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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock par
value $.10 per share
Name of exchange on which registered: American Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant"s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer. Yes |_|
No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: June 30, 2003: $38,753,796
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,424,078 shares outstanding as of March 5, 2004.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
Page
----
Part I
Item 1 - Business 3
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 8
Item 2 - Properties 13
Item 3 - Legal Proceedings 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 - Market for Registrant"s Common Equity and
Related Stockholder Matters 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
(d) Securities Authorized for Issuance Under Equity Compensation Plans 14
Item 6 - Selected Financial Data 15
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 30
Item 8 - Financial Statements and Supplementary Data 31
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 32
Item 9A - Controls and Procedures 32
Part III
Item 10 - Directors and Executive Officers of the Registrant 32
Item 11 - Executive Compensation 34
Item 12 - Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 37
Item 13 - Certain Relationships and Related Transactions 38
Item 14 - Principal Accounting Fees and Services 38
Part IV
Item 15 - Exhibits, Financial Statements and Reports on Form 8-K 39
Signatures 41
2
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which
accounts for most of the Company's net income. The Bank assumed its present name
in 1925 following the acquisition by the Robbins Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the successor to a private banking firm established in 1874. The
Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of Connecticut and its deposits are
insured by the Federal Deposit Insurance Corporation in accordance with the
Federal Deposit Insurance Act. The Bank's main office is at 5 Bissell Street,
Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. Substantially all of the
Bank's customers reside in or maintain their principal offices in Litchfield
County, Connecticut or in Dutchess County or Columbia County, New York or in
Berkshire County, Massachusetts.
(b) Financial Information about Industry Segments
The Company's products and services are all of a nature of commercial bank and
trust company.
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2003, it totaled $147,021,000 which represents
approximately 47.26% of total assets and it produced interest and dividend
income of $6,423,000 for the year 2003 as compared with $6,480,000 for 2002 and
$5,746,000 for 2001 respectively.
3
Deposits and Borrowings
The Bank's primary sources of funds are deposits, borrowings and principal
payments on loans. Although competition for funds from non-banking institutions
remains aggressive, the Bank continues its efforts to build multiple account
relationships with its customers. As a result, average daily deposits increased
4.03% to $213,392,000 during 2003.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $60,897,000 at December 31, 2003 as compared with
$51,891,000 at December 31, 2002.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis and
the accompanying Consolidated Financial Statements.
Fiduciary
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts and estate planning and estate settlement. Another
service is that of serving as Guardian or Conservator of estates and managing
the financial position of Guardianships or Conservatorships. Self directed IRAs
and Pension plans are also offered.
All Others
The Company also offers safe deposit rentals, foreign exchange, a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Competition
The Company and the Bank encounter competition in all phases of their business.
There are numerous financial institutions that have offices in the areas in
which the Company and Bank compete in Northwestern Connecticut, Western
Massachusetts and proximate areas of New York State.
All of the offices of the Bank are located in the northwest corner of Litchfield
County, designated by the Federal Reserve Banks of Boston and New York to be
within the "Metro Banking Market". The Bank maintains four (4) banking offices
within the Metro Banking Market, which is served by 277 commercial banks and
savings banks. The Bank has less than a 1% market share of deposits in such
Market.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Insurance companies, investment counseling firms and other
businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services. Many non-bank
competitors are not subject to the extensive regulation described below under
"LEGISLATION, REGULATION AND SUPERVISION" and in certain
4
respects may have a competitive advantage over banks in providing certain
services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions and
mergers of Connecticut banks and bank holding companies of or with banks and
bank holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank's future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
5
Under the BHCA and the regulations of the Federal Reserve System promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined therein, without prior approval of the Federal Reserve Board. The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it wishes to acquire voting shares of any other bank, if after such
acquisition it would own or control more than five percent (5%) of the voting
share of such bank. The BHCA imposes limitations upon the Company as to the
types of business in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:
(i) the bank holding company's capital ratios exceed the threshold established
for "well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirements; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
6
o Disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o The presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by Company's auditor. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. On October 26, 2001, President Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001.
Part of the USA Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of the Bank to declare
cash dividends to its shareholders.
7
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank's
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
Employees
The Company's current workforce at February 13, 2004 was 92 employees of whom 83
were full time and 9 were part time. The employees are not represented by a
collective bargaining unit.
(d) Financial Information about Foreign and Domestic Operations and Export
Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.
8
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, are presented on the following pages of this Report
on Form 10-K.
Page(s) of
Item of Guide 3 This Report
- --------------- -----------
I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential 17
II. Investment Portfolio 9
III. Loan Portfolio 10
IV. Summary of Loan Loss Experience 11
V. Deposits 23
VI. Return on Equity and Assets 10
VII. Short-Term Borrowings 12
9
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables sets forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands)
2003 2002 2001
-------- -------- --------
Available-for-sale securities:
(at fair value)
Equity securities $ 136 $ 90 $ 135
U.S. government agencies preferred stock 7,610 4,179 0
U.S. Treasury securities and other
U.S. government corporations and agencies 51,979 41,635 38,701
Obligations of states and political subdivisions 45,988 42,792 30,273
Mortgage-backed securities 37,307 46,473 33,139
-------- -------- --------
$143,020 $135,169 $102,248
======== ======== ========
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ $ $
Obligations of states and political subdivisions 0 0 0
Mortgage-backed securities 229 321 400
-------- -------- --------
$ 229 $ 321 $ 400
======== ======== ========
Federal Home Loan Bank stock $ 3,771 $ 2,945 $ 2,945
======== ======== ========
For the following table, yields are not calculated and presented on a fully
taxable-equivalent ("FTE") basis.
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
2003:
(dollars in thousands)
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
------ ----- ----- ----- ----- ----- ----- ----- -----
Held-to-maturity
securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 0 $ 0 $ 0
Obligations of state and
political subdivisions 0 0 0 0 0
Mortgage-backed
securities 0 0 0 229 4.38% 229
------ ------ ------- -------- --------
$ 0 $ 0 $ 0 $ 229 $ 229
====== ====== ======= ======== ========
Available-for-sale
Securities
(at fair value)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 7,099 6.01% $ 44,880 4.05% $ 51,979
Obligations of state and
political subdivisions $ 0 $ 241 4.70% $ 206 3.60% $ 45,541 4.81% $ 45,988
Mortgage-backed
securities $ 42 7.50% $ 18 7.00% $ 0 $ 37,247 4.68% $ 37,307
------ ------ ------- -------- --------
$ 42 $ 259 $ 7,305 $127,668 $135,274
====== ====== ======= ======== ========
10
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
-----------------------------------------------------------------
Commercial, financial and $ 9,149 $ 10,127 $ 10,797 $ 8,592 $ 9,025
agricultural
Real Estate-construction and 15,307 6,027 3,935 6,275 3,382
land development
Real Estate - residential 90,807 93,636 102,201 98,312 86,680
Real Estate-commercial 19,199 18,002 17,423 15,463 15,324
Consumer 6,692 9,007 10,030 10,673 10,698
Other 73 291 125 247 364
-----------------------------------------------------------------
141,227 137,090 144,511 139,562 125,473
Allowance for possible loan losses (1,664) (1,458) (1,445) (1,292) (1,160)
Unearned income 0 (0) (0) (0) (0)
-----------------------------------------------------------------
Net loans $ 139,563 $ 135,632 $ 143,066 $ 138,270 $ 124,313
=================================================================
There are no industry concentrations in the Bank's loan portfolio.
The following table shows the maturity of commercial, financial and agricultural
loans, real estate commercial loans and real estate-construction loans
outstanding as of December 31, 2002. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due in Due after
one year one year to Due after
or less five years five years
---------------------------------
Commercial, financial,
agricultural and real estate commercial $ 6,070 $ 3,224 $19,053
Real estate-construction and land development 15,307 0 0
--------------------------------
$21,377 $ 3,224 $19,053
================================
Maturities after
One Year with:
Fixed interest rates $ 2,004 $12,423
Variable interest rates 1,220 6,630
-------------------
$ 3,224 $19,053
===================
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
Year ended December 31,
-----------------------
2003 2002 2001
----- ----- -----
Return on average total assets
(net income divided by average total assets) 1.24% 1.13% 1.14%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 13.47% 12.63% 12.25%
Dividend payout ratio
(total declared dividends divided by net income) 34.07% 39.11% 41.34%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.21% 8.92% 9.27%
11
Nonaccrual, Past Due and Restructured Loans
At December 31, 2003, there were two (2) nonaccrual loans in the Bank's
portfolio both of which were secured by real estate. When a mortgage loan
becomes 90 days past due, and there is not sufficient collateral to cover the
principal and accrued interest, the Bank generally stops accruing interest
unless there are unusual circumstances which warrant an exception. Generally the
only loan types that the Bank reclassifies to nonaccrual are those secured by
real estate. Other types of loans are generally charged off if they become 90
days or more delinquent. However, exception is warranted with the $535,000 in
loans that are presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
-------------------------------------------------------
Nonaccrual $ 75 $ 855 $ 372 $ 186 $ 473
90 days or more past due 535 124 215 323 10
Restructured loans 0 271 0 12 12
-------------------------------------------------------
Total nonperforming loans $ 610 $1 250 $ 587 $ 521 $ 495
=======================================================
Total nonperforming loans as per-
centage of the total loan portfolio 0.43% 0.92% 0.41% 0.37% 0.39%
Allowance for loan losses as a per-
centage of nonperforming loans 272.79% 116.64% 246.17% 247.99% 234.34%
Information with respect to non-accrual and
restructured loans at December 31,
2003, 2002 and 2001 is as follows:
(dollars in thousands) Year Ended December 31
2002 2002 2001
------------------------
Interest income that would have been recorded under original terms $ 4 $ 68 $ 38
Gross interest recorded 0 49 28
------------------------
Foregone interest $ 4 $ 19 $ 10
========================
Summary of Loan Loss Experience
(dollars in thousands)
Year Ended December 31
2003 2002 2001 2000 1999
---------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 1,458 $ 1,445 $ 1,292 $ 1,160 $ 1,260
---------------------------------------------------------
Charge-offs:
Commercial, financial and
agricultural 71 60 0 0 1
Real estate mortgage 0 46 13 21 243
Consumer 84 146 88 50 25
---------------------------------------------------------
Total charge-offs 155 252 101 71 269
---------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 24 2 0 0 0
Real estate mortgage 0 1 87 6 19
Consumer 24 26 17 17 30
---------------------------------------------------------
Total recoveries 48 29 104 23 49
---------------------------------------------------------
Net charge-offs 107 223 (3) 48 220
Provisions charged to operations 313 300 150 180 120
Transfer of allowance for loan
losses to other liabilities 0 (64) 0 0 0
---------------------------------------------------------
Balance at end of year $ 1,664 $ 1,458 $ 1,445 $ 1,292 $ 1,160
=========================================================
Ratio of net charge-offs to
average loans outstanding .01% .02% (.002%) .04% .18%
Ratio of allowance for loan losses
to year end loans 1.18% 1.07% 1.01% .93% .93%
12
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2003 2002 2001 2000 1999
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16% $ 160 7.19%
Real estate construction
and land development 112 10.82% 50 4.40% 24 2.72% 0 4.50% 0 2.70%
Real estate mortgage 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51% 941 81.30%
Consumer 357 4.72% 244 6.57% 100 6.94% 65 7.65% 58 8.52%
Other loans 5 .05% 8 .21% 1 .09% 1 .18% 1 .29%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,664 100.00% $1,458 100.00% $1,445 100.00% $1,292 100.00% $1,160 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for possible loan losses are charged to operating
expenses and are based on past experience, current economic conditions and
management's judgement of the amount necessary to cover losses inherent in the
portfolio. The Bank records provisions for estimated loan losses, which are
charged against earnings, in the period they are established.
Short-Term Borrowings
(dollars in thousands) December 31
2003 2002 2001
--------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.06% 5.35% 5.95%
For the year 4.21% 5.45% 5.62%
Average amount outstanding during the year $65,282 $52,438 $53,407
Maximum amount outstanding at any month $74,705 $59,125 $56,766
Amount outstanding at year end $60,897 $51,891 $53,004
ITEM 2. DESCRIPTION OF PROPERTIES
The holding company is not the owner or lessee of any properties. The Bank does
not lease any properties. The properties described below are owned by the Bank.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Bank's trust
department is located in a separate building adjacent to the main office of the
Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Office 94 Main Street Owned
Canaan, Connecticut
13
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, there are no material
legal proceedings pending to which the Company, Bank, or their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2003 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2003 Quarters 2002 Quarters
------------------------------------ ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------ ------------------------------------
Range of Stock prices:
High $38.95 $32.25 $29.50 $30.00 $28.01 $25.25 $26.75 $25.25
Low $29.50 $29.00 $26.00 $26.00 $25.00 $22.51 $24.10 $21.25
(b) Holders
There were approximately 473 holders of record of the common stock of the
Company as of March 5, 2004. This number includes brokerage firms and other
financial institutions which hold stock in their name but which is actually
owned by third parties.
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. During the year 2003, the Company declared
a cash dividend each quarter of $.23 per share. Dividends for the year 2003
totaled $.92 per share which compared to total dividends of $.88 that were
declared in the year 2002. At their February 27, 2004 meeting, the Directors of
the Company declared a cash dividend of $.24 per share for the first quarter of
2004. The dividend will be paid on April 28, 2004 to shareholders of record as
of March 31, 2004. Payment of all dividends are dependent upon the condition and
earnings of the Company. The Company's ability to pay dividends is limited by
the prudent banking principles applicable to all bank holding companies and by
the provisions of Connecticut Corporate law, which provide that no distribution
may be made by a company if, after giving it effect: (1) the company would not
be able to pay its debts as they become due in the usual course of business or
(2) the company's total assets would be less than the sum of its total
liabilities plus amounts needed to satisfy any preferred stock rights. The
following table presents cash dividends declared per share for the last two
years:
2003 Quarters 2002 Quarters
------------------------------------ ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------ ------------------------------------
Cash dividends
declared $0.23 $0.23 $0.23 $0.23 $0.22 $0.22 $0.22 $0.22
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 12 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $139,563 $135,632 $143,066 $138,270 $124,313
Allowance For Loan Losses 1,664 1,458 1,445 1,292 1,160
Investments 147,021 138,435 105,593 91,922 77,745
Total Assets 311,100 293,107 283,602 249,054 215,385
Deposits 218,457 211,037 201,351 166,436 154,358
Borrowings 60,897 51,891 53,004 47,357 39,712
Shareholders' Equity 28,850 27,345 23,363 22,460 19,895
Nonperforming Assets 685 1,400 587 521 495
Statement of Income Data:
Interest and Fees on Loans $ 9,226 $ 9,677 $ 11,344 $ 10,494 $ 9,621
Interest and Dividends on Securities
and Other Interest Income 6,423 6,481 5,746 6,015 4,903
Interest Expense 5,613 6,898 8,301 8,284 6,683
-------- -------- -------- -------- --------
Net Interest Income 10,036 9,260 8,789 8,225 7,841
Provision for Loan Losses 313 300 150 180 120
Trust Department Income 1,252 1,100 1,070 1,108 1,121
Other Income 1,674 1,388 1,187 914 860
Net Gain (Loss) on Sales of Securities 1,058 634 130 (64) (2)
Other Expenses 8,599 7,775 6,755 5,797 5,523
-------- -------- -------- -------- --------
Pre Tax Income 5,108 4,307 4,271 4,206 4,177
Income Taxes 1,268 1,108 1,370 1,357 1,484
-------- -------- -------- -------- --------
Net Income $ 3,840 $ 3,199 $ 2,901 $ 2,849 $ 2,693
======== ======== ======== ======== ========
Per Share Data:
Earnings per common share $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Earnings per common share, assuming dilution $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Cash Dividends Declared per share $ 0.92 $ 0.88 $ 0.84 $ 0.77 $ 0.70
Book Value (at year end) $ 20.26 $ 19.21 $ 16.43 $ 15.40 $ 13.23
Selected Statistical Data:
Return on Average Assets 1.24% 1.13% 1.14% 1.23% 1.25%
Return on Average Shareholders' Equity 13.47% 12.63% 12.25% 13.64% 12.96%
Dividend Payout Ratio 34.07% 39.11% 41.38% 39.72% 39.16%
Average Shareholders' Equity to Average Assets 9.21% 8.92% 9.27% 8.98% 9.67%
Net Interest Spread 3.23% 3.13% 2.91% 2.83% 3.07%
Net Interest Margin 3.65% 3.72% 3.71% 3.79% 3.93%
15
Salisbury Bancorp, Inc.
and Subsidiary
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and the Bank
were formed in 1998 and 1848, respectively. This discussion should be read in
conjunction with the Company's consolidated financial statements and the notes
to the consolidated financial statements that are presented as part of this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2003 and 2002
OVERVIEW
The reported earnings for the Company were $3,840,000 in 2003, an increase of
$641,000 or 20.04% over year 2002 earnings of $3,199,000. As a result, earnings
per share increased $.45 or 20.00% to $2.70 in 2003. This compares to earnings
per share of $2.25 in 2002 and $2.03 in 2001. The improvement in net income is
primarily the result of growth in earning assets that has produced an increase
in total net interest income, a reduction in interest expense and an increase in
other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2003, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 15.35% for Tier 1 capital and 16.44% for
total capital. The Company's leverage ratio was 8.05% at December 31, 2003. This
compares to a Tier 1 capital ratio at December 31, 2002 of 16.05%, a total
capital ratio of 17.21%, and a Company leverage ratio of 7.80%. As a result of
the Company's financial performance, the Board of Directors increased total
dividends declared on the Company's common stock to $.92 per share in 2003. This
compares to an $.88 per share dividend paid in 2002 and a $.84 per share
dividend that was paid in 2001.
CRITICAL ACCOUNTING ESTIMATES
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
changed conditions, which could have an adverse impact on reported earnings in
the future. See "Provisions and Allowance for Loan Losses".
NET INTEREST AND DIVIDEND INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors or
borrows funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the
16
interest rate paid on those interest-bearing deposits and borrowed funds. For
this discussion, net interest income is presented on a fully taxable-equivalent
("FTE") basis. FTE interest income restates reported interest income on tax
exempt loans and securities as if such interest were taxed at the applicable
State and Federal income tax rates for all periods presented.
(dollars in thousands) December 31,
2003 2002 2001
----------------------------------
Interest and Dividend Income
(financial statements) $ 15,650 $ 16,157 $ 17,089
Tax Equivalent Adjustment 1,075 1,028 504
-------- -------- --------
Total Interest Income (on an FTE basis) 16,725 17,185 17,593
Interest Expense (5,613) (6,898) (8,301)
-------- -------- --------
Net Interest Income-FTE $ 11,112 $ 10,287 $ 9,292
======== ======== ========
The Company's 2003 total interest and dividend income on an FTE basis of
$16,725,000 was $460,000 or 2.68% less than the total interest and dividend on
an FTE basis of $17,185,000 in 2002. Although there was an increase in earning
assets, this decrease in interest and dividend income is primarily the result of
an economic environment with lower interest rates. A change in the mix of
earning assets during 2002 and continuing into 2003 has increased tax exempt
securities in the securities portfolio which has resulted in an increase in the
tax equivalent adjustment of $1,075,000 in 2003 and $1,028,000 in 2002 when
compared to the tax equivalent adjustment of $504,000 in 2001.
Interest expense on deposits in 2003 decreased $1,173,000 or 29.05% to
$2,866,000 compared to $4,039,000 for the corresponding period in 2002 and
$5,302,000 in 2001. Although deposits increased, generally lower interest rates
resulted in the decrease. Interest expense for Federal Home Loan Bank advances
decreased $111,000 to $2,747,000 in 2003 compared to $2,858,000 in 2002 and
$2,999,000 in 2001. Lower interest rates resulted in the decrease in interest
expense. Although interest margins continue to be pressured by generally lower
interest rates and by aggressive competition, net interest income on an FTE
basis increased $825,000 or 8.02% over 2002 and totaled $11,112,000 at December
31, 2003 compared to total net interest income on an FTE basis of $10,287,000 at
December 31, 2002 and $9,292,000 in 2001.
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 2003 net interest margin on an FTE basis
was 3.65%. This compares to a net interest margin of 3.72% for 2002. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2003, 2002 and 2001. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material. Interest earned on tax exempt securities in the table is presented on
a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing these calculations. Actual tax exempt income earned in 2003 was
$2,086,000 with a yield of 4.83%. Actual tax exempt income in 2002 totaled
$1,995,000 with a yield of 4.88% and in 2001 actual tax exempt income was
$977,000 with a yield of 4.95%.
17
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2003 2002 2001
----------------------------------------------------------------------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest Earning Assets:
Loans $142,752 $ 9,226 6.46% $139,582 $ 9,677 6.93% $145,502 $11,344 7.80%
Taxable Securities $101,931 $ 3,875 3.80% $ 81,715 $ 4,144 5.07% $ 68,921 $ 4,204 6.10%
Tax-Exempt Securities * $ 43,603 $ 3,161 7.25% $ 41,347 $ 3,023 7.31% $ 20,030 $ 1,481 7.39%
Federal Funds $ 3,125 $ 28 0.90% $ 7,214 $ 111 1.54% $ 9,986 $ 324 3.24%
Other Interest Income $ 1,359 $ 10 0.74% $ 549 $ 11 2.00% $ 809 $ 36 4.45%
------------------- ------------------- -------------------
Total Interest Earning $292,770 $16,300 5.57% $270,407 $16,966 6.27% $245,248 $17,389 7.09%
------- ------- -------
Assets
Alowance for Loan
Losses ($ 1,468) ($ 1,403) ($ 1,412)
Cash & due from
Banks $ 6,425 $ 5,923 $ 5,138
Premises,Equipment $ 3,000 $ 2,810 $ 2,676
Net unrealized gain/loss
on AFS Securities $ 2,316 $ 1,083 $ 500
Other Assets $ 6,403 $ 5,263 $ 3,312
-------- -------- --------
Total Average Assets $309,446 $284,083 $255,462
======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $ 59,521 $ 363 0.61% $ 62,756 $ 807 1.29% $ 67,516 $ 1,902 2.82%
Savings Deposits $ 45,975 $ 450 0.98% $ 37,629 $ 743 1.97% $ 16,674 $ 396 2.37%
Time Deposits $ 68,898 $ 2,053 2.98% $ 67,157 $ 2,490 3.71% $ 60,854 $ 3,004 4.94%
Borrowed Funds $ 65,282 $ 2,747 4.21% $ 51,966 $ 2,858 5.50% $ 53,407 $ 2,999 5.62%
------------------- ------------------- -------------------
Total Interest Bearing
Liabilities $239,676 $ 5,613 2.34% $219,508 $ 6,898 3.14% $198,451 $ 8,301 4.18%
------- ------- -------
Demand Deposits $ 38,998 $ 37,578 $ 31,497
Other Liabilities $ 2,130 $ 1,660 $ 1,829
Shareholders' Equity $ 28,642 $ 25,337 $ 23,685
-------- -------- --------
Total Liabilities and
Equity $309,446 $284,083 $255,462
======== ======== ========
Net Interest Income $10,687 $10,068 $ 9,088
======= ======= =======
Net Interest Spread 3.23% 3.13% 2.91%
Net Interest Margin 3.65% 3.72% 3.71%
* Presented on a fully taxable equivalent ("FTE") basis
18
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2003 over 2002 2002 over 2001
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
----------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ 220 $ (671) $ (451) $ (462) $(1,205) $(1,667)
Taxable investment securities 1,025 (1,294) (269) 780 (840) (60)
Tax-exempt investment securities 165 (27) 138 1,575 (33) 1,542
Other interest income (51) (33) (84) (100) (138) (238)
------- ------- ------- ------- ------- -------
Total interest income $ 1,359 $(2,025) $ (666) $ 1,793 $(2,216) $ (423)
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (42) $ (402) $ (444) $ (134) $ (961) $(1,095)
Savings deposits (164) (129) (293) 496 (149) 347
Time deposits 65 (502) (437) 311 (825) (514)
Borrowed funds 732 (843) (111) (81) (60) (141)
------- ------- ------- ------- ------- -------
Total interest expense $ 591 $(1,876) $(1,285) $ 592 $(1,995) $(1,403)
------- ------- ------- ------- ------- -------
Net interest margin $ 768 $ (149) $ 619 $ 1,201 $ (221) $ 980
======= ======= ======= ======= ======= =======
NONINTEREST INCOME
Noninterest income increased $862,000 or 27.61% and totaled $3,984,000 for the
year ended December 31, 2003 as compared to $3,122,000 for the year ended
December 31, 2002. Trust Department income increased $152,000 to $1,252,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $560,000 for 2003. This is an increase of
$88,000 or 18.64% when comparing total service charges of $472,000 in 2002. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales of available-for-sale securities totaled $1,058,000 in 2003
representing an increase of $424,000 or 66.88% compared to $634,000 in 2002.
This increase is primarily attributable movements in the markets which resulted
in opportunities for the Company to enhance the return from the securities
portfolio and at the same time realize gains on sales of available-for-sale
securities. Mortgage refinancing remained very active during 2003 as rates
remained at all time lows. Competition in the secondary mortgage market
continues to be very aggressive. Gains on sale of loans held-for-sale increased
$35,000 or 15.42% to $262,000 in 2003 compared to $227,000 in 2002. Other income
however, increased 16.13% to $799,000 in 2003 compared to other income of
$688,000 in 2002. This increase is primarily attributable to the increase in
fees earned from activity in the secondary mortgage market due to the change of
investors. Historically the Company has had few instances in which it foreclosed
on properties and therefore has a low volume of OREO properties. The Company
acquired one OREO property during the 2002, sold it in 2003 and realized a gain
on the sale of $52,000.
NONINTEREST EXPENSE
Noninterest expense increased 10.61% to $8,600,000 for the year ended December
31, 2003 as compared to $7,775,000 for the corresponding period in 2002.
Salaries and employee benefits totaled $4,834,000 for the twelve months ended
December 31, 2003 compared to $4,235,000 for the same period in 2002. This is an
increase of $599,000 or 14.14% over 2002 and is primarily the result of an
increase in staff along with salary increases and the increase in the costs of
employee benefits. Occupancy and equipment expenses increased $64,000 or 7.31%
to $939,000 compared to $875,000 for 2002. The increase is primarily the result
of expenses associated with routine maintenance and repairs of the Company's
facilities and equipment. Data processing expenses increased $42,000 or 7.88%
for the year ended December 31, 2003 over 2002 and totaled $575,000. This
increase is attributable to normal increasing costs related to enhancing the
delivery channels of products to our customers. Legal expenses totaled $128,000
for 2003. This is an increase of $67,000 or 110% when comparing total legal
expense in 2002 of $61,000. The increase is primarily the result of additional
services required due to compliance requirements of the Sarbanes-Oxley Act.
Amortization expense of the "Core Deposit Intangible" assets associated with the
2001 Branch acquisition totaled $68,000 and did not change from 2002.
19
INCOME TAXES
In 2003, the Company's income tax provision totaled $1,268,000, which reflects
an effective tax rate of 24.82% compared to an income tax provision of
$1,108,000 and an effective tax rate of 25.72% in 2002. Although there was a
decrease in the effective tax rate, the provision increased $160,000 as the
result of an increase in taxable income.
NET INCOME
Overall, net income totaled $3,840,000 for the year ended December 31, 2003
compared to net income of $3,199,000 for the year 2002 representing an increase
of $641,000 or 20.04%. On a per share basis, net income amounted to $2.70 per
share for 2003 as compared to $2.25 for 2002.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2002 and 2001
Net income for the Company was $3,199,000 in 2002, an increase of $298,000 or
10.27% over year 2001 earnings of $2,901,000. As a result, earnings per share
increased $.22 or 10.83% to $2.25 in 2002. This compared to earnings per share
of $2.03 in 2001. The improvement in net income was primarily the result of
growth in earning assets that produced an increase in total net interest income
coupled with an increase in other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2002, which included the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 16.05% for Tier 1 capital and 17.21% for
total capital. The Company's leverage ratio was 7.80% at December 31, 2002. This
compared to a Tier 1 capital ratio at December 31, 2001 of 15.09%, a total
capital ratio of 16.21% The Company's leverage ratio was 7.61%.
As a result of the Company's financial performance, the Board of Directors
increased total dividends declared on the Company's common stock to $.88 per
share in 2002 as compared to $.84 per share in 2001.
NET INTEREST AND DIVIDEND INCOME
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2002 2001 2000
------------------------------
Interest and Dividend Income
(financial statements) $ 16,157 $ 17,089 $ 16,510
Tax Equivalent Adjustment 1,028 504 335
-------- -------- --------
Total Interest Income (on an FTE basis) 17,185 17,593 16,845
Interest Expense (6,898) (8,301) (8,284)
-------- -------- --------
Net Interest Income-FTE $ 10,287 $ 9,292 $ 8,561
======== ======== ========
20
The Company's 2002 total interest and dividend income on an FTE basis of
$17,185,000 was $408,000 or 2.32% less than the total interest and dividend on
an FTE basis of $17,593,000 in 2001. Although there was an increase in earning
assets, this decrease in interest and dividend income was primarily the result
of an economic environment with lower interest rates. A change in the mix of
earning assets which reflects an increase in tax exempt securities resulted in a
significant increase in the tax equivalent adjustment of $1,028,000 for 2002 as
compared to $504,000 for 2001. This was an increase of approximately 104%.
Interest expense on deposits in 2002 decreased $1,262,000 or 23.80% and totaled
$4,040,000. This compared to $5,302,000 for the corresponding period in 2001.
Although deposits increased, primarily as the result of a branch acquisition
which was completed in September 2001, generally lower interest rates resulted
in the decrease in interest expense. Interest expense for Federal Home Loan Bank
advances decreased $141,000 to $2,858,000 in 2002. This compared to interest
expense of $2,999,000 in 2001 and is primarily the result of a decrease in
borrowings. Although interest margins continue to be pressured by generally
lower interest rates and by aggressive competition, net interest income on an
FTE basis increased $995,000 or 10.71% and totaled $10,287,000 at December 31,
2002. This compared to total net interest income on an FTE basis of $9,292,000
at December 31, 2001.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship between
interest earned and paid. The Company's 2002 net interest margin on an FTE basis
was 3.72%. This compares to a net interest margin of 3.71% for the corresponding
period in 2001. The following table reflects average balances, interest earned
or paid and rates for the three years ended December 31, 2002, 2001 and 2000.
The average loan balances include both non-accrual and restructured loans.
Interest earned on loans also includes fees on loans such as late charges
collected that are not deemed to be material. Interest earned on tax exempt
securities in the table is presented on a fully taxable-equivalent basis
("FTE"). A federal tax rate of 34% was used in performing these calculations.
Actual tax exempt income earned in 2002 was $1,995,000 with a yield of 4.83%.
Actual tax exempt income in 2001 totaled $977,000 with a yield of 4.88%.
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2002 over 2001 2001 over 2000
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
----------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ (462) $(1,205) $(1,667) $ 1,253 $ (403) $ 850
Taxable investment securities 780 (840) (60) (327) (61) (388)
Tax-exempt investment securities 1,575 (33) 1,542 515 (21) 494
Other interest income (100) (138) (238) 132 (340) (208)
------- ------- ------- ------- ------- -------
Total interest income $ 1,793 $(2,216) $ (423) $ 1,573 $ (825) $ 748
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (134) $ (961) $(1,095) $ 272 $ (616) $ (344)
Savings deposits 496 (149) 347 24 (10) 14
Time deposits 311 (825) (514) 368 (158) 210
Borrowed funds (81) (60) (141) 239 (103) 136
------- ------- ------- ------- ------- -------
Total interest expense $ 592 $(1,995) $(1,403) $ 903 $ (887) $ 16
------- ------- ------- ------- ------- -------
Net interest margin $ 1,201 $ (221) $ 980 $ 670 $ 62 $ 732
======= ======= ======= ======= ======= =======
21
NONINTEREST INCOME
Noninterest income totaled $3,122,000 for the year ended December 31, 2002
compared to $2,387,000 for the year ended December 31, 2001. Trust Department
income increased slightly to $1,100,000 from $1,070,000. This was primarily the
result of the efforts of new business development. Service charges remained
consistent at $472,000 for 2002 and 2001, respectively. Gains on sales of
available-for-sale securities totaled $634,000 in 2002. This represented an
increase of $504,000 or 388% when comparing total gains on sales of
available-for-sale securities of $130,000 in 2001. Movement in the markets
presented opportunities for the Company to enhance the return from the
securities portfolio which resulted in this increase. Other income, including
gain on sale of loans held-for sale, increased $200,000 or 27.97% to $915,000 in
2002. This compares to total other income, including gain on sale of loans
held-for-sale, of $715,000 in 2001. This increase was primarily the result of
increased fees generated from the refinancing activities in the secondary market
as well as an increase in transaction fees generated from activity of deposit
accounts.
NONINTEREST EXPENSE
Noninterest expense increased 15.10% to $7,775,000 for the year ended December
31, 2002 as compared to $6,755,000 for the corresponding period in 2001.
Salaries and employee benefits totaled $4,235,000 for the twelve months ended
December 31, 2002 compared to $3,834,000 for the same period in 2001. This was
an increase of $401,000 or 10.46% and was primarily the result of the addition
of staff for the branch that was acquired in September 2001 coupled with the
additional staff that was also hired to service the increase in new business at
the Bank's other facilities. Annual pay raises and the increasing costs of
employee benefits also contributed to the increased expense. Occupancy and
equipment expenses increased $142,000 or 19.37% to $875,000. This compared to
total occupancy and equipment expense of $733,000 for the same period in 2001.
The increase was primarily the result of expenses associated with having an
additional office to maintain. The Company incurred some equipment costs
relating to system upgrades. Data processing expenses increased $39,000 or 7.79%
for the year ended December 31, 2002 and totaled $533,000. Data processing
expenses for the same period in 2001 totaled $495,000. Insurance expenses for
the year 2002, which do not include insurance benefits associated with
employees, increased $22,000 or 23.69% and totaled $114,000 as compared to
$92,000 for 2001. Printing and stationery costs and legal expenses remained very
consistent when comparing 2002 to 2001. Amortization expense of the "Core
Deposit Intangible" assets associated with the 2001 branch acquisition totaled
$68,000 for the year ended December 31, 2002. This expense for 2002 represented
a full year of amortization while the total expense of $48,000 represented only
three and one half months of the year 2001 because the acquisition was completed
in September 2001. Other operating expenses totaled $1,701,000 for the year
ended December 31, 2002 compared to other operating expenses totaling $1,318,000
for the corresponding period in 2001. This increase of $383,000 or 29.06% was
primarily the result of additional expenses relating to the operation of the
newly acquired branch coupled with increased expenses relating to Trust
operations as well as normal increases in expenses associated with the operation
of the Company.
INCOME TAXES
In 2002, the Company's income tax provision totaled $1,108,000, an effective tax
rate of 25.72%. This compared to an income tax provision of $1,370,000 in 2001,
reflecting an effective tax rate of 32.08%. This decrease was primarily the
result of the impact of an increase in tax exempt interest earned from the
securities portfolio.
NET INCOME
Overall, net income totaled $3,199,000 for the year ended December 31, 2002,
compared to net income of $2,901,000 for 2001. This was an increase of $298,000
or 10.27% and reflected earnings of $2.25 per share compared to earnings per
share of $2.03 for 2001.
22
FINANCIAL CONDITION
Comparison of December 31, 2003 and 2002
Total assets at December 31, 2003 were $311,100,000 compared to $293,107,000 at
December 31, 2002. This is an increase of $17,993,000 or 6.14%. The increase is
primarily due to additional advances taken from the Federal Home Loan Bank as
part of a strategy to increase interest income.
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, 2003, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $147,021,000. This represents an
increase of $8,586,000 or 6.20% over year-end 2002. The increase is a reflection
of the strategy to increase interest income as a portion of the advances from
the Federal Home Loan Bank were used to purchase securities at a rate of return
higher than the borrowing cost in order to generate additional interest income
from the securities portfolio.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either Securities-Available-for-
Sale and Securities-Held-to-Maturity. The securities reported as available-for-
sale are stated at fair value in the financial statements of the Company.
Unrealized holding gains and losses (accumulated other comprehensive
income/loss) are not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until realized. At
December 31, 2003, the unrealized gain net of tax was $686,000. This compares to
an unrealized gain net of tax of $1,734,000 at December 31, 2002. The securities
reported as securities-held-to-maturity are stated at amortized cost.
FEDERAL FUNDS SOLD
The balance of federal funds sold totaled $2,272,000 at December 31, 2003. This
compares to $1,750,000 at December 31, 2002. This represents a normal operating
range of funds for daily cash needs and is considered to be adequate by
Management.
LENDING
New business development during the year coupled with a small increase in loan
demand resulted in an increase in loans receivable, net of allowance for loan
losses of $3,931,000 or 2.90% to $139,563,000 at December 31, 2003, as compared
to $135,632,000 at December 31, 2002. Competition for loans remains very
aggressive in the market area of the Company. Although the largest dollar
volumes of loan activity continues to be in the residential mortgage area, the
Company offers a wide variety of loan types and terms along with competitive
pricing to customers. The Company's credit function is designed to ensure
adherence to prudent credit standards despite competition for loans in the
Company's market area.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
Total gross loans at December 31, 2003 were $141,228,000, as compared to
$137,090,000 at December 31, 2002. This is an increase of $4,138,000 or 3.02%.
At December 31, 2003 approximately 89% of the Bank's loan portfolio was related
to real estate products and although the portfolio increased during the year
2003, the concentration remained consistent as approximately 86% of the
portfolio was related to real estate at December 31, 2002. The increase in total
gross loans was primarily the result of an increase in construction mortgages.
Otherwise there were no material changes in the composition of the loan
portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Company's objectives. Because of the risk
23
associated with extending loans the Company maintains an allowance or reserve
for credit losses through charges to earnings. The loan loss provision for the
year 2003 was $313,000 as compared to $300,000 for the year ended December 31,
2002. The level of nonperfoming loans remains low as a percentage of total
loans. Nonperforming loans totaled $610,000 or .43 % of total loans at December
31, 2003 as compared to $1,250,000 or .91% of total assets at December 31, 2002.
Nonperforming loans are closely monitored by management.
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
used in making this determination during the year ended December 31, 2003. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which is submitted to the Board of Directors for
approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
residential real estate mortgages with balances of $300,000 or more and
commercial loans of $100,000 or more. Such loans are considered impaired when it
is probable that the Bank will not be able to collect all principal and interest
due according to the terms of the note. Any such commercial loans and
residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
years ended December 31, 2003 and 2002.
At December 31, 2003 the allowance for loan losses totaled $1,664,000,
representing 272.79% of nonperforming loans, which totaled $610,000, and 1.18%
of total loans of $141,228,000. This compares to $1,458,000, representing
116.64% of nonperforming loans, which totaled $1,250,000 and .91% of total loans
of $137,090,000 at December 31, 2002. A total of $155,000 in loans were charged
off during the year 2003, as compared to $251,000 during 2002. A total of
$48,000 of previously charged off loans was recovered during the year ended
December 31, 2003. Recoveries for the year 2002 totaled $29,000. When comparing
the two years, net charge-offs were $107,000 for the year 2003 and during the
year 2002 net charge-offs totaled $222,000. Management believes that the
allowance for loan losses is adequate. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans or other factors.
Additionally, despite the overall good quality of the loan portfolio generally,
with expectations of the Company to continue to grow its existing portfolio,
future additions to the allowance may be necessary to maintain adequate reserve
coverage.
24
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2003 totaled $218,457,000 compared to
$211,037,000 at year-end 2002. This increase of $7,420,000 or 3.52% can be
primarily attributed to the ongoing efforts of the Company to competitively
price products and develop and maintain relationship banking with its customers.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and the aggressive
competition from nonbanking entities. During the year, there was an increase in
demand, NOW and savings accounts which are lower cost core deposits.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
(dollars in thousands)
Year ended December 31
2003 2002 2001
-------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------------------------------------------------------------
Demand $ 38,998 $ 37,578 $ 31,497
NOW 20,030 .31% 19,833 .82% 17,185 1.07%
Money Market 39,491 .76% 42,923 1.50% 50,331 3.41%
Savings 45,975 .98% 37,629 1.98% 16,674 2.37%
Time 68,898 2.98% 67,157 3.71% 60,854 4.94%
-------- -------- --------
$213,392 1.34% $205,120 1.97% $176,541 3.00%
======== ======== ========
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 are summarized as follows:
(dollars in thousands)
Year Ended December 31
2003 2002 2001
-----------------------------
Three months or less $ 5,575 $ 3,454 $ 3,895
Over three months through six months 1,343 3,630 4,161
Over six months through one year 5,591 7,913 4,398
Over one year 11,080 8,050 5,708
------- ------- -------
Total $23,589 $23,047 $18,162
======= ======= =======
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, 2003, the Company had $60,897,000 in
outstanding advances from the Federal Home Loan Bank compared to $51,891,000 at
December 31, 2002. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
25
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At December
31, 2003, the Company was slightly asset sensitive (positive gap). This would
suggest that the during a period of rising interest rates the Company would be
in a better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at December 31, 2003 is within the limits approved by the
Board of Directors.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston which provides a
source of available borrowings for liquidity.
At December 31, 2003, the Company had approximately $29,003,000 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, 2003, the Company had $28,850,000 in shareholder equity compared
to $27,345,000 at December 31, 2002. This represents an increase of $1,505,000
or 5.50%. Several components contributed to the change since December 2002.
Earnings for the year totaled $3,840,000. Market conditions have reduced
unrealized securities gains and resulted in a negative adjustment to
comprehensive income of $1,049,000. The Company declared dividends in 2003
resulting in a decrease in capital of $1,310,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan
during the second quarter of 2002 which resulted in an increase in capital of
$24,000. Under current regulatory definitions, the Company and the Bank are
considered to be "well capitalized" for capital adequacy purposes. As a result,
the Bank pays the lowest federal deposit insurance deposit premiums possible.
One primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk weighted assets. This method of measuring
capital adequacy helps to establish capital requirements that are sensitive to
the differences in risk associated with various assets. It takes in account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low risk assets. At year-end 2003, the Company
had a risk-based capital ratio of 16.44% compared to 17.21% at December 31,
2002. The primary difference results from the negative effect of market
movements on unrealized gains and therefore a decrease in comprehensive income.
Maintaining strong capital is essential to bank safety and soundness. However,
the effective management of capital resources requires generating attractive
returns on equity to build value for shareholders while maintaining appropriate
levels of capital to fund growth, meet regulatory requirements and be consistent
with prudent industry practices. Management believes that the capital ratios of
the Company and Bank are adequate to continue to meet the foreseeable capital
needs of the institution.
26
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.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. Paragraph 5 of SFAS No. 147, which relates to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition was on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in paragraphs 8-14 were effective on October 1, 2002, with
earlier application permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 it's recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of December
31, 2003. The Company determined that its reclassified goodwill as of those
dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
27
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003. There was
no substantial impact on the Company's consolidated financial statements on
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity.
In December 2003, the FASB revised Interpretation No. 46, also referred to as
Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not
to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company only if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The Company is
required to apply FIN 46, as revised, to all entities subject to it no later
than the end of the first reporting period ending after March 15, 2004. However,
prior to the required application of FIN 46, as revised, the Company shall apply
FIN 46 or FIN 46 (R) to those entities that are considered to b