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, 2004
| | 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
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SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
5 Bissell Street, Lakeville, CT 06039
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(Address of Principal Executive Offices) (Zip Code)
Registrant"s telephone number, including area code: 860-435-9801
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Securities registered pursuant to Section 12 (b) of the Act: None
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Securities registered pursuant to Section 12 (g) of the Act: Common stock par value $.10 per share
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Name of exchange on which registered: American Stock Exchange
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant"s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
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, 2004: $47,651,640
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 1,682,401 shares outstanding as of March 4, 2005.
Documents Incorporated by Reference: None
TABLE OF CONTENTS
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Page
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Part I
Item 1 - Business 3
(a) General Development of the Business 3
(b) Financial Information about Industry Segments 3
(c) Narrative Description of Business 4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 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 Related Stockholder
Matters and Issuer Purchases of Equity Securities 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
(d) Securities Authorized for Issuance Under Equity Compensation Plans 14
Item 6 - Selected Financial Data 15
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 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
Item 9B- Other Information 32
Part III
Item 10 -Directors and Executive Officers of the Registrant 32
Item 11 -Executive Compensation 34
Item 12 -Security Ownership of Directors and Management
and Related Stockholder Matters 37
Item 13-Certain Relationships and Related Transactions 38
Item 14-Principal Accounting Fees and Services 39
Part IV
Item 15 - Exhibits and Financial Statement Schedules 40
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.
On September 10, 2004 the Company completed the acquisition of Canaan National
Bancorp, Inc. and the merger of The Canaan National Bank with and into Salisbury
Bank and Trust Company. Following of the merger, the Bank operated five (5) full
service offices which are located in Canaan, Lakeville, Salisbury and Sharon,
Connecticut and South Egremont, Massachusetts. In addition, a branch in
Sheffield, Massachusetts opened in March 2005. Most of the Bank's business is
derived from customers located in Litchfield County, Connecticut 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 a commercial bank and
trust company.
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2004, it totaled $184,286,000 which represents
approximately 43.56% of total assets and it produced interest and dividend
income of $6,905,000 for the year 2004 as compared with $6,385,000 for 2003 and
$6,358,000 for 2002 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
14.42% to $244,167,000 during 2004.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $79,213,000 at December 31, 2004 as compared with
$60,897,000 at December 31, 2003.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operation 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 two subsidiaries, SBT Realty, Inc. which is incorporated under the laws
of the State of New York and SBT Mortgage Corp. which is incorporated under the
laws of the State of Connecticut. SBT Realty, Inc. holds and manages bank owned
real estate situated in New York State.
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, Connecticut and South Berkshire County, Massachusetts. The Bank
maintains six (6) banking offices within these two counties and also attracts
customers from nearby Columbia County and Dutchess County, New York. The bank's
market area within the four counties is served by 47 commercial banks and
savings banks. The Bank has a 2.75% 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
4
firms and other businesses and individuals actively compete with the Bank for
personal and corporate trust services and investment counseling services. Many
non-bank competitors are not subject to the extensive regulation described below
under "LEGISLATION, REGULATION AND SUPERVISION" and in certain respects may have
a competitive advantage over banks in providing certain services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions and
mergers of Connecticut banks and bank holding companies 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.
5
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
Under the BHCA and the regulations of the Federal Reserve System promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined therein, without prior approval of the Federal Reserve Board. The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it wishes to acquire voting shares of any other bank, if after such
acquisition it would own or control more than five percent (5%) of the voting
share of such bank. The BHCA imposes limitations upon the Company as to the
types of business in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:
(i) the bank holding company's capital ratios exceed the threshold established
for "well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
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.
6
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
o Disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o The presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
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 200 (the "USA Patriot Act").
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 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
7
Bank to declare cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank's
failure to meet the minimum capital and risk-based capital guidelines discussed
below would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
Employees
The Company's current workforce at March 14, 2005 consists of 130 employees of
whom 111 were full time and 19 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, 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 18
II. Investment Portfolio 10
III. Loan Portfolio 11
IV. Summary of Loan Loss Experience 12 V. Deposits 25
VI. Return on Equity and Assets 11
VII. Short-Term Borrowings 13
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 set forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands)
2004 2003 2002
------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 146 $ 136 $ 90
U.S. government agencies preferred stock 12,209 7,610 4,179
U.S. Treasury securities and other
U.S. government corporations and agencies 53,416 51,979 41,635
Obligations of states and political subdivisions 58,452 45,988 42,792
Mortgage-backed securities 54,432 37,307 46,473
------------------------------
$178,655 $143,020 $135,169
==============================
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ 0 $ 0 $ 0
Obligations of states and political subdivisions 0 0 0
Mortgage-backed securities 218 229 321
------------------------------
$ 218 $ 229 $ 321
==============================
Federal Home Loan Bank stock $ 5,413 $ 3,771 $ 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,
2004:
(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 0 218 3.38% 218
-------- -------- -------- -------- --------
$ 0 $ 0 $ 0 $ 218 $ 218
======== ======== ======== ======== ========
Available-for-sale
- ------------------
Securities
- ----------
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 23,692 4.81% $ 29,724 4.19% $ 53,416
Obligations of state and
political subdivisions $ 240 4.70% $ 0 $ 591 4.04% $ 57,621 4.75% $ 58,452
Mortgage-backed
securities $ 0 $ 1,289 5.10% $ 1,439 5.35% $ 51,704 4.40% $ 54,432
-------- -------- -------- -------- --------
$ 240 $ 1,289 $ 25,722 $139,049 $166,300
======== ======== ======== ======== ========
10
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2004 2003 2002 2001 2000
-------------------------------------------------------------
Commercial, financial and $ 15,127 $ 9,149 $ 10,127 $ 10,797 $ 8,592
agricultural
Real Estate-construction and 14,290 15,307 6,027 3,935 6,275
land development
Real Estate - residential 130,414 90,807 93,636 102,201 98,312
Real Estate-commercial 35,487 19,199 18,002 17,423 15,463
Consumer 9,122 6,692 9,007 10,030 10,673
Other 69 73 291 125 247
-------------------------------------------------------------
204,509 141,227 137,090 144,511 139,562
Allowance for possible loan losses (2,512) (1,664) (1,458) (1,445) (1,292)
Unearned income (19) (0) (0) (0) (0)
-------------------------------------------------------------
Net loans $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270
=============================================================
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, 2004. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
year or less five years five years
--------------------------------------------
Commercial, financial,
agricultural and real estate commercial $ 4,385 $8,628 $ 37,601
Real estate-construction and land development 14,290 0 0
-----------------------------------------
$ 18,675 $8,628 $ 37,601
=========================================
Maturities after
One Year with:
Fixed interest rates $6,169 $ 8,629
Variable interest rates 2,459 28,972
-----------------------
$8,628 $ 37,601
=======================
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,
-----------------------
2004 2003 2002
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.14% 1.24% 1.13%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 12.34% 13.41% 12.63%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 35.96% 34.07% 39.11%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.20% 9.26% 8.92%
11
Non-accrual, Past Due and Restructured Loans
At December 31, 2004, there were eleven (11) non-accrual loans in the Bank's
portfolio all of which were secured by real estate. In the month following the
month in which a mortgage loan becomes 90 days past due, the Bank generally
stops accruing interest unless there are unusual circumstances which warrant an
exception. Generally the only loan types that the Bank reclassifies to
nonaccrual are those secured by real estate or large commercial loans on which
substantial collateral exists. Other types of loans are generally charged off
when they become 120 days or more delinquent. However, exceptions may be made as
warranted.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2004 2003 2002 2001 2000
----------------------------------------------
Non-accrual $1,739 $ 75 $ 855 $ 372 $ 186
90 days or more past due 528 535 124 215 323
Restructured loans 0 0 271 0 12
----------------------------------------------
Total nonperforming loans $2,267 $ 610 $1,250 $ 587 $ 521
==============================================
Total nonperforming loans as per-
centage of the total loan portfolio 1.12% 0.43% 0.92% 0.41% 0.37%
Allowance for loan losses as a per-
centage of nonperforming loans 110.76% 272.79% 116.64% 246.17% 247.99%
Information with respect to non-accrual and restructured loans
at December 31, 2004, 2003 and 2002 is as follows:
(dollars in thousands) Year Ended December 31
2004 2003 2002
------------------------------
Interest income that would have been recorded under original terms $ 100 $ 4 $ 68
Gross interest recorded 72 0 49
------------------------------
Foregone interest $ 28 $ 4 $ 19
==============================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2004 2003 2002 2001 2000
--------------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $1,664 $1,458 $ 1,445 $ 1,292 $1,160
Charge-offs:
Commercial, financial and
agricultural 0 71 60 0 0
Real estate mortgage 0 0 46 13 21
Consumer 70 84 146 88 50
--------------------------------------------------------------
Total charge-offs 70 155 252 101 71
--------------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 0 25 2 0 0
Real estate mortgage 0 0 1 87 6
Consumer 28 24 26 17 17
--------------------------------------------------------------
Total recoveries 28 49 29 104 23
--------------------------------------------------------------
Net charge-offs 42 106 223 (3) 48
Provisions charged to operations 250 312 300 150 180
Balance acquired from CNB 640
Transfer of allowance for loan
losses to other liabilities 0 0 (64) 0 0
--------------------------------------------------------------
Balance at end of year $2,512 $1,664 $ 1,458 $ 1,445 $1,292
==============================================================
Ratio of net charge-offs to
average loans outstanding .02% .01% .02% (.002%) .04%
Ratio of allowance for loan losses
to year end loans 1.23% 1.18% 1.07% 1.01% .93%
12
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2004 2003 2002 2001 2000
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 613 7.40% $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16%
Real estate construction
and land development 83 6.99% 112 10.82% 50 4.40% 24 2.72% 0 4.50%
Real estate mortgage 1,614 81.12% 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51%
Consumer 198 4.46% 357 4.72% 244 6.57% 100 6.94% 65 7.65%
Other loans 4 .03% 5 .05% 8 .21% 1 .09% 1 .18%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,512 100.00% $1,664 100.00% $1,458 100.00% $1,445 100.00% $1,292 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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
2004 2003 2002
------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.29% 4.06% 5.35%
For the year 3.90% 4.21% 5.45%
Average amount outstanding during the year $ 74,954 $65,282 $53,438
Maximum amount outstanding at any month $100,680 $74,705 $59,125
Amount outstanding at year end $ 79,213 $60,897 $51,891
ITEM 2. DESCRIPTION OF PROPERTIES
The Company is not the owner or lessee of any properties. The Bank leases two
(2) properties; a branch office at 51 Main Street, South Egremont, Massachusetts
and a branch at 73 Main Street, Sheffield, Massachusetts which opened in March
2005.
The Bank serves its customers from its six (6) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield and South
Egremont, Massachusetts. The Bank's trust department is located in a separate
building adjacent to the main office of the Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Operations 94 Main Street Owned
Canaan, Connecticut
Canaan Office 100 Main Street Owned
Canaan, Connecticut
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 2004 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2004 Quarters 2003 Quarters
--------------------------------- ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------- ---------------------------------
Range of Stock prices:
High $45.55 $43.05 $38.80 $41.55 $38.95 $32.25 $29.50 $30.00
Low $43.00 $36.00 $36.25 $38.50 $29.50 $29.00 $26.00 $26.00
(b) Holders
There were approximately 742 holders of record of the common stock of the
Company as of March 4, 2005. 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 2004, the Company declared
a cash dividend each quarter of $.24 per share. Dividends for the year 2004
totaled $.96 per share which compared to total dividends of $.92 that were
declared in the year 2003. At their February 25, 2005 meeting, the Directors of
the Company declared a cash dividend of $.25 per share for the first quarter of
2005. The dividend will be paid on April 27, 2005 to shareholders of record as
of March 31, 2005. Payments of all dividends are dependent upon the condition
and earnings of the Company. The Company's ability to pay dividends is limited
by the prudent banking principles applicable to all bank holding companies and
by the provisions of Connecticut Corporate law, which provide that no
distribution may be made by a company if, after giving it effect: (1) the
company would not be able to pay its debts as they become due in the usual
course of business or (2) the company's total assets would be less than the sum
of its total liabilities plus amounts needed to satisfy any preferred stock
rights. The following table presents cash dividends declared per share for the
last two years:
2004 Quarters 2003 Quarters
----------------------------------------- -----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
----------------------------------------- -----------------------------------------
Cash dividends
declared $ 0.24 $ 0.24 $ 0.24 $ 0.24 $ 0.23 $ 0.23 $ 0.23 $ 0.23
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 13 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
14
Item 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $ 201,978 $ 139,563 $ 135,632 $ 143,066 $ 138,270
Allowance For Loan Losses 2,512 1,664 1,458 1,445 1,292
Investments 184,286 147,021 138,435 105,593 91,922
Total Assets 423,101 311,100 293,107 283,602 249,054
Deposits 298,842 218,457 211,037 201,351 166,436
Borrowings 79,213 60,897 51,891 53,004 47,357
Shareholders' Equity 40,700 28,850 27,345 23,363 22,460
Nonperforming Assets 2,267 685 1,400 587 521
Statement of Income Data:
Interest and Fees on Loans $ 9,592 $ 9,226 $ 9,677 $ 11,344 $ 10,494
Interest and Dividends on Securities
and Other Interest Income 6,959 6,423 6,481 5,746 6,015
Interest Expense 5,659 5,613 6,898 8,301 8,284
--------- --------- --------- --------- ---------
Net Interest Income 10,892 10,036 9,260 8,789 8,225
Provision for Loan Losses 250 313 300 150 180
Trust Department Income 1,411 1,252 1,100 1,070 1,108
Other Income 1,854 1,674 1,388 1,187 914
Net Gain (Loss) on Sales of Securities 1,490 1,058 634 130 (64)
Other Expenses 10,603 8,599 7,775 6,755 5,797
--------- --------- --------- --------- ---------
Pre Tax Income 4,794 5,108 4,307 4,271 4,206
Income Taxes 775 1,268 1,108 1,370 1,357
--------- --------- --------- --------- ---------
Net Income $ 4,019 $ 3,840 $ 3,199 $ 2,901 $ 2,849
========= ========= ========= ========= =========
Per Share Data:
Earnings per common share $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92
Earnings per common share, assuming dilution $ 2.67 $ 2.70 $ 2.25 $ 2.03 $ 1.92
Cash Dividends Declared per share $ 0.96 $ 0.92 $ 0.88 $ 0.84 $ 0.77
Book Value (at year end) $ 24.19 $ 20.26 $ 19.21 $ 16.43 $ 15.40
Selected Statistical Data:
Return on Average Assets 1.14% 1.24% 1.13% 1.14% 1.23%
Return on Average Shareholders' Equity 12.34% 13.47% 12.63% 12.25% 13.64%
Dividend Payout Ratio 35.96% 34.07% 39.11% 41.38% 39.72%
Average Shareholders' Equity to Average Assets 9.20% 9.21% 8.92% 9.27% 8.98%
Net Interest Spread 3.22% 3.23% 3.13% 2.91% 2.83%
Net Interest Margin 3.63% 3.65% 3.72% 3.71% 3.79%
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Subsidiary
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company and the Bank were formed in 1998 and 1848,
respectively, and the Company's sole subsidiary is the Bank. On September 10,
2004, the Company acquired Canaan National Bancorp, Inc. and merged its
subsidiary, The Canaan National Bank into the Bank. The Bank currently operates
six (6) full service offices including a Trust Department located in the towns
of Canaan, Lakeville, Salisbury and Sharon, Connecticut as well as South
Egremont, Massachusetts. Our sixth branch in Sheffield, Massachusetts opened
March 14, 2005. In order to provide a foundation for building shareholder value
and servicing customers, the Company remains committed to investing in the
technological and human resources necessary to developing new personalized
financial products and services to meet the needs of customers. 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.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------
Overview
- --------
The earnings for the Company totaled $4,019,000 in 2004, an increase of $179,000
or 4.66% over year 2003 earnings of $3,840,000. Earnings per average share
outstanding totaled $2.67 in 2004. This compares to earnings per average share
outstanding of $2.70 in 2003 and $2.25 in 2002. The decrease in earnings per
average share for 2004 is primarily the result of issuing 257,483 new shares of
Company stock, in connection with the acquisition of Canaan National Bancorp,
Inc.
The Company's assets at December 31, 2004 totaled $423,101,000 which represents
growth of $112,001,000 or 36.00% since December 31, 2003. This increase is
primarily attributable to the Bank's acquisition of Canaan National Bancorp,
Inc., which was completed during September 2004. In connection with this
transaction, the Bank received approximately $54,000,000 in loans, a securities
portfolio totaling approximately $44,000,000 and recorded goodwill of
approximately $7.1 million. Canaan National Bancorp, Inc.'s fixed assets and
bank premises were also included in the merger. Non-performing loans totaled $
2,267,000 at December 31, 2004. This compares to non-performing loans totaling
$610,000 for the corresponding period in 2003. Deposits at December 31, 2004
totaled $298,842,000 as compared to total deposits of $218,457,000 at December
31, 2003. This increase is primarily attributable to the approximately
$76,000,000 in deposits that were assumed in the merger with Canaan National
Bancorp, Inc.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2004, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 11.12% for Tier 1 capital and 12.13% for
total capital. The Company's leverage ratio was 7.22% at December 31, 2004. This
compares to a Tier 1 capital ratio at December 31, 2003 of 15.35%, a total
capital ratio of 16.44%, and a Company leverage ratio of 8.05%.
The Board of Directors increased total dividends declared on the Company's
common stock to $.96 per share in 2004. This compares to a $.92 per share
dividend paid in 2003 and a $.88 per share dividend that was paid in 2002.
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".
16
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 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,
2004 2003 2002
--------------------------------
Interest and Dividend Income
(financial statements) $ 16,551 $ 15,650 $ 16,157
Tax Equivalent Adjustment 1,182 1,075 1,028
-------- -------- --------
Total Interest Income (on an FTE basis) 17,733 16,725 17,185
Interest Expense (5,659) (5,613) (6,898)
-------- -------- --------
Net Interest Income-FTE $ 12,074 $ 11,112 $ 10,287
======== ======== ========
The Company's 2004 total interest and dividend income on an FTE basis of
$17,733,000 was $1,008,000 or 6.03% more than the total interest and dividend on
an FTE basis of $16,725,000 in 2003. The increase is primarily attributable to
an increase in earning assets as well as an economic environment experiencing an
increase in interest rates. A change in the mix of earning assets during 2004
has increased tax exempt securities in the securities portfolio which has
resulted in an increase in the tax equivalent adjustment of $1,182,000 in 2004
and $1,075,000 in 2003 when compared to the tax equivalent adjustment of
$1,028,000 in 2002.
Interest expense on deposits in 2004 decreased $127,000 or 4.43% to $2,739,000
compared to $2,866,000 for the corresponding period in 2003 and $4,039,000 in
2002. Interest expense for Federal Home Loan Bank advances increased $173,000 to
$2,920,000 in 2004 compared to $2,747,000 in 2003 and $2,858,000 in 2002. The
increase was primarily the result of an increase in advances during the year.
Although competition remains aggressive and interest margins continue to be
pressured, net interest income on an FTE basis increased $962,000 or 8.66% over
2003 and totaled $12,074,000 at December 31, 2004, compared to total net
interest income on an FTE basis of $11,112,000 at December 31, 2003 and
$10,287,000 in 2002.
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 2004 net interest margin on an FTE basis
was 3.63%. This compares to a net interest margin of 3.65% for 2003. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2004, 2003 and 2002. 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 2004 was
$2,294,000 with a yield of 4.68%. Actual tax exempt income in 2003 totaled
$2,086,000 with a yield of 4.78% and in 2002 actual tax exempt income was
$1,995,000 with a yield of 4.83%.
17
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2004 over 2003 2003 over 2002
---------------------------- -----------------------------
Volume Rate Total Volume Rate Total
---------------------------- -----------------------------
Increase (decrease) in:
Interest income on:
Loans $ 1,139 $ (773) $ 366 $ 220 $ (671) $ (451)
Taxable investment securities 593 143 736 1,025 (1,294) (269)
Tax-exempt investment securities 393 (79) 314 165 (27) 138
Other interest income 6 8 14 (51) (33) (84)
------- ------- ------- ------- ------- -------
Total interest income $ 2,131 $ (701) $ 1,430 $ 1,359 $(2,025) $ (666)
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 19 $ 10 $ 29 $ (42) $ (402) $ (444)
Savings deposits 84 (7) 77 (164) (129) (293)
Time deposits 189 (261) (72) 65 (502) (437)
Borrowed funds 407 (234) 173 732 (843) (111)
------- ------- ------- ------- ------- -------
Total interest expense $ 699 $ (492) $ 207 $ 591 $(1,876) $(1,285)
------- ------- ------- ------- ------- -------
Net interest margin $ 1,432 $ (209) $ 1,223 $ 768 $ (149) $ 619
======= ======= ======= ======= ======= =======
18
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2004 2003 2002
----------------------------------------------------------------------------------------------------------
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 $160,382 $9,592 5.98% $142,752 $9,226 6.46% $139,582 $9,677 6.93%
Taxable Securities $117,535 $4,613 3.92% $101,931 $4,299 4.22% $81,715 $4,341 5.31%
Tax-Exempt Securities * $49,017 $3,475 7.09% $43,603 $3,161 7.25% $41,347 $3,045 7.36%
Federal Funds $3,455 $39 1.13% $3,125 $29 0.93% $7,214 $111 1.54%
Other Interest Income $1,809 $14 0.77% $1,359 $10 0.74% $549 $11 2.00%
----------------------- ------------------------ -------------------------
Total Interest Earning $332,198 $17,733 5.34% $292,770 $16,725 5.71% $270,407 $17,185 6.36%
------------ ------------ -------------
Assets
Alowance for Loan
Losses ($1,952) ($1,468) ($1,403)
Cash & due from
Banks $7,987 $6,425 $5,923
Premises,Equipment $3,865 $3,000 $2,810
Net unrealized gain/loss
on AFS Securities ($412) $2,316 $1,083
Other Assets $12,330 $6,403 $5,263
----------- ------------ ------------
Total Average Assets $354,016 $309,446 $284,083
=========== ============ ============
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $62,681 $382 0.61% $59,521 $363 0.61% $62,756 $807 1.29%
Savings Deposits $54,596 $373 0.68% $45,975 $450 0.98% $37,629 $743 1.97%
Time Deposits $75,241 $1,984 2.64% $68,898 $2,054 2.98% $67,157 $2,490 3.71%
Borrowed Funds $74,954 $2,920 3.90% $65,282 $2,746 4.21% $51,966 $2,858 5.50%
----------------------- ------------------------ -------------------------
Total Interest Bearing
Liabilities $267,472 $5,659 2.12% $239,676 $5,613 2.34% $219,508 $6,898 3.14%
------------ ------------ -------------
Demand Deposits $51,649 $38,998 $37,578
Other Liabilities $2,329 $2,130 $1,660
Shareholders' Equity $32,566 $28,642 $25,337
----------- ------------ ------------
Total Liabilities and
Equity $354,016 $309,446 $284,083
=========== ============ ============
Net Interest Income $12,074 $11,112 $10,287
============ ============ =============
Net Interest Spread 3.22% 3.37% 3.21%
Net Interest Margin 3.63% 3.80% 3.80%
* Presented on a fully taxable equivalent ("FTE") basis
19
Noninterest Income
- ------------------
Noninterest income increased $771,000 or 19.35% and totaled $4,755,000 for the
year ended December 31, 2004 as compared to $3,984,000 for the year ended
December 31, 2003. Trust Department income increased $159,000 to $1,411,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $621,000 for 2004. This is an increase of
$61,000 or 10.89% when comparing total service charges of $560,000 in 2003. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales of available-for-sale securities totaled $1,490,000 in 2004
representing an increase of $432,000 or 40.83% compared to $1,058,000 in 2003.
This increase is primarily attributable to movements in the markets which
resulted in opportunities for the Company to enhance the return from the
securities portfolio and at the same time realize gains on sales of
available-for-sale securities. Mortgage refinancing remained very active during
2004 as rates remained attractive to consumers. Competition in the secondary
mortgage market continues to be very aggressive. Gains on sale of loans
held-for-sale increased $43,000 or 16.48% to $304,000 in 2004 compared to
$261,000 in 2003. Other income increased 16.13% to $929,000 in 2004 compared to
other income of $800,000 in 2003. 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 sold one OREO property during 2003. There were no OREO property
sales in 2004.
Noninterest Expense
- -------------------
Noninterest expense increased 23.29% for the year ended December 31, 2004 as
compared to the corresponding period in 2003. The components of noninterest
expense and the changes in the period were as follows (amounts in thousands):
2004 2003 Change %Change
--------------------------------------
Salaries and employee benefits $ 5,971 $ 4,834 $ 1,137 23.52
Occupancy expense 436 359 77 21.45
Trust department expense 339 409 (70) (17.11)
Equipment expense 600 579 21 3.63
Data processing 711 576 135 23.44
Conversion expense 464 1 463 463.00
Insurance 122 115 7 6.09
Printing and stationery 254 184 70 38.04
Professional fees 272 300 (28) (9.33)
Legal expense 106 128 (22) (17.19)
Amortization of core deposit intangible 101 68 33 48.53
Other expense 1,227 1,047 180 17.19
------- ------- -------
Total other expense $10,603 $ 8,600 $ 2,003 23.29
======= ======= =======
The increase in salary and employee benefits is primarily due to an increase in
staff attributable to the merger with Canaan National Bancorp, Inc. and the
required employee time needed to make the system changes relating to the
conversion of the core processing system, along with salary increases and the
increase in the cost of employee benefits. The increase in occupancy expense is
also directly related to the merger. The decrease in Trust department expenses
is the result of management's efforts to control operating expenses. The
increase in data processing costs are attributable to the changes made in the
core processing system during the third quarter coupled with additional costs
related to the merger. Conversion expenses are various nonrecurring expenses
related to the conversion and the enhancement of the core account processing
system. The increase in the core deposit intangible amortization is primarily
the result of the fair market adjustment of the assets and liabilities acquired
from Canaan National Bancorp, Inc. at merger. Other expense increases are
primarily attributable to costs associated with the merger as previously
mentioned.
Income Taxes
- ------------
In 2004, the Company's income tax provision totaled $775,000 which reflects an
effective tax rate of 16.16%. This compares to an income tax provision of
$1,268,000 and an effective tax rate of 24.82% for the same period in 2003. This
decrease is primarily attributable to a decrease in taxable income. In addition,
the Company formed a passive investment
20
company to operate a significant component of the Bank's residential mortgage
lending activity. A passive investment company's structure is such that income
earned results in a reduction of tax liability for the Company.
Net Income
- ----------
Overall, net income totaled $4,019,000 for the year ended December 31, 2004.
This compares to net income of $3,840,000 for the year ended December 31, 2003.
This is an increase of $179,000 or 4.66% and represents earnings per average
share outstanding of $2.67. Earnings per average share outstanding for the year
ended December 31, 2003 was $2.70. The decrease in the earnings per average
share outstanding is primarily the result of issuing an additional 257,483
shares in connection with the acquisition of Canaan National Bancorp, Inc.
RESULTS OF OPERATIONS
- ---------------------
Comparison of the Years Ended December 31, 2003 and 2002
- --------------------------------------------------------
Overview
- --------
The earnings for the Company was $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 average
share outstanding increased $.45 or 20.00% to $2.70 in 2003. This compares to
earnings per average share outstanding of $2.25 in 2002 and $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, a reduction in interest
expense and an increase in other noninterest income.
The Company was "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
compared 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%.
The Board of Directors increased total dividends declared on the Company's
common stock to $.92 per share in 2003. This compared to an $.88 per share
dividend paid in 2002 and an $.84 per share dividend that was paid in 2001.
Net Interest and Dividend Income
- --------------------------------
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 was 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 created an increase in tax
exempt securities in the securities portfolio which 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.
21
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.
The Company's 2003 net interest margin on an FTE basis was 3.80%. This compares
to a net interest margin of 3.80% 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%.
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 to movements in the markets which
resulted in opportunities for the Company to enhance the return from the
securities portfolio and at the same time realize gains on sales of
available-for-sale securities. Mortgage refinancing 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 $34,000 or 14.98% to $261,000 in 2003 compared to $227,000 in 2002.
Other income increased 16.28% to $800,000 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 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
22
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 People's Branch
acquisition totaled $68,000 and did not change from 2002.
Income Taxes
- ------------
In 2003, the Company's income tax provision totaled $1,268,000, which reflected
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, 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 an average per share outstanding basis, net income
amounted to $2.70 per share for 2003 as compared to $2.25 for 2002.
FINANCIAL CONDITION
- -------------------
Comparison of the Years Ended December 31, 2004 and 2003
- --------------------------------------------------------
Total assets at December 31, 2004 were $423,101,000 compared to $311,100,000 at
December 31, 2003. This is an increase of $112,001,000 or 36.00%. The increase
primarily reflects the assets acquired from the merger with Canaan National
Bancorp, Inc.
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, 2004, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $184,286,000. This represents an
increase of $37,265,000 or 25.35% over year-end 2003. The increase is
attributable to the assets acquired as part of the merger previously mentioned.
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 or 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, 2004, the unrealized loss net of tax was $723,000.
This compares to an unrealized gain net of tax of $686,000 at December 31, 2003.
The securities reported as securities-held-to-maturity are stated at amortized
cost.
Federal Funds Sold
- ------------------
The balance of federal funds sold totaled $2,271,000 at December 31, 2004. This
compares to $2,272,000 at December 31, 2003. This represents a normal operating
range of funds for daily cash needs and is considered to be adequate by
Management.
23
Lending
- -------
New business development during the year coupled with the loans acquired as part
of the previously described merger resulted in an increase in total loans
outstanding to $201,979,000 at December 31, 2004, as compared to $139,563,000 at
December 31, 2003. This is an increase of $62,416,000 or 44.72%. 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.
The following table represents the composition of the loan portfolio comparing
December 31, 2004 to December 31, 2003:
December 31, 2004 December 31, 2003
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 15,127 $ 9,149
Real Estate-construction and land development 14,290 15,307
Real Estate-residential 130,414 90,807
Real Estate-commercial 35,487 19,199
Consumer 9,122 6,692
Other 69 73
--------- ---------
$ 204,509 $ 141,227
Unearned Income (19)
Allowance for loan losses (2,512) (1,664)
--------- ---------
Loans, net $ 201,978 $ 139,563
========= =========
Provisions and Allowance for Loan Losses
- ----------------------------------------
Total gross loans at December 31, 2004 were $204,509,000, when compared to total
gross loans of $141,228,000 at December 31, 2003. This is an increase of
$63,281,000 or 44.81% and reflects the merger with Canaan National Bancorp, Inc.
as well as growth within the loan portfolio resulting from new business
development. At December 31, 2004 approximately 88% of the Bank's loan portfolio
was related to real estate products and although the portfolio increased during
the year 2004, the concentration remained consistent as approximately 89% of the
portfolio was related to real estate at December 31, 2003. 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
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 2004 was $250,000 as compared to $312,500 for the year ended December 31,
2003. The level of nonperfoming loans remains low as a percentage of total
loans. Nonperforming loans totaled $2,267,000 or 1.11 % of total loans at
December 31, 2004 as compared to $610,000 or .43% of total loans at December 31,
2003. 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, 2004. 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.
24
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, 2004 and 2003.
At December 31, 2004 the allowance for loan losses totaled $2,512,000,
representing 110.81% of nonperforming loans, which totaled $2,267,000, and 1.11%
of total loans of $204,509,000. This compares to $1,664,000, representing
272.79% of nonperforming loans, which totaled $610,000 and 1.18% of total loans
of $141,228,000 at December 31, 2003. A total of $70,000 in loans was charged
off during the year 2004, as compared to $155,000 during 2003. A total of
$28,000 of previously charged off loans was recovered during the year ended
December 31, 2004. Recoveries for the year 2003 totaled $49,000. When comparing
the two years, net charge-offs were $42,000 for the year 2004 and during the
year 2003 net charge-offs totaled $106,000. 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.
Deposits
- --------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2004 totaled $298,842,000 compared to
$218,457,000 at year-end 2003. This increase of $80,384,000 or 36.80% can be
primarily attributed to the deposits acquired with the merger of the Canaan
National Bancorp, Inc. merger. The Company continues its efforts to
competitively price products and develop and maintain relationship banking with
its customers. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and the aggressive competition from nonbanking entities. During the year, there
was an increase in demand, NOW and savings accounts 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
2004 2003 2002
----------------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------
Demand $ 51,649 $ 38,998 $ 37,578
NOW 23,797 .01% 20,030 .31% 19,833 .82%
Money Market 38,884 .83% 39,491 .76% 42,923 1.50%
Savings 54,596 .68% 45,975 .98% 37,629 1.98%
Time 75,241 1.65% 68,898 2.98% 67,157 3.71%
---------- ---------- ----------
$ 244,167 1.12% $ 213,392 1.34% $ 205,120 1.97%
========== ========== ==========
25
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 is summarized as follows:
(dollars in thousands)
Year Ended December 31
2004 2003 2002
---------------------------
Three months or less $ 9,540 $ 5,575 $ 3,454
Over three months through six months 1,011 1,343 3,630
Over six months through one year 7,517 5,591 7,913
Over one year 14,887 11,080 8,050
------- ------- -------
Total $32,955 $23,589 $23,047
======= ======= =======
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, 2004, the Company had $79,213,000 in
outstanding advances from the Federal Home Loan Bank compared to $60,897,000 at
December 31, 2003. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
Interest Rate Risk
- ------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's asset 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, 2004, 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
26
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, 2004 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, 2004, the Company had approximately $48,157,000 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, 2004, the Company had $40,700,000 in shareholder equity compared
to $28,850,000 at December 31, 2003. This represents an increase of $11,850,000
or 41.08%. Several components contributed to the change since December 2003.
Earnings for the year totaled $4,019,000. Market conditions have reduced
unrealized securities gains and resulted in a negative adjustment to
comprehensive income of $723,000. The Company declared dividends in 2004
resulting in a decrease in capital of $1,491,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan
during the second quarter of 2004 which resulted in an increase in capital of
$32,000. 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 2004, the Company
had a risk-based capital ratio of 12.13% compared to 16.44% at December 31,
2003. 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. As a result of the merger, each shareholder of Canaan
National Bancorp, Inc. received 1.3371 shares of the Company, in addition to
$31.20 in cash for each share of Canaan National Bancorp Inc. stock. As of
September 10, 2004, a total of 257,483 shares of the Company were issued to
shareholders of Canaan National Bancorp, Inc. This resulted in an increase in
capital of $10,698,000. The value of these additional shares was determined
based on the September 10, 2004 closing market price of $41.55 of Salisbury
Bancorp Inc.'s common stock. Fractional shares of the Company were not issued as
a result of the merger, but were paid at a price of $41.06 per share. At
December 31, 2004, a total of 1,682,401 shares of the Company common stock were
issued and outstanding.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Company's consolidated financial statements are pre