SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X ] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
[ ] TRANSITION REPORT UNDER 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.
(Name of Small Business Issuer in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
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(Address of Principal Executive Offices) (Zip Code)
(860) 435-9801
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(Issuer's telephone number, Including area code)
Securities registered under Section 12 (b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common stock par value $.10 per share American Stock Exchange
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Securities registered under Section 12 (g) of the Exchange Act:
None
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [ X ]
The revenues for the issuer's fiscal year ended December 31, 2001 are
$19,476,528
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act). On February 4, 2002: $28,179,255
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.
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,422,358 shares outstanding as of March 8, 2002.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
Documents Incorporated by Reference: None
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TABLE OF CONTENTS
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Page
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Part I
Item 1 - Description of Business 3
(a) General Development of the Business 3
(b) Narrative Description of Business 4
Item 2 - Description of 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 Common Equity and
Related Stockholder Matters 14
(a) Market Information 14
(b) Holders 14
(c) Dividends 14
Item 6- Management"s Discussion and Analysis 15
Item 7 - Financial Statements 25
Item 8 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 26
Part III
Item 9 - Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16 (a) of the Exchange Act 26
Item 10 -Executive Compensation 28
Item 11- Security Ownership of Certain Beneficial Owners
and Management 31
Item 12- Certain Relationships and Related Transactions 32
Item 13 -Exhibits, List and Reports on Form 8-K 33
Signatures 34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which
accounts for most of the Company"s net income. The Bank assumed its present name
in 1925 following the acquisition by the Robbins Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the successor to a private banking firm established in 1874. The
Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of Connecticut and its deposits are
insured by the Federal Deposit Insurance Corporation in accordance with the
Federal Deposit Insurance Act. The Bank"s main office is at 5 Bissell Street,
Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. Substantially all of the
Bank"s customers reside in or maintain their principal offices in Litchfield
County, Connecticut or in Dutchess County or Columbia County, New York or in
Berkshire County, Massachusetts.
The Company's products and services are all of the nature of a commercial bank
and trust company.
Lending
Lending is the principal business of the Bank and loans represent the largest
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. The Bank has also increased its lending activity through
home equity loans. 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 and are
completely serviced by the Bank.
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 a 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 securities 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. At December 31, 2001, it totaled
$105,593,000 which represents approximately 37.23% of total assets.
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
9.51% to $176,540,000 during 2001.
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The Bank is a member of the Federal Home Loan Bank of Boston. Borrowings totaled
$53,003,746 at December 31, 2001 as compared with $47,357,293 at December 31,
2000.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 6, Management"s Discussion and Analysis and
the accompanying Consolidated Financial Statements.
Fiduciary
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts, 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.
(b) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Competition
The Company and the Bank encounter competition in all phases of their business.
Several competitive financial institutions have offices in the Salisbury,
Connecticut Banking Market. In addition, the Bank competes with banking
institutions located in Massachusetts and New York, as well as proximate areas
of Connecticut.
The banking business in the area served by the Bank is very competitive. Based
on information published by the Federal Reserve Bank of Boston, the Salisbury,
Connecticut Banking market is served by seven (7) commercial banks and savings
banks. As reflected below, the Bank has a 51.43% market share of deposits in
such Salisbury Banking Market.
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SALISBURY, CONNECTICUT
ALL INSTITUTIONS, BY TOTAL DEPOSITS
Market Market
City State Deposits Share
l. Salisbury Bancorp, Inc. Lakeville CT $ 183,320 51.43%
(Salisbury Bank & Trust Company) ($183,320) ---
2. Canaan National Bancorp, Inc. Canaan CT $ 52,310 14.67%
(Canaan National Bank) ($ 52,310) ---
3. Iron Bancshares, Inc. Salisbury CT $ 34,060 9.56%
(National Iron Bank) ($ 34,060) ---
4. NewMil Bancorp, Inc. New Milford CT $ 32,990 9.26%
(NewMil Bank) ($ 32,990) ---
5. Torrington Savings Bank Torrington CT $ 26,800 7.52%
6. Union Savings Bank Danbury CT $ 14,370 4.03%
7. Connecticut Mutual Holding Company Winsted CT $ 12,590 3.53%
--------- -----
(Litchfield Bancorp)
$ 356,440 100.00%
======== ======
Herfindahl-Hirschman Index: 3,123
Note: The table is based on June 30, 2000 FDIC and OTS Summary of Deposits data
(dollars in millions). It reflects all mergers and bank holding company
acquisitions completed by January 2, 2002. Holding companies with at least one
commercial bank subsidiary are always considered commercial banking
organizations, even in markets where only their thrift(s) operate.
While the Bank enjoys a large market share of the Salisbury Connecticut Banking
Market, the Bank's share of the total deposits throughout all of Litchfield
County would represent approximately 6% of such market, and would make the Bank
the 8th largest of 20 institutions within Litchfield County.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Insurance companies, investment counseling firms and other
businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services. Many non-bank
competitors are not subject to the extensive regulation described below under
"LEGISLATION, REGULATION AND SUPERVISION" and in certain respects may have a
competitive advantage over banks in providing certain services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions of and
mergers with Connecticut banks and bank holding companies with banks and bank
holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
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Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank"s future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
The Federal Reserve Act imposes certain restrictions on loans by the Bank to the
Company and certain other activities, on investments, in their stock or
securities, and on the taking by the Bank of such stock or securities as
collateral security for loans to any borrower.
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
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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 will
be permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank"s internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required, among other things, to open branch
offices and to consummate merger transactions and other business combinations.
The Connecticut Banking Commissioner conducts periodic examinations of the Bank.
The Connecticut banking statutes also restrict the ability of the Bank to
declare cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank"s capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank"s deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank"s
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
-7-
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".
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 January 31, 2002 was 79 employees of whom 66
were full time and 13 were part time. The employees are not represented by a
collective bargaining unit.
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STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management"s Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, are presented on the following pages of this Report
on Form 10-KSB.
Page(s) of
Item of Guide 3 This Report
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I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential 21
II. Investment Portfolio 10
III. Loan Portfolio 11
IV. Summary of Loan Loss Experience 12
V. Deposits 17
VI. Return on Equity and Assets 11
VII. Short-Term Borrowings 13
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Investment Portfolio
As of December 1994, Salisbury Bank and Trust Company adopted Statement of
Financial Accounting Standard No. 115 (SFAS 115), "Accounting for Certain
Investments in Debt and Equity Securities". SFAS 115 provides for the
categorization of investments into three (3) 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 table sets forth the carrying amounts of the investment securities
as of December 31:
(dollars in thousands)
2001 2000 1999
-------- -------- -------
Available-for-sale securities:
(at fair value)
Equity securities $ 135 $ 179 $ 137
U.S. Treasury securities and other
U.S. government corporations and agencies 38,701 46,761 33,290
Obligations of states and political subdivisions 30,273 14,170 12,379
Mortgage-backed securities 33,139 27,472 29,347
-------- -------- -------
$102,248 $ 88,582 $75,153
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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 400 410 489
Mortgage-backed securities $ 400 $ 410 $ 489
------- ------- -------
Federal Home Loan Bank stock $ 2,945 $ 2,930 $ 2,102
======= ======= =======
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,
2001:
(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
Mortgage-backed
securities 400 6.38% $ 400
Available-for-sale
------------------
securities
----------
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 1,038 5.38% $ 3,034 6.70% $34,629 6.89% $ 38,701
Obligations of state and
political subdivisions $ 0 $ 451 4.76% $ 3,370 4.98% $26,452 4.84%
$30,273
Mortgage-backed
securities $ 0 $ 1,473 7.16% $ 1,053 6.00% $30,613 6.31% $ 33,139
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Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2001 2000 1999 1998 1997
--------- -------- -------- --------- --------
Commercial, financial and $ 10,797 $ 8,592 $ 9,025 $ 10,692 $ 11,575
agricultural
Real Estate-construction and 3,935 6,275 3,382 3,392 4,203
land development
Real Estate - residential 102,201 98,312 86,680 80,451 77,336
Real Estate-commercial 17,423 15,463 15,324 14,909 13,355
Consumer 10,030 10,673 10,698 10,430 10,805
Other 125 247 364 535 655
--------- -------- -------- --------- --------
144,511 139,562 125,473 120,409 117,929
Allowance for possible loan losses (1,445) (1,292) (1,160) (1,260) (1,226)
Unearned income 0 (0) (0) (6) (12)
--------- -------- -------- --------- --------
Net loans $ 143,066 $138,270 $124,313 $ 119.143 $116,691
========= ======== ======== ========= ========
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, 2001. 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 $19,074 $ 3,029 $ 6,117
Real estate-construction and land development 3,957 0 0
------- ------- -------
$23,031 $ 3,029 $ 6,117
======= ======= =======
Maturities after
One Year with:
Fixed interest rates $ 2,266 $ 6,117
Variable interest rates 763 0
------- -------
$ 3,029 $ 6,117
======= =======
Return on Equity and Assests
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
Year ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.14% 1.23% 1.25%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 12.25% 13.64% 12.96%
Dividend payout ratio
(total declared dividends divided by net income) 41.38% 39.72% 39.16%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.27% 8.98% 9.67%
Nonaccrual, Past Due and Restructured Loans
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At December 31, 2001, there were two (2) nonaccrual loans in the Bank's
portfolio. They were secured by 1-4 family residential properties. There were
three (3) real estate loans 90 days past due and still accruing. They are
scheduled to be brought current during 2002. When a mortgage loan becomes 90
days past due, and there is not sufficient collateral to cover the principal and
accrued interest, the Bank generally stops accruing interest unless there are
unusual circumstances which warrant an exception. Generally the only loan types
that the Bank reclassifies to nonaccrual are those secured by real estate. Other
types of loans are generally charged off if they become 90 days or more
delinquent. However, exception is warranted with the $44,000 in loans that are
presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Nonaccrual $ 372 $ 186 $ 473 $1,208 $1,328
90 days or more past due 215 323 10 109 279
Restructured loans 0 12 12 547 764
------ ------ ------ ------ ------
Total nonperforming loans $ 587 $ 521 $ 495 $1,864 $2,371
====== ====== ====== ====== ======
Total nonperforming loans as per-
centage of the total loan portfolio 0.41% 0.37% 0.39% 1.55% 2.01%
Allowance for loan losses as a per-
centage of nonperforming loans 246.17% 247.99% 234.34% 67.60% 51.71%
Information with respect to non-accrual and restructured loans
at December 31, 2001, 2000 and 1999 is as follows:
(dollars in thousands) Year Ended December 31
2001 2000 1999
----- ------ -----
Interest income that would have been recorded under original terms $ 38 $ 12 $ 37
Gross interest recorded 28 1 11
----- ------ -----
Foregone interest $ 10 $ 11 $ 26
===== ====== =====
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance of the allowance for
loan losses at beginning of year $ 1,292 $ 1,160 $ 1,260 $ 1,226 $ 1,242
------- ------- ------- ------- -------
Charge-offs:
Commercial, financial and
agricultural 0 0 1 0
Real estate mortgage 13 21 243 53 38
Consumer 88 50 25 52 66
------- ------- ------- ------- -------
Total charge-offs 101 71 269 112 104
------- ------- ------- ------- -------
Recoveries:
Commercial, financial and
agricultural 0 0 0 0 11
Real estate mortgage 87 6 19 13 7
Consumer 17 17 30 13 20
------- ------- ------- ------- -------
Total recoveries 104 23 49 26 38
------- ------- ------- ------- -------
Net charge-offs (3) 48 220 86 66
Provisions charges to operations 150 180 120 120 50
------- ------- ------- ------- -------
Balance at end of year $ 1,445 $ 1,292 $ 1,160 $ 1,260 $ 1,226
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans outstanding (.002%) .04% .18% .07% .06%
Ratio of allowance for loan losses
to year end loans 1.01% .93% .93% 1.05% 1.04%
-12-
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2001 2000 1999 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial, financial and
agricultural $ 120 7.47% $ 160 6.16% $ 160 7.19% $ 182 8.90% $ 190 9.82%
Real estate construction
and land development 24 2.72% 0 4.50% 0 2.70% 0 3.01% 0 3.56%
Real estate mortgage 1,200 82.78% 1,066 81.51% 941 81.30% 982 78.59% 941 76.90%
Consumer 100 6.94% 65 7.65% 58 8.52% 95 8.96% 94 9.16%
Other loans 1 .09% 1 .18% 1 .29% 1 .54% 1 .56%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,445 100.00% $1,292 100.00% $1,160 100.00% $1,260 100.00% $1,226 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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 possible losses on the
collection of loans. 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
2001 2000 1999
---- ---- ----
Federal Home Loan Bank Advances
Average interest rate
At year end 5.95% 5.93% 5.19%
For the year 5.62% 5.81% 5.19%
Average amount outstanding during the year $53,407 $49,291 $35,954
Maximum amount outstanding at any month $56,766 $58,605 $42,038
Amount outstanding at year end $53,004 $47,357 $39,712
ITEM 2. DESCRIPTION OF PROPERTIES
The Company is not the owner or lessee of any properties. The Bank does not
lease any properties. The properties described below are owned by the Bank.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Bank's trust
department is located in a separate building adjacent to the main office of the
Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
-13-
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Office 94 Main Street Owned
Canaan, Connecticut
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, there are no material
legal proceedings pending to which the Company, Bank, or their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company"s 2001 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT"S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2001 Quarters 2000 Quarters
--------------------------------------- --------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Range of Stock prices:
High $23.60 $24.25 $20.00 $19.00 $18.50 $17.50 $17.75 $18.88
Low $20.79 $19.70 $19.00 $18.00 $17.25 $17.00 $17.19 $17.25
(b) Holders
There were approximately 519 holders of stock as of March 8, 2002. This number
includes brokerage firms and other financial institutions which hold stock in
their name but which is actually owned by third parties. The Company is not
provided with the number or identities of these parties.
(c) Dividends
Dividends are currently declared four (4) times a year, and the Company expects
to follow such practices in the future. During the year 2001, Salisbury Bancorp,
Inc. declared a cash dividend each quarter of $.21 per share. Dividends for the
year 2001 totaled $.84 per share which compared to total dividends of $.77 that
were declared in the year 2000. At their February 25, 2002 meeting, the
Directors of Salisbury Bancorp, Inc. declared a cash dividend of $.22 per share
for the first quarter of 2002. The dividend will be paid on April 26, 2002 to
shareholders of record as of March 29, 2002. Payment of all dividends are
dependent upon the condition and earnings of the Company. The Company's ability
to pay dividends is limited by the prudent banking principles applicable to all
bank holding companies and by the provisions of Connecticut Corporate law, which
provide that no distribution may be made by a company if, after giving it
effect: (1) the company would not be able to pay its debts as they become due in
the usual course of business or (2) the company's total assets would be less
than the sum of its total liabilities plus amounts needed to satisfy any
preferred stock rights. The following table presents cash dividends declared per
share for the last two (2) years:
-14-
2001 Quarters 2000 Quarters
--------------------------------------- --------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Cash dividends
declared $0.21 $0.21 $0.21 $0.21 $0.38 $0.13 $0.13 $0.13
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 12 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc. And
Subsidiary
OVERVIEW
The following provides management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of Canaan,
Lakeville, Salisbury and Sharon, Connecticut. The Company and the Bank were
formed in 1998 and 1848, respectively. This discussion should be read in
conjunction with the Company's consolidated financial statements and the notes
to the consolidated financial statements that are presented as part of this
Annual Report.
In order to provide a strong foundation for building shareholder value and to
serve its customers, the Company remains committed to investing in the
technological and human resources necessary to implement new personalized
financial products and to deliver them with the highest quality of service. To
that end, in 2001, the Bank launched a new internet banking product called
"SBTNET" and acquired a branch in Canaan, Connecticut. This new branch has added
banking convenience for our Canaan area customers and, with deposits of
$26,811,000 as of December 31, 2001, offers a solid base for expanding the
Bank's operation in that area.
Earnings for the Company amounted to $2,901,000 in 2001, a 1.83% increase over
year 2000 earnings of $2,849,000. Earnings per diluted share increased 5.73% to
$2.03 per share for 2001 compared to a $1.92 for 2000.
The growth in net income and earnings per share during 2001 reflect an increase
in average earning assets and noninterest income, the continuing efforts of
management to control operating expenses, and the reduced number of shares
outstanding as a result of stock repurchases.
The Company's risk-based capital ratios at December 31, 2001, which includes the
risk-weighted assets and capital of the Salisbury Bank and Trust Company were
15.09% for Tier 1 capital and 16.21% for total capital. The Company's leverage
ratio was 7.61% at December 31, 2001.
As a result of the Company's financial performance, the Board of Directors
increased the dividends declared on the Company's common stock to $.84 per share
in 2001, compared to $.77 per share in 2000.
FINANCIAL CONDITION
COMPARISON OF DECEMBER 31, 2001 AND 2000
Total assets at December 31, 2001 were $283,602,000 compared to $249,054,000 at
December 31, 2000, an increase of $34,548,000 or 13.87%. This growth is
primarily attributable to the Bank's purchase of People's Bank Canaan branch
office that was completed during September 2001. In connection with this
transaction, the Bank assumed approximately $26,000,000 in deposits, received
approximately $120,000 in loans and $272,000 in fixed assets.
SECURITIES PORTFOLIO
As of December 31, 2001, the securities portfolio, including Federal Home Loan
Bank of Boston stock, totaled $105,593,000. This represents an increase of
$13,671,000 or 14.87% when compared to $91,922,000 at year-end 2000. 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
-15-
interest rate risk and asset-quality diversification to the Company's assets.
The securities portfolio also acts as collateral for deposits of public
agencies. The Company continues to use arbitrage strategy by borrowing funds and
investing them at a rate of return higher than the borrowing cost in order to
generate additional interest income. This strategy contributes to the growth in
the portfolio. The growth in the securities portfolio however, is primarily the
result of increased investing activities resulting from the cash received from
the purchase of the Canaan branch.
The primary component of the total portfolio is U.S. Government sponsored
agencies, which account for 34.72% of the portfolio at December 31, 2001
compared to 48.70% at December 31, 2000. This decrease from year-end 2000 is the
result of Management's efforts to increase after tax earnings by increasing
investment activity in tax-exempt municipal investments. The remaining portion
of the portfolio primarily consists of mortgage-backed securities. At December
31, 2001, securities totaling $102,248,000 were classified as available-for-sale
and securities totaling $400,000 were classified as held-to-maturity.
As of January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This resulted in new classifications of the securities in the
portfolio; Securities-Available-for-Sale, and Securities-Held-to-Maturity. The
securities reported as available-for-sale are stated at fair value in the
financial statements of the Company. Unrealized holding losses and gains
(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, 2001, the unrealized loss net of tax was
$279,000 compared to an unrealized loss net of tax of $171,000 at December 31,
2000. The securities reported as securities-held-to-maturity are stated at
amortized cost.
FEDERAL FUNDS SOLD
The balance of federal funds sold totaled $18,150,000 at December 31, 2001. This
compares to $5,125,000 at December 31, 2000. This increase is primarily the
result of the cash received with the acquisition of the new Canaan branch.
Although this total is somewhat higher than the Bank's normal operating range of
funds for daily cash needs, some of the funds are being invested in the
securities portfolio while others will fund loans.
LENDING
Loans receivable, net of allowance for loan losses increased $4,796,000 to
$143,066,000 at December 31, 2001 or 3.47% compared to $138,270,000 at December
31, 2000. The Company's credit function is designed to insure adherence to
prudent credit standards despite competition for loans in the Company's market
area. The Company offers a wide variety of loan types and terms along with
competitive pricing to customers, although the largest dollar volumes of loan
growth continue to be in the residential mortgage area. For the year ending
December 31, 2001, residential mortgages increased $3,889,000 or 3.96% to
$102,201,000. This compares to residential mortgages that totaled $98,312,000 at
December 31, 2000. This increase is primarily the result of continuing efforts
to develop new personalized financial products and services designed to meet the
needs of our customers.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
Total loans at December 31, 2001 were $144,511,000, which compares to total
loans of $139,562,000 at December 31, 2000. This is an increase of $4,949,000 or
3.55%. While the Bank's loan portfolio continues to grow, 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. At December 31, 2001
approximately 86% of the Bank's loan portfolio was related to real estate
products and although the portfolio increased during the year 2001, the
concentration remained consistent as approximately 86% of the portfolio was
related to real estate at December 31, 2001. There were no material changes in
the composition of the loan portfolio during this period.
Credit risk is inherent in the business of extending loans. The Company
maintains an allowance or reserve for credit losses through charges to earnings.
The loan loss provision for the year 2001 was $150,000 as compared to $180,000
for the year ended December 31, 2000.
-16-
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
uses in making this determination during the year ended December 31, 2001. 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.
Impaired loans 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 when it is probable that the Bank will not be able to collect all principal
and interest due according to the terms of the note. Any such commercial loans
and residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses, which
make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and
improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
year ended December 31, 2001.
At December 31, 2001, the allowance for loan losses totaled $1,445,000,
representing 246.17% of nonperforming loans, which totaled $587,000, and 1.00%
of total loans of $144,511,000. This compared to $1,292,000 representing 247.99%
of nonperforming loans, which totaled $521,000 and .93% of total loans of
$139,562,000 at December 31, 2000. Management does not believe that the increase
of $66,000 in nonperforming loans represents any trend towards increased
delinquency of loans, which would be likely to have an effect on the adequacy of
the allowance for loan losses. While a total of $101,000 loans were charged off
during the year 2001, as compared to $71,000 during 2000, a total of $104,000 of
previously charged off loans was recovered during the year ended December 31,
2001. Recoveries for the year 2000 totaled $23,000. When comparing the two
years, net charge-offs were $48,000 for the year 2000 and during the year 2001
net recoveries exceeded charge offs by $3,000. The $51,000 difference in net
recoveries more than compensated for the $30,000 reduction in provisions during
2001. Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, no
assurances can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans or other factors. Additionally, with expectations of
the Company to grow its existing portfolio, future additions to the allowance
may be necessary to maintain adequate coverage ratios.
-17-
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2001 totaled $201,351,000 compared to
$166,436,000 at year-end 2000. This increase of $34,915,000 or 20.98% can be
primarily attributed to the acquisition of the Canaan branch as previously
mentioned where the Company acquired approximately $26,000,000 in deposits as
part of that transaction. Ongoing efforts of the Company to develop and maintain
relationship banking with its customers coupled with competitively priced
products has also been a contributing factor in the growth of deposits. 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 savings and
money market 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
2001 2000 1999
------------------- ------------------ --------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Demand $ 31,497 $ 31,522 $ 30,024
NOW 17,185 1.07% 16,246 1.06% 16,400 2.03%
Money Market 50,331 3.41% 43,975 4.71% 36,782 3.67%
Savings 16,674 2.37% 15,691 2.43% 15,315 2.43%
Time 60,854 4.94% 53,781 5.20% 58,933 4.99%
-------- -------- --------
$176,541 3.00% $161,215 3.36% $157,454 3.07%
======== ======== ========
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 are summarized as follows:
(dollars in thousands)
Year Ended December 31
2001 2000 1999
------- ------- -------
Three months or less $ 3,895 $ 3,355 $ 2,296
Over three months through six months 4,161 4,351 4,120
Over six months through one year 4,398 7,105 5,194
Over one year 5,708 2,088 3,294
------- ------- -------
Total $18,162 $16,899 $14,904
======= ======= =======
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 which 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, 2001, the Company had $53,004,000 in
outstanding advances from the Federal Home Loan Bank compared to $47,357,000 at
December 31, 2000. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank of
Boston.
-18-
INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
At December 31, 2001 the Company was slightly asset sensitive, however, the
level of interest rate risk is within the limits approved by the Board of
Directors.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston. This enhances the
liquidity position by providing a source of available borrowings.
At December 31, 2001, the Company had approximately $27,232,000 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, 2001, the Company had $23,363,000 in shareholder equity compared
to $22,460,000 at December 31, 2000. This represents an increase of $903,000 or
4.02%. Several components contributed to the change since December 2000.
Earnings for the year totaled $2,901,000. Market conditions have resulted in a
negative adjustment to unrealized comprehensive income of $108,000. The Company
declared dividends in 2001 resulting in a decrease in capital of $1,199,000.
During 2001, the Company repurchased 36,008 shares of stock which reduced
capital in the amount of $691,000. Under current regulatory definitions, the
Company and the Bank are considered to be "well capitalized" for capital
adequacy purposes. As a result, the Bank pays the lowest federal deposit
insurance deposit premiums possible. One primary measure of capital adequacy for
regulatory purposes is based on the ratio of risk-based capital to risk weighted
assets. This method of measuring capital adequacy helps to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets. It takes in account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low risk
assets. At year-end 2001, the Company had a risk-based capital ratio of 16.21%
compared to 20.05% at December 31, 2000. The decrease is the result of the
activity in the Company's stock buy back program during the year as well as the
impact on the risk-based capital resulting from the acquisition of the Canaan
branch as mentioned previously. Despite the decrease from the prior year end,
the Company's ratio of total capital to risk rated assets of 16.21%
substantially exceeds all applicable requirements for "well capitalized"
institutions.
-19-
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, meeting regulatory requirements and being
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.
RESULTS OF OPERATIONS
COMPARISON BETWEEN 2001 AND 2000
NET INTEREST INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and the second is by
charging fees for services provided. The first involves functioning as a
financial intermediary. The Company accepts funds from depositors or borrows
funds and then either lends the funds to borrowers or invests those funds in
various types of securities. The second 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 and 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
2001 2000 1999
-------- -------- --------
Interest Income
(financial statements) $ 17,089 $ 16,510 $ 14,524
Tax Equivalent Adjustment 504 335 295
Interest Expense (8,300) (8,284) (6,683)
-------- -------- --------
Net Interest Income-FTE $ 9,293 $ 8,561 $ 8,136
======== ======== ========
The Company's 2001 interest income-FTE of $17,089,000 was $579,000 or 3.51%
greater than 2000. This is primarily the result of an increase in average
earning assets of $19,444,000 or 8.61% during 2001. Interest expense increased
$16,000 to $8,300,000 in 2001. Although average deposits increased $15,441,000
or 11.91% and average advances from the Federal Home Loan Bank increased
$4,116,000 or 8.35%, an environment of generally lower rates resulted in the
minimal increase in interest expense for the year 2001. Overall, net interest
income-FTE increased 8.55% to $9,293,000 in 2001 compared to $8,561,000 in 2000.
Net interest margin is net interest income expressed as a percentage of average
earning assets. It is used to measure the difference between the average rate of
interest earned on assets and the average rate of interest that must be paid to
support those assets. To maintain its net interest margin, the Company must
manage the relationship between interest earned and paid. The Company's 2001 net
interest margin (FTE) of 3.79% was the same as that in 2000. Although interest
margins continue to be pressured by aggressive competition, increased volumes of
deposits and borrowings have resulted in the increase in net interest and
dividend income on a fully taxable equivalent basis.
-20-
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2001 2000 1999
------------------------------- ------------------------------ ---------------------------------
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 $145,502 $11,344 7.80% $129,972 $10,494 8.07% $123,174 $9,621 7.81%
TaxableSecurities $68,921 $4,422 6.42% $73,958 $4,810 6.50% $65,403 $4,016 6.14%
Tax-Exempt securities $20,030 $1,481 7.39% $13,160 $987 7.50% $11,614 $867 7.47%
Federal Funds $9,986 $310 3.10% $8,382 $533 6.36% $6,156 $295 4.79%
Other Interest Income $809 $36 4.45% $332 $21 6.33% $447 $20 4.47%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest earning $245,248 $17,593 7.17% $225,804 $16,845 7.46% $206,794 $14,819 7.17%
======= ======= =======
assets
Alowance for loan
losses ($1,412) ($1,187) ($1,190)
Cash & due from
Banks $5,138 $5,040 $5,101
Premise,Equipment $2,676 $2,425 $2,498
Net unrealized gain/loss
on AFS Securities $500 ($2,803) ($754)
Other Assets $3,312 $3,281 $2,378
-------- -------- --------
Total Average Assets $255,462 $232,560 $214,827
======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest Bearing
Liabilities:
Now/Money Market
Deposits $67,516 $1,901 2.82% $60,221 $2,245 3.73% $53,182 $1,524 2.87%
Savings Deposits $16,674 $396 2.37% $15,691 $382 2.43% $15,315 $372 2.43%
Time Deposits $60,854 $3,004 4.94% $53,781 $2,794 5.20% $58,933 $2,939 4.99%
Borrowed Funds $53,407 $2,999 5.62% $49,291 $2,863 5.81% $35,594 $1,848 5.19%
------- ------ ---- ------- ------ ---- ------- ------ ----
Total Interest Bearing
Liabilities $198,451 $8,300 4.18% $178,984 $8,284 4.63% $163,024 $6,683 4.10%
------ -------- --------
Demand Deposits $31,497 $31,522 $30,024
Other Liabilities $1,829 $1,167 $999
Shareholders' Equity $23,685 $20,887 $20,780
-------- -------- --------
Total Liabilities and
Equity $255,462 $232,560 $214,827
======== ======== ========
Net Interest Income $9,293 $8,561 $8,136
====== ====== ======
Net Interest Spread 2.99% 2.83% 3.07%
Net Interest Margin 3.79% 3.79% 3.93%
* Annualized
Consolidated
-21-
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2001 over 2000 2000 over 1999
--------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
Increase (decrease) in:
Interest income on:
Loans $ 1,253 $ (403) $ 850 $ 531 $ 342 $ 873
Taxable investment securities (327) (61) (388) 525 269 794
Tax-exempt investment securities 515 (21) 494 116 4 120
Other interest income 132 (340) (208) 101 138 239
Total interest income $ 1,573 $ (825) $ 748 $ 1,273 $ 753 $ 2,026
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 272 $ (616) $ (344) $ 202 $ 519 $ 721
Savings deposits 24 (10) 14 9 1 10
Time deposits 368 (158) 210 (258) 113 (145)
Borrowed funds 239 (103) 136 711 304 1,015
------- ------- ------- ------- ------- -------
Total interest expense $ 903 $ (887) $ 16 $ 664 $ 937 $ 1,601
------- ------- ------- ------- ------- -------
Net interest margin $ 670 $ 62 $ 732 $ 609 $ (184) $ 425
======= ======= ======= ======= ======= =======
NONINTEREST INCOME
Fees earned by the Trust Department remain the largest component of noninterest
income and amounted to $1,070,000 in 2001. This compares to $1,108,000 for the
corresponding period in 2000. A significant portion of trust fee income is based
upon the value of assets under management, and, as such, the calculation of fees
is influenced by the value of the markets at the time of assessment. During the
year 2001, as a result of this decline in stock market values, trust fee income
decreased from year 2000 levels. Estate settlement fees also contribute to trust
department income. Although the timing of the receipt of the fee is difficult to
predict, the overall volume of business for 2001 and 2000 was very comparable.
Other noninterest income increased $467,000 to $1,317,000 for the year ended
compared to $850,000 for the same period in 2000. Service charges on deposit
accounts increased $78,000 or 23.08% to $416,000 compared to $338,000 for the
same period in 2001. Growth in demand deposit and NOW accounts generated an
increase in transaction volumes resulting in increased fees. As a result of
investment activities in the securities portfolio during the year the Company
recorded gains on sales of available-for-sale securities of $130,000. This
compared to recorded losses of ($64,000) for the year ended December 31, 2000.
This represents an increase of $194,000 when comparing the two years. An
economic environment of generally lower interest rates resulted in significant
activity in mortgage refinancing and was the primary result of the increase in
fees generated from the sale of loans held-for-sale to $184,000 for the year
ended December 31, 2001. This is an increase of $111,000 or 152.05% over a total
of $73,000 earned for the year ended December 31, 2000. Other noninterest income
increased $84,000 or 16.70% to $587,000 from $503,000 for the year ended
December 31, 2001 as compared to the same period in 2000. The Company's VISA
credit card program and Master Money Debit Card program grew during 2001,
resulting in increased transaction fees. The Company continues to seek to
increase noninterest income due to its importance as a potential contributor to
profitability.
NONINTEREST EXPENSE
Noninterest expense totaled $6,755,000 in 2001. This is an increase of $958,000
when compared to total noninterest expense of $5,797,000 in 2000. However, as a
percentage of total average earning assets, these expenses have remained
generally consistent at 2.75% in 2001 and 2.57% in 2000. Salaries and employee
benefits increased $439,000 or 12.92%. This is primarily the result of the
additional staff hired to service the increase in new business coupled with
annual pay increases and increasing costs of employee benefits. Occupancy and
equipment expenses increased 12.54% to $733,000 from $651,000. The increases in
these expenses were costs primarily associated with the acquisition of the new
Canaan branch as mentioned previously. During 2001 data processing expenses
decreased 14.34% to $247,000 from $288,000 as a result of the renegotiation of
various data processing agreements with vendors. Insurance expenses for the year
2001, which do not include insurance benefits associated with employees,
decreased $14,000 or 13.21% to $92,000 from $106,000, as a result of the
Company's claim experience and management's renegotiation of various renewal
-22-
premiums on policies. Printing and stationery costs increased $29,000 or 19.33%
to $179,000 for the year ended December 31, 2001 compared to $150,000 for the
year 2000. This is the result of the need for new forms and documentation
relating primarily to either new regulatory requirements or the new office in
Canaan. Amortization of intangible assets from branch acquisitions is a new
expense to the Company that is associated with the Canaan branch acquisition.
For the year ended December 31, 2001 the expense totaled $48,000. Other
operating expenses increased $423,000 or 37.07% to $1,564,000 from $1,141,000
when comparing the two years. This is primarily the result of additional costs
related to the Canaan branch.
INCOME TAXES
In 2001, the Company's tax expense was $1,370,000, an effective tax rate of
32.08%. This compares to income tax expense of $1,357,000 in 2000, reflecting an
effective tax rate of 32.26%. This is primarily the result of the impact of an
increase in tax-exempt interest income earned from the securities portfolio.
NET INCOME
Overall, net income totaled $2,901,000 for the year ended December 31, 2001,
compared to net income of $2,849,000 for the year 2000. This was an increase of
$52,000 or 1.83% and reflects earnings of $2.03 per diluted share for the year,
compared to earnings per diluted share of $1.92 for the same period in 2000.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation; although they do not necessarily move in the same direction
or with the same magnitude as the prices of goods and services. Although not an
influence in recent years, inflation could impact earnings in future periods.
FORWARD LOOKING STATEMENTS
This form 10-KSB and future filings made by the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and Bank, may include forward-looking statements
relating to such matters as (a) assumptions concerning future economic and
business conditions and their effect on the economy in general and on the
markets in which the Company and the Bank do business and (b) expectations for
revenues and earnings for the Company and Bank through growth resulting from
attraction of new deposit and loan customers and the introduction of new
products and services. Such forward-looking statements are based on assumptions
rather than historical or current facts and, therefore, are inherently uncertain
and subject to risk. For those statements, the Company claims the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's and Bank's business include the following: (a) the risk
of adverse changes in business conditions in the banking industry generally and
in the specific markets in which the Bank operates; (b) changes in legislative
and regulatory environment that negatively impact the Company and Bank through
increased operating expenses; (c) increased competition from other financial and
non-financial institutions; (d) the impact of technological advances; and (e)
other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
-23-
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for the integrity and objectivity of the financial
statements and other information appearing in this Annual Report. The financial
statements were prepared in accordance with generally accepted accounting
principles applying estimates and Management's best judgement as required. To
fulfill their responsibilities, Management establishes and maintains accounting
systems and practices adequately supported by internal accounting controls.
These controls include the selection and training of management and supervisory
personnel; an organization structure providing for delegation of authority and
establishment or responsibilities; communication of requirements for compliance
with approved accounting, control and business practices throughout the
organization; business planning and review; and a program of internal audit.
Management believes the internal accounting controls in use provide reasonable
assurance that assets are safeguarded, that transactions are executed in
accordance with Management's authorization and that financial records are
reliable for the purpose of preparing financial statements.
-24-
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
------------------------------------------
Report of Independent Auditors" January 28, 2002........................ F-1
Consolidated Balance Sheets at December 31, 2001 and 2000............... F-2
Consolidated Statements of Income for the Years Ended
December 31, 2001 and 2000............................................. F-3
Consolidated Statements of Changes in Stockholders" Equity
for the Years Ended December 31, 2001 and 2000......................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001 and 2000............................................. F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2001 and 2000................................. F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 2001 and 2000............................ F-22
Statement of Income for the Year Ended December 31, 2001 and 2000...... F-23
Statement of Cash Flows for the Year Ended December 31, 2000 and 1999.. F-24
-25-
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
-------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 28, 2002
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2001 and 2000
--------------------------
ASSETS 2001 2000
------ ------------------------------------
Cash and due from banks $ 7,184,123 $ 6,799,553
Interest bearing demand deposits with other banks 258,097 673,455
Money market mutual funds 617,461 1,161,416
Federal funds sold 18,150,000 5,125,000
------------- -------------
Cash and cash equivalents 26,209,681 13,759,424
Investments in available-for-sale securities (at fair value) 102,248,029 88,581,628
Investments in held-to-maturity securities (fair values of $401,403 as of
December 31, 2001 and $408,188 as of December 31, 2000) 399,989 410,441
Federal Home Loan Bank stock, at cost 2,945,200 2,930,300
Loans, net 143,066,109 138,270,230
Investment in real estate 75,000 75,000
Premises and equipment 2,683,487 2,521,329
Intangible assets on branch acquisition 3,226,554
Accrued interest receivable 1,681,268 1,790,228
Other assets 1,067,143 715,415
------------- -------------
Total assets $ 283,602,460 $ 249,053,995
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 37,702,153 $ 32,098,094
Interest-bearing 163,649,335 134,337,910
------------- -------------
Total deposits 201,351,488 166,436,004
Federal Home Loan Bank advances 53,003,746 47,357,293
Due to broker 4,203,808 11,004,451
Other liabilities 1,680,272 1,795,991
------------- -------------
Total liabilities 260,239,314 226,593,739
------------- -------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,422,358 shares in 2001 and 1,458,366 shares in 2000 142,236 145,837
Paid-in capital 2,281,415 2,968,894
Retained earnings 21,218,155 19,516,414
Accumulated other comprehensive loss (278,660) (170,889)
------------- -------------
Total stockholders' equity 23,363,146 22,460,256
------------- -------------
Total liabilities and stockholders' equity $ 283,602,460 $ 249,053,995
============= =============
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
2001 2000
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 11,343,508 $ 10,494,181
Interest and dividends on securities:
Taxable 4,218,806 4,608,874
Tax-exempt 977,487 651,386
Dividends on equity securities 203,806 200,784
Other interest 345,784 554,517
------------ ------------
Total interest and dividend income 17,089,391 16,509,742
------------ ------------
Interest expense:
Interest on deposits 5,301,623 5,421,144
Interest on Federal Home Loan Bank advances 2,999,174 2,863,277
------------ ------------
Total interest expense 8,300,797 8,284,421
------------ ------------
Net interest and dividend income 8,788,594 8,225,321
Provision for loan losses 150,000 180,000
------------ ------------
Net interest and dividend income after provision for
loan losses 8,638,594 8,045,321
------------ ------------
Other income:
Trust department income 1,070,017 1,108,249
Service charges on deposit accounts 416,060 337,708
Gains (losses) on sales of available-for-sale securities, net 130,117 (63,976)
Gain on sale of loans held-for-sale 183,618 72,719
Other income 587,325 502,993
------------ ------------
Total other income 2,387,137 1,957,693
------------ ------------
Other expense:
Salaries and employee benefits 3,833,838 3,395,161
Occupancy expense 246,549 233,107
Equipment expense 486,393 418,146
Data processing 247,061 288,426
Insurance 92,323 105,613
Net cost of operation of other real estate owned 1,559 1,762
Printing and stationery 178,624 149,988
Legal expense 56,286 64,192
Amortization of intangible assets from branch acquisitions 47,767
Other expense 1,564,454 1,140,601
------------ ------------
Total other expense 6,754,854 5,796,996
------------ ------------
Income before income taxes 4,270,877 4,206,018
Income taxes 1,369,674 1,356,994
------------ ------------
Net income $ 2,901,203 $ 2,849,024
============ ============
Earnings per common share $ 2.03 $ 1.92
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
Accumulated
Number Other
of Comprehensive
Shares Common Paid-in Retained Treasury Income
Issued Stock Capital Earnings Stock (Loss) Total
------ ----- ------- -------- ----- ------ -----
Balance, December 31, 1999 1,504,171 $150,417 $3,780,376 $17,798,981 $ $(1,835,023) $19,894,751
Comprehensive income: 2,849,02
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect 1,664,134
Comprehensive income 4,513,158
Repurchase of common stock (816,062) (816,062)
Transfer treasury stock to reduce shares
issued (45,805) (4,580) (811,482) 816,062
--------- -------- ---------- ----------- --------- ----------- -----------
Dividends declared ($.77 per share) (1,131,591) (1,131,591)
Balance, December 31, 2000 1,458,366 145,837 2,968,894 19,516,414 (170,889) 22,460,256
Comprehensive income:
Net income 2,901,203
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect (107,771)
Comprehensive income 2,793,432
Repurchase of common stock (691,080) (691,080)
Transfer treasury stock to reduce shares
issued (36,008) (3,601) (687,479) 691,080
Dividends declared ($.84 per share) (1,199,462) (1,199,462)
--------- -------- ---------- ----------- --------- ----------- -----------
Balance, December 31, 2001 1,422,358 $142,236 $2,281,415 $21,218,155 $ $ (278,660) $23,363,146
========= ======== ========== ============ ========= =========== ===========
Reclassification disclosure for the years ended December 31:
2001 2000
----------- -----------
Net unrealized gains (losses) on available-for-sale securities $ (46,411) $ 2,661,877
Reclassification adjustment for realized (gains) losses in net income (130,117) 63,976
----------- -----------
Other comprehensive income (loss) before income tax effect (176,528) 2,725,853
Income tax (expense) benefit 68,757 (1,061,719)
----------- -----------
Other comprehensive income (loss), net of tax $ (107,771) $ 1,664,134
=========== ===========
Accumulated other comprehensive loss as of December 31, 2001 and 2000 consists
of net unrealized holding losses on available-for-sale securities, net of taxes.
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 2,901,203 $ 2,849,024
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net (49,133) (65,908)
(Gain) loss on sales of available-for-sale securities, net (130,117) 63,976
Provision for loan losses 150,000 180,000
Depreciation and amortization 262,703 269,143
Amortization of intangible assets from branch acquisition 47,767
Accretion of fair value adjustment on deposits (136,287)
(Increase) decrease in interest receivable 108,960 (214,704)
Deferred tax benefit (24,072) (139,532)
Increase in prepaid expenses (84,167) (10,377)
Increase in cash surrender value of insurance
policies (29,192) (26,945)
Increase in income tax receivable (43,254)
(Increase) decrease in other assets (91,608) 112,654
Decrease in taxes payable (8,081)
Increase in accrued expenses 176,341 236,033
Increase (decrease) in interest payable (39,979) 106,596
Decrease in other liabilities (7,275) (1,502)
------------ ------------
Net cash provided by operating activities 3,011,890 3,350,377
------------ ------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (14,900) (828,300)
Purchases of available-for-sale securities (88,096,807) (21,958,344)
Proceeds from sales of available-for-sale securities 19,419,941 6,225,720
Proceeds from maturities of available-for-sale securities 48,212,964 16,036,879
Proceeds from maturities of held-to-maturity securities 10,032 78,479
Loan purchases (2,800,000) (715,000)
Loan originations and principal collections, net (2,128,114) (13,444,992)
Recoveries of loans previously charged off 103,658 22,543
Capital expenditures (152,711) (541,761)
------------ ------------
Net cash used in investing activities (25,445,937) (15,124,776)
------------ ------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
(continued)
2001 2000
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 18,060,288 14,653,988
Net decrease in time deposits (9,573,854) (2,576,311)
Assumption of net deposits on branch acquisitions 22,897,443
Advances from Federal Home Loan Bank 20,000,000 29,000,000
Principal payments on advances from Federal Home Loan Bank (14,353,547) (21,354,686)
Dividends paid (1,454,946) (1,088,830)
Net repurchase of common stock (691,080) (816,062)
------------ ------------
Net cash provided by financing activities 34,884,304 17,818,099
------------ ------------
Net increase in cash and cash equivalents 12,450,257 6,043,700
Cash and cash equivalents at beginning of year 13,759,424 7,715,724
------------ ------------
Cash and cash equivalents at end of year $ 26,209,681 $ 13,759,424
============ ============
Supplemental disclosures:
Interest paid $ 8,340,776 $ 8,177,825
Income taxes paid 1,437,000 1,488,445
Branch office acquisition:
Deposits assumed $ 26,565,337
Loans acquired (121,423)
Fixed assets acquired (272,150)
------------
Net liabilities assumed 26,171,764
Cash received (22,897,443)
------------
Intangible assets $ 3,274,321
============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank & Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp
and the Bank are referred to together as the (Company)).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in residential and commercial real estate, consumer and small business
loans.
NOTE 2 - ACCOUNTING POLICIES
----------------------------
The accounting and reporting policies of the Company and its subsidiary conform
to accounting policies generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated financial
statements were prepared using the accrual basis of accounting. The significant
accounting policies are summarized below to assist the reader in better
understanding the consolidated financial statements and other data contained
herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank, and the Bank's
wholly-owned subsidiary, SBT Realty, Inc. SBT Realty, Inc. holds and
manages bank owned real estate situated in New York state. All
significant intercompany accounts and transactions have been eliminated
in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand
deposits with other banks, money market mutual funds and federal funds
sold.
Cash and due from banks as of December 31, 2001 includes $1,294,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
F-7
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are measured at amortized cost
in the balance sheet. Unrealized holding gains and losses
are not included in earnings or in a separate component of
capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the consolidated balance sheet. Unrealized holding gains and
losses are not included in earnings but are reported as a
net amount (less expected tax) in a separate component of
capital until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheet. Unrealized holding gains and
losses for trading securities are included in earnings.
-- Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings
as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances reduced by any charge-offs, the allowance for loan losses and
any deferred fees or costs on originated loans or unamortized premiums
or discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs
are deferred, and the net amount amortized as an adjustment of the
related loan's yield. The Company is amortizing these amounts over the
contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
F-8
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets and subsequent writedowns are included in other expense.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company
classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company
disclose estimated fair value for its financial instruments. Fair value
methods and assumptions used by the Company in estimating its fair
value disclosures are as follows:
F-9
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are,
by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that
applies interest rates currently being offered on advances to a
schedule of aggregated expected monthly maturities on Federal Home Loan
Bank advances.
Due to broker: The carrying amount of due to broker approximates its
fair value.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
STOCK BASED COMPENSATION:
The Company recognizes stock-based compensation using the intrinsic
value approach set forth in APB Opinion No. 25 rather than the fair
value method introduced in SFAS No. 123. Entities electing to continue
to follow the provisions of APB No. 25 must make pro forma disclosure
of net income and earnings per share, as if the fair value method of
accounting defined in SFAS No. 123 had been applied. The Company has
made the pro forma disclosures required by SFAS No. 123. The Company
had no stock options outstanding as of December 31, 2001 and 2000.
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity.
F-10
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective for fiscal
years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded
in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure
them at fair value. If certain conditions are met, an entity may elect
to designate a derivative as follows: (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement
generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net
income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value will be recognized in
net income in the period of change. The adoption of this Statement did
not have a material impact on the consolidated financial statements.
The Company had no derivative instruments as of December 31, 2001 and
2000.
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This Statement
replaces SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" and rescinds SFAS
Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125". SFAS No. 140 provides accounting
and reporting standards for transfers and servicing of financial assets
and extinguishments of liabilities. This statement provides consistent
standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001; however,
the disclosure provisions are effective for fiscal years ending after
December 15, 2000. The adoption of this Statement did not have a
material impact on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations".
This statement addresses financial accounting and reporting for
business combinations and supercedes APB Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". Under Opinion 16, business
combinations were accounted for using one of two methods, the
pooling-of-interests method or the purchase method. All business
combinations in the scope of SFAS No. 141 are to be accounted for using
one method - the purchase method. The provisions of SFAS No. 141 apply
to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for using the purchase method for which
the date of acquisition is July 1, 2001, or later.
On September 14, 2001 the Company acquired a bank branch. The
acquisition is described on the following page. The results of
operations of the acquired bank branch are included in the income
statement of the Company for the period from September 15, 2001 to
December 31, 2001.
F-11
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement addresses financial accounting and
reporting for required goodwill and other intangible assets and
supercedes APB Opinion No. 17, "Intangible Assets". The initial
recognition and measurement provisions of SFAS No. 142 apply to
intangible assets which are defined as assets (not including financial
assets) that lack physical substance. The term "intangible assets" is
used in SFAS No. 142 to refer to intangible assets other than goodwill.
The accounting for a recognized intangible asset is based on its useful
life. An intangible asset with a finite useful life is amortized; an
intangible asset with an indefinite useful life is not amortized. An
intangible asset that is subject to amortization shall be reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of".
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is
defined as the excess of the cost of an acquired entity over the net of
the amounts assigned to assets acquired and liabilities assumed. SFAS
No. 142 further provides that goodwill shall be tested for impairment
at a level of reporting referred to as a reporting unit. Impairment is
the condition that exists when the carrying amount of goodwill exceeds
its implied fair value.
SFAS No. 142 is effective as follows:
All of the provisions of SFAS No. 142 shall be applied in fiscal
years beginning after December 15, 2001, to all goodwill and
intangible assets recognized in an entity's statement of financial
position at the beginning of that fiscal year, regardless of when
those previously recognized assets were initially recognized.
The Company has intangible assets as of December 31, 2001 in the amount
of $3,226,554 that arose from the Company's purchase of certain assets
and its assumption of certain liabilities of a bank branch in Canaan,
Connecticut on September 14, 2001. The fair value of the liabilities
assumed exceeded the fair value of the assets acquired. Included in the
intangible assets acquired was an identified intangible asset (a core
deposit intangible) in the amount of $888,606 which is being amortized
to expense over 13 years on the straight line method. The Company
classified the remainder of the intangible assets acquired, in the
amount of $2,385,715, as an unidentifiable intangible asset and is
amortizing it to expense over 25 years on the straight-line method.
Accumulated amortization of the intangible assets was $47,767.
Estimated amortization expense in each of the five years in the period
from January 1, 2002 to December 31, 2006 is $163,783. This accounting
is in accordance with SFAS No. 72, "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" and will not change because SFAS No.
142 did not change the essential parts of SFAS No. 72. However, the
intangible asset will be subject to the impairment review requirements
of SFAS No. 121.
On October 10, 2001 the Financial Accounting Standards Board (Board)
affirmed that paragraph 5 of FASB Statement No. 72, Accounting for
Certain Acquisitions of Banking or Thrift Institutions, applies to all
acquisitions of financial institutions (or branches thereof) whether
"troubled" or not, in which the fair value of the liabilities assumed
exceeds the fair value of tangible and intangible assets acquired. The
Board decided to reconsider the guidance in paragraphs 5-7 of Statement
72 as part of its consideration of combinations of mutual enterprises
within the scope of the project on combinations of not-for-profit
organizations.
F-12
NOTE 3 - INVESTMENTS IN SECURITIES
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values are as follows as of December 31:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2001:
Equity securities $ 3,031 $ 131,978 $ $ 135,009
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies 38,459,596 278,375 (37,178) 38,700,793
Debt securities issued by states of the
United States and political subdivisions
of the states 30,927,212 151,015 (804,544) 30,273,683
Money market mutual funds 617,461 617,461
Mortgage-backed securities 33,314,635 171,006 (347,097) 33,138,544
------------- ------------- ------------- -------------
103,321,935 732,374 (1,188,819) 102,865,490
Money market mutual funds included in cash
and cash equivalents (617,461) (617,461)
------------- ------------- ------------- -------------
$ 102,704,474 $ 732,374 $ (1,188,819) $ 102,248,029
============= ============= ============= =============
December 31, 2000:
Equity securities $ 11,830 $ 166,735 $ 178,565
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 46,925,648 35,087 (199,693) 46,761,042
Debt securities issued by states of the
United States and political subdivisions
of the states 14,134,594 209,400 (173,563) 14,170,431
Money market mutual funds 1,161,416 1,161,416
Mortgage-backed securities 27,789,473 63,523 (381,406) 27,471,590
------------- ------------- ------------- -------------
90,022,961 474,745 (754,662) 89,743,044
Money market mutual funds included in cash
and cash equivalents (1,161,416) (1,161,416)
------------- ------------- ------------- -------------
$ 88,861,545 $ 474,745 $ (754,662) $ 88,581,628
============= ============= ============= =============
Gross Gross
Net Unrecognized Unrecognized
Carrying Holding Holding Fair
Amount Gains Loss Value
------ ----- ---- -----
Held-to-maturity securities:
December 31, 2001:
Mortgage-backed securities $399,989 $ 1,414 $ $401,403
======== ======== ======== ========
December 31, 2000:
Mortgage-backed securities $410,441 $ $ (2,253) $408,188
======== ======== ======== ========
F-13
The scheduled maturities of securities (other than equity securities) were as
follows as of December 31, 2001:
Available-For-Sale Held-To-Maturity
Fair Net Carrying
Value Amount
------------------- -----------------
Due within one year $ $
Due after one year through five years 1,489,496
Due after five years through ten years 6,404,004
Due after ten years 61,080,975
Mortgage-backed securities 33,138,545 399,989
------------ ------------
$102,113,020 $ 399,989
============ ============
During 2001, proceeds from sales of available-for-sale securities amounted to
$19,419,941. Gross realized gains on those sales amounted to $130,117. During
2000, proceeds from sales of available-for-sale securities amounted to
$6,225,720. Gross realized gains and gross realized losses on those sales
amounted to $145 and $64,121, respectively. The tax (expense) benefit applicable
to these net realized gains and losses amounted to $(50,681) and $24,919,
respectively.
There were no issuers of securities whose carrying amount exceeded 10% of
stockholders' equity as of December 31, 2001.
Total carrying amounts of $6,199,068 and $7,073,366 of debt securities were
pledged to secure public deposits and for other purposes as required by law as
of December 31, 2001 and 2000, respectively.
NOTE 4 - LOANS
--------------
Loans consisted of the following as of December 31:
2001 2000
--------- ---------
(in thousands)
Commercial, financial and agricultural $ 10,797 $ 8,592
Real estate - construction and land development 3,935 6,275
Real estate - residential 102,201 98,312
Real estate - commercial 17,423 15,463
Consumer 10,030 10,673
Other 125 247
--------- ---------
144,511 139,562
Allowance for loan losses (1,445) (1,292)
--------- ---------
Net loans $ 143,066 $ 138,270
========= =========
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2001.
Total loans to such persons and their companies amounted to $1,336,893 as of
December 31, 2001. During 2001 advances of $178,014 were made and repayments
totaled $342,922.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2001 2000
---------- ----------
Balance at beginning of period $1,291,502 $1,159,537
Provision for loan losses 150,000 180,000
Recoveries of loans previously charged off 103,658 22,543
Loans charged off (100,656) (70,578)
---------- ----------
Balance at end of period $1,444,504 $1,291,502
========== ==========
F-14
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
2001 2000
------------------------- ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----- ------ ----- ------
Loans for which there is a related allowance for credit losses $0 $0 $ 0 $0
Loans for which there is no related allowance for credit losses 0 0
--- ---- ------------ ----
Totals $0 $0 $ 0 $0
== == =========== ==
Average recorded investment in impaired loans during the
year ended December 31 $0 $58,211
== =======
Related amount of interest income recognized during the time, in the year ended
December 31, that the loans were impaired
Total recognized $0 $ 0
== ===========
Amount recognized using a cash-basis method of
accounting $0 $ 0
== ===========
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
The following is a summary of premises and equipment as of December 31:
2001 2000
----------- -----------
Land $ 350,644 $ 324,194
Buildings 2,514,603 2,231,783
Furniture and equipment 1,884,112 1,768,521
----------- -----------
4,749,359 4,324,498
Accumulated depreciation and amortization (2,065,872) (1,803,169)
----------- -----------
$ 2,683,487 $ 2,521,329
=========== ===========
NOTE 6 - DEPOSITS
-----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2001 and 2000 was $18,161,373 and $16,899,009,
respectively.
For time deposits as of December 31, 2001, the scheduled maturities for years
ended December 31 are:
2002 $49,355,011
2003 7,726,724
2004 819,561
2005 3,033,450
2006 5,383,084
-----------
$66,317,830
===========
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank. Total
deposits to such persons and their companies amounted to $727,850 as of December
31, 2001 and $663,517 as of December 31, 200l.
F-15
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2001 and thereafter are summarized as follows:
AMOUNT
-----------
2002 $ 1,113,139
2003 10,993,295
2004 766,823
2005 263,339
2006 188,605
Thereafter 39,678,545
-----------
$53,003,746
===========
The advances due after 2006 include three advances that are redeemable at par at
the option of the FHLB. An advance of $19,000,000 is redeemable on January 25,
2002, an advance of $10,000,000 is redeemable on December 15, 2003 and an
advance of $10,000,000 is redeemable on February 26, 2004.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Advances are secured by the Company's stock in that institution, its residential
real estate mortgage portfolio and the remaining U.S. government and agency
obligations not otherwise pledged.
At December 31, 2001, the interest rates on FHLB advances ranged from 4.81
percent to 6.58 percent. At December 31, 2001, the weighted average interest
rate on FHLB advances was 5.39 percent.
NOTE 8 - EMPLOYEE BENEFITS
--------------------------
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
F-16
The following tables set forth information about the plan as of December 31 and
the years then ended:
2001 2000
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,174,561 $ 2,004,633
Actuarial (gain) loss (1,540) 191,408
Service cost 141,721 131,006
Interest cost 168,343 163,061
Benefits paid (137,467) (315,547)
----------- -----------
Benefit obligation at end of year 2,345,618 2,174,561
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 2,296,344 2,567,234
Actual return on plan assets (45,501) 44,657
Contributions 57,817
Benefits paid (137,467) (315,547)
----------- -----------
Fair value of plan assets at end of year 2,171,193 2,296,344
----------- -----------
Funded status (174,425) 121,783
Unrecognized net gain from actuarial experience (301,286) (516,865)
Unrecognized prior service cost 95,436 96,328
Unamortized net asset existing at date of adoption of
SFAS No. 87 58,364 58,364
----------- -----------
Accrued benefit cost included in other liabilities $ (321,911) $ (240,390)
=========== ===========
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligation were 8.0% and 6.0% for 2001 and 2000, respectively. The
weighted-average expected long-term rate of return on assets was 8.0% for 2001
and 2000.
Components of net periodic cost:
2001 2000
--------- ---------
Service cost $ 141,721 $ 131,006
Interest cost on benefit obligation 168,343 163,061
Expected return on assets (180,290) (192,757)
Amortization of prior service cost 9,564 9,564
--------- ---------
Net periodic cost $ 139,338 $ 110,874
========= =========
The Company adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute up to fifteen percent of their pay. The Company may
make discretionary contributions to the Plan. The Company's contribution in the
years ended December 31, 2001 and 2000 amounted to $48,000 and $44,000,
respectively. Discretionary contributions vest in full after five years.
Five of the Company's executives have a change in control agreement (agreement)
with the Company. Under the agreements, if the executive officer's employment is
terminated within twelve months subsequent to a change in control as defined in
the agreements, then the officer is entitled to a lump sum amount equal to the
executive's annual compensation, as defined in the agreements, less amounts
previously paid the executive from the date of the change in control.
F-17
NOTE 9 - INCOME TAXES
---------------------
The components of income tax expense are as follows for the years ended December
31:
2001 2000
----------- -----------
Current:
Federal $ 1,073,942 $ 1,172,814
State 319,804 323,712
----------- -----------
1,393,746 1,496,526
Deferred:
Federal (19,437) (113,530)
State (4,635) (26,002)
----------- -----------
(24,072) (139,532)
----------- -----------
Total income tax expense $ 1,369,674 $ 1,356,994
=========== ===========
The reasons for the differences between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
2001 2000
------- -------
% of % of
Income Income
Federal income tax at statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (7.8) (5.3)
Other items 1.0 (1.0)
State tax, net of federal tax benefit 4.9 4.6
---- ----
Effective tax rates 32.1% 32.3%
==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2001 2000
--------- ---------
Deferred tax assets:
Allowance for loan losses $ 365,020 $ 306,595
Interest on non-performing loans 10,283 6,244
Accrued deferred compensation 20,602 22,361
Post retirement benefits 19,475 14,801
Other real estate owned property writedown 25,317 25,317
Deferred organization costs 2,193 3,386
Accrued pensions 125,385 110,771
Net unrealized holding loss on available-for-sale securities 177,785 109,028
--------- ---------
Gross deferred tax assets 746,060 598,503
--------- ---------
Deferred tax liabilities:
Core deposit intangible asset (60,672)
Accelerated depreciation (323,737) (335,378)
Discount accretion (13,569) (7,872)
--------- ---------
Gross deferred tax liabilities (397,978) (343,250)
--------- ---------
Net deferred tax assets $ 348,082 $ 255,253
========= =========
Deferred tax assets as of December 31, 2001 and 2000 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 2001, the Company had no operating loss and tax credit
carryovers for tax purposes.
F-18
NOTE 10 - FINANCIAL INSTRUMENTS
-------------------------------
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
2001 2000
-------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Value Amount
------------- ------------- ------------- -----------
Financial assets:
Cash and cash equivalents $ 26,209,681 $ 26,209,681 $ 13,759,424 $13,759,424
Available-for-sale securities 102,248,029 102,248,029 88,581,628 88,581,628
Held-to-maturity securities 399,989 401,403 410,441 408,188
Federal Home Loan Bank stock 2,945,200 2,945,200 2,930,300 2,930,300
Loans 143,066,109 143,680,000 138,270,230 136,498,000
Accrued interest receivable 1,681,268 1,681,268 1,790,228 1,790,228
Financial liabilities:
Deposits 201,351,488 201,601,000 166,436,004 166,426,000
FHLB advances 53,003,746 53,974,000 47,357,293 47,029,000
Due to broker 4,203,808 4,203,808 11,004,451 11,004,451
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2001 2000
----------- -----------
Commitments to originate loans $ 6,692,798 $ 7,462,000
Standby letters of credit 20,000 20,000
Unadvanced portions of loans:
Home equity 8,631,632 7,355,736
Commercial lines of credit 5,260,748 6,653,389
Construction 881,951 3,792,995
Consumer 5,744,632 4,976,987
----------- -----------
$27,231,761 $30,261,107
F-19
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
Commitments to purchase when issued investment securities at December 31, 2001
totaled $3,140,546.
The Company has no derivative financial instruments subject to the provisions of
SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value
of Financial Instruments."
NOTE 11 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------
Most of the Bank's business activity is with customers located in northwestern
Connecticut and bordering New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 12 - REGULATORY MATTERS
----------------------------
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2001, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2001, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are also presented
in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)
Consolidated $21,919 16.21% $10,820 >8.0% N/A
-
Salisbury Bank & Trust Company 21,739 16.09 10,812 >8.0 $13,515 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 20,415 15.09 5,410 >4.0 N/A
-
Salisbury Bank & Trust Company 20,235 14.97 5,406 >4.0 8,109 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 20,415 7.61 10,730 >4.0 N/A
-
Salisbury Bank & Trust Company 20,235 7.56 10,713 >4.0 13,515 >5.0
- -
F-20
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------------------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2000:
Total Capital (to Risk Weighted Assets)
Consolidated $23,998 20.05% $9,573 >8.0% N/A
-
Salisbury Bank & Trust Company 23,658 19.80 9,558 >8.0 $11,948 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 22,631 18.91 4,787 >4.0 N/A
-
Salisbury Bank & Trust Company 22,291 18.66 4,779 >4.0 9,468 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 22,631 9.53 9,500 >4.0 N/A
-
Salisbury Bank & Trust Company 22,291 9.42 9,468 >4.0 11,835 >5.0
- -
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 2001 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $9,393,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 13 - DIRECTORS STOCK RETAINER PLAN
---------------------------------------
At the 2001 annual meeting the stockholders of the Company voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan
provides non-employee directors of the Company with shares of restricted stock
of the Company as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the plan
shall not exceed 15,000. The first grant date under this plan will precede the
2002 annual meeting of stockholders. Each director whose term of office begins
with or continues after the date of the Plan was approved by the stockholders
shall be issued an "annual stock retainer" consisting of 120 shares of common
stock of the Company.
NOTE 14 - EARNINGS PER SHARE (EPS)
----------------------------------
During the years ended December 31, 2001 and 2000 there were no dilutive
potential common shares that could have been issued by the Company. Therefore,
diluted earnings per share is not presented.
NOTE 15 - RECLASSIFICATION
--------------------------
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 16 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
F-21
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
---------------------
BALANCE SHEETS
--------------
December 31, 2001 and 2000
--------------------------
ASSETS 2001 2000
------ ------------ -------------
Checking account in Salisbury Bank & Trust Company $ 335 $
Money market mutual funds 470,905 661,312
Investments in available-for-sale securities (at fair value) 230,000
Investment in subsidiary 23,182,570 22,120,121
Other assets 2,193 3,386
------------ ------------
Total assets $ 23,656,003 $ 23,014,819
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 298,695 $ 554,179
Other liabilities (5,838) 384
------------ ------------
Total liabilities 292,857 554,563
------------ ------------
Total stockholders' equity 23,363,146 22,460,256
------------ ------------
Total liabilities and stockholders' equity $ 23,656,003 $ 23,014,819
============ ============
F-22
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
---------------------
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
2001 2000
----------- -----------
Dividend income from subsidiary $ 1,740,000 $ 1,330,000
Taxable interest on securities 14,442 44,555
----------- -----------
1,754,442 1,374,555
----------- -----------
Legal expense 8,596 9,906
Supplies and printing 6,211 12,828
Other expense 13,297 18,063
----------- -----------
28,104 40,797
----------- -----------
Income before income tax (benefit) expense
and equity in undistributed net income of subsidiary 1,726,338 1,333,758
Income tax (benefit) expense (4,645) 1,464
----------- -----------
Income before equity in undistributed net income of subsidiary 1,730,983 1,332,294
Equity in undistributed net income of subsidiary 1,170,220 1,516,730
----------- -----------
Net income $ 2,901,203 $ 2,849,024
=========== ===========
F-23
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
---------------------
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2001 and 2000
--------------------------------------
2001 2000
----------- -----------
Cash flows from operating activities:
Net income $2,901,20 $ 2,849,024
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary (1,170,220) (1,516,730)
Deferred tax expense 1,193 1,080
Accretion of securities (22,262)
(Decrease) increase in taxes payable (8,081)
Increase (decrease) in due to subsidiary (6,222) 384
----------- -----------
Net cash provided by operating activities 1,725,954 1,303,415
----------- -----------
Cash flows from investing activities:
Proceeds from sales of available-for-sale securities 292,263
Maturities of available-for-sale securities 230,000
----------- -----------
Net cash provided by investing activities 230,000 292,263
----------- -----------
Cash flows from financing activities:
Net repurchase of common stock (691,080) (816,062)
Dividends paid (1,454,946) (1,088,830)
----------- -----------
Net cash used in financing activities (2,146,026) (1,904,892)
----------- -----------
Net increase (decrease) in cash and cash equivalents (190,072) (309,214)
Cash and cash equivalents at beginning of year 661,312 970,526
----------- -----------
Cash and cash equivalents at end of year $ 471,240 $ 661,312
=========== ===========
F-24
TEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two (2) most recent fiscal years, the Company and the Bank have had
no changes in or disagreements with their independent accountants on accounting
and financial disclosure matters.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT.
MANAGEMENT OF THE COMPANY
The following table sets forth the name and age of each Executive Officer, his
principal occupation for the last five (5) years and the year in which he was
first appointed an Executive Officer of the Company.
EXECUTIVE
OFFICER OF THE
NAME AGE POSITION COMPANY SINCE:
---- --- -------- --------------
John F. Perotti 55 President and Chief 1998 (1)
Executive Officer
Richard J. Cantele, Jr. 42 Secretary 2001 (2)
John F. Foley 51 Chief Financial Officer 1998 (3)
(1) Mr. Perotti is also the President and Chief Executive Officer of the Bank
and has been an Executive Officer of the Bank since 1982.
(2) Mr. Cantele is also the Executive Vice President, Treasurer and Chief
Operating Officer of the Bank and has been an Executive Officer of the Bank
since 1989.
(3) Mr. Foley is also the Senior Vice President, Comptroller and Principal
Financial Officer of the Bank and has been an Executive Officer of the Bank
since 1986.
Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide for a Board
of Directors of not less than seven (7) members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors of the Company
is divided into three (3) classes. Classes of directors serve for staggered
three (3) year terms. A successor class is to be elected at each annual meeting
of shareholders. When the terms of office of the members of one class expire
vacant directorships may be filled, until the expiration of the term of the
vacated directorship, by the vote of a majority of the directors then in office.
The Company does not have a nominating committee. Rather, the full Board of
Directors performs that function.
-26-
The following table sets forth certain information, as of March 8, 2002 with
respect to the directors of the Company.
NOMINEES FOR ELECTION
Position Held Director Term
Name Age with the Company Since Expiring
---- --- ---------------- ----- --------
John R. H. Blum 72 Chairman 1998 2002
Louise F. Brown 58 Director 1998 2002
Nancy F. Humphreys 60 Director 2001 2002
CONTINUING DIRECTORS
Gordon C. Johnson 67 Director 1998 2003
Holly J. Nelson 48 Director 1998 2003
Walter C. Shannon, Jr. 66 Director 1998 2003
John F. Perotti 55 President, CEO, 1998 2004
and Director
Craig E. Toensing 64 Director 1998 2004
Michael A. Varet 59 Director 1998 2004
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the positions
described for at least five (5) years.
John R. H. Blum is an attorney in private practice and former Commissioner of
Agriculture for the State of Connecticut. He has been a director of the Bank
since 1995 and was elected Chairman of the Board of Directors of the Company and
the Bank in 1998.
Louise F. Brown has been a director of the Bank since 1992 and is a partner at
the Sharon office in the law firm of Gager & Peterson, LLP.
Nancy F. Humphreys has been a director of the Bank since 2001. She retired from
Citigroup New York, Citibank in February of 2000, as Managing Director and
Treasurer of Global Corporate Investment Bank North America.
Gordon C. Johnson has been a director of the Bank since 1994 and is a Doctor of
Veterinary Medicine.
Holly J. Nelson has been a director of the Bank since 1995. She is a member of
Horses North, LLC, a tour operator, and is a partner in Oblong Property
Management, LLC.
John F. Perotti is President and Chief Executive Officer of the Company and the
Bank. Prior to that he served as Executive Vice President and Chief Operating
Office of the Bank and prior to that, he was Vice President and Treasurer of the
Bank. He has been a director of the Bank since 1985.
Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and
President of William J. Cole Agency, Inc. He has been a director of the Bank
since 1993.
Craig E. Toensing has been a director of the Bank since 1995 and retired in
December 2001 as Senior Vice President and Trust Officer of the Bank.
-27-
Michael A. Varet is a partner in the law firm of Piper Marbury Rudnick & Wolfe
LLP. Mr. Varet has been a director of the Bank since 1997. Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company"s executive officers, directors and persons who own more than ten
percent (10%) of the Company"s Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of ownership and changes in ownership of
the Company"s Common Stock. Executive officers, directors and any shareholders
owning greater than ten percent (10%) of the Company"s Common Stock are required
by the SEC"s regulations to furnish the Company with copies of all such reports
that they file.
Based solely on a review of copies of reports filed with the SEC since January
1, 2001 and of written representations by certain executive officers and
directors, all persons subject to the reporting requirements of Section 16(a)
are believed by management to have filed the required reports on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION
Fees
During 2001, each director received an annual retainer of $2,000. In addition,
directors received $500 for each Board of Directors meeting attended and $200
for each committee meeting attended. Directors' Perotti and Toensing received no
additional compensation for their services as directors or members of any board
committee during 2001.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company and the Bank for services rendered
in all capacities during the fiscal years ended December 31, 2001, 2000 and
1999. No other current executive officer of the Company or the Bank received
cash compensation in excess of $100,000 during the year ended December 31, 2001.
All compensation expense was paid by the Bank.
Summary Compensation Table
Annual
Compensation All Other
Name and Principal Compensation
Position Year Salary($)(1) Bonus($) ($) (2) (3)
-------- ---- ------------ -------- -----------
John F. Perotti 2001 $179,920 $25,949 $3,400 (3)
President and 2000 172,992 38,515 3,400 (2)
Chief Executive Officer 1999 163,200 30,243 --
of the Company and the Bank
Craig E. Toensing (4) 2001 $134,108 $19,530 $2,985 (3)
Senior Vice President 2000 130,200 30,825 $3,221 (2)
and Trust Officer of the Bank 1999 122,808 24,641 ---
Richard J. Cantele, Jr. (5) 2001 $ 93,652 $17,063 $2,145 (3)
Secretary of the Company 2000 87,504 17,700 $2,104 (2)
Executive Vice President, Treasurer 1999 75,000 13,191 ---
and Chief Operating Officer of the Bank
(1) Compensation above does not include accrual of benefits under the Bank"s
defined pension plan or supplemental arrangements described below.
(2) The Bank's matching contribution to the 401(k) plan for 2000.
(3) The Bank's matching contribution to the 401(k) plan for 2001.
(4) Craig E. Toensing retired as Senior Vice President and Trust Officer of the
Bank on December 31, 2001.
(5) Richard J. Cantele, Jr. was appointed Secretary of the Company on December
27, 2001.
-28-
Insurance
In addition to the cash compensation paid to the executive officers of the
Company and the Bank, the executive officers receive group life, health,
hospitalization and medical insurance coverage. However, these plans do not
discriminate in scope, terms or operation, in favor of officers or directors of
the Company and the Bank and are available generally to all full-time employees.
Pension Plan
The Bank maintains a non-contributory defined pension plan for officers and
other salaried employees of the Bank who become participants after attaining age
21 and completing one (1) year of service. Pension benefits are based upon
average base salary (determined as of each January 1st) during the highest five
(5) consecutive years of service prior to attaining normal retirement date. The
amount of annual benefit is fifty percent (50%) of average base salary less
fifty percent (50%) of the primary Social Security benefit, pro rated for less
than 25 years of service, plus one-half of one percent (.5%) of average base
salary for each of up to ten (10) additional years of service. This benefit
formula may be modified to conform with recent changes in the pension laws.
The present average base salary and years of service to date of Messrs. Perotti,
Toensing and Cantele are: Mr. Perotti: $186,692; 29 years; Mr. Toensing:
$140,331; 21 years; and Mr. Cantele $90,126; 20 years. The following table shows
estimated annual retirement benefits payable at normal retirement date as a
straight life annuity for various average base salary and service categories
before the offset of a portion of the primary Social Security benefit.
Average
Base Salary Estimated Annual Retirement Benefit With
at Retirement Years of Service at Retirement Indicated
------------- ----------------------------------------
10 Years 20 Years 25 Years 35 Years
-------- -------- -------- --------
$ 80,000 $16,000 $32,000 $ 40,000 $ 44,000
90,000 18,000 36,000 45,000 49,500
100,000 20,000 40,000 50,000 55,000
110,000 22,000 44,000 55,000 60,500
120,000 24,000 48,000 60,000 66,000
130,000 26,000 52,000 65,000 71,500
140,000 28,000 56,000 70,000 77,000
150,000 30,000 60,000 75,000 82,500
160,000 32,000 64,000 80,000 88,000
170,000 34,000 68,000 85,000 93,500
180,000 36,000 72,000 90,000 99,000
190,000 38,000 76,000 95,000 104,500
200,000 40,000 80,000 100,000 110,000
210,000 42,000 84,000 105,000 115,500
-29-
Supplemental Retirement Arrangements
In 1994, the Bank entered into a supplemental retirement arrangement (the
"Supplemental Retirement Agreement") with John F. Perotti. Following disability
or retirement at the earlier of the age of 65, or after thirty (30) years of
service to the Bank, Mr. Perotti will receive monthly payments of $1,250
(increased by 5% per year or greater to reflect increases in the cost of living
index) for a period of ten (10) years. These payments are in addition to any
payments under the Bank"s retirement plan. The Supplemental Retirement Agreement
includes provisions which would prevent Mr. Perotti from working for a
competitor in the proximity of the Bank.
Directors Stock Retainer Plan
At the 2001 Annual Meeting, the shareholders of the Company voted to
approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc." (the
"Plan"). The Plan provides non-employee directors of the Company with shares of
restricted stock of the Company as a component of their compensation for
services as non-employee directors. The maximum number of shares of stock that
may be issued pursuant to the Plan shall not exceed 15,000. The first grant date
under this Plan will precede the 2002 Annual Meeting of Shareholders. Each
non-employee director will be issued an "annual stock retainer" consisting of
120 shares of restricted common stock of the Company. The number of shares to be
issued to any new non-employee director will be prorated to reflect the number
of months which they served as a non-employee director prior to any grant date.
Change in Control Agreements
During 2001, the Bank entered into change in control agreements with the
following Executive Officers of the Bank: John F. Perotti, Richard J. Cantele,
Jr., John F. Foley, Todd M. Clinton and Diane E. R. Johnstone. The agreements
provide that, in the event of a change in control of the Company or Bank, each
Executive Officer will be entitled to a lump sum payment equal to his or her
annual compensation based upon the most recent aggregate base salary paid to the
Executive Officer in the twelve (12) month period immediately preceding the date
of change in control. In no event shall such payments be made in an amount which
would cause them to be deemed non-deductible to the Bank by reason of the
operation of Section 280G of the Internal Revenue Code.
401(k) Plan
The Bank offers a 401(k) profit sharing plan. This plan began in the year 2000.
Each Plan Year, the Bank will announce the amount of the matching contributions,
if any. The amount of the matching contributions is directly related to the
employees' 401(k) salary deferral contribution. For the Plan Year that began
January 1, 2001, all eligible participants received a matching contribution
equal to 50% of their 401(k) salary deferral contribution to the Plan; however,
it is limited to 2% of the plan compensation not to exceed $3,400. The Plan
expense was $42,874 for 2001.
-30-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 8, 2002 regarding
the number of shares of Common Stock beneficially owned by each director and
officer and by all directors and officers as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,336 (3) 1.08%
Louise F. Brown 3,156 (4) .22%
Richard J. Cantele, Jr. 2,868 (5) .20%
John F. Foley 3,696 (6) .26%
Nancy F. Humphreys 1,000 (7) .07%
Gordon C. Johnson 1,502 (8) .11%
Holly J. Nelson 1,048 (9) .07%
John F. Perotti 10,839 (10) .76%
Walter C. Shannon, Jr. 3,604 (11) .25%
Craig E. Toensing 3,000 (12) .21%
Michael A. Varet 65,646 (13) 4.62%
------- ----
All Directors and Officers
as a group of (11 persons) 111,695 7.85%
======= =====
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director"s spouse and/or children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 1,422,358 shares of the Bank"s Common
Stock outstanding and entitled to vote on March 8, 2002. The definition
of beneficial owner includes any person who, directly or indirectly,
through any contract, agreement or understanding, relationship or
otherwise has or shares voting power or investment power with respect
to such security.
(3) Includes 2,100 shares owned by John R. H. Blum"s wife.
(4) Includes 1,068 shares owned by Louise F. Brown as custodian for her
daughter.
(5) Includes 1,182 shares owned jointly by Richard J. Cantele, Jr. and his
wife and 6 shares owned by Richard J. Cantele, Jr. as custodian for his
daughter.
(6) Includes 1,518 shares owned jointly by John F. Foley and his wife and
66 shares owned by John F. Foley as custodian for his children.
(7) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her
husband.
(footnotes continued on following page)
-31-
(footnotes continued from previous page)
(8) Includes 660 shares owned by Gordon C. Johnson"s wife and for which Mr.
Johnson has disclaimed beneficial ownership.
(9) Includes 6 shares owned by Holly J. Nelson as guardian for a minor
child.
(10) Includes 9,514 shares owned jointly by John F. Perotti and his wife,
761 shares owned by his wife and 564 shares in trust for his son.
(11) All shares are owned individually by Walter C. Shannon, Jr.
(12) Includes 42 shares owned by Craig E. Toensing as custodian for his son.
(13) Includes 18,540 shares owned by Michael A. Varet"s wife, 12,366 shares
which are owned by his son and 6,180 shares owned by his daughter.
Michael A. Varet has disclaimed beneficial ownership for all of these
shares.
Principal Shareholders of the Company
As of March 8, 2002, management was not aware of any person (including any
"group" as that term is used in Section 13 (d)(3) of the Exchange Act) who owns
beneficially more than 5% of the Company"s Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with directors, officers,
principle shareholders and their associates on substantially the same terms as
those available for comparable transactions with others.
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law. The Company has engaged Mr. Blum in past years and
even though his services were not used in 2001, the Company may engage his
services in 2002 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Gager & Peterson, LLP. The Company has engaged Ms. Brown in past years and even
though her services were not used in 2001, the Company may engage her services
in 2002 in connection with certain legal matters.
Walter C. Shannon, Jr. is a director of the Company and the President Emeritus
of Wagner McNeil, Inc. which serves as the insurance agent for many of the
Company"s insurance needs.
The Bank has had, and expects to have in the future, banking transactions in the
ordinary course of its business with directors, officers, principal shareholders
of the Company, and their associates, on substantially the same terms, including
interest rates and collateral on loans, as those prevailing at the same time for
comparable transactions with others and such loans did not involve more than the
normal risk of collectability or present other unfavorable features. Since
January 1, 2001, the highest aggregate outstanding principal amount of all loans
extended by the Bank to the Company"s directors, executive officers and all
associates of such persons as a group was $1,487,466 representing an aggregate
principal amount equal to 5.81% of the equity capital accounts of the Bank.
-32-
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report on Form
l0-KSB.
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
3.2 Bylaws of Salisbury Bancorp, Inc., as amended. (2)
10.1 Pension Supplement Agreement with
John F. Perotti. (3)
10.2 Form of change in control agreement
with Executive Officers.
10.3 Director Stock Retainer Plan.
21. Subsidiaries of the Company. (4)
(1) Exhibit was filed on April 23, 1998 as Exhibit 3.1 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(2) Exhibit was filed on March 30, 2001 as Exhibit 3.2 to the Company's
Annual Report Form 10KSB for the Fiscal Year ended December 31, 2001
and is incorporated herein by reference.
(3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's
Registration Statement on Form S-4 (No. 333- 50857) and is incorporated
herein by reference.
(4) Exhibit was filed on April 23, 1998 as Exhibit 21 to Company's
Registration Statement on Form S-4 (No. 333- 50857) and is incorporated
herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the fourth quarter of the 2001 fiscal year:
1. On November 26, 2001 the Company filed a Form 8-K reporting the
declaration of a $.21 per share quarterly cash dividend for the fourth
quarter of 2001.
-33-
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Lakeville, Connecticut
on March 25, 2002
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
----------------------
John F. Perotti
President and
Chief Executive Officer
By: /s/ John F. Foley
--------------------
John F. Foley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John F. Perotti President, March 25, 2002
------------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ John R. H. Blum Chairman March 25, 2002
-----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 25, 2002
------------------------------
(Louise F. Brown)
/s/ Nancy F. Humphreys Director March 25, 2002
-------------------------------
(Nancy F. Humphreys)
/s/ Gordon C. Johnson Director March 25, 2002
----------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 25, 2002
-------------------------------
(Holly J. Nelson)
/s/ Walter C. Shannon, Jr. Director March 25, 2002
----------------------------
(Walter C. Shannon, Jr.)
/s/ Craig E. Toensing Director March 25, 2002
--------------------------
(Craig E. Toensing)
/s/ Michael A. Varet Director March 25, 2002
--------------------------
(Michael A. Varet)
-34-