the UST, the QFI will appoint a depositary
to hold the Senior Preferred and issue depositary receipts.
Executive Compensation: As a condition to the closing of this investment, the
QFI and its senior executive officers covered by the EESA shall modify or
terminate all benefit plans, arrangements and agreements (including golden
parachute agreements) to the extent necessary to be in compliance with, and
following the closing and for so long as UST holds any equity or debt securities
of the QFI, the QFI shall agree to be bound by, the executive compensation and
corporate governance requirements of Section 111 of the EESA and any guidance or
regulations issued by the Secretary of the Treasury on or prior to the date of
this investment to carry out the provisions of such subsection. As an additional
condition to closing, the QFI and its senior executive officers covered by the
EESA shall grant to the UST a waiver releasing the UST from any claims that the
QFI and such senior executive officers may otherwise have as a result of the
issuance of any regulations which modify the terms of benefits plans,
arrangements and agreements to eliminate any provisions that would not be in
compliance with the executive compensation and corporate governance requirements
of Section 111 of the EESA and any guidance or regulations issued by the
Secretary of the Treasury on or prior to the date of this investment to carry
out the provisions of such subsection.
Summary of Warrant Terms
Warrant: The UST will receive warrants to purchase a number of shares of common
stock of the QFI having an aggregate market price equal to 15% of the Senior
Preferred amount on the date of investment, subject to reduction as set forth
below under "Reduction". The initial exercise price for the warrants, and the
market price for determining the number of shares of common stock subject to the
warrants, shall be the market price for the common stock on the date of the
Senior Preferred investment (calculated on a 20-trading day trailing average),
subject to customary anti-dilution adjustments. The exercise price shall be
reduced by 15% of the original price on each six-month anniversary of the issue
date of the warrants if the consent of the QFI stockholders described below has
not been received, subject to a maximum reduction of 45% of the original
exercise price.
B-3
Term: 10 years.
Exercisability: Immediately exercisable, in whole or in part.
Transferability: The warrants will not be subject to any contractual
restrictions on transfer; provided that the UST may only transfer or exercise an
aggregate of one-half of the warrants prior to the earlier of (i) the date on
which the QFI has received aggregate gross proceeds of not less than 100% of the
issue price of the Senior Preferred from one or more Qualified Equity Offerings
and (ii) December 31, 2009. The QFI will file a shelf registration statement
covering the warrants and the common stock underlying the warrants as promptly
as practicable after the date of this investment and, if necessary, shall take
all action required to cause such shelf registration statement to be declared
effective as soon as possible. The QFI will also grant to the UST piggyback
registration rights for the warrants and the common stock underlying the
warrants and will take such other steps as may be reasonably requested to
facilitate the transfer of the warrants and the common stock underlying the
warrants. The QFI will apply for the listing on the national exchange on which
the QFI's common stock is traded of the common stock underlying the warrants and
will take such other steps as may be reasonably requested to facilitate the
transfer of the warrants or the common stock.
Voting: The UST will agree not to exercise voting power with respect to any
shares of common stock of the QFI issued to it upon exercise of the warrants.
Reduction: In the event that the QFI has received aggregate gross proceeds of
not less than 100% of the issue price of the Senior Preferred from one or more
Qualified Equity Offerings on or prior to December 31, 2009, the number of
shares of common stock underlying the warrants then held by the UST shall be
reduced by a number of shares equal to the product of (i) the number of shares
originally underlying the warrants (taking into account all adjustments) and
(ii) 0.5.
Consent: In the event that the QFI does not have sufficient available authorized
shares of common stock to reserve for issuance upon exercise of the warrants
and/or stockholder approval is required for such issuance under applicable stock
exchange rules, the QFI will call a meeting of its stockholders as soon as
practicable after the date of this investment to increase the number of
authorized shares of common stock and/or comply with such exchange rules, and to
take any other measures deemed by the UST to be necessary to allow the exercise
of warrants into common stock.
Substitution: In the event the QFI is no longer listed or traded on a national
securities exchange or securities association, or the consent of the QFI
stockholders described above has not been received within 18 months after the
issuance date of the warrants, the warrants will be exchangeable, at the option
of the UST, for senior term debt or another economic instrument or security of
the QFI such that the UST is appropriately compensated for the value of the
warrant, as determined by the UST.
B-4
[LOGO SALISBURY BANCORP, INC.]
February 12, 2009
To Our Shareholders:
In the past several months, we have witnessed a global economic meltdown and
unprecedented financial devastation affecting some of the largest U.S. companies
and financial institutions. It seems that with each new day we hear about more
lay-offs and financial difficulties. No one can predict with any degree of
certainty when economic conditions will improve. With this uncertainty comes
fear, which is an emotion caused by events that we cannot control. In response,
the U.S. Treasury Department initiated a Capital Purchase Program to encourage
U.S. financial institutions to build capital to increase the flow of financing
to U.S. businesses and consumers and restore confidence.
As a "well-capitalized" community banking company, we have both a historical
record and commitment to meeting the financial needs of the businesses,
consumers and communities which we serve, while building a prudent and
profitable franchise for our shareholders. Accordingly, Salisbury Bancorp
applied for, and was granted preliminary approval from the U.S. Treasury, to
participate in this Program in an amount up to $8,816,000. Your management team
and Board of Directors are evaluating the advantages and disadvantages of
participating in this Program, and we ask you to authorize an amendment to our
Certificate of Incorporation to create the preferred stock necessary to sell to
the Treasury, should the Company decide to participate. As a "well-capitalized"
and profitable institution, we are not seeking a "bailout" and we will only
participate if the Board determines that participation is in the best interests
of the Company and its shareholders based upon the information available at the
time. In deciding whether to participate, the Board is considering the costs,
benefits and uncertainties of participating in the Capital Purchase Program as
well as the potential risks of declining to participate in the Program.
We are calling upon our shareholders to consider and approve a proposed
amendment to our Certificate of Incorporation which would authorize preferred
stock and provide us with the potential to participate in the Capital Purchase
Program. The enclosed proxy material should answer any questions you might have
regarding the Capital Purchase Program and our potential participation. However,
we encourage you to contact us and to attend the Special Meeting of Shareholders
to be held at 10:00 a.m. on Tuesday, March 10, 2009 at The Interlaken Inn, 74
Interlaken Road, Route 112, Lakeville, Connecticut 06039 to consider and vote
upon this proposed amendment. Even if you plan to attend the Special Meeting, we
request that you complete, sign, date and mail the enclosed proxy in the
envelope provided. If you attend the Special Meeting, you may revoke the proxy
and vote in person if you wish.
We would like to conclude this letter by saying "Thank you". We greatly value
your commitment to our Company and your continued support.
Sincerely,
/s/ John F. Perotti
John F. Perotti
Chairman and Chief Executive Officer
/s/ Richard J. Cantele. Jr.
Richard J. Cantele. Jr.
President and Chief Operating Officer
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
REVOCABLE PROXY
SALISBURY BANCORP, INC.
THIS PROXY SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF SALISBURY BANCORP, INC.
The undersigned holder(s) of the Common Stock of Salisbury Bancorp, Inc.
(the "Company") do hereby nominate, constitute and appoint Louis E. Allyn, II
and Holly J. Nelson jointly and severally, proxies with full power of
substitution, for us and in our name, place and stead to vote all the Common
Stock of the Company, standing in our name on February 4, 2009 at the Special
Meeting of its Shareholders to be held at the Interlaken Inn, 74 Interlaken
Road, Lakeville, Connecticut 06039 on Tuesday, March 10, 2009 at 10:00 a.m. or
any adjournment thereof with all the powers the undersigned would possess if
personally present, as follows:
(1) APPROVAL of an amendment to the Company's Certificate of Incorporation to
authorize 25,000 shares of preferred stock, par value $0.01 per share.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
(2) OTHER BUSINESS: To conduct whatever other business may properly be brought
before the Special Meeting or any adjournment thereof. Management at
present knows of no other business to be presented by or on behalf of the
Company or its Management at the Special Meeting. In the event that any
other business requiring a vote of the Shareholders is properly presented
at the Special Meeting, the holders of the proxies will vote your shares
in accordance with their best judgment and the recommendations of a
majority of the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL (1).
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE SPECIFICATION INDICATED.
IF NO SPECIFICATION IS INDICATED, THIS PROXY WILL BE VOTED "FOR" PROPOSAL (1)
AND IN ACCORDANCE WITH THE DETERMINATION OF A MAJORITY OF THE BOARD OF DIRECTORS
AS TO OTHER MATTERS.
PLEASE CHECK THE BOX IF YOU PLAN TO ATTEND THE MEETING [ ]
Please be sure to sign and date Date ____________, 2009
this Proxy in the box below.
----------------------- -----------------------------
Shareholder sign above Co-holder (if any) sign above
--------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
SALISBURY BANCORP, INC.
PLEASE ACT PROMPTLY PLEASE COMPLETE, DATE, SIGN, AND MAIL THIS PROXY CARD
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
All joint owners must sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title. If more than one
trustee, all must sign.
THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO THE MEETING BY PROVIDING
WRITTEN NOTICE TO THE COMPANY SECRETARY OR MAY BE WITHDRAWN AND YOU MAY VOTE IN
PERSON SHOULD YOU ATTEND THE SPECIAL MEETING.
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
---------------------------------
---------------------------------
---------------------------------
SALISBURY BANCORP, INC.
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AND RELATED INFORMATION
EXTRACTED FROM THE FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2008
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(amounts in thousands, except per share data)
September 30, 2008 and December 31, 2007
----------------------------------------
September 30, December 31,
2008 2007
------------- ------------
(unaudited)
ASSETS
------
Cash and due from banks $ 6,915 $ 12,811
Interest bearing demand deposits with other banks 1,445 726
Money market mutual funds 1,422 1,341
Federal funds sold 2,958 300
-------- --------
Cash and cash equivalents 12,740 15,178
Investments in available-for-sale securities (at fair value) 144,482 147,377
Investments in held-to-maturity securities (fair values of $67 as of
September 30, 2008 and $71 as of December 31, 2007) 68 71
Federal Home Loan Bank stock, at cost 5,323 5,176
Loans held-for-sale 122 120
Loans, less allowance for loan losses of $3,105 as of September 30, 2008
and $2,475 as of December 31, 2007 293,740 268,191
Investment in real estate 75 75
Other real estate owned 205 0
Premises and equipment 7,269 6,803
Goodwill 9,829 9,829
Core deposit intangible 1,206 1,329
Accrued interest receivable 2,395 2,539
Cash surrender value of life insurance policies 3,780 3,688
Other assets 4,416 1,584
-------- --------
Total assets $485,650 $461,960
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 69,198 $ 69,215
Interest-bearing 275,411 248,526
-------- --------
Total deposits 344,609 317,741
Securities sold under agreements to repurchase 12,370 0
Federal Home Loan Bank advances 86,490 95,011
Other liabilities 3,461 3,645
-------- --------
Total liabilities 446,930 416,397
-------- --------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,685,861 shares at September 30, 2008 and 1,685,021
shares at December 31, 2007 169 169
Paid-in capital 13,158 13,130
Retained earnings 34,037 35,583
Accumulated other comprehensive loss (8,644) (3,319)
-------- --------
Total shareholders' equity 38,720 45,563
-------- --------
Total liabilities and shareholders' equity $485,650 $461,960
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(amounts in thousands, except per share data)
(unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $ 13,918 $ 13,273 $ 4,686 $ 4,537
Interest on debt securities:
Taxable 3,988 4,094 1,358 1,337
Tax-exempt 1,775 1,745 622 634
Dividends on equity securities 169 241 39 82
Other interest 121 46 7 12
-------- -------- -------- --------
Total interest and dividend income 19,971 19,399 6,712 6,602
-------- -------- -------- --------
Interest expense:
Interest on deposits 5,124 6,109 1,485 2,087
Interest on securities sold under agreements to repurchase 46 0 46 0
Interest on Federal Home Loan Bank advances 3,135 3,126 1,056 1,080
-------- -------- -------- --------
Total interest expense 8,305 9,235 2,587 3,167
-------- -------- -------- --------
Net interest and dividend income 11,666 10,164 4,125 3,435
Provision for loan losses 690 0 520 0
-------- -------- -------- --------
Net interest and dividend income after provision for
loan losses 10,976 10,164 3,605 3,435
-------- -------- -------- --------
Noninterest income (charge):
Trust department income 1,684 1,508 543 475
Loan commissions 2 22 0 9
Service charges on deposit accounts 610 544 209 183
(Write downs) gains on available-for-sale securities, net (2,317) 222 (2,671) 42
Gain on sales of loans held-for-sale 236 246 77 79
Other income 1,026 757 497 272
-------- -------- -------- --------
Total noninterest income (charge) 1,241 3,299 (1,345) 1,060
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 6,225 5,763 2,148 1,931
Occupancy expense 721 586 258 206
Equipment expense 650 584 219 214
Data processing 1,005 939 310 301
Insurance 148 121 58 47
Printing and stationery 201 216 66 72
Professional fees 651 500 218 161
Legal expense 282 167 116 41
Amortization of core deposit intangible 123 123 41 41
Other expense 1,176 1,026 401 387
-------- -------- -------- --------
Total noninterest expense 11,182 10,025 3,835 3,401
-------- -------- -------- --------
Income (loss) before income taxes 1,035 3,438 (1,575) 1,094
Income taxes 883 638 337 177
-------- -------- -------- --------
Net income (loss) $ 152 $ 2,800 $ (1,912) $ 917
======== ======== ======== ========
Earnings (loss) per common share $ .09 $ 1.66 $ (1.13) $ .54
-------- -------- -------- --------
Dividends per common share $ .84 $ .81 $ .28 $ .27
-------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
2
SALISBURY BANCORP INC. AND SUBSIDIARY
-------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Nine months ended September 30, 2008 and 2007
(unaudited)
2008 2007
--------- ---------
Cash flows from operating activities:
Net income $ 152 $ 2,800
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net 57 70
Gain on sales of available-for-sale securities, net (539) (222)
Write-downs of available-for-sale securities 2,856 0
Provision for loan losses 690 0
Change in loans held-for-sale (2) 189
Change in deferred loan costs, net (2) (101)
Net (increase) decrease in mortgage servicing rights (1) 89
Depreciation and amortization 519 403
Amortization of core deposit intangible 123 123
Accretion of fair value adjustment on deposits & borrowings (98) (98)
Amortization of fair value adjustment on loans 36 59
Decrease (increase) in interest receivable 144 (112)
Deferred tax benefit (138) (1,085)
(Increase) decrease in taxes receivable (13) 317
(Increase) decrease in prepaid expenses (30) 978
Increase in cash surrender value of insurance policies (92) (91)
Increase in income tax payable 0 254
(Increase) decrease in other assets (159) 87
Increase in accrued expenses 213 95
Decrease in interest payable (164) (60)
Decrease in other liabilities (8) (130)
Issuance of shares for Directors' fees 28 30
(Decrease) increase in unearned income on loans (1) 4
Cash and cash equivalents acquired from New York Community Bank
net of expenses paid of $115 0 181
--------- ---------
Net cash provided by operating activities 3,571 3,780
--------- ---------
Cash flows from investing activities
Purchase of Federal Home Loan Bank stock (147) (495)
Purchases of available-for-sale securities (102,304) (52,271)
Proceeds from sales of available-for-sale securities 94,723 51,371
Proceeds from maturities of held-to-maturity securities 3 3
Loan originations and principal collections, net (24,372) (6,013)
Purchase of loans (1,935) (3,733)
Recoveries of loans previously charged-off 36 53
Other real estate owned - expenditures capitalized (204) 0
Capital expenditures (941) (1,318)
--------- ---------
Net cash used in investing activities (35,141) (12,403)
--------- ---------
3
SALISBURY BANCORP INC. AND SUBSIDIARY
-------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(amounts in thousands)
Nine months ended September 30, 2008 and 2007
(unaudited)
(continued)
2008 2007
--------- ---------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and savings accounts 24,927 (2,312)
Net increase in time deposits 1,940 1,319
Federal Home Loan Bank advances 17,000 21,000
Principal payments on advances from Federal Home Loan Bank (16,786) (16,404)
Net change in short term advances from Federal Home Loan Bank (8,637) 3,551
Net increase in securities sold under agreements to repurchase 12,370 0
Dividends paid (1,682) (1,348)
--------- ---------
Net cash provided by financing activities 29,132 5,806
--------- ---------
Net decrease in cash and cash equivalents (2,438) (2,817)
Cash and cash equivalents at beginning of period 15,178 11,757
--------- ---------
Cash and cash equivalents at end of period $ 12,740 $ 8,940
========= =========
Supplemental disclosures:
Interest paid $ 8,567 $ 9,393
Income taxes paid 1,034 1,152
New York Community Bank Branch Acquisition:
Cash and cash equivalents acquired $ 296,060
Deposits assumed 496,060
---------
Net liabilities assumed (200,000)
Acquisition costs 115,207
---------
Goodwill $ 315,207
=========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Salisbury Bancorp, Inc. (the "Company"),
its wholly owned subsidiary Salisbury Bank and Trust Company (the "Bank"), and
the Bank's subsidiaries, S.B.T. Realty, Inc. and SBT Mortgage Service
Corporation (the "PIC") formed in April 2004. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the nine months ended September 30,
2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2007 Annual Report on Form 10-K.
The year-end condensed balance sheet data derived from audited financial
statements does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE (LOSS) INCOME
------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure of comprehensive
income which includes net income and any changes in equity from non-owner
sources that are not recorded in the income statement (such as changes in the
net unrealized gains (losses) on securities). The purpose of reporting
comprehensive (loss) income is to report a measure of all changes in equity that
result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. The Company's
sources of other comprehensive (loss) income are the net changes in unrealized
holding (losses) or gains on securities and the net change in unrecognized
pension plan expense.
Comprehensive (Loss) Income
Nine months ended Three months ended
September 30, September 30,
2008 2007 2008 2007
-------- ------- ------- ----------
(amounts in thousands) (amounts in thousands)
Net income $ 152 $ 2,800 $(1,912) $ 917
Net change in unrealized holding (losses) or
gains on securities and net change in
unrecognized pension plan expense,
net of tax during period (5,325) (1,775) (2,403) 967
------- ------- ------- ----------
Comprehensive (loss) income $(5,173) $ 1,025 $(4,315) $ 1,884
======= ======= ======= ==========
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Instruments" (SFAS 155), which permits,
but does not require, fair value accounting for any hybrid financial instrument
that contains an embedded derivative that would otherwise require bifurcation in
accordance with SFAS 133. The statement also subjects beneficial interests
issued by securitization vehicles to the requirements of SFAS No. 133. The
statement is effective as of January 1, 2007. The adoption of SFAS 155 did not
have an impact on the Company's financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140 ("SFAS No. 156"). SFAS
156 requires any entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however,
an entity may elect the "amortization method" or "fair value method" for
subsequent balance
5
sheet reporting periods. The adoption of this statement did not have a material
impact on the Company's financial condition, results of operations or cash
flows.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement 109" (FIN 48). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return and provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS 157 defines fair value, establishes a framework for measuring fair
value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS 157 retains the exchange price
notion and clarifies that the exchange price is the price that would be received
for an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants on the measurement date. SFAS 157 is
effective for the Company's consolidated financial statements for the year
beginning on January 1, 2008, with earlier adoption permitted. The adoption of
this statement did not have a material impact on its financial condition and
results of operations. See Note 5.
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements," (EITF Issue 06-4). EITF 06-4 requires companies with an
endorsement split-dollar life insurance arrangement to recognize a liability for
future postretirement benefits. The effective date is for fiscal years beginning
after December 15, 2007, with earlier application permitted. Companies should
recognize the effects of applying this issue through either (a) a change in
accounting principle through a cumulative effect adjustment to retained earnings
or (b) a change in accounting principle through retrospective application to all
periods. The adoption of EITF Issue 06-4 did not have a material impact on the
Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
The new standard is effective at the beginning of the Company's fiscal year
beginning January 1, 2008, and early application may be elected in certain
circumstances. The adoption of this statement did not have a material impact on
its financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2008), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. It
also amends the accounting treatment for certain specific items including
acquisition costs and non controlling minority interests and includes a
substantial number of new disclosure requirements. SFAS 141(R) applies
prospectively to business combinations for which acquisition date is on or after
January 1, 2009. The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS
161). SFAS 161 changes the disclosure requirements for derivative instruments
and hedging activities. Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedge items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
6
NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------
The following summarizes the net periodic benefit cost for the nine months and
three months ended September 30:
Nine Months Ended Three Months Ended
September 30, September 30,
2008 2007 2008 2007
--------------------- ---------------------
Components of net periodic benefit cost:
Service cost $ 302,856 $ 328,305 $ 100,952 $ 109,435
Interest cost 275,213 256,517 91,738 85,506
Expected return on plan assets (320,244) (276,707) (106,748) (92,236)
Amortization of:
Prior service cost 669 670 223 223
Actuarial loss 33,646 51,177 11,215 17,059
--------- --------- --------- ---------
Net periodic benefit cost $ 292,140 $ 359,962 $ 97,380 $ 119,987
========= ========= ========= =========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.00% 6.00% 6.00%
Average wage increase Graded table* Graded table* Graded table* Graded table*
Expected return on plan assets 7.50% 7.25% 7.50% 7.25%
*5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
NOTE 5 - ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS
-----------------------------------------------------------
The fair value hierarchy established by SFAS No. 157 is based on observable and
unobservable inputs participants use to price an asset or liability. SFAS No.
157 has prioritized these inputs into the following value hierarchy:
Level 1 Inputs - Unadjusted quoted prices in active markets for identical
assets or liabilities that are available at the measurement date.
Level 2 Inputs - Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (such as
interest rates, volatilities, prepayment speeds, credit risks, etc.) or
inputs that are derived principally from a corroborated by market data by
correlation or other means.
Level 3 Inputs - Unobservable inputs for determining the fair value of the
asset or liability and are based on the entity's own assumption about the
assumptions that market participants would use to price the asset or
liability.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general clarification of such instruments pursuant to
the valuation hierarchy is set forth below. These valuation methodologies were
applied to all of the Company's financial assets and liabilities carried at fair
value effective January 1, 2008.
7
($ in 000s) Fair Value Measurements at Reporting using
Quoted Prices
in Active
Markets for Significant Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description 9/30/08 (Level 1) (Level 2) (Level 3)
--------- ------------- ----------------- ------------
AFS securities $ 144,482 $0 $144,482 $0
--------- -- -------- --
Total $ 144,482 $0 $144,482 $0
========= == ======== ==
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Business
--------
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation that is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has seven (7)
full service offices including a Trust/Wealth Services Division. Such offices
are located in the towns of North Canaan, Lakeville, Salisbury and Sharon,
Connecticut, Sheffield and South Egremont, Massachusetts, and Dover Plains, New
York. In addition, the bank has received regulatory approvals to open a
full-service branch in Millerton, New York. The Company and Bank were formed in
1998 and 1848, respectively. In order to provide a strong foundation for
building shareholder value and servicing customers, the Company remains
committed to investing in the technological and human resources necessary to
developing new personalized financial products and services to meet the needs of
customers. This discussion should be read in conjunction with Salisbury Bancorp,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's assets at September 30, 2008 totaled $485,650,000 compared to
total assets of $461,960,000 at December 31, 2007. During the first nine months
of 2008, net loans outstanding, not including loans held-for-sale, increased
$25,549,000 or 9.53% to $293,740,000. This compares to total net loans
outstanding, not including loans held-for-sale, of $268,191,000 at December 31,
2007. This increase is primarily attributable to increased loan demand during
the period that was generated as the result of new business development efforts.
The growth was funded by an increase in deposits. Non-performing assets totaled
$1,796,000 at September 30, 2008. Non-performing loans totaled $1,591,000 at
September 30, 2008 or 0.54% of total loans outstanding and Other Real Estate
Owned totaled $205,000. This compares to non-performing loans totaling
$1,824,000 at December 31, 2007 or 0.68% of total loans outstanding. There were
no other non-performing assets at December 31, 2007. 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.
Deposits at September 30, 2008 totaled $344,609,000 as compared to total
deposits of $317,741,000 at December 31, 2007. This increase is primarily the
result of new business development efforts.
The Company's earnings for the nine months ended September 30, 2008 was $152,000
or $.09 per average share outstanding. This compares to earnings of $2,800,000
or $1.66 per share for the same period in 2007. The Company reported a third
quarter loss of $1,912,000 or $1.13 per average share outstanding compared to
earnings of $917,000 or $.54 per average share outstanding, in the third quarter
8
of 2007. Earnings for the respective periods were impacted by a pre-tax charge
of $2,856,000 as a result of the U.S. Government placing FHLMC (Freddie Mac)
into conservatorship, which necessitated the Company to take a write-down of
Freddie Mac preferred stock during the quarter ended September 30, 2008. No tax
benefit was recognized as a result of this charge for the quarter ended
September 30, 2008, because applicable law at the time forced financial
institutions to treat the loss as a capital loss. On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 was enacted, which includes a
provision permitting banks to recognize losses relating to the Freddie Mac
preferred stock as an ordinary loss, thereby allowing a tax benefit for both tax
and financial reporting purposes. If the legislation permitting this action had
been effective in the third quarter rather than the fourth quarter, the positive
impact of the tax charge that would have been recorded would have resulted in
September 30, 2008 year-to-date earnings of $1,123,000 or $.67 per average share
outstanding. The Company will recognize the additional tax benefit totaling
approximately $971,000 or $.58 per average share outstanding relating to the
write-down of the Freddie Mac preferred stock in the quarter ending December 31,
2008. Earnings, not including the Freddie Mac preferred stock write-down, for
the first nine months of 2008 would have totaled $3,008,000 or $1.78 per average
share outstanding.
The Bank remains "well capitalized" pursuant to the standards of the Federal
Deposit Insurance Corporation. The Bank's total risk based capital ratio was
13.15%; the Tier 1 capital ratio was 12.08% and the leverage ratio was 7.54%. As
previously disclosed, on September 2, 2008 the Board of Directors declared a
third quarter cash dividend of $.28 per common share, which was paid on October
31, 2008 to shareholders of record as of September 30, 2008. This compared to a
cash dividend of $.27 per common share that was paid for the third quarter of
2007. Year-to-date dividends total $.84 per common share outstanding for this
year. This compares to total year-to-date dividends of $.81 per common share one
year ago.
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 an estimation of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of estimated 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."
NINE MONTHS ENDED SEPTEMBER 30, 2008
AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2007
Net Interest and Dividend Income
--------------------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent noninterest income. Net interest and dividend
income is the difference between interest and dividends earned primarily on the
loan and securities portfolios and interest paid on deposits, securities sold
under agreements to repurchase and advances from the Federal Home Loan Bank.
Noninterest income is primarily derived from the Trust/Wealth Advisory Services
division, service charges and other fees related to deposit and loan accounts
and income from gains in securities transactions. For the following discussion,
net interest and dividend income is presented on a fully taxable-equivalent
("FTE") basis. FTE interest income restates reported interest income on tax
exempt securities as if such interest were taxed at the Company's federal tax
rate of 34% for all periods presented.
9
(amounts in thousands)
Nine Months Ended September 30, 2008 2007
------ ----
Total Interest and Dividend Income
(financial statements) $ 19,971 $ 19,399
Tax Equivalent Adjustment 914 898
-------- --------
Total Interest and Dividend Income (on a FTE basis) 20,885 20,297
Total Interest Expense 8,305 9,235
-------- --------
Net Interest and Dividend Income-FTE $ 12,580 $ 11,062
======== ========
Total interest and dividend income on a FTE basis for the nine months ended
September 30, 2008, when compared to the same period in 2007, increased $588,000
or 2.90%. The increase was primarily attributable to an increase in earning
assets.
Interest expense on deposits for the first nine months of 2008 totaled
$5,124,000, a decrease of $985,000 or 16.12% when compared to $6,109,000 for the
same period in 2007. This decrease reflects an economic environment of generally
lower interest rates. The Bank's volume of Federal Home Loan Bank advances
outstanding at September 30, 2008 decreased 9.00% when compared to total
advances outstanding at December 31, 2007, however overnight borrowings through
out the year resulted in an increase of interest expense totaling $9,000. Total
interest expense for the nine months ended September 30, 2008 was $8,305,000, a
decrease of $930,000 or 10.07% when compared to the same period in 2007.
Overall, net interest and dividend income (on a FTE basis) increased $1,518,000
or 13.72% to $12,580,000 for the period ended September 30, 2008 when compared
to the same period in 2007.
Noninterest Income
------------------
Noninterest income, not including the write-downs and net gains on sales of
available-for-sale securities, totaled $3,558,000 for the nine months ended
September 30, 2008. This is an increase of $481,000 or 15.63% compared to
noninterest income, not including gains on available-for-sale securities
transactions, of $3,077,000 for the nine months ended September 30, 2007.
Continuing growth of the Trust/Wealth Advisory Services Division has resulted in
increased income of $176,000 or 11.67% to $1,684,000 for the period ended
September 30, 2008 compared to income totaling $1,508,000 for the corresponding
period in 2007. Write-downs on available-for-sale securities totaled $2,856,000
for the period ended September 30, 2008. As described previously, this is
primarily the result of the U.S. Governments actions relating to Freddie Mac.
Other income, which primarily consists of fees associated with transaction
accounts, fees related to the origination and servicing of mortgage loans and
gains related to the sale of mortgage loans, increased $305,000 or 19.44% to
$1,874,000 for the nine months ended September 30, 2008 compared to $1,569,000
for the nine months ended September 30, 2007.
Noninterest Expense
-------------------
Noninterest expense increased $1,157,000 or 11.54% for the first nine months of
2008 as compared to the same period in 2007. Although some increases in the
described noninterest expenses in the table below are attributable to normal
volumes of business, the increase also reflects additional staffing and the
additional costs associated with the daily operation of our new Dover Plains,
New York branch, which opened in August of 2007. The increase in professional
fees is primarily attributable to the Trust and Wealth Advisory Services
Division working with Bradley Foster and Sargent, Inc., an independent
investment advisory firm that assists in providing a broader scope of highly
personalized professional investment services to clients. In addition, internal
audit expense increased which is the result of additional services required due
to compliance requirements of the Sarbanes-Oxley Act. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
10
2008 2007 Change % Change
----------------------------------------------------------------------------------
Salaries and employee benefits $ 6,225 $ 5,763 $ 462 8.01%
Occupancy expense 721 586 135 23.03
Equipment expense 650 584 66 11.30
Data processing 1,005 939 66 7.02
Insurance 148 121 27 22.31
Printing and stationery 201 216 (15) (6.94)
Professional fees 651 500 151 30.20
Legal expense 282 167 115 68.86
Amortization of core deposit intangible 123 123 0 0
Other expense 1,176 1,026 150 14.61
-------- -------- -------
Total noninterest expense $ 11,182 $ 10,025 $ 1,157 11.54
======== ======== =======
Income Taxes
------------
The income tax provision for the first nine months of 2008 totaled $883,000 in
comparison to $638,000 for the same nine-month period in 2007. As mentioned
previously, the Emergency Economic Stabilization Act (EESA) enacted in October
2008 will permit a fourth quarter tax benefit of $971,000 for the
other-than-temporary impairment recorded in the quarter ended September 30,
2008.
Net Income
----------
The Company's pre tax income, not including write-downs and gains on securities
transactions, for the nine month period ended September 30, 2008 would have
totaled $3,352,000. This is an increase of $136,000 or approximately 4.23% when
compared to pre tax income, not including gains on securities transactions, for
the period ended September 30, 2007 that totaled $3,216,000. Net income was
$152,000 or $.09 per average share outstanding for the nine months ended
September 30, 2008. Net income for the corresponding period in 2007 totaled
$2,800,000 or $1.66 per average share outstanding.
THREE MONTHS ENDED SEPTEMBER 30, 2008
AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2007
Net Interest and Dividend Income
--------------------------------
For the following discussion, net interest and dividend 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 Company's federal tax rate of 34% for all periods presented.
(amounts in thousands)
Three Months Ended September 30 2008 2007
------- --------
Total Interest and Dividend Income
(financial statements) $ 6,712 $ 6,602
Tax Equivalent Adjustment 320 327
------- --------
Total Interest and Dividend Income (on a FTE basis) 7,032 6,929
Total Interest (Expense) (2,587) (3,167)
------- --------
Net Interest and Dividend Income-FTE $ 4,445 $ 3,762
======= ========
Total interest and dividend income on a FTE basis for the three months ended
September 30, 2008 increased $103,000 or 1.49% compared to the same period in
2007. The increase was primarily attributable to an increase in earning assets.
Interest expense on deposits decreased $602,000 or 28.85% for the quarter to
$1,485,000 compared to $2,087,000 for the same quarter in 2007. This decrease is
primarily the result of an economic environment of generally lower interest
rates. The Bank's volume of Federal Home Loan Bank advances decreased during the
three month period ended September 30, 2008 when compared to the corresponding
period in 2007. Interest expense on these advances decreased $24,000 or 2.22%
and totaled $1,056,000 for the three months ended September 30, 2008 compared to
$1,080,000 for the corresponding period in 2007. Total interest expense for the
three months ending
11
September 30, 2008 was $2,587,000 compared to total interest expense for the
same period in 2007 of $3,167,000, a decrease of $580,000 or 18.31%. This
decrease is a reflection of an economic environment of generally lower interest
rates and a reduction of FHLB borrowings. Overall, net interest and dividend
income (on a FTE basis) increased $683,000 or 18.16% to $4,445,000 for the
three-month period ended September 30, 2008 when compared to the corresponding
period in 2007.
Noninterest Income
------------------
Noninterest income not including write-downs on and net gains on sales of
available-for-sale securities totaled $1,326,000 for the three months ended
September 30, 2008 as compared to $1,018,000 for the three months ended
September 30, 2007. This represents an increase of $308,000 or 30.26%. Income
from the Trust/Wealth Advisory Services Division increased $68,000 or 14.32% to
$543,000 for the third quarter of 2008. This is primarily the result of
continued growth in assets under management. Other income which consists
primarily of fees associated with transaction accounts, fees related to the
origination and servicing of loans and a non recurring premium on the sale of
the Bank's credit card portfolio of $183,000 totaled $783,000 for the third
quarter of 2008. As previously mentioned, the write-down of Freddie Mac
preferred stock following it being put into conservatorship by the U.S.
Government, for the quarter ended September 30, 2008 was $2,856,000. Overall, a
charge of $1,345,000 was recorded for noninterest income for the three month
period ended September 30, 2008. This compares to noninterest income of
$1,060,000 for the corresponding period in 2007.
Noninterest Expense
-------------------
Noninterest expense totaled $3,835,000 for the three month period ended
September 30, 2008 as compared to $3,401,000 for the same period in 2007, an
increase of $434,000 or 12.76%. Although some increases in noninterest expense
are attributable to normal volumes of business, much of the overall increase in
the noninterest expense listed in the table below is primarily attributable to
additional staffing, and expenses related to the establishment of a new branch
in New York State, which commenced operations in August 2007. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
2008 2007 Change % Change
--------------------------------------------------------------------------------
Salaries and employee benefits $ 2,148 $ 1,931 $ 217 11.24%
Occupancy expense 258 206 52 25.24
Equipment expense 219 214 5 2.34
Data processing 310 301 9 2.99
Insurance 58 47 11 23.40
Printing and stationery 66 72 (6) (8.33)
Professional fees 218 161 57 35.40
Legal expense 116 41 75 182.93
Amortization of core deposit intangible 41 41 0 0
Other expense 401 387 14 3.62
------- ------- -----
Total non-interest expense $ 3,835 $ 3,401 $ 434 12.76
======= ======= =====
Income Taxes
------------
The income tax provision for the three-month period ended September 30, 2008
totaled $337,000 in comparison to $177,000 for the same three month period in
2007. As mentioned previously, the EESA enactment in October 2008 will permit
the Company to record a fourth quarter tax benefit of approximately $971,000 for
the other-than-temporary impairment recorded in the quarter ended September 30,
2008.
Net Income
----------
The Company's pre tax income, not including write-downs and gains on sales of
securities, for the three month period ended September 30, 2008 would have
totaled $1,096,000. This is an increase of $44,000 when compared to pre tax
income, not including gains on securities transactions for the corresponding
three month period ended September 30, 2007, that totaled $1,052,000. Overall,
the Company reported a net loss totaling $1,912,000 or $1.13 per average share
outstanding for the three months ended September
12
30, 2008. Net income for the corresponding period in 2007 totaled $917,000 or
$0.54 per average share outstanding.
FINANCIAL CONDITION
-------------------
Total assets at September 30, 2008 were $485,650,000, compared to $461,960,000
at December 31, 2007, an increase of 5.13%. The increase is primarily the result
of an increase in earning assets during the period that were funded by growth in
deposits.
Investment Securities
---------------------
The make up of the investment portfolio is diversified among U.S. Government
sponsored agencies, mortgage-backed securities and securities issued by states
of the United States and political subdivisions of the states. The portfolio
does not include securities collateralized by pools of sub-prime mortgages.
During the nine months ended September 30, 2008, the investment portfolio,
including Federal Home Loan Bank stock, decreased $2,751,000 or 1.80% to
$149,873,000 from $152,624,000 at December 31, 2007.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities in the
portfolio are classified as available-for-sale. The securities reported as
available-for-sale are stated at fair value in the financial statements of the
Company. Unrealized holding gains and losses on available-for-sale securities
(accumulated other comprehensive income/loss) are not included in earnings, but
are reported as a net amount (less expected tax) in a separate component of
capital until realized. At September 30, 2008, the unrealized loss net of tax
was $7,620,000. This compares to an unrealized loss net of tax of $2,273,000 at
December 31, 2007. As previously discussed, the U.S. Government placing Freddie
Mac into conservatorship necessitated the write-down of Freddie Mac preferred
stock during the quarter. The amortized cost basis of the investment which was
made in 2003 was $2,975,000. This represented approximately 1.8% of the total
investment securities portfolio. Management deems the remaining securities in
the portfolio that are currently in an unrealized loss position as not other
than temporarily impaired. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
-------
Net loans outstanding (not including loans held for sale) totaled $293,740,000
at September 30, 2008 compared to net loans outstanding (not including loans
held for sale) of $268,191,000 at December 31, 2007. This is an increase in net
loans of $25,549,000 or 9.53%. Competition for loans remains aggressive in the
Bank's market area, however, new business development coupled with an increase
in loan demand resulted in the increase.
13
The following table represents the composition of the loan portfolio comparing
September 30, 2008 to December 31, 2007:
September 30, 2008 December 31, 2007
------------------ -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 19,239 $ 20,629
Real estate-construction and land
development 35,690 28,928
Real estate-residential 174,250 158,600
Real estate-commercial 60,966 53,823
Consumer 5,935 8,005
Other 457 376
--------- ---------
296,537 270,361
Deferred costs, net 308 306
Unearned income 0 (1)
Allowance for loan losses (3,105) (2,475)
--------- ---------
Net Loans $ 293,740 $ 268,191
========= =========
Provision and Allowance for Loan Losses
---------------------------------------
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Bank's objectives. Because of this risk
associated with extending loans, the Bank maintains an allowance or reserve for
loan and lease losses through charges to earnings. For the first nine-month
period of 2008, the provision for loan losses was $690,000. There was no
provision for loan losses in the comparable period in 2007.
The Bank evaluates the adequacy of the allowance no less frequently than on a
quarterly basis. No material changes have been made in the estimation methods or
assumptions that the Bank uses in making this determination during the period
ended September 30, 2008. Such evaluations are based on assessments of credit
quality and "risk rating" of loans by senior management, which is reviewed by
the Bank's Loan Committee on a regular basis. Loans are initially risk rated
when originated. If there is deterioration in the credit, the risk rating is
adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("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 Bank'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 Bank 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, based on 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
14
collateral dependent. Specifically identifiable and quantifiable losses are
immediately charged off against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
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 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 nonaccrual status
along with loans that are 90 days or more past due and still accruing, are
closely monitored by management. At September 30, 2008, nonperforming loans
totaled $1,591,000 or 0.54% of total loans outstanding of $296,537,000, which
does not include loans held for sale. In addition, while currently performing
and secured, the Company has concerns relating to the timely repayment of a loan
in the amount of $3,400,000 which is the subject of litigation. (See Legal
Proceedings.) The allowance for loan losses totaled $3,105,000 representing
195.16% of nonperforming loans. Nonperforming loans totaled $1,824,000 or 0.67%
of total loans outstanding, (which does not include loans held for sale) of
$270,361,000 at December 31, 2007. The allowance for loan losses totaled
$2,475,000 at December 31, 2007 and represented 135.69% of nonperforming loans.
A total of $95,000 of loans were charged off by the Bank during the nine months
ended September 30, 2008. These charged-off loans consisted primarily of
consumer loans. This compares to loans charged off during the nine-month period
ended September 30, 2007 that totaled $72,000. A total of $36,000 of previously
charged-off loans was recovered during the nine month period ended September 30,
2008. Recoveries for the same period in 2007 totaled $53,000. While management
estimates loan losses using the best available information, no assurances can be
given that future additions to the allowance will not be necessary based on
changes in economic and real estate market conditions, further information
obtained regarding problem loans, identification of additional problem loans or
other factors. Additionally, future additions to the allowance may be necessary
to maintain adequate coverage ratios. At September 30, 2008, the Bank had other
real estate owned ("OREO") in the amount of $205,000.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at September 30, 2008 and December 31, 2007:
September 30, 2008 December 31, 2007
(amounts in thousands)
Demand $ 69,198 $ 69,215
NOW 27,121 23,652
Money Market 60,578 56,210
Savings 69,724 52,616
Time 117,988 116,048
-------- --------
Total Deposits $344,609 $317,741
======== ========
Deposits constitute the principal funding source of the Company's assets.
15
Borrowings
----------
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy 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 September 30, 2008, the Company had $86,490,000 in
outstanding advances from the Federal Home Loan Bank compared to $95,011,000 at
December 31, 2007. In addition, the Company began offering securities sold under
agreements to repurchase as part of its operating strategy. At September 30,
2008 they totaled $12,370,000. Management expects that it will continue these
strategies of supplementing deposit growth.
Off-Balance Sheet Arrangements
------------------------------
In the normal course of business, the Company enters into certain relationships
characterized as lending related off-balance sheet arrangements. These lending
commitments have various terms and are designed to accommodate the financial
needs of consumers, businesses and other entities. Many of these loan
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of these commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
Loan commitments have credit risk essentially the same as that involved in
extending loans to customers. They are subject to normal credit approval
procedures and policies. Collateral is obtained based on management's assessment
of the customer's credit. The accompanying table summarizes the Company's off
balance sheet lending-related financial instruments by remaining maturity at
September 30, 2008:
(amounts in thousands)
By remaining maturity Less than 1 year 1-3 years 4-5 years After 5 years Total
Off balance sheet lending-related
Financial Instruments
Residential real estate related $ 2,196 $ $ 3 $ 28,059 $ 30,258
Commercial related 3,650 5,502 77 14,973 24,202
Consumer related 1,302 1,302
Standby letters of credit 29 29
--------------------------------------------------------------
Total $ 5,875 $ 5,502 $ 80 $ 44,334 $ 55,791
==============================================================
Interest Rate Risk
------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest-bearing liabilities
mature or reprice on a different basis than earning assets. In an attempt to
manage its exposure to changes in interest rates, the Bank's assets and
liabilities are managed in accordance with policies established and reviewed by
the Bank's Board of Directors. The Bank's Asset/Liability Management Committee
monitors asset and deposit levels, developments and trends in interest rates,
liquidity and capital. One of the primary financial objectives is to manage
interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future,
16
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 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 September 30, 2008, the
Company maintains a liability sensitive (negative gap) position. This would
suggest that during a period of declining interest rates, the Company would be
in a better position to increase net interest income. To the contrary, during a
period of rising interest rates, a negative gap would result in a decrease in
interest income. The level of interest rate risk at September 30, 2008 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
fluctuations 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, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At September 30, 2008, the Company
had approximately $55,791,000 in loan commitments outstanding. Management
believes that the current level of liquidity is ample to meet the Company's
needs for both the present and foreseeable future.
Capital
-------
At September 30, 2008, the Company had $38,720,000 in shareholders' equity, a
decrease of 15.02% when compared to December 31, 2007 shareholders' equity
totaling $45,563,000. Several components contributed to the change since
December 31, 2007. Earnings for the nine-month period ended September 30, 2008
totaled $152,000. Securities in the investment 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. Market
fluctuations of fair value of the securities portfolio for the period ending
September 30, 2008 resulted in accumulated other comprehensive loss net of tax
totaling $7,620,000. Changes in unrecognized pension plan expense per SFAS No.
158, resulted in accumulated other comprehensive loss net of tax of $1,024,000
for the nine month period ended September 30, 2008.
A review and analysis of securities determined that, as a result of the U.S.
Government placing FHLMC (Freddie Mac) into conservatorship, the Company needed
to take a write-down of Freddie Mac preferred stock during the quarter ended
September 30, 2008. Earnings for the period were impacted by pre-tax charges of
$2,856,000. No other credit deterioration was revealed and the unrealized loss
on securities available-for-sale is due to the current interest rate
environment, and management deems the remaining securities to be not other than
temporarily impaired. The Company has declared three quarterly dividends
resulting in a decrease in capital of $1,890,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan that
resulted in an increase in capital of $28,000. 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 lower federal deposit
insurance premiums than those banks that are not "well capitalized." One primary
measure of capital adequacy for regulatory
17
purposes is based on the ratio of risk-based capital to risk-weighted assets.
This method of measuring capital adequacy helps to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets. It takes into account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low-risk
assets. At September 30, 2008, the Company had a total risk based capital ratio
of 13.15% compared to 15.00% at December 31, 2007. Maintaining strong capital is
essential to Bank safety and soundness. However, the effective management of
capital resources requires generating attractive returns on equity to build
value for shareholders while maintaining appropriate levels of capital to fund
growth, meet regulatory requirements and be consistent with prudent industry
practices.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles that require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation, although interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Although not a material factor in recent years, inflation could impact earnings
in future periods.
18
SALISBURY BANCORP, INC.
AUDITED CONSOLIDATED
FINANCIAL STATEMENTS
AND RELATED INFORMATION
EXTRACTED FROM THE FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2007
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows of the years then ended. 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, 2007 and 2006, and the
consolidated results of their operations and their cash flows for the years then
ended, 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
February 21, 2008
1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2007 and 2006
--------------------------
ASSETS 2007 2006
------ ------------- -------------
Cash and due from banks $ 12,810,681 $ 8,988,609
Interest-bearing demand deposits with other banks 726,623 568,693
Money market mutual funds 1,340,891 1,199,881
Federal Funds sold 300,000 1,000,000
------------- -------------
Cash and cash equivalents 15,178,195 11,757,183
Investments in available-for-sale securities (at fair value) 147,377,154 156,492,547
Investments in held-to-maturity securities (fair values of $71,435 and $74,818
as of December 31, 2007 and 2006, respectively) 70,798 74,931
Federal Home Loan Bank stock, at cost 5,176,100 4,663,700
Loan held-for-sale 120,000 304,000
Loans, less allowance for loan losses of $2,474,893 and $2,474,118 as of
December 31, 2007 and 2006, respectively 268,191,275 252,464,430
Investment in real estate 75,000 75,000
Premises and equipment 6,803,198 6,135,546
Goodwill 9,828,712 9,509,305
Core deposit intangible 1,329,283 1,493,499
Accrued interest receivable 2,538,607 2,483,547
Cash surrender value of life insurance policies 3,688,021 3,554,995
Other assets 1,584,055 1,330,987
------------- -------------
Total assets $ 461,960,398 $ 450,339,670
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing $ 69,214,697 $ 70,502,249
Interest-bearing 248,526,572 243,084,032
------------- -------------
Total deposits 317,741,269 313,586,281
Federal Home Loan Bank advances 95,011,155 87,093,402
Due to broker 0 1,579,611
Other liabilities 3,644,376 3,731,195
------------- -------------
Total liabilities 416,396,800 405,990,489
------------- -------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding, 1,685,021 shares in 2007
and 1,684,181 shares in 2006 168,502 168,418
Paid-in capital 13,130,247 13,099,881
Retained earnings 35,583,443 33,602,991
Accumulated other comprehensive loss (3,318,594) (2,522,109)
------------- -------------
Total shareholders' equity 45,563,598 44,349,181
------------- -------------
Total liabilities and shareholders' equity $ 461,960,398 $ 450,339,670
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
2
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 17,968,801 $ 15,686,978
Interest on debt securities:
Taxable 5,457,879 5,604,866
Tax-exempt 2,332,374 2,079,981
Dividends on equity securities 324,329 277,356
Other interest 68,762 80,412
------------ ------------
Total interest and dividend income 26,152,145 23,729,593
------------ ------------
Interest expense:
Interest on deposits 8,200,214 6,885,893
Interest on Federal Home Loan Bank advances 4,232,221 3,573,052
------------ ------------
Total interest expense 12,432,435 10,458,945
------------ ------------
Net interest and dividend income 13,719,710 13,270,648
Benefit for loan losses 0 (87,488)
------------ ------------
Net interest and dividend income after benefit
for loan losses 13,719,710 13,358,136
------------ ------------
Noninterest income:
Trust department income 2,050,000 1,980,500
Loan commissions 22,131 117,298
Service charges on deposit accounts 743,901 707,431
Gain on sales of available-for-sale securities, net 294,984 517,326
Gain on sales of loans held-for-sale 316,736 357,628
Other income 1,036,911 902,394
------------ ------------
Total noninterest income 4,464,663 4,582,577
------------ ------------
Noninterest expense:
Salaries and employee benefits 7,723,691 7,150,746
Occupancy expense 801,558 751,670
Equipment expense 819,474 786,637
Data processing 1,193,887 1,134,078
Insurance 163,024 154,562
Printing and stationery 280,172 239,617
Professional fees 931,352 706,100
Amortization of core deposit intangible 164,216 164,216
Other expense 1,436,945 1,157,534
------------ ------------
Total noninterest expense 13,514,319 12,245,160
------------ ------------
Income before income taxes 4,670,054 5,695,553
Income taxes 870,006 1,441,935
------------ ------------
Net income $ 3,800,048 $ 4,253,618
============ ============
Earnings per common share $ 2.26 $ 2.53
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings Loss Total
---------- ----------- ----------- ----------- ------------- -----------
Balance, December 31, 2005 1,683,341 $ 168,334 $13,068,045 $31,100,702 $(2,894,758) $41,442,323
Comprehensive income:
Net income 4,253,618
Other comprehensive income, net of tax
effect 1,410,531
Comprehensive income 5,664,149
Adjustment to initially apply SFAS No. 158,
net of tax effect (1,037,882) (1,037,882)
Issuance of 840 shares for Directors' fees 840 84 31,836 31,920
Dividends declared ($1.04 per share) (1,751,329) (1,751,329)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2006 1,684,181 168,418 13,099,881 33,602,991 (2,522,109) 44,349,181
Comprehensive income:
Net income 3,800,048
Other comprehensive loss, net of tax
effect (796,485)
Comprehensive income 3,003,563
Issuance of 840 shares for Directors' fees 840 84 30,366 30,450
Dividends declared ($1.08 per share) (1,819,596) (1,819,596)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 1,685,021 $ 168,502 $13,130,247 $35,583,443 $(3,318,594) $45,563,598
========== =========== =========== =========== =========== ===========
Reclassification disclosure for the years ended December 31:
2007 2006
----------- -----------
Unrealized holding (losses) gains on available-for-sale securities
Net unrealized holding (losses) gains on available-for-sale securities $(1,344,871) $ 2,654,494
Reclassification adjustment for net realized gains in net income (294,984) (517,326)
----------- -----------
(1,639,855) 2,137,168
Income tax benefit (expense) 557,551 (726,637)
----------- -----------
Unrealized holding (losses) gains on available-for-sale securities, net of tax (1,082,304) 1,410,531
----------- -----------
Comprehensive income - defined benefit pension plan 433,058 0
Income tax expense (147,239) 0
----------- -----------
Comprehensive income - defined benefit pension plan, net of tax 285,819 0
----------- -----------
Other comprehensive (loss) income, net of tax $ (796,485) $ 1,410,531
=========== ===========
Accumulated other comprehensive loss consists of the following as of December
31:
2007 2006
----------- -----------
Net unrealized holding losses on available-for-sale securities, net of taxes $(2,272,627) $(1,190,323)
Unrecognized pension plan expense - SFAS No. 158, net of taxes (1,045,967) (1,331,786)
----------- -----------
Accumulated other comprehensive loss $(3,318,594) $(2,522,109)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 3,800,048 $ 4,253,618
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 75,014 34,953
Gain on sales of available-for-sale securities, net (294,984) (517,326)
Benefit for loan losses 0 (87,488)
Change in loans held-for-sale 184,000 (304,000)
Change in deferred loan costs, net (137,362) (168,573)
Change in unearned income on loans (2,528) (4,913)
Net decrease in mortgage servicing rights 110,515 78,715
Depreciation and amortization 565,267 538,449
Amortization of core deposit intangible 164,216 164,216
Amortization of fair value adjustment on loans 71,357 112,712
Accretion of fair value adjustments on deposits and borrowings (130,203) (134,217)
Increase in interest receivable (64,671) (111,012)
Deferred tax provision 34,785 396,418
Increase in prepaid expenses (4,594) (1,031,510)
Increase in cash surrender value of insurance policies (133,026) (130,809)
Decrease in income tax receivable 89,869 181,005
Decrease (increase) in other assets 90,673 (91,796)
Increase (decrease) in accrued expenses 102,293 (243,196)
Increase in interest payable 6,794 257,975
Increase (decrease) in other liabilities 216,509 (57,050)
Issuance of shares for Directors' fees 30,450 31,920
------------ ------------
Net cash provided by operating activities 4,774,422 3,168,091
------------ ------------
Cash flows from investing activities:
Redemption of Federal Home Loan Bank stock 0 860,200
Purchases of Federal Home Loan Bank stock (512,400) (110,700)
Purchases of available-for-sale securities (69,642,478) (83,058,698)
Proceeds from sales of available-for-sale securities 63,597,747 62,356,620
Proceeds from maturities of available-for-sale securities 12,170,270 14,007,603
Proceeds from maturities of held-to-maturity securities 4,102 71,691
Loan originations and principal collections, net (11,448,576) (36,142,073)
Purchases of loans (4,313,300) (252,000)
Recoveries of loans previously charged off 103,564 67,054
Capital expenditures (1,396,923) (207,787)
Cash and cash equivalents acquired from New York Community
Bank, net of expenses paid of $119,407 176,653 0
------------ ------------
Net cash used in investing activities (11,261,341) (42,408,090)
------------ ------------
The accompanying notes are an integral part of these
consolidated financial statements.
5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
(continued)
2007 2006
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 8,467,718 (5,638,393)
Net (decrease) increase in time deposits (4,805,216) 31,957,486
Federal Home Loan Bank advances 21,000,000 25,000,000
Principal payments on Federal Home Loan Bank advances (16,589,044) (10,460,009)
Net change in short-term Federal Home Loan Bank advances 3,637,000 1,668,000
Dividends paid (1,802,527) (1,734,277)
------------ ------------
Net cash provided by financing activities 9,907,931 40,792,807
------------ ------------
Net increase in cash and cash equivalents 3,421,012 1,552,808
Cash and cash equivalents at beginning of year 11,757,183 10,204,375
------------ ------------
Cash and cash equivalents at end of year $ 15,178,195 $ 11,757,183
============ ============
Supplemental disclosures:
Interest paid $ 12,559,418 $ 10,335,187
Income taxes paid 745,352 864,512
New York Community Bank Branch Acquisition:
Cash and cash equivalents acquired $ 296,060
------------
296,060
------------
Deposits assumed 492,486
Accrued interest payable assumed 3,574
------------
496,060
------------
Net liabilities assumed 200,000
Acquisition costs
119,407
------------
Goodwill $ 319,407
============
The accompanying notes are an integral part of these
consolidated financial statements.
6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
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, two banking offices located in
Massachusetts, and one banking office in Dover Plains, New York. 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.
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 the Bancorp
and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiaries, SBT Realty, Inc., and SBT Mortgage Service Corporation (the
"PIC"). SBT Realty, Inc. holds and manages bank owned real estate situated
in New York state. The PIC operates as a passive investment company, which
owns and services residential and commercial mortgages. 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, 2007 and 2006 includes
$650,000, which is subject to withdrawals and usage restrictions to
satisfy the reserve requirements of the Federal Reserve Bank.
7
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts to approximate the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
The Company may classify 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 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 two years ended December 31, 2007 and 2006, 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 status
when reaching 90 days past due or in the process of foreclosure. Lines of
credit secured by real estate 90 days past due or in the process of
foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans 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
8
loan at the contractual interest rate. Any cash interest payments received
in excess of the limit and not applied to reduce the net carrying amount
of the loan are recorded as recoveries of charge-offs until the
charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. The Bank does not separately identify individual
consumer and residential loans for impairment disclosures, but instead
evaluates smaller groups of homogeneous loans collectively for impairment.
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
9
properties are carried at the lower of cost or estimated fair value less
estimated costs to sell. Any write-down 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 write-down 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, 2007 and December 31, 2006, the Company
does not have any other real estate owned.
ADVERTISING:
The Bank directly expenses costs associated with advertising as they are
incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at 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.
10
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
STOCK BASED COMPENSATION:
Bancorp has a stock-based plan to compensate non-employee directors for
their services. This plan is more fully described in Note 14. Compensation
cost for these services is reflected in net income in an amount equal to
the fair value on the date of issuance of the shares of Bancorp common
stock issued to the directors.
EARNINGS PER SHARE (EPS):
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Weighted average common shares outstanding
were 1,684,699 in 2007 and 1,683,893 in 2006. 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 years ended December 31, 2007 and 2006.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS No. 155),
which permits, but does not require, fair value accounting for any hybrid
financial instrument that contains an embedded derivative that would
otherwise require bifurcation in accordance with SFAS 133. The statement
also subjects beneficial interests issued by securitization vehicles to
the requirements of SFAS No. 133. The statement is effective as of January
1, 2007. The adoption of SFAS No. 155 did not have an impact on the
Company's financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140" (SFAS No. 156).
SFAS No. 156 requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specific
situations. Additionally, the servicing asset or servicing liability shall
be initially measured at fair value; however, an entity may elect the
"amortization method" or "fair value method" for subsequent balance sheet
reporting periods. SFAS No. 156 is effective as of an entity's first
fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements, including interim
financial statements,
11
for any period of that fiscal year. The adoption of this statement did not
have a material impact on the Company's financial condition, results of
operations or cash flows.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken, or expected to be taken, in a tax return and provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The adoption
of FIN 48 did not have a material impact on the Company's financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles
(GAAP) and enhances disclosures about fair value measurements. SFAS No.
157 retains the exchange price notion and clarifies that the exchange
price is the price that would be received for an asset or paid to transfer
a liability (an exit price) in an orderly transaction between market
participants on the measurement date. SFAS No. 157 is effective for the
Company's consolidated financial statements for the year beginning on
January 1, 2008, with earlier adoption permitted. The Company does not
expect the adoption of this statement to have a material impact on its
financial condition and results of operations.
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements," ("EITF Issue 06-4"). EITF 06-4
requires companies with an endorsement split-dollar life insurance
arrangement to recognize a liability for future postretirement benefits.
The effective date is for fiscal years beginning after December 15, 2007,
with earlier application permitted. Companies should recognize the effects
of applying this issue through either (a) a change in accounting principle
through a cumulative effect adjustment to retained earnings or (b) a
change in accounting principle through retrospective application to all
periods. The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. This Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. The new standard is effective
at the beginning of the Company's fiscal year beginning January 1, 2008,
and early application may be elected in certain circumstances. The Company
does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
12
NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2007:
Equity securities $ 3,031 $ 157,453 $ 0 $ 160,484
Preferred stock 2,975,000 0 1,149,730 1,825,270
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 47,224,654 4,492 370,330 46,858,816
Debt securities issued by states of the
United States and political subdivisions
of the states 58,707,327 11,409 1,739,673 56,979,063
Money market mutual funds 1,340,891 0 0 1,340,891
Mortgage-backed securities 41,910,517 99,631 456,627 41,553,521
------------- ------------- ------------- -------------
152,161,420 272,985 3,716,360 148,718,045
Money market mutual funds included in
cash and cash equivalents (1,340,891) (1,340,891)
------------- ------------- ------------- -------------
$ 150,820,529 $ 272,985 $ 3,716,360 $ 147,377,154
============= ============= ============= =============
December 31, 2006:
Equity securities $ 3,031 $ 178,395 $ 0 $ 181,426
Preferred stock 2,975,000 0 462,900 2,512,100
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 55,323,358 23,343 1,200,395 54,146,306
Debt securities issued by states of the
United States and political subdivisions
of the states 44,891,148 379,553 34,667 45,236,034
Money market mutual funds 1,199,881 0 0 1,199,881
Mortgage-backed securities 55,103,530 191,698 878,547 54,416,681
------------- ------------- ------------- -------------
159,495,948 772,989 2,576,509 157,692,428
Money market mutual funds included in
cash and cash equivalents (1,199,881) (1,199,881)
------------- ------------- ------------- -------------
$ 158,296,067 $ 772,989 $ 2,576,509 $ 156,492,547
============= ============= ============= =============
Held-to-maturity securities:
December 31, 2007:
Mortgage-backed securities $ 70,798 $ 637 $ 0 $ 71,435
============= ============= ============= =============
December 31, 2006:
Mortgage-backed securities $ 74,931 $ 0 $ 113 $ 74,818
============= ============= ============= =============
13
The scheduled maturities of debt securities were as follows as of December 31,
2007:
Available-For-Sale Held-To-Maturity
------------------ ----------------------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ ------------ ------------
Due after one year through five years $ 992,952 $ 0 $ 0
Due after five years through ten years 21,988,592 0 0
Due after ten years 80,856,335 0 0
Mortgage-backed securities 41,553,521 70,798 71,435
------------ ------------ ------------
$145,391,400 $ 70,798 $ 71,435
============ ============ ============
During 2007, proceeds from sales of available-for-sale securities amounted to
$63,597,747. Gross realized gains and gross realized losses on those sales
amounted to $305,726 and $10,742, respectively. During 2006, proceeds from sales
of available-for-sale securities amounted to $62,356,620. Gross realized gains
and gross realized losses on those sales amounted to $724,286 and $206,960,
respectively. The tax provision applicable to these net realized gains amounted
to $100,295 and $175,891 respectively.
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of shareholders' equity as of December 31, 2007.
Total carrying amounts of $55,203,368 and $55,251,654 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, treasury tax
and loans and for other purposes as required by law as of December 31, 2007 and
2006, 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:
December 31, 2007
--------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Preferred stock $ 0 $ 0 $ 1,825,270 $ 1,149,730 $ 1,825,270 $ 1,149,730
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 8,963,668 20,009 33,518,205 350,321 42,481,873 370,330
Debt securities issued by states of the
United States and political
subdivisions of the states 46,754,407 1,684,443 1,314,923 55,230 48,069,330 1,739,673
Mortgage-backed securities 4,501,563 48,263 20,534,104 408,364 25,035,667 456,627
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired securities $60,219,638 $ 1,752,715 $57,192,502 $ 1,963,645 $117,412,140 $ 3,716,360
=========== =========== =========== =========== ============ ===========
14
December 31, 2006
--------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Preferred stock $ 0 $ 0 $ 2,512,100 $ 462,900 $ 2,512,100 $ 462,900
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 792,581 57,553 49,159,124 1,142,842 49,951,705 1,200,395
Debt securities issued by states of the
United States and political
subdivisions of the states 1,809,175 12,100 2,094,013 22,567 3,903,188 34,667
Mortgage-backed securities 13,486,446 54,270 27,940,134 824,390 41,426,580 878,660
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired securities $16,088,202 $ 123,923 $81,705,371 $ 2,452,699 $97,793,573 $ 2,576,622
=========== =========== =========== =========== =========== ===========
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 agency
securities, which have a significant impact in financial markets, have minimal
credit risk. Preferred stock securities are issued by the Federal Home Mortgage
Corporation, a U.S. government sponsored or chartered enterprise. 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. The unrealized losses in the above table are mainly attributable to
changes in market interest rates. As Company management has the ability and
intent to hold securities until anticipated recovery to cost basis occurs, no
declines are deemed to be other than temporary.
NOTE 4 - LOANS
--------------
Loans consisted of the following as of December 31:
2007 2006
------------- -------------
Commercial, financial and agricultural $ 20,629,467 $ 16,464,762
Real estate - construction and land development 28,927,954 21,169,024
Real estate - residential 158,599,546 145,394,844
Real estate - commercial 53,822,693 50,859,332
Consumer 8,004,931 8,815,789
Term federal funds 0 12,000,000
Other 376,257 69,367
------------- -------------
270,360,848 254,773,118
Deferred costs, net 305,935 168,573
Unearned income (615) (3,143)
Allowance for loan losses (2,474,893) (2,474,118)
------------- -------------
Net loans $ 268,191,275 $ 252,464,430
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2007.
Total loans to such persons and their companies amounted to $1,218,271 as of
December 31, 2007. During 2007, principal advances of $487,004 were made and
repayments totaled $334,057.
15
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2007 2006
------------- -------------
Balance at beginning of period $ 2,474,118 $ 2,626,170
Benefit for loan losses 0 (87,488)
Recoveries of loans previously charged off 103,564 67,054
Loans charged off (102,789) (131,618)
------------- -------------
Balance at end of period $ 2,474,893 $ 2,474,118
============= =============
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2007 2006
------------- -------------
Total nonaccrual loans $ 1,007,890 $ 886,377
============= =============
Accruing loans which are 90 days or more overdue $ 816,581 $ 77,525
============= =============
As of December 31, 2007 and 2006, and during the years ended, there were no
loans that met the definition of an impaired loan in SFAS No. 114.
In 2007 and 2006, the Bank capitalized mortgage servicing rights totaling
$59,882 and $147,353 respectively, and amortized $171,034 and $225,732
respectively. The balance of capitalized mortgage servicing rights included in
other assets at December 31, 2007 and 2006 was $225,670 and $336,185,
respectively.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:
2007 2006
-------- --------
Balance, beginning of year $ 1,451 $ 1,115
Additions 2,451 19,392
Reductions (3,088) (19,056)
-------- --------
Balance, end of year $ 814 $ 1,451
======== ========
The fair value of the mortgage servicing rights was $562,911 and $671,145 as of
December 31, 2007 and 2006, 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 $48,696,731 and $49,117,195 at December 31, 2007 and
2006, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
The following is a summary of premises and equipment as of December 31:
2007 2006
------------ ------------
Land $ 775,844 $ 775,844
Buildings 6,281,851 5,721,601
Furniture and equipment 3,385,608 2,786,494
------------ ------------
10,443,303 9,283,939
Accumulated depreciation and amortization (3,640,105) (3,148,393)
------------ ------------
$ 6,803,198 $ 6,135,546
============ ============
16
NOTE 6 - DEPOSITS
-----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2007 and 2006 were $36,440,424 and $35,777,326
respectively.
The aggregate amount of brokered time deposits as of December 31, 2007 and 2006
was $14,681,000 and $19,538,000, respectively. Brokered time deposits are not
included in time deposit accounts in denominations of $100,000 or more above.
For time deposits as of December 31, 2007, the scheduled maturities for years
ended December 31, are as follows:
2008 $ 93,821,737
2009 10,670,809
2010 2,078,871
2011 7,987,502
2012 1,489,704
-------------
$ 116,048,623
=============
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2007. Total deposits of such persons and their companies amounted to $2,075,350
and $1,372,156 as of December 31, 2007 and 2006, 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, 2007, and thereafter, are summarized as follows:
2008 $25,214,699
2009 1,320,213
2010 21,202,309
2011 10,794,029
2012 5,178,531
Thereafter 31,116,919
Fair value adjustment 184,455
-----------
$95,011,155
===========
As of December 31, 2007, 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 1/28/2008 and quarterly thereafter $ 500,000
4/27/2009 1/28/2008 and quarterly thereafter 500,000
1/25/2010 1/25/2008 and quarterly thereafter 19,000,000
2/8/2010 2/7/2008 and quarterly thereafter 600,000
12/15/2010 3/17/2008 and quarterly thereafter 800,000
12/20/2010 3/20/2008 and quarterly thereafter 500,000
2/28/2011 2/26/2008 and quarterly thereafter 10,000,000
3/1/2011 3/3/2008 and quarterly thereafter 500,000
3/2/2012 3/3/2008 and quarterly thereafter 5,000,000
12/16/2013 3/17/2008 and quarterly thereafter 10,000,000
12/12/2016 3/12/2008 and quarterly thereafter 15,000,000
7/31/2017 1/31/2008 and quarterly thereafter 6,000,000
17
Amortizing advances are repaid in equal monthly payments and are 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, 2007, the interest rates on FHLB advances ranged from 2.66
percent to 6.30 percent. At December 31, 2007, the weighted average interest
rate on FHLB advances was 4.74 percent.
NOTE 8 - EMPLOYEE BENEFITS
--------------------------
The Bank has an insured noncontributory defined benefit retirement plan
available to 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.
In 2006, the plan was amended, effective September 1, 2006, to provide that
employees hired or rehired on or after September 1, 2006 are not eligible to
participate in the plan.
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:
2007 2006
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 6,027,929 $ 5,495,706
Actuarial gain (229,821) (128,601)
Service cost 437,740 430,035
Interest cost 342,022 318,310
Benefits paid (218,769) (87,521)
----------- -----------
Benefit obligation at end of year 6,359,101 6,027,929
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 5,016,664 3,370,954
Actual return on plan assets 503,050 392,231
Contributions by employer 500,000 1,341,000
Benefits paid (218,769) (87,521)
----------- -----------
Fair value of plan assets at end of year 5,800,945 5,016,664
----------- -----------
Funded status and recognized liability
included in the balance sheet $ (558,156) $(1,011,265)
=========== ===========
Amounts recognized in accumulated other comprehensive loss, before tax effect,
consist of:
December 31,
------------
2007 2006
---------- ----------
Net loss $1,583,889 $2,016,054
Prior service cost 910 1,803
---------- ----------
$1,584,799 $2,017,857
========== ==========
The accumulated benefit obligation for the plan was $4,602,777 and $4,179,551 at
December 31, 2007 and 2006, respectively.
18
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2007 and 2006. The rate of increase in
future compensation levels was based on the following graded table for 2007 and
2006:
AGE RATE
--- ----
25 4.75%
35 4.25%
45 3.75%
55 3.25%
65 3.00%
Components of net periodic cost are as follows for the years ended December 31:
2007 2006
--------- ---------
Service cost $ 437,740 $ 430,035
Interest cost on benefit obligation 342,022 318,310
Expected return on plan assets (368,942) (295,598)
Amortization of prior service cost 893 893
Recognized net loss 68,236 89,194
--------- ---------
Net periodic benefit cost 479,949 542,834
--------- ---------
Other changes in plan assets and benefit obligations recognized in other
comprehensive loss:
Net actuarial gain (363,929) 0
Amortization of net loss (68,236) 0
Prior service cost (893) 0
--------- ---------
Total recognized in other comprehensive loss (433,058) 0
--------- ---------
Total recognized in net periodic cost and other
comprehensive loss $ 46,891 $ 542,834
========= =========
The estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the
year ended December 31, 2008 are $56,833 and $893, respectively.
The discount rate used to determine the net periodic benefit cost was 6.00% for
2007 and 2006; and the expected return on plan assets was 7.50% for 2007 and
2006.
The graded table above was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2007 and 2006.
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 2007. 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 55% equity and 40% fixed income and 5% cash equivalents. 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.
19
Plan Assets:
The pension plan investments are co-managed by the Trust and Investment Services
division of the Bank and Bradley, Foster and Sargent, Inc. 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, 2007 December 31, 2006
--------------------------- ---------------------------
Asset Category Fair Value Percent Fair Value Percent
---------------------------------------------- ---------- ---------- ---------- ----------
Equity securities $3,407,281 58.7% $2,537,994 50.6%
U.S. Government treasury and agency securities 1,252,945 21.6 1,480,289 29.5
Corporate bonds 122,687 2.1 23,040 0.5
Mutual funds 296,365 5.1 200,503 4.0
Money market mutual funds 617,567 10.7 672,228 13.4
Certificates of deposit 104,100 1.8 102,610 2.0
---------- ---------- ---------- ----------
Total $5,800,945 100.0% $5,016,664 100.0%
========== ========== ========== ==========
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2007 and 2006.
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:
2008 $ 87,000
2009 120,000
2010 205,000
2011 216,000
2012 1,980,000
2013 - 2017 2,978,000
The Bank expects to make a contribution of $500,000 in 2008.
The Bank offers a 401(k) Plan to eligible employees. 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.
Effective September 1, 2006, the 401(k) Plan was amended to provide that
employees hired or rehired after September 1, 2006 are not eligible to
participate in the plan. The Bank has established a second 401(k) Plan to
provide a discretionary match to employees hired or rehired, on or after
September 1, 2006 who satisfy certain eligibility requirements.
The Bank's contribution expense for the 401(k) Plans in the years ended December
31, 2007 and 2006 amounted to approximately $100,000 and $93,000 respectively.
Discretionary contributions vest in full after five years.
Fifteen of the Bank's officers have a change in control agreement ("agreement")
with the Bank. The agreements provide that if, within twelve (12) months after a
"change-in-control" has occurred, the officer's employment terminates or is
reassigned under defined circumstances, then the Bank and/or its
20
successor shall pay the officer a lump sum amount equal to the officer's most
recent aggregate base salary paid in the twelve (12) month period immediately
preceding his or her termination or reassignment less amounts previously paid
from 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:
2007 2006
---------- ----------
Current:
Federal $ 774,753 $ 990,839
State 60,468 54,678
---------- ----------
835,221 1,045,517
---------- ----------
Deferred:
Federal 24,785 217,852
State 0 0
Change in valuation allowance 10,000 178,566
---------- ----------
34,785 396,418
---------- ----------
Total income tax expense $ 870,006 $1,441,935
========== ==========
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:
2007 2006
---- ----
% of %of
Income Income
------ ------
Federal income tax at statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income and dividends received deduction (19.1) (13.6)
Other items 2.6 1.2
State tax, net of federal tax benefit 0.9 0.6
Change in valuation allowance 0.2 3.1
---- ----
Effective tax rates 18.6% 25.3%
==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2007 2006
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 618,527 $ 619,233
Interest on non-performing loans 22,710 15,402
Accrued deferred compensation 30,584 26,288
Post-retirement benefits 22,440 22,440
Other real estate owned property write-down 22,100 22,101
Capital loss carry forward 398,191 398,191
Mark to market purchase accounting adjustments 0 8,373
Unrecognized pension expense - FASB No. 158 538,832 686,071
Net unrealized holding loss on available-for-sale securities 1,170,748 613,197
----------- -----------
Gross deferred tax assets 2,824,132 2,411,296
Valuation allowance (270,166) (260,166)
----------- -----------
2,553,966 2,151,130
----------- -----------
21
Deferred tax liabilities:
Deferred loan costs, net (104,018) (57,315)
Goodwill and core deposit intangible asset (662,257) (646,483)
Accelerated depreciation (957,538) (985,152)
Mark-to-market purchase accounting adjustments (23,204) 0
Mortgage servicing rights (76,728) (114,304)
Prepaid pension (349,059) (342,241)
----------- -----------
Gross deferred tax liabilities (2,172,804) (2,145,495)
----------- -----------
Net deferred tax asset $ 381,162 $ 5,635
=========== ===========
As of December 31, 2007, 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.
Commitments to purchase securities on a when issued basis totaled $1,410,241 at
December 31, 2007.
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.
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, 2007 and 2006, the
maximum potential amount of the Bank's obligation was $12,800 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
22
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:
2007 2006
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 15,178,195 $ 15,178,195 $ 11,757,183 $ 11,757,183
Available-for-sale securities 147,377,154 147,377,154 156,492,547 156,492,547
Held-to-maturity securities 70,798 71,435 74,931 74,818
Federal Home Loan Bank stock 5,176,100 5,176,100 4,663,700 4,663,700
Loans held-for-sale 120,000 121,403 304,000 307,071
Loans, net 268,191,275 264,217,484 252,464,430 250,312,089
Accrued interest receivable 2,538,607 2,538,607 2,483,547 2,483,547
Financial liabilities:
Deposits $317,741,269 $318,498,739 $313,586,281 $313,560,974
FHLB advances 95,011,155 95,183,700 87,093,402 87,478,836
Due to broker 0 0 1,579,611 1,579,611
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:
2007 2006
----------- -----------
Commitments to originate loans $ 9,002,416 $10,540,525
Standby letters of credit 12,800 12,800
Unadvanced portions of loans:
Home equity 26,511,813 26,599,791
Commercial lines of credit 10,482,619 8,642,393
Construction 6,178,958 7,322,201
Consumer 7,129,237 6,928,313
----------- -----------
$59,317,843 $60,046,023
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------
Most of the Bank's business activity is with customers located in northwestern
Connecticut and nearby 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 nearby New
York and Massachusetts towns.
23
NOTE 13 - REGULATORY MATTERS
----------------------------
Bancorp and its subsidiary, the Bank, are subject to various regulatory capital
requirements administered by 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,
2007 and 2006, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2007, 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. The Company's and the
Bank's actual capital amounts and ratios are also presented in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
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, 2007:
Total Capital (to Risk Weighted Assets)
Consolidated $39,545 15.00% $21,087 >8.0% N/A
-
Salisbury Bank and Trust Company 38,683 14.69 21,069 >8.0 $26,336 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 37,070 14.06 10,544 >4.0 N/A
-
Salisbury Bank and Trust Company 36,174 13.74 10,534 >4.0 15,801 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 37,070 8.24 17,988 >4.0 N/A
-
Salisbury Bank and Trust Company 36,174 8.06 17,945 >4.0 22,431 >5.0
- -
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)
Consolidated $38,030 15.28% $19,914 >8.0% N/A
-
Salisbury Bank and Trust Company 37,295 14.98 19,929 >8.0 $24,911 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 35,555 14.28 9,957 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 13.97 9,964 >4.0 14,946 >6.0
- -
24
Tier 1 Capital (to Average Assets)
Consolidated 35,555 8.43 16,879 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 8.26 16,848 >4.0 21,060 >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, 2007, the Bank may declare dividends to
Bancorp in an amount not to exceed $7,135,303.
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
---------------------------------------
At the 2001 annual meeting the shareholders 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 2007 and 2006, 840 shares were issued under the Plan and the related
compensation expense amounted to $30,450 and $31,920 respectively.
Note 15- ACQUISITION
--------------------
On August 1, 2007, the Bank opened a full service branch office in Dover Plains,
New York. The opening of the branch reflected consummation on July 31, 2007 of
the purchase of a branch office in Mt. Vernon, New York by the Bank pursuant to
the Purchase and Assumption Agreement dated October 3, 2006 by and between the
Bank and New York Community Bank. Such branch was relocated to Dover Plains, New
York and opened for business August 1, 2007.
The assets acquired and liabilities assumed have been recorded by the Company at
their fair values at the consummation date. Goodwill recorded totaled $319,407
and will be analyzed for impairment on at least an annual basis. Financial
statement amounts for the transaction are included in the Company's consolidated
financial statements beginning on the acquisition date. A summary is included in
the supplemental disclosure in the cash flow statement.
NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------
The Company's assets as of December 31, 2007 and 2006 include goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001 and $7,151,421
of additional goodwill from the 2004 merger with Canaan National Bancorp, Inc.
In 2007, the Company recorded $319,407 of additional goodwill from the purchase
of a branch of a bank in Mt. Vernon, NY.
The Company evaluated its goodwill and intangible assets as of December 31, 2007
and 2006 and found no impairment.
25
A summary of acquired amortizing intangible assets is as follows:
As of December 31, 2007
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 430,064 $ 458,542
Core deposit intangible-Canaan National merger 1,191,279 320,538 870,741
---------- ---------- ----------
Total $2,079,885 $ 750,602 $1,329,283
========== ========== ==========
As of December 31, 2006
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 361,709 $ 526,897
Core deposit intangible-Canaan National merger 1,191,279 224,677 966,602
---------- ---------- ----------
Total $2,079,885 $ 586,386 $1,493,499
========== ========== ==========
Amortization expense was $164,216 for the years ending December 31, 2007 and
2006. Amortization is being calculated on a straight-line basis.
Estimated amortization expense for each of the five years succeeding 2007 is as
follows:
2008 $ 164,216
2009 164,216
2010 164,216
2011 164,216
2012 164,216
----------
$ 821,080
==========
NOTE 17 - RECLASSIFICATION
--------------------------
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following 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.
26
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
BALANCE SHEETS
--------------
December 31, 2007 and 2006
--------------------------
ASSETS 2007 2006
------ ----------- -----------
Money market mutual funds $ 1,340,891 $ 1,199,881
Cash in Salisbury Bank and Trust Company 6,316 2,494
----------- -----------
Cash and cash equivalents 1,347,207 1,202,375
Investment in subsidiary 44,668,437 43,579,224
Other assets 2,910 5,469
----------- -----------
Total assets $46,018,554 $44,787,068
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable $ 454,956 $ 437,887
----------- -----------
Total liabilities 454,956 437,887
Total shareholders' equity 45,563,598 44,349,181
----------- -----------
Total liabilities and shareholders' equity $46,018,554 $44,787,068
=========== ===========
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
----------- -----------
Dividend income from subsidiary $ 1,920,000 $ 1,800,000
Taxable interest on securities 48,487 34,435
----------- -----------
1,968,487 1,834,435
----------- -----------
Legal expense 5,485 9,984
Supplies and printing 380 3,503
Other expense 51,181 37,517
----------- -----------
57,046 51,004
----------- -----------
Income before income tax benefit and equity in undistributed
net income of subsidiary 1,911,441 1,783,431
Income tax benefit (2,909) (5,469)
----------- -----------
Income before equity in undistributed net income of subsidiary 1,914,350 1,788,900
Equity in undistributed net income of subsidiary 1,885,698 2,464,718
----------- -----------
Net income $ 3,800,048 $ 4,253,618
=========== ===========
27
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income $ 3,800,048 $ 4,253,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (1,885,698) (2,464,718)
Decrease (increase) in taxes receivable 2,559 (3,892)
Issuance of shares for Directors' fees 30,450 31,920
----------- -----------
Net cash provided by operating activities 1,947,359 1,816,928
----------- -----------
Cash flows from financing activities:
Dividends paid (1,802,527) (1,734,277)
----------- -----------
Net cash used in financing activities (1,802,527) (1,734,277)
----------- -----------
Net increase in cash and cash equivalents 144,832 82,651
Cash and cash equivalents at beginning of year 1,202,375 1,119,724
----------- -----------
Cash and cash equivalents at end of year $ 1,347,207 $ 1,202,375
=========== ===========
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------
Summarized quarterly financial data for 2007 and 2006 follows:
(In thousands, except earnings per share)
2007 Quarters Ended
-------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 6,437 $ 6,360 $ 6,602 $ 6,753
Interest expense 3,071 2,997 3,167 3,197
------- ------- ------- -------
Net interest and dividend income 3,366 3,363 3,435 3,556
Provision for loan losses 0 0 0 0
Other income 1,124 1,115 1,060 1,165
Other expense 3,319 3,305 3,401 3,489
------- ------- ------- -------
Income before income taxes 1,171 1,173 1,094 1,232
Income tax expense 237 224 177 232
------- ------- ------- -------
Net income $ 934 $ 949 $ 917 $ 1,000
======= ======= ======= =======
Earnings per common share $ .55 $ .56 $ .54 $ .59
======= ======= ======= =======
28
(In thousands, except earnings per share)
2006 Quarters Ended
-------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 5,460 $ 5,789 $ 6,111 $ 6,369
Interest expense 2,167 2,531 2,754 3,007
------- ------- ------- -------
Net interest and dividend income 3,293 3,258 3,357 3,362
Benefit for loan losses 0 0 0 (87)
Other income 1,026 1,001 1,213 1,344
Other expense 2,837 2,992 3,101 3,315
------- ------- ------- -------
Income before income taxes 1,482 1,267 1,469 1,478
Income tax expense 335 261 309 537
------- ------- ------- -------
Net income $ 1,147 $ 1,006 $ 1,160 $ 941
======= ======= ======= =======
Earnings per common share $ .68 $ .60 $ .69 $ .56
======= ======= ======= =======
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Salisbury Bancorp, Inc. (the "Company"), a Connecticut corporation, formed in
1998, is the holding company for Salisbury Bank and Trust Company, (the "Bank").
The Company's sole subsidiary is the Bank, formed in 1848 which has seven (7)
full service offices located in the towns of North Canaan, Lakeville, Salisbury
and Sharon, Connecticut, South Egremont and Sheffield, Massachusetts, and Dover
Plains, New York. A full Trust and Investment Services Division is also located
in Lakeville, Connecticut. The Management's Discussion and Analysis of Results
of Operations and Financial Condition that follows presents Management's
comments on the consolidated operating results of the Company. In order to
provide a foundation for building shareholder value and servicing customers, the
Company remains committed to investing in the technological and human resources
necessary for developing and delivering new personalized financial products and
services in order to better serve both current and future customers in the
tri-state area. The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes to the consolidated
financial statements that are presented as part of this Annual Report.
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.
30
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".)
RESULTS OF OPERATION
--------------------
Comparison of the Years Ended December 31, 2007 and 2006
--------------------------------------------------------
Overview
--------
The reported earnings for the Company totaled $3,800,000 in 2007, which yielded
earnings per average share outstanding of $2.26. This compares to earnings of
$4,254,000 or $2.53 per average share outstanding in 2006. The decrease in
earnings is primarily attributable to an increase in noninterest expense due to
additional staff to support new marketing strategies, growth, and expansion into
New York State. The Company's assets at December 31, 2007 totaled $461,960,000
compared to total assets of $450,340,000 at December 31, 2006. New business
development efforts have resulted in the growth of net loans outstanding, which
totaled $268,191,000 at December 31, 2007. This compares to net loans
outstanding of $252,464,000 at December 31, 2006, and represents an increase of
$15,727,000 or 6.23%. This growth was funded by an increase in deposits as well
as an increase in advances from the Federal Home Loan Bank of Boston. Deposits
at December 31, 2007 totaled $317,741,000 and compared to total deposits of
$313,586,000 at December 31, 2006. Advances from the Federal Home Loan Bank
totaled $95,011,000 at December 31, 2007, which compared to advances totaling
$87,093,000 at December 31, 2006. 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
$1,824,000 at December 31, 2007 as compared to nonperforming loans totaling
$964,000 at December 31, 2006. While the level of nonperforming loans increased,
such loans represent less than one percent (1%) of total loans outstanding.
Accordingly, while the overall quality of the loan portfolio remains high,
management continues to monitor the portfolio for trends in light of current
economic conditions.
The Bank is "well capitalized". The Bank's risk-based capital ratios at December
31, 2007 were 13.74% for Tier 1 risk based capital and 14.69% for total risk
based capital. The Bank's leverage ratio was 8.06% at December 31, 2007. This
compares to a Tier 1 risk based capital ratio at December 31, 2006 of 13.97%, a
total risk based capital ratio of 14.98% and a leverage ratio of 8.26%. As a
result of the Company's financial performance, the Board of Directors increased
total dividends declared on the Company's common stock to $1.08 per share in
2007. This compares to a $1.04 per share dividend declared in 2006.
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.
31
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 an 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,
2007 2006
--------------------------
Interest and Dividend Income
(financial statements) $ 26,152 $ 23,730
Tax Equivalent Adjustment 1,202 1,072
-------- --------
Total Interest and Dividend
Income (on an FTE basis) 27,354 24,802
Interest Expense (12,432) (10,459)
-------- --------
Net Interest and Dividend Income-FTE $ 14,922 $ 14,343
======== ========
The Company's 2007 total interest and dividend income on an FTE basis for the
period ended December 31, 2007 increased $2,552,000 or 10.29% when compared to
the same period in 2006. The increase is primarily attributable to an increase
in earning assets as well an economic environment experiencing an increase in
interest rates.
Interest expense on deposits in 2007 increased $1,314,000 or 19.09% to
$8,200,000 compared to $6,886,000 for the corresponding period in 2006. The
increase is primarily attributable to generally higher interest rates during the
period as well as an increase in interest bearing deposits. Interest expense for
Federal Home Loan Bank advances increased $659,000 to $4,232,000 in 2007
compared to $3,573,000 in 2006. The increase was the result of an increase in
advances during the year. Competition remains aggressive and interest margins
continue to be pressured, however, net interest and dividend income on an FTE
basis increased $579,000 or 4.04% over 2006 and totaled $14,922,000 for the year
ended December 31, 2007 and compared to net interest and dividend income on an
FTE basis of $14,343,000 for the year ended December 31, 2006.
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2007 over 2006 2006 over 2005
--------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
--------------------------------- ---------------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 1,981 $ 301 $ 2,282 $ 1,335 $ 1,032 $ 2,367
Taxable investment securities (256) 156 (100) (50) 836 786
Tax-exempt investment securities 489 (108) 381 (351) (26) (377)
Other interest earning (1) (10) (11) (26) 36
------- ------- ------- ------- ------- -------
10
Total interest and dividend income $ 2,213 $ 339 $ 2,552 $ 908 $ 1,878 $ 2,786
------- ------- ------- ------- ------- -------
32
Interest expense on:
NOW/Money Market deposits $ 18 $ 24 $ 42 $ (34) $ 617 $ 583
Savings deposits (24) 198 174 (81) 265 184
Time deposits 528 570 1,098 561 1,387 1,948
Borrowed funds 808 (149) 659 172 220 392
------- ------- ------- ------- ------- -------
Total interest expense $ 1,330 $ 643 $ 1,973 $ 618 $ 2,489 $ 3,107
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 883 $ (304) $ 579 $ 290 $ (611) $ (321)
======= ======= ======= ======= ======= =======
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 2007 net interest margin on an FTE basis
was 3.54%. This compares to a net interest margin of 3.67% for 2006. The
following table reflects average balances, interest earned or paid and rates for
the two years ended December 31, 2007 and 2006. The average loan balances
include non-accrual loans and loans currently past due 90 days and still
accruing. 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 an FTE basis. A federal tax rate of 34%
was used in performing these calculations. Actual tax exempt income earned in
2007 was $2,332,000 with a yield of 4.28%. Actual tax exempt income in 2006
totaled $2,080,000 with a yield of 4.41%.
33
YIELD ANALYSIS
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
(dollars in thousands) 2007 2006
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-Earning Assets:
Loans $ 258,714 $17,969 6.95% $ 229,704 $15,687 6.83%
Taxable Securities 106,775 5,783 5.42% 111,635 5,883 5.27%
Tax-Exempt Securities* 54,541 3,533 6.48% 47,215 3,152 6.68%
Federal Funds 643 31 4.82% 1,154 56 4.85%
Other Interest-Earning 1,071 38 3.55% 703 24 3.41%
---------------------- ----------------------
Total Interest-Earning
Assets 421,744 27,354 6.49% 390,411 24,802 6.35%
------- -------
Allowance for Loan
Losses (2,467) (2,603)
Cash & Due From
Banks 6,554 6,949
Premises, Equipment 6,645 6,388
Net unrealized loss
on AFS Securities (3,468) (4,106)
Other Assets 20,619 20,348
--------- ---------
Total Average Assets $ 449,627 $ 417,387
========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW/Money Market
Deposits $ 80,180 1,854 2.31% $ 79,356 1,812 2.28%
Savings Deposits 47,063 814 1.73% 48,882 640 1.31%
Time Deposits 119,052 5,532 4.65% 106,395 4,434 4.17%
Borrowed Funds 87,649 4,232 4.83% 71,471 3,573 5.00%
---------------------- ----------------------
Total Interest-Bearing
Liabilities 333,944 12,432 3.72% 306,104 10,459 3.42%
------- -------
Demand Deposits 66,304 65,151
Other Liabilities 4,673 2,842
Shareholders' Equity 44,706 43,290
--------- ---------
Total Liabilities and
Shareholders' Equity $ 449,627 $ 417,387
========= =========
Net Interest Income $14,922 $14,343
======= =======
Net Interest Spread 2.77% 2.93%
Net Interest Margin 3.54% 3.67%
* Presented on a fully taxable equivalent ("FTE") basis
34
Noninterest Income
------------------
Noninterest income totaled $4,465,000 for the year ended December 31, 2007 and
compared to $4,583,000 for the year ended December 31, 2006. This is a decrease
of $118,000 or 2.57%. Gains on sales of available-for-sale securities, net
decreased $222,000 or 42.94%. This decrease is primarily the result of movement
in market rates during the year, which limited opportunities to generate gains
on sales of available-for-sale securities. Trust and investment services income
increased $70,000 to $2,050,000 primarily as a result of the efforts of new
business development, which has increased assets under management. Service
charges on deposit accounts totaled $744,000 for 2007. This is an increase of
$37,000 or 5.23% when compared to total service charges of $707,000 in 2006. The
increase can be attributed to an increase in the number of deposit accounts.
Mortgage refinancing remained active during 2007 resulting in revenues from
gains on sales of loans that totaled $317,000, which compares to revenues
totaling $358,000 for the corresponding period in 2006. Competition in the
secondary mortgage market continues to be very aggressive. Other income during
fiscal 2007 totaled $1,037,000. This compares to other income of $902,000 for
2006 and represents an increase of $135,000 or 14.97%. This category of income
primarily consists of fees associated with transaction accounts and fees related
to the origination and servicing of mortgage loans as well as gains reflecting
the sale of mortgage loans.
Noninterest Expense
-------------------
Overall, noninterest expense increased 10.36% for the year ended December 31,
2007 as compared to the corresponding period in 2006. Professional fees which
are included in noninterest expenses increased $225,000 or 31.87%. This increase
is primarily attributable to the Company's trust and investment services
division's working partnership with Bradley Foster and Sargent, Inc., an
independent investment advisory firm which assists in providing a broader scope
of highly personalized professional investment services to clients. In addition,
internal audit expense increased, which is the result of additional services
required due to compliance requirements of the Sarbanes-Oxley Act. Although some
increases in the described noninterest expenses in the table below are
attributable to normal volumes of business, the largest contribution to the
increases in noninterest expense, including other expense, reflect non-recurring
expenses associated with the Bank's entry into New York State. A branch office
was established in Dover Plains, New York, which opened its doors for business
on August 1, 2007.
The components of noninterest expense and the changes in the period were as
follows (amounts in thousands):
2007 2006 $ Change % Change
---------------------------------------------------------------------------------------
Salaries and employee benefits $ 7,724 $ 7,151 $ 573 8.01%
Occupancy expense 802 752 50 6.65
Equipment expense 819 787 32 4.07
Data processing 1,194 1,134 60 5.29
Insurance 163 154 9 5.84
Printing and stationery 280 240 40 16.67
Professional fees 931 706 225 31.87
Amortization of core deposit intangible 164 164 0 .00
Other expense 1,437 1,157 280 24.20
------- ------- -------
Total noninterest expense $13,514 $12,245 $ 1,269 10.36
======= ======= =======
Income Taxes
------------
In 2007, the Company's income tax provision totaled $870,000 which reflects an
effective tax rate of 18.63%. This compares to an income tax provision of
$1,442,000 and an effective tax rate of 25.32% for the same period in 2006. This
decrease is primarily attributable to a decrease in taxable income.
35
Net Income
----------
Overall, net income totaled $3,800,000 for the year ended December 31, 2007 and
represents earnings per average share outstanding of $2.26. This compares to net
income of $4,254,000 for the year ended December 31, 2006, which reflects
earnings per average share outstanding of $2.53.
FINANCIAL CONDITION
Comparison of December 31, 2007 and 2006
----------------------------------------
Total assets at December 31, 2007 were $461,960,000 compared to $450,340,000 at
December 31, 2006. This is an increase of 2.58%. The increase is primarily the
result of an increase in earning assets that were funded by an increase in
deposits and advances from the Federal Home Loan Bank of Boston.
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, 2007, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $152,624,000. This represents a decrease
of $8,607,000 or 5.34% over year-end 2006. This decrease reflects a change in
asset mix as securities portfolio assets were used to fund the growth in loan
demand during the year.
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. At December 31, 2007, the unrealized holding losses
on available-for-sale securities, net of taxes was $2,273,000. This compares to
an unrealized loss net of taxes of $1,190,000 at December 31, 2006. 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
------------------
Federal funds sold at December 31, 2007 totaled $300,000. Federal funds sold at
December 31, 2006 totaled $1,000,000. This variance represents a normal
operating range of funds for daily cash needs.
Lending
-------
New business development during the year coupled with an increase in loan demand
resulted in an increase in net loans outstanding to $268,191,000 at December 31,
2007, as compared to $252,464,000 at December 31, 2006. This is an increase of
$15,727,000 or 6.23%. Although the largest dollar volumes of loan activity
continue to be in the residential mortgage area, the Company offers a wide
variety of loan types and terms along with competitive pricing to customers. At
December 31, 2006, the portfolio also
36
included $12,000,000 in Term federal funds, which are short term loans to other
financial institutions. The Company's credit function is designed to ensure
adherence to prudent credit standards despite competition for loans in the
Company's market area.
The following table represents the composition of the loan portfolio comparing
December 31, 2007 to December 31, 2006:
December 31, 2007 December 31, 2006
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 20,629 $ 16,465
Real Estate-construction and land development 28,928 21,169
Real Estate-residential 158,600 145,395
Real Estate-commercial 53,823 50,859
Consumer 8,005 8,816
Term federal funds 0 12,000
Other 376 69
270,361 254,773
Deferred costs, net 306 168
Unearned income (1) (3)
Allowance for loan losses (2,475) (2,474)
--------- ---------
Net loans $ 268,191 $ 252,464
========= =========
Provisions and Allowance for Loan Losses
----------------------------------------
Total loans outstanding as of December 31, 2007 were $270,361,000 and compares
to total loans outstanding of $254,773,000 at December 31, 2006. This growth can
be attributed primarily to an increase in both residential and commercial real
estate loan demand as well as the Bank's new business development program.
Approximately 90% of the Company's loan portfolio continues to be real estate
secured.
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 Company evaluates the adequacy of
the allowance on a monthly basis. Such evaluations are based on assessments of
credit quality and trends within the portfolio 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 for Loan and Lease Losses (ALLL) at December 31, 2007 totaled
$2,475,000 representing 135.69% of nonperforming loans of $1,824,000 and .92% of
total loans outstanding of $270,361,000. This compares to an ALLL of $2,474,000
which is 256.64% of nonperforming loans of $964,000 and .97% of total loans
outstanding of $254,773,000 at December 31, 2006. A separate component that is
evaluated is the Allowance for Off Balance Sheet Commitments, which totaled
$34,000 as of December 31, 2007. The December 31, 2006 allowance for off balance
sheet commitments was $36,000. A total of $103,000 in loans were charged-off
during 2007 compared to $132,000 during 2006. Recoveries of previously
charged-off loans totaled $104,000 during 2007 compared to $67,000 in recoveries
for 2006. 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.
37
Any such commercial loan and/or residential mortgage will be considered for
impairment 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.
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 averages of net losses by loan types
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.
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 expectations of
the Company to continue to grow its existing portfolio, future additions to the
allowance may be necessary to maintain adequate reserve coverage. Overall,
management is of the opinion that the ALLL is adequate as of December 31, 2007.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2007 totaled $317,741,000 compared to
$313,586,000 at year-end 2006. 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 2007, there was a change in the mix of deposits. Demand, NOW and savings
balances, which are lower cost core deposits, decreased and were replaced
primarily by time deposits, which, as illustrated by the table below, results in
a significant increase in interest expense.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
38
(dollars in thousands) Year ended December 31
2007 2006
-----------------------------------------------------
Average Average
Balance Rate Balance Rate
-----------------------------------------------------
Demand $ 66,304 $ 65,151
NOW 24,822 .26% 25,090 .26%
Money Market 55,358 3.23% 54,266 3.22%
Savings 47,063 1.73% 48,882 1.31%
Time 119,052 4.65% 106,395 4.17%
---------- ----------
$ 312,599 2.62% $ 299,784 2.29%
========== ==========
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31 are summarized as follows:
(dollars in thousands) December 31
2007 2006
-------------------
Three months or less $ 7,603 $12,045
Over three months through six months 17,429 8,946
Over six months through one year 15,114 24,791
Over one year 10,975 9,533
------- -------
Total $51,121 $55,315
======= =======
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, 2007, the Company had $95,011,000 in
outstanding advances from the Federal Home Loan Bank compared to $87,093,000 at
December 31, 2006. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston. (See Note 7 to the Financial Statements.)
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.
The Bank uses asset/liability modeling software to develop scenario analyses,
which measure the impact that changing interest rates have on net interest
income. These model simulations are projected out over a two year time horizon,
assuming proportional upward and downward interest rate movements of 100, 200
and 300 basis points. Simulations are projected out in two ways:
39
(1) using the same balance sheet as the Bank had on the simulation
date, and
(2) using a growing balance sheet based on recent growth patterns
and strategies.
As interest rates rise or fall, these simulations incorporate expected future
lending rates, current and expected future funding sources and cost, the
possible exercise of options, changes in prepayment rates, and other factors
which may be important in determining the future growth of net interest income.
The rates the Company earns on its assets and the rates it pays on its
liabilities are generally fixed for a contractual period of time. Imbalance in
these contractual maturities can create significant earnings volatility because
market interest rates change over time. In a period of rising interest rates,
the interest income earned on assets may not increase as rapidly as the interest
paid on liabilities. In a period of declining interest rates the interest income
earned on assets may decrease more rapidly than the interest paid on
liabilities. This would primarily be attributed to accelerated prepayments on
loans and securities that are significantly influenced by movements in market
rates.
The net interest margin may be adversely affected by several possible interest
rate environments. Foremost, a continued flat or inverted yield curve may result
in shorter term market interest rates that equal or exceed those of longer term
rates. This could further increase the Bank's cost of interest-bearing
liabilities that continue to outpace its yield on earning assets resulting in
additional net interest rate spread compression.
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, the Bank, is a member of
the Federal Home Loan Bank of Boston, which provides a source of available
borrowings for liquidity.
At December 31, 2007, the Company had approximately $59,318,000 in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the Company's needs for both the present and foreseeable
future.
Capital
-------
At December 31, 2007, the Company had $45,564,000 in shareholders' equity
compared to $44,349,000 at December 31, 2006. This represents an increase of
$1,215,000 or 2.74%. Several components contributed to the change since December
2006. Earnings for the year totaled $3,800,000. 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. Market fluctuations of fair value of the securities portfolio during
2007 resulted in other comprehensive loss net of tax totaling $1,082,000. The
initial application of SFAS No. 158, as described in Note 2 to the Financial
Statements, resulted in other comprehensive income, net of tax of $286,000 in
2007. The Company declared dividends in 2007 resulting in a decrease in capital
of $1,820,000. The Company issued 840 new shares of common stock under the terms
of the Director Stock Retainer Plan during the second quarter of 2007, which
resulted in an increase in capital of $30,000.
Under current regulatory definitions, the Bank is 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
40
that are sensitive to the differences in risk associated with various assets. It
takes into account off-balance sheet exposure in assessing capital adequacy and
it minimizes disincentives to holding liquid, low risk assets. At year-end 2007,
the Bank had a total risk-based capital ratio of 14.69% compared to 14.98% at
December 31, 2006. Maintaining strong capital is essential to bank safety and
soundness. However, the effective management of capital resources requires
generating attractive returns on equity to build value for shareholders while
maintaining appropriate levels of capital to fund growth, meet regulatory
requirements and be consistent with prudent industry practices. Management
believes that the capital ratios of the Company and Bank are adequate to
continue to meet the foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money, over time, due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result, interest rates tend to have a greater impact on the Company's
performance than do the effects of general levels of inflation. Although
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.
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).
Statement of Management's Responsibility
----------------------------------------
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization structure
providing for delegation of authority and establishment 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.
Management's Report on Internal Control Over Financial Reporting
----------------------------------------------------------------
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control process
has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
41
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007, utilizing the
framework established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2007 is effective.
Our internal control over financial reporting includes policies and procedures
that (1) pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, the transactions and dispositions of assets of
the Company; (2) provide reasonable assurances that: (a) transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America and (b) receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and (3) provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that could
have a material effect on the Company's financial statements.
21
This Annual Report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this Annual Report.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ John F. Perotti /s/ Richard J. Cantele, Jr. /s John F. Foley
------------------- --------------------------- ---------------------------
John F. Perotti Richard J. Cantele, Jr. John F. Foley
Chairman & CEO President & COO CFO, Treasurer & Secretary
42