SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________to ______________
Commission file number 0-24751
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SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act:
Common stock par value $.10 per share
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Securities registered pursuant to Section 12 (g) of the Act: None
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Name of exchange on which registered: American Stock Exchange
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Indicate by check mark if the registrant is a well-known seasoned issuer as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [ ] No [ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company. Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: June 30, 2006: $61,528,473.
Note. If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving an unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions, reasonable under the circumstances,
provided that the assumptions are set forth in this Form.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,684,181 shares outstanding as of March 9, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated by reference in Part III of this Form 10-K are portions of the
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007.
TABLE OF CONTENTS
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Page
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Part I
Item 1 - Business 1
(a) General Development of the Business 1
(b) Financial Information about Industry Segments 1
(c) Narrative Description of Business 2
(d) Financial Information about Foreign and Domestic
Operations and Export Sales 6
Item 1A - Risk Factors 11
Item 1B - Unresolved Staff Comments 14
Item 2 -Properties 14
Item 3 - Legal Proceedings 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Part II
Item 5 - Market for Registrant's Common Equity, Related
Shareholder Matters and Issuer Purchases of Equity
Securities 15
Item 6 - Selected Financial Data 18
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 19
Item 7A - Quantitative and Qualitative Disclosures about
Market Risk 34
Item 8 - Financial Statements and Supplementary Data 35
Item 9 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 36
Item 9A - Controls and Procedures 36
Item 9B - Other Information 36
Part III
Item 10 - Directors, Executive Officers and Corporate Governance 36
Item 11 - Executive Compensation 37
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 37
Item 13 - Certain Relationships and Related Transactions, and
Director Independence 37
Item 14 - Principal Accounting Fees and Services 37
Part IV
Item 15 - Exhibits, Financial Statement Schedules 38
Signatures 39
i
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank"),
which accounts for most of the Company's net income. The Company was founded in
April, 1998 for the purpose of acquiring all of the stock of the Bank in a
shareholder-approved reorganization, which became effective in 1998. The Bank
assumed its present name in 1925 following the acquisition by the Robbins
Burrall Trust Company of the Salisbury Savings Society. The Robbins Burrall
Trust Company was incorporated in 1909 as the successor to a private banking
firm established in 1874. The Salisbury Savings Society was incorporated in
1848. The Bank is chartered as a state bank and trust company by the State of
Connecticut and its deposits are insured by the Federal Deposit Insurance
Corporation in accordance with the Federal Deposit Insurance Act. The Bank's
main office is at 5 Bissell Street, Lakeville, Connecticut 06039. Its telephone
number is (860) 435-9801, and its website address is: www.salisburybank.com. The
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Company makes available free of charge on the Bank's website a link to its
Annual Reports on Form 10-K, Quarterly Reports on Forms 10-Q and Current Reports
on Form 8-K promptly after filing such reports with the Securities and Exchange
Commission ("SEC"). Also available on the website are the respective Charters of
the Board's Nominating and Governance Committee and Audit Committee.
On September 10, 2004 the Company completed the acquisition of Canaan National
Bancorp, Inc. and the merger with and into the Company. The Bank currently
operates six (6) full service offices, which are located in Canaan, Lakeville,
Salisbury and Sharon, Connecticut and South Egremont and Sheffield,
Massachusetts. Most of the Bank's business is derived from customers located in
Litchfield County, Connecticut, Dutchess County and Columbia County, New York
and Berkshire County, Massachusetts. In October, 2006 the Bank entered a
purchase and assumption agreement with New York Community Bank ("NYCB"),
pursuant to which the Bank has agreed to purchase certain assets and assume
certain liabilities of NYCB's branch office located in Mount Vernon, New York.
The Bank has received regulatory approval for the acquisition of such branch in
the first calendar quarter of 2007. The Bank has submitted application materials
to regulators to relocate such Mount Vernon branch to a new office in Dover
Plains, New York upon consummation of the purchase and assumption transaction.
The Bank expects to commence operations in New York State later this year.
(b) Financial Information about Industry Segments
The Company's products and services are all of a nature of a commercial bank and
trust company. The Bank is a full-service bank offering a wide range of
commercial and personal banking services, including the following:
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings
1
in the form of interest and dividends. It also plays a role in the interest rate
risk management of the Company and it provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2006, the portfolio totaled $161,231,000 which
represents approximately 35.80% of total assets, and it produced interest and
dividend income of $7,962,000 for the year 2006 as compared with $7,427,000 for
2005 and $6,905,000 for 2004, respectively.
Deposits and Borrowings
The Bank's primary sources of funds are deposits, borrowings and principal
payments on loans. Although competition for funds from non-banking institutions
remains aggressive, the Bank continues its efforts to build account
relationships with its customers. Deposits totaled $313,586,000 at December 31,
2006 as compared with $287,271,000 at December 31, 2005.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $87,093,000 at December 31, 2006 as compared with
$71,016,000 at December 31, 2005.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operation and the accompanying Consolidated
Financial Statements, and Notes thereto.
Fiduciary Activities
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust and Investment Services Division. 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.
Other Services
The Company also offers safe deposit rentals, foreign exchange, a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services, which include a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust and investment services are also available. The Bank
owns and operates two subsidiaries, SBT Realty, Inc., which is incorporated
under the laws of the State of New York, and SBT Mortgage Service Corporation,
which is incorporated under the laws of the State of Connecticut. SBT Realty,
Inc. holds and manages bank owned real estate situated in New York State. SBT
Mortgage Service Corporation, a Passive Investment Company ("PIC") was formed to
take advantage of favorable Connecticut corporate tax benefits, which result
when a Bank transfers a portion of its mortgage portfolio to a PIC. In general,
the PIC will earn mortgage interest income and may dividend funds to the Bank.
In turn, those funds will be exempt from the Connecticut corporate business tax.
Competition
The Company and the Bank encounter competition in all phases of their business.
There are numerous financial institutions that have offices in the areas in
which the Company and Bank compete in Northwestern Connecticut, Western
Massachusetts and proximate areas of New York State.
The offices of the Bank are located in the northwest corner of Litchfield
County, Connecticut and South Berkshire County,
2
Massachusetts. The Bank maintains six (6) banking offices within these two
counties and also attracts customers from nearby Columbia County and Dutchess
County, New York. The Bank's market area within the four counties is served by
45 commercial banks and savings banks.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
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 that liberalizes banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking and Branching Act permits
acquisitions and mergers of Connecticut banks and bank holding companies with
banks and bank holding companies in other states. Accordingly, it is possible
for large super-regional organizations to enter many new markets, including the
market served by the Bank. Certain competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
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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.
3
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
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.
Gramm-Leach-Bliley Act
----------------------
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." The Company qualified and registered as a financial holding
company on May 3, 2000. Financial holding companies are subject to oversight by
the Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries, that are financial in nature or
that engage in activities incidental or complementary to a financial activity.
Additionally, pursuant to the GLBA, securities and insurance firms are permitted
to purchase full-service banks. While the GLBA facilitates the ability of
financial institutions to offer a wide range of financial services, large
financial institutions would appear to be the beneficiaries as a result of this
Act because many community banks lack the capital and management resources
needed to facilitate broad expansion of financial services.
Sarbanes-Oxley Act
------------------
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report. In addition, the Sarbanes-Oxley Act requires officers to
forfeit certain bonuses and profits under certain circumstances. Specifically,
if an issuer is required to prepare an accounting restatement due to the
material noncompliance of the issuer as a result of misconduct with any
financial reporting requirements under the securities laws, the chief executive
officer and chief financial officer of the issuer shall be required to reimburse
the issuer for (1) any bonus or other incentive-based or equity based
compensation received by that person from the issuer during the 12-month period
following the first public issuance or filing
4
with the SEC of the financial document embodying such financial reporting
requirements; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
o Disclosure of all material off-balance sheet transactions and
relationships that may have a material effect upon the financial status
of an issuer; and
o The presentation of pro forma financial information in a manner that is
not misleading, and which is reconcilable with the financial condition
of the issuer under generally accepted accounting principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of Company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by the Company's auditor. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the Company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The Patriot Act
---------------
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. In 2001, President Bush signed into law the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "Patriot Act"). On March 10,
2006, the President signed legislation making permanent certain provisions of
the Patriot Act.
Part of the Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Connecticut Regulation
----------------------
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes. As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking
5
Commissioner conducts periodic examinations of the Bank. The Connecticut banking
statutes also restrict the ability of a 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 currently insures the Bank's deposit accounts in an amount up to
$100,000 for each insured depositor. In addition, effective April 1, 2006, the
federal deposit insurance limits on certain retirement accounts increased so
that such retirement accounts are separately insured up to $250,000. FDIC
insurance of deposits may be terminated by the FDIC, after notice and a hearing,
upon a finding by the FDIC that the insured institution has engaged in unsafe or
unsound practices, or is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule or order of, or
condition imposed by, the FDIC. A bank's failure to meet the minimum capital and
risk-based capital guidelines discussed below would be considered to be unsafe
and unsound banking practices. The Bank, as a Connecticut-chartered FDIC-insured
bank, is regulated by the FDIC in many of the areas also regulated by the
Connecticut Banking Commissioner. The FDIC also conducts its own periodic
examinations of the Bank, and the Bank is required to submit financial and other
reports to the FDIC on a quarterly and annual basis, or as otherwise required by
the FDIC.
FDIC-insured banks, such as the Bank, pay premium assessments to the FDIC for
the insurance of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Satisfactory". Failure to receive at least a "Satisfactory" rating
may inhibit an institution from engaging in certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
GLBA.
Employees
---------
The Company's current workforce at March 9, 2007 consists of 133 employees of
whom 118 were full time and 15 were part time. The employees are not represented
by a collective bargaining unit.
(d) Financial Information about Geographic Areas
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.
6
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, are presented on the following pages of this Report on Form 10-K.
Page(s) of
Item of Guide 3 This Report
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I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential 22
II. Investment Portfolio 8
III. Loan Portfolio 9
IV. Summary of Loan Loss Experience 10
V. Deposits 30
VI. Return on Equity and Assets 9
VII. Short-Term Borrowings 11
7
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables set forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands) 2006 2005 2004
------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 181 $ 148 $ 146
U.S. government agencies preferred stock 2,512 12,446 12,209
U.S. Treasury securities and other
U.S. government corporations and agencies 54,146 50,516 53,416
Obligations of states and political subdivisions 45,236 41,332 58,452
Mortgage-backed securities 54,417 41,166 54,432
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$156,492 $145,608 $178,655
==============================
Held-to-maturity securities
(at amortized cost)
Mortgage-backed securities $ 75 $ 147 $ 218
==============================
Federal Home Loan Bank stock $ 4,664 $ 5,413 $ 5,413
==============================
For the following table, yields are not 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,
2006:
(dollars in thousands)
Maturing Maturing Maturing Maturing
-------- -------- -------- --------
Within Yield After 1 but Yield After 5 Yield After 10 Yield Total
------ ----- ----------- ----- ------- ----- -------- ----- -----
1 year within 5 but within Years
------ -------- ---------- -----
Amount Years 10 Years Amount
------ ----- -------- ------
Amount Amount
------ ------
Held-to-maturity
----------------
securities
----------
(at amortized cost)
Mortgage-backed
securities $ 0 $ 0 $ 0 $ 75 5.35% $ 75
======== ======== ======== ======== ========
Available-for-sale
------------------
securities
----------
(at fair value)
U.S. Treasury
securities
and other U.S.
government
corporations and
agencies $ 0 $ 0 $ 17,794 5.46% $ 36,352 6.19% $ 54,146
Obligations of states and
political subdivisions 0 0 173 3.55% 45,063 5.04% 45,236
Mortgage-backed
securities 0 623 4.57% 271 5.63% 53,523 4.35% 54,417
-------- -------- -------- -------- --------
$ 0 $ 623 $ 18,238 $134,938 $153,799
======== ======== ======== ======== ========
8
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2006 2005 2004 2003 2002
-------------------------------------------------------------
Commercial, financial and
agricultural $ 16,465 $ 15,354 $ 15,127 $ 9,149 $ 10,127
Real Estate-construction and
land development 21,169 18,814 14,290 15,307 6,027
Real Estate - residential 145,395 135,619 130,414 90,807 93,636
Real Estate-commercial 50,859 40,889 35,487 19,199 18,002
Consumer 8,816 7,900 9,122 6,692 9,007
Term federal funds 12,000 0 0 0 0
Other 69 47 69 73 291
-------------------------------------------------------------
254,773 218,623 204,509 141,227 137,090
Deferred costs, net 168 0 0 0 0
Allowance for loan losses (2,474) (2,626) (2,512) (1,664) (1,458)
Unearned income (3) (8) (19) (0) (0)
-------------------------------------------------------------
Net loans $ 252,464 $ 215,989 $ 201,978 $ 139,563 $ 135,632
=============================================================
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, 2006. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
(dollars in thousands) year or less five years five years
----------------------------------------
Commercial, financial,
agricultural and real estate commercial $ 2,232 $ 8,754 $ 56,338
Real estate-construction and land development 20,990 179 0
----------------------------------------
$ 23,222 $ 8,933 $ 56,338
========================================
Maturities after one year with:
Fixed interest rates $ 6,338 $ 10,410
Variable interest rates 2,595 45,928
------------ -----------
$ 8,933 $ 56,338
============ ===========
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
At or for the
-------------
Year ended December 31,
-----------------------
2006 2005 2004
---- ---- ----
Return on average total assets
(net income divided by average total assets) 1.02% 1.12% 1.14%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 9.83% 10.81% 12.34%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 41.11% 36.90% 35.96%
Equity to assets ratio
(average shareholders' equity divided by
average total assets) 10.37% 10.38% 9.20%
9
Nonaccrual, Past Due and Restructured Loans
At December 31, 2006, there were seven (7) nonaccrual loans in the Bank's
portfolio six of which were secured by real estate. In the month following the
month in which a mortgage loan becomes 90 days past due, the Bank generally
stops accruing interest unless there are unusual circumstances which warrant an
exception. Generally the only loan types that the Bank reclassifies to
nonaccrual are those secured by real estate or large commercial loans on which
substantial collateral exists. Other types of loans are generally charged off
when they become 120 days or more delinquent. However, exceptions may be made as
warranted.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2006 2005 2004 2003 2002
----------------------------------------------
Nonaccrual $ 886 $ 694 $1,739 $ 75 $ 855
90 days or more past due 77 79 528 535 124
Restructured loans 0 0 0 0 271
----------------------------------------------
Total nonperforming loans $ 963 $ 773 $2,267 $ 610 $1,250
==============================================
Total nonperforming loans as per-
centage of the loan portfolio 0.38% 0.35% 1.11% 0.43% 0.92%
Allowance for loan losses as a per-
centage of nonperforming loans 256.91% 339.72% 110.81% 272.79% 116.64%
Information with respect to nonaccrual and restructured loans
at December 31, 2006, 2005 and 2004 is as follows:
(dollars in thousands) Year Ended December 31
2006 2005 2004
--------------------------
Interest income that would have been recorded under original terms $ 66 $157 $100
Less gross interest recorded 37 133 72
--------------------------
Foregone interest $ 29 $ 24 $ 28
==========================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2006 2005 2004 2003 2002
----------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 2,626 $ 2,512 $ 1,664 $ 1,458 $ 1,445
Charge-offs:
Commercial, financial and
agricultural 25 7 0 71 60
Real estate mortgage 0 0 0 0 46
Consumer 106 128 70 84 146
----------------------------------------------------
Total charge-offs 131 135 70 155 252
----------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 6 0 0 25 2
Real estate mortgage 0 0 0 0 1
Consumer 60 39 28 24 26
----------------------------------------------------
Total recoveries 66 39 28 49 29
----------------------------------------------------
Net charge-offs 65 96 42 106 223
(Benefit) provision charged to
operations (87) 210 250 312 300
Balance acquired from CNB 0 0 640 0 0
Transfer of allowance for loan
losses to other liabilities 0 0 0 0 (64)
----------------------------------------------------
Balance at end of year $ 2,474 $ 2,626 $ 2,512 $ 1,664 $ 1,458
====================================================
Ratio of net charge-offs
to average loans outstanding .03% .05% .03% .07% .02%
Ratio of allowance for loan losses
to year end loans .97% 1.20% 1.23% 1.18% 1.07%
10
Allocation of the Allowance for Loan Losses; Percentage of loans by type to total loans
(dollars in thousands)
2006 2005 2004 2003 2002
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and
agricultural $ 342 6.46% $ 495 7.02% $ 613 7.40% $ 441 6.47% $ 316 7.39%
Real estate construction
and land development 85 8.31% 95 8.61% 83 6.99% 112 10.82% 50 4.40%
Real estate mortgage 1,832 77.03% 1,761 80.74% 1,614 81.12% 749 77.94% 840 81.43%
Consumer 173 3.46% 247 3.61% 198 4.46% 357 4.72% 244 6.57%
Term Federal Funds 0 4.71% 0 0 0 0
Other loans 42 .03% 28 .02% 4 .03% 5 .05% 8 .21%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,474 100.00% $2,626 100.00% $2,512 100.00% $1,664 100.00% $1,458 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for loan losses are charged to operating expenses
and are based on past experience, current economic conditions and management's
judgement of the amount necessary to cover losses inherent in the portfolio. The
Bank records provisions for estimated loan losses, which are charged against
earnings, in the period they are established.
Short-Term Borrowings
(dollars in thousands) December 31
2006 2005 2004
--------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.97% 4.90% 4.29%
For the year 5.00% 4.69% 3.90%
Average amount outstanding during the year $ 71,471 $ 67,793 $ 74,954
Maximum amount outstanding at any month $ 90,403 $ 75,536 $100,680
Amount outstanding at year end $ 87,093 $ 71,016 $ 79,213
ITEM 1A. RISK FACTORS
In addition to the other information contained in this report, the following
risks may affect the Company. If any of these risks occurs, the Company's
business, financial condition or operating results could be adversely affected.
The Company's business and financial condition is directly affected by the
Bank's business and financial condition and, thus, is subject to certain risks
of the Bank.
Changes in economic conditions could materially negatively impact the
Company's business.
The business of the Company and the Bank is directly affected by factors such as
economic, political and market conditions, broad trends in industry and finance,
legislative and regulatory changes, changes in government monetary and fiscal
policies and inflation, all of which are beyond the Company's control. The Bank
is particularly affected by economic conditions in Litchfield County,
Connecticut, Berkshire County, Massachusetts, and Colombia and Dutchess Counties
in New York. Deterioration in economic conditions could result in the following
consequences, any of which could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows:
o problem assets and foreclosures may increase;
o demand for the Bank's products and services may decline;
o low cost or non-interest bearing deposits may decrease; and,
o collateral for loans made by the Bank, especially real estate, may decline
in value, in turn reducing customers' borrowing power, and reducing the
value of assets and collateral associated with the Bank's existing loans.
In view of the geographic concentration of the Bank's operations and the
collateral securing the Bank's loan portfolio, the Company may be particularly
susceptible to the adverse effects of any of these consequences, any of which
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flows.
11
The Company is dependent on key personnel and the loss of one or more
of those key personnel may materially and adversely affect the Company's
prospects.
Competition for qualified employees and personnel in the banking industry is
intense and there are a limited number of qualified persons with knowledge of,
and experience in, the banking industry within the communities the Bank serves.
The Company's and the Bank's success depends to a significant degree upon the
ability to attract and retain qualified management, loan origination, finance,
administrative, marketing and technical personnel and upon the continued
contributions of management and personnel. The loss of the services of the
senior executive management team members or other key executives could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Bank's business is subject to interest rate risk.
A substantial portion of the Company's income is derived from the differential
or "spread" between the Bank's interest earned on loans, securities and other
interest earning assets, and interest paid on deposits, borrowings and other
interest bearing liabilities. Because of the differences in the maturities and
repricing characteristics of interest earning assets and interest bearing
liabilities, changes in interest rates do not produce equivalent changes in
interest income earned on interest earning assets and interest paid on interest
bearing liabilities. Accordingly, fluctuations in interest rates could adversely
affect the interest rate spread and, in turn, the Company's profitability. In
addition, loan origination volumes are affected by market interest rates. Rising
interest rates, generally, are associated with a lower volume of loan
originations while lower interest rates are usually associated with higher loan
originations. Conversely, in rising interest rate environments, loan repayment
rates may decline and in falling interest rate environments, loan repayment
rates may increase. Falling interest rate environments may cause additional
refinancing of commercial real estate and 1-4 family residence loans, which may
depress the Company's loan volumes or cause rates on loans to decline. In
addition, an increase in the general level of short-term interest rates on
variable rate loans may adversely affect the ability of certain borrowers to pay
the interest on and principal of their obligations or reduce the amount they
wish to borrow. As short-term rates continue to rise, retention of existing
deposit customers and the attraction of new deposit customers may require the
Company to increase rates it pays on deposit accounts. Changes in levels of
market interest rates could materially and adversely affect net interest spread,
asset quality, loan origination volume, business, financial condition, results
of operations and cash flows.
Certain types of loans have a higher degree of risk.
A downturn in the Company's real estate markets could hurt the Company's
business because most of the Bank's loans are secured by real estate. Real
estate values and real estate markets are generally affected by changes in
national, regional or local economic conditions, fluctuations in interest rates
and the availability of loans to potential purchasers, changes in tax laws and
other governmental statutes, regulations and policies and acts of nature. If
real estate prices decline, the value of real estate collateral securing the
Bank's loans could be reduced. The Bank's ability to recover on defaulted loans
by foreclosing and selling the real estate collateral would then be diminished
and the Company would be more likely to suffer losses on defaulted loans. If
there is a significant decline in real estate values, especially in the
Company's market area, the collateral for the Bank's loans will provide less
security. Any such downturn could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
The ability to attract deposits may effect Bank's growth.
The Company's ability to increase its assets depends in large part on the Bank's
ability to attract additional deposits at favorable rates. The Bank anticipates
seeking additional deposits by offering deposit products that are competitive
with those offered by other financial institutions in the Company's markets and
by establishing personal relationships with the Bank's customers. The Bank's
ability to attract additional deposits at competitive rates could have a
material effect on the Company's business, financial condition, results of
operations and cash flows.
In the business of banking, the allowance for loan and lease losses is
an estimate and may not be adequate to cover all future actual losses.
A source of risk arises from the possibility that losses could be sustained
because borrowers, guarantors, and related parties may fail to perform in
accordance with the terms of their loans and leases. The underwriting and credit
monitoring policies and procedures that the Company has adopted to address this
risk may not prevent unexpected losses that could have a material adverse effect
on the Company's business, financial condition, results of operations and cash
flows. Unexpected
12
losses may arise from a wide variety of specific or systemic factors, many of
which are beyond the Company's ability to predict, influence or control.
Like all banking institutions, the Bank maintains an allowance for loan and
lease losses to provide for loan and lease defaults and non-performance. The
allowance for loan and lease losses reflects the Bank's estimate of the probable
losses in the Bank's loan and lease portfolio at the relevant balance sheet
date. The Bank's allowance for loan and lease losses is based on prior
experience, as well as an evaluation of the known risks in the current
portfolio, composition and growth of the loan and lease portfolio and economic
factors. The determination of an appropriate level of loan and lease loss
allowance is an inherently difficult process and is based on numerous
assumptions. The amount of future losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates, that may be
beyond the Bank's control and these losses may exceed current estimates. Federal
and state regulatory agencies, as an integral part of their examination process,
review the Bank's loans and leases and allowance for loan and lease losses.
Banks rely on communications, information, operating and financial
control systems technology from third-party service providers, and banks may
suffer an interruption in those systems that may result in lost business and
banks may not be able to obtain substitute providers on terms that are as
favorable if bank's relationships with bank's existing service providers are
interrupted.
The Bank relies on certain third-party service providers for much of the Bank's
communications, information, operating and financial control systems technology.
Any failure or interruption or breach in security of these systems could result
in failures or interruptions in the Bank's customer relationship management,
general ledger, deposit, servicing and/or loan origination systems. The Bank
cannot be certain that such failures or interruptions will not occur or, if they
do occur, that they will be adequately addressed by the Bank or the third
parties on which the Bank relies. The occurrence of any failures or
interruptions could have a material adverse effect on the Bank's business,
financial condition, results of operations and cash flows. If any of the Bank's
third-party service providers experience financial, operational or technological
difficulties, or if there is any other disruption in the Bank's relationships
with them, the Bank may be required to locate alternative sources of such
services, and the Company cannot be certain that the Bank could negotiate terms
that are as favorable to the Company, or could obtain services with similar
functionality as found in the Bank's existing systems without the need to expend
substantial resources, if at all. Any of these circumstances could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flows.
The Bank faces strong competition from financial service companies and
other companies that offer banking services.
Increased competition in the Bank's markets may result in reduced loans and
deposits. Ultimately, the Bank may not be able to compete successfully against
current and future competitors. Many competitors offer the banking services that
the Bank offers in its service areas. These competitors include national banks,
regional banks and other community banks. The Bank also faces competition from
many other types of financial institutions, including savings and loan
associations, finance companies, brokerage firms, insurance companies, credit
unions, mortgage banks and other financial intermediaries. In particular, the
Bank's competitors include several major financial companies whose greater
resources may afford them a marketplace advantage by enabling them to maintain
numerous locations and mount extensive promotional and advertising campaigns.
Additionally, banks and other financial institutions with larger capitalization
and financial intermediaries not subject to bank regulatory restrictions may
have larger lending limits, which would allow them to serve the credit needs of
larger customers. Areas of competition include interest rates for loans and
deposits, efforts to obtain loan and deposit customers and a range in quality of
products and services provided, including new technology-driven products and
services. Technological innovation continues to contribute to greater
competition in domestic and international financial services markets as
technological advances enable more companies to provide financial services. The
Bank also faces competition from out-of-state financial intermediaries that
solicit deposits in the Bank's market areas. If the Bank is unable to attract
and retain banking customers, it may be unable to continue the Bank's loan and
deposit growth and the Company's business, financial condition, results of
operations and cash flows may be adversely affected.
The Company and the Bank are subject to extensive government
regulation.
The operations of the Company and the Bank are subject to extensive regulation
by federal, state and local governmental authorities and are subject to various
laws and judicial and administrative decisions imposing requirements and
restrictions on part or all of the operations of the Company and the Bank.
Because the Company's and the Bank's business is highly regulated, the
applicable laws, rules and regulations are subject to regular modification and
change. The Company cannot be
13
certain that laws, rules and regulations will not be adopted in the future,
which could make compliance much more difficult or expensive, or otherwise
adversely affect the Company's and the Bank's business, financial condition,
results of operations or cash flows.
The Company may be exposed to risk of environmental liabilities with
respect to properties to which the Bank takes title.
In the course of the Bank's business, the Bank may foreclose and take title to
real estate that could subject the Company to environmental liabilities with
respect to these properties.
Customer Information may be obtained and used fraudulently.
Risk of theft of customer information resulting from security breaches by third
parties exposes the Company to reputation risk and potential monetary loss. The
Company has exposure to fraudulent use of its customers' personal information
resulting from its general business operations and through customer use of
financial instruments, such as debit cards. If a breach in security does occur
and the financial data of customers is compromised, the Company will react as
quickly as possible to protect customer accounts and limit potential losses to
the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Bank serves its customers from its six (6) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut and Sheffield and South
Egremont, Massachusetts. The Bank's trust and investment services division is
located in a separate building adjacent to the main office of the Bank.
The Bank leases the following properties: a branch office at 51 Main Street,
South Egremont, Massachusetts; a branch office at 73 Main Street, Sheffield,
Massachusetts; and the Bank has agreed to assume a short term lease for space in
a supermarket which is located in Mount Vernon, New York. Such branch is
expected to be acquired from NYCB later in 2007. (See "Business" above).
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION
Main Office 5 Bissell Street
Lakeville, Connecticut
Trust and Investment 19 Bissell Street
Services division Lakeville, Connecticut
Salisbury Office 18 Main Street
Salisbury, Connecticut
Sharon Office 29 Low Road
Sharon, Connecticut
Canaan Operations 94 Main Street
Canaan, Connecticut
Canaan Office 100 Main Street
Canaan, Connecticut
14
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 2006 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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.
2006 Quarters 2005 Quarters
--------------------------------- ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------- ---------------------------------
Range of Stock prices:
High $39.25 $39.70 $39.50 $38.25 $40.20 $40.70 $40.80 $43.50
Low $37.50 $37.50 $35.50 $36.50 $37.90 $35.60 $36.50 $39.00
Holders
There were approximately 733 holders of record of the common stock of the
Company as of March 9, 2007. This number includes brokerage firms and other
financial institutions which hold stock in their name, but which is actually
owned by third parties.
Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. During the year 2006, the Company declared
a cash dividend each quarter of $.26 per share. Dividends for the year 2006
totaled $1.04 per share which compared to total dividends of $1.00 that were
declared in the year 2005. At their February 28, 2007 meeting, the Directors of
the Company declared a cash dividend of $.27 per share for the first quarter of
2007. The dividend will be paid on April 30, 2007 to shareholders of record as
of March 30, 2007. Payments of all dividends are dependent upon the condition
and earnings of the Company. The Company's ability to pay dividends is limited
by the prudent banking principles applicable to all bank holding companies and
by the provisions of Connecticut Corporate law, which provide that no
distribution may be made by a company if, after giving it effect: (1) the
company would not be able to pay its debts as they become due in the usual
course of business or (2) the company's total assets would be less than the sum
of its total liabilities plus amounts needed to satisfy any preferred stock
rights. The following table presents cash dividends declared per share for the
last two years:
2006 Quarters 2005 Quarters
------------------------------ -----------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------ -----------------------------
Cash dividends
declared $0.26 $0.26 $0.26 $0.26 $0.25 $0.25 $0.25 $0.25
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 13 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
15
Securities Authorized for Issuance Under Equity
Compensation Plans (as of December 31, 2006)
Recent Sales of Unregistered Securities
The shareholders of the Company voted to approve the Directors Stock Retainer
Plan (the "Plan") at the 2001 Annual Meeting of Shareholders. The Plan provides
non-employee directors of the Company with shares of Common Stock as a component
of their compensation for services as non-employee directors. The maximum number
of shares of Common Stock that may be issued pursuant to the plan is 15,000.
Each year a grant under the Plan consists of 120 shares of Common Stock for each
non-employee director who served for twelve months and a prorated number of
shares to reflect the number of months served for any new non-employee director.
On May 10, 2006, 840 shares were issued pursuant to the Plan. The next grant
date under the Plan will immediately precede the Annual Meeting of Shareholders
which is to be held on May 16, 2007, and will be in the amount of 120 shares per
director. All such issuances shall be exempt from registration under the
Securities Act of 1933, as amended pursuant to Section 3(a)(2) and Section 4(2),
as they are transactions by a bank not involving any public offering.
16
Stock Price Performance Graph
-----------------------------
Set forth below is a line graph with an explanatory table comparing the
yearly percentage change in the cumulative total stockholder return on the
Company's Common Stock, based on the market price of the Company's Common Stock
and assuming reinvestment of dividends, with the total return of the AMEX Major
Market Index and the SNL Bank Index for Banks with total assets more than $250
million and less than $500 million. The calculation of total cumulative return
assumes a $100 investment in the Company's Common Stock and each of the other
indices on December 31, 2001.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG SALISBURY BANCORP, INC., THE AMEX MAJOR MARKET INDEX
AND THE SNL $250M-$500M BANK INDEX
[GRAPH]
As of
------------------------------------------------------------
Index 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
-------------------------------------------------------------------------------------
Salisbury Bancorp, Inc. 100.00 126.96 184.34 211.08 189.20 192.39
AMEX Major Market Index 100.00 87.77 108.87 119.80 115.78 137.82
SNL Bank $250M-$500M 100.00 128.95 186.31 211.46 224.51 234.58
17
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2006 2005 2004 2003 2002
--------- -------- -------- -------- --------
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $ 252,464 $215,989 $201,978 $139,563 $135,632
Allowance For Loan Losses 2,474 2,626 2,512 1,664 1,458
Investments 161,231 151,168 184,286 147,021 138,435
Total Assets 450,340 402,922 423,101 311,100 293,107
Deposits 313,586 287,271 298,842 218,457 211,037
Borrowings 87,093 71,016 79,213 60,897 51,891
Shareholders' Equity 44,349 41,442 40,700 28,850 27,345
Nonperforming Assets 963 773 2,267 685 1,400
Statement of Income Data:
Interest and Fees on Loans $ 15,687 $ 13,320 $ 9,592 $ 9,226 $ 9,677
Interest and Dividends on Securities
and Other Interest Income 8,043 7,496 6,959 6,423 6,481
Interest Expense 10,459 7,352 5,659 5,613 6,898
--------- -------- -------- -------- --------
Net Interest and Dividend Income 13,271 13,464 10,892 10,036 9,260
(Benefit) Provision for Loan Losses (87) 210 250 313 300
Trust Department Income 1,981 1,571 1,411 1,252 1,100
Other Income 2,085 2,084 1,854 1,674 1,388
Net Gain on Sales of Securities 517 1,210 1,490 1,058 634
Other Expenses 12,245 12,444 10,603 8,599 7,775
--------- -------- -------- -------- --------
Pre Tax Income 5,696 5,675 4,794 5,108 4,307
Income Taxes 1,442 1,114 775 1,268 1,108
--------- -------- -------- -------- --------
Net Income $ 4,254 $ 4,561 $ 4,019 $ 3,840 $ 3,199
========= ======== ======== ======== ========
Per Share Data:
Earnings per common share $ 2.53 $ 2.71 $ 2.67 $ 2.70 $ 2.25
Earnings per common share, assuming dilution $ 2.53 $ 2.71 $ 2.67 $ 2.70 $ 2.25
Cash Dividends Declared per share $ 1.04 $ 1.00 $ 0.96 $ 0.92 $ 0.88
Book Value (at year end) $ 26.33 $ 24.61 $ 24.19 $ 20.26 $ 19.21
Selected Statistical Data:
Return on Average Assets 1.02% 1.12% 1.14% 1.24% 1.13%
Return on Average Shareholders' Equity 9.83% 10.81% 12.34% 13.47% 12.63%
Dividend Payout Ratio 41.11% 36.90% 35.96% 34.07% 39.11%
Average Shareholders' Equity to Average Assets 10.37% 10.38% 9.20% 9.21% 8.92%
Net Interest Spread 2.93% 3.35% 3.22% 3.37% 3.21%
Net Interest Margin 3.67% 3.89% 3.63% 3.80% 3.80%
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATION and Subsidiary
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation, which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has six (6) full
service offices located in the towns of North Canaan, Lakeville, Salisbury and
Sharon, Connecticut and South Egremont and Sheffield, Massachusetts, and a Trust
and Investment Services Division located in Lakeville, Connecticut. The Company
and the Bank were formed in 1998 and 1848, respectively. In order to provide a
foundation for building shareholder value and servicing customers, the Company
remains committed to investing in the technological and human resources
necessary to developing new personalized financial products and services in
order to better serve both current and future customers in the tri-state area.
On October 3, 2006, the Bank announced that it had entered into a purchase and
assumption agreement to acquire certain assets and liabilities of a small branch
of New York Community Bank in Mount Vernon, New York. The acquisition received
state and federal regulatory approvals and makes it possible for the Company and
the Bank to establish additional offices in New York State subject to regulatory
approvals. The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes to the consolidated
financial statements that are presented as part of this Annual Report on Form
10-K.
RESULTS OF OPERATION
--------------------
Comparison of the Years Ended December 31, 2006 and 2005
--------------------------------------------------------
Overview
--------
The reported earnings for the Company totaled $4,254,000 in 2006, a decrease of
$307,000 or 6.73% over year 2005 earnings of $4,561,000. Earnings per average
share outstanding totaled $2.53 in 2006. This compares to earnings per average
share outstanding of $2.71 in 2005 and $2.67 in 2004. The decrease in earnings
per share is primarily attributable to an increase in interest expense due to a
higher level of deposits and to a decrease in noninterest income; specifically,
reduced income from gains in securities transactions when comparing the two
periods. The Company's gains on sale of available-for-sale securities amounted
to $517,000 in 2006 compared to $1,210,000 for the year 2005. Total noninterest
expense for the period ending December 31, 2006 totaled $12,245,000. This is a
decrease of $199,000 or 1.60% when comparing the corresponding period in 2005.
This decrease is primarily the result of management's continuing efforts to
control operating expenses.
The Company's assets at December 31, 2006 totaled $450,340,000 compared to total
assets of $402,922,000 at December 31, 2005. New business development efforts
have resulted in the growth of net loans outstanding which totaled $252,464,000
at December 31, 2006. This compares to net loans outstanding of $215,989,000 at
December 31, 2005 and represents an increase of $36,475,000 or 16.89%. This
growth was funded by an increase in deposits as well as an increase in advances
from the Federal Home Loan Bank of Boston. Deposits at December 31, 2006 totaled
$313,586,000 and compared to total deposits of $287,271,000 at December 31,
2005. Approximately $19.5 million of this growth is the result of the Bank's
decision to begin using brokered deposits as part of a growth strategy. The
remaining growth is primarily the result of the Company's new business
development plan. Advances from the Federal Home Loan Bank totaled $87,093,000
at December 31, 2006 which compared to advances totaling $71,016,000 at December
31, 2005. The Bank continues to monitor the quality of the loan portfolio to
ensure that loan quality will not be sacrificed for growth or otherwise
compromise the Company's objectives. Nonperforming loans totaled $963,000 at
December 31, 2006 as compared to nonperforming loans totaling $773,000 at
December 31, 2005. This represents an increase of $190,000 or 24.58%, but is not
considered to be indicative of any trend as the level of non-performing loans
remains less than one-half of one percent (1%) of total loans.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2006, which includes the risk-weighted assets and capital of the
Bank, were 14.28% for Tier 1 capital and 15.28% for total capital. The Company's
leverage ratio was 8.43% at December 31, 2006. This compares to a Tier 1 capital
ratio at December 31, 2005 of 14.58%, a total capital ratio of 15.76% and a
Company leverage ratio of 8.27%. As a result of the Company's financial
performance, the Board of Directors increased total dividends declared on the
Company's common stock to $1.04 per share in 2006. This compares to a $1.00 per
share dividend declared in 2005 and a $.96 per share dividend that was declared
in 2004.
19
Critical Accounting Estimates
-----------------------------
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
changed conditions, which could have an adverse impact on reported earnings in
the future. (See "Provisions and Allowance for Loan Losses".)
Net Interest and Dividend Income
--------------------------------
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors and
borrows funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest-earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2006 2005 2004
-------- -------- --------
Interest and Dividend Income
(financial statements) $ 23,730 $ 20,816 $ 16,551
Tax Equivalent Adjustment 1,072 1,200 1,182
-------- -------- --------
Total Interest and Dividend
Income (on an FTE basis) 24,802 22,016 17,733
Interest Expense (10,459) (7,352) (5,659)
-------- -------- --------
Net Interest and Dividend Income-FTE $ 14,343 $ 14,664 $ 12,074
======== ======== ========
The Company's 2006 total interest and dividend income on an FTE basis for the
period ended December 31, 2006 increased $2,786,000 or 12.65% when compared to
the same period in 2005. The increase is primarily attributable to an increase
in earning assets as well an economic environment experiencing an increase in
interest rates.
Interest expense on deposits in 2006 increased $2,715,000 or 65.09% to
$6,886,000 compared to $4,171,000 for the corresponding period in 2005 and
$2,739,000 in 2004. The increase is primarily attributable to an increase in
deposits as well as an interest rate environment that was on the rise for most
of the year as a result of Federal Reserve actions. Interest expense for Federal
Home Loan Bank advances increased $392,000 to $3,573,000 in 2006 compared to
$3,181,000 in 2005 and $2,920,000 in 2004. The increase was primarily the result
of an increase in advances during the year. Competition remains aggressive and
interest margins continue to be pressured. As a result, net interest and
dividend income on an FTE basis decreased $321,000 or 2.19% over 2005 and
totaled $14,343,000 for the year ended December 31, 2006 and compared to net
interest and dividend income on an FTE basis of $14,664,000 for the year ended
December 31, 2005 and $12,074,000 for the year ended 2004.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship
20
between interest earned and paid. The Company's 2006 net interest margin on an
FTE basis was 3.67%. This compares to a net interest margin of 3.89% for 2005.
The following table reflects average balances, interest earned or paid and rates
for the three years ended December 31, 2006, 2005 and 2004. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material. Interest earned on tax exempt securities in the table is presented on
a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing these calculations. Actual tax exempt income earned in 2006 was
$2,080,000 with a yield of 4.41%. Actual tax exempt income in 2005 totaled
$2,329,000 with a yield of 4.44% and in 2004 actual tax exempt income was
$2,294,000 with a yield of 4.68%.
21
YIELD ANALYSIS
---------------------------------------------------------------------------------------------------------
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
---------------------------------------------------------------------------------------------------------
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------------------------------------
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 $ 229,704 $ 15,687 6.83% $ 208,786 $ 13,320 6.38% $ 160,382 $ 9,592 5.98%
Taxable Securities $ 111,635 $ 5,883 5.27% $ 112,746 $ 5,097 4.52% $ 117,535 $ 4,613 3.92%
Tax-Exempt Securities* $ 47,215 $ 3,152 6.68% $ 52,435 $ 3,529 6.73% $ 49,017 $ 3,475 7.09%
Federal Funds $ 1,154 $ 56 4.85% $ 1,840 $ 48 2.61% $ 3,455 $ 39 1.13%
Other Interest-Earning $ 703 $ 24 3.41% $ 1,096 $ 22 2.01% $ 1,809 $ 14 0.77%
---------------------- ---------------------- ----------------------
Total Interest-Earning
Assets $ 390,411 $ 24,802 6.35% $ 376,903 $ 22,016 5.84% $ 332,198 $ 17,733 5.34%
--------- --------- ---------
Allowance for Loan
Losses ($ 2,603) ($ 2,652) ($ 1,952)
Cash & Due From
Banks $ 6,949 $ 8,189 $ 7,987
Premises, Equipment $ 6,388 $ 6,432 $ 3,865
Net unrealized loss
on AFS Securities ($ 4,106) ($ 2,127) ($ 412)
Other Assets $ 20,348 $ 19,707 $ 12,330
--------- --------- ---------
Total Average Assets $ 417,387 $ 406,452 $ 354,016
========= ========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW/Money Market
Deposits $ 79,356 $ 1,812 2.28% $ 81,602 $ 1,229 1.51% $ 62,681 $ 382 0.61%
Savings Deposits $ 48,882 $ 640 1.31% $ 59,466 $ 456 0.77% $ 54,596 $ 373 0.68%
Time Deposits $ 106,395 $ 4,434 4.17% $ 86,794 $ 2,486 2.86% $ 75,241 $ 1,984 2.64%
Borrowed Funds $ 71,471 $ 3,573 5.00% $ 67,793 $ 3,181 4.69% $ 74,954 $ 2,920 3.90%
---------------------- ---------------------- ----------------------
Total Interest-Bearing
Liabilities $ 306,104 $ 10,459 3.42% $ 295,655 $ 7,352 2.49% $ 267,472 $ 5,659 2.12%
--------- --------- ---------
Demand Deposits $ 65,151 $ 65,591 $ 51,649
Other Liabilities $ 2,842 $ 3,008 $ 2,329
Shareholders' Equity $ 43,290 $ 42,198 $ 32,566
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 417,387 $ 406,452 $ 354,016
========= ========= =========
Net Interest Income $ 14,343 $ 14,664 $ 12,074
========= ========= =========
Net Interest Spread 2.93% 3.35% 3.22%
Net Interest Margin 3.67% 3.89% 3.63%
* Presented on a fully taxable equivalent ("FTE") basis
22
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2006 over 2005 2005 over 2004
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
----------------------------- -----------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 1,335 $ 1,032 $ 2,367 $ 2,895 $ 833 $ 3,728
Taxable investment securities (50) 836 786 (188) 672 484
Tax-exempt investment securities (351) (26) (377) 242 (188) 54
Other interest earning (26) 36 10 (23) 40 17
Total interest and dividend income $ 908 $ 1,878 $ 2,786 $ 2,926 $ 1,357 $ 4,283
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (34) $ 617 $ 583 $ 115 $ 732 $ 847
Savings deposits (81) 265 184 33 50 83
Time deposits 561 1,387 1,948 305 197 502
Borrowed funds 172 220 392 (279) 540 261
------- ------- ------- ------- ------- -------
Total interest expense $ 618 $ 2,489 $ 3,107 $ 174 $ 1,519 $ 1,693
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 290 $ (611) $ (321) $ 2,752 $ (162) $ 2,590
======= ======= ======= ======= ======= =======
Noninterest Income
------------------
Noninterest income totaled $4,583,000 for the year ended December 31, 2006 and
compared to $4,865,000 for the year ended December 31, 2005. This is a decrease
of $282,000 or 5.80%. Gains on sales of available-for-sale securities decreased
$693,000 or 57.27%. This decrease is primarily the result of movement in market
rates during the year. The yield curve remained flat and at times was inverted
during the year which limited opportunities to generate gains on sales of
available-for-sale securities. Trust and investment services income increased
$410,000 to $1,981,000 primarily as a result of the efforts of new business
development. Service charges on deposit accounts totaled $707,000 for 2006. This
is an increase of $65,000 or 10.12% when compared to total service charges of
$642,000 in 2005. The increase can be attributed to an increase in the number of
deposit accounts. Mortgage refinancing remained active during 2006. Competition
in the secondary mortgage market continues to be very aggressive. Other income
has remained relatively consistent when comparing the year 2006 to 2005. This
category of income primarily consists of fees associated with transaction
accounts and in addition, fees related to the origination and servicing of
mortgage loans as well as gains reflecting the sale of mortgage loans.
Noninterest Expense
-------------------
Overall, noninterest expense decreased 1.60% for the year ended December 31,
2006 as compared to the corresponding period in 2005. Professional fees however,
increased $248,000 or 80.78%. The Company's trust and investment services
division teamed with Bradley Foster and Sargent, Inc, an independent investment
advisory firm which assists in providing a broader scope of highly personalized
professional investment services to clients. In addition, there were several
projects that required the services of consultants during the year that
influenced the increase in professional fees. Other increases in noninterest
expenses are attributable to normal volumes of business. The decreases in the
noninterest expenses listed in the table below are all primarily attributable to
management's continuing efforts to control operating expenses.
The components of noninterest expense and the changes in the period were as
follows (amounts in thousands):
2006 2005 $ Change % Change
-------------------------------------------------------------------------------
Salaries and employee benefits $ 7,151 $ 7,355 $ (204) (2.77)%
Occupancy expense 752 728 24 3.30
Equipment expense 787 777 10 1.29
Data processing 1,134 1,014 120 11.83
Insurance 154 148 6 4.05
Printing and stationery 240 278 (38) (13.67)
Professional fees 555 307 248 80.78
Legal expense 151 264 (113) (42.80)
Amortization of core deposit intangible 164 164 0 .00
Other expense 1,157 1,409 (252) (17.89)
------- ------- -------
Total noninterest expense $12,245 $12,444 $ (199) (1.60)
======= ======= =======
23
Income Taxes
------------
In 2006, the Company's income tax provision totaled $1,442,000 that reflects an
effective tax rate of 25.32%. This compares to an income tax provision of
$1,114,000 and an effective tax rate of 19.63% for the same period in 2005. This
increase is primarily attributable to an increase in taxable income.
Net Income
----------
Overall, net income totaled $4,254,000 for the year ended December 31, 2006.
This compares to net income of $4,561,000 for the year ended December 31, 2005.
This is a decrease of $307,000 or 6.73% and represents earnings per average
share outstanding of $2.53. Earnings per average share outstanding for the year
ended December 31, 2005 was $2.71.
RESULTS OF OPERATION
Comparison of the Years Ended December 31, 2005 and 2004
--------------------------------------------------------
Overview
--------
The earnings for the Company were $4,561,000 in 2005, an increase of $542,000 or
13.49% over year 2004 earnings of $4,019,000. Earnings per average share
outstanding were $2.71 in 2005. This compared to earnings per average share
outstanding of $2.67 in 2004 and $2.70 in 2003. The increase in earnings per
share was primarily the result of the increased base of earnings assets
following consummation of the Company's acquisition of Canaan National Bancorp,
Inc. on September 10, 2004.
The Company's assets at December 31, 2005 were $402,922,000 compared to total
assets of $423,101,000 at December 31, 2004. The decrease was primarily
attributable to a reduction in the securities portfolio. During the year 2005,
net loans outstanding increased $14,011,000 or 6.94% and total $215,989,000.
This compared to net loans outstanding of $201,978,000 at December 31, 2004. The
Bank monitored the quality of the loan portfolio to ensure that loan quality was
not sacrificed for growth or otherwise compromised the Company's objectives.
Nonperforming loans were $773,000 at December 31, 2005 as compared to
nonperforming loans of $2,267,000 at December 31, 2004. This was a decrease of
$1,494,000 or 65.90%. Deposits at December 31, 2005 were $287,271,000 compared
to total deposits of $298,842,000 at December 31, 2004, representing a decrease
of $11,571,000.
The Bank was "well capitalized". The Company's risk-based capital ratios at
December 31, 2005, which included the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 14.58% for Tier 1 capital and 15.76% for
total capital. The Company's leverage ratio was 8.27% at December 31, 2005. This
compared to a Tier 1 capital ratio at December 31, 2004 of 11.12%, a total
capital ratio of 12.13% and a Company leverage ratio of 7.22%. As a result of
the Company's financial performance, the Board of Directors increased total
dividends declared on the Company's common stock to $1.00 per share in 2005.
This compared to a $.96 per share dividend declared in 2004 and a $.92 per share
dividend that was declared in 2003.
Net Interest and Dividend Income
--------------------------------
For this discussion, net interest income is presented on a fully
taxable-equivalent ("FTE") basis. FTE interest income restates reported interest
income on tax exempt loans and securities as if such interest were taxed at the
applicable State and Federal income tax rates for all periods presented.
(dollars in thousands) December 31,
2005 2004 2003
--------------------------------
Interest and Dividend Income
(financial statements) $ 20,816 $ 16,551 $ 15,650
Tax Equivalent Adjustment 1,200 1,182 1,075
-------- -------- --------
Total Interest and Dividend
Income (on an FTE basis) 22,016 17,733 16,725
Interest Expense (7,352) (5,659) (5,613)
-------- -------- --------
Net Interest and Dividend Income-FTE $ 14,664 $ 12,074 $ 11,112
======== ======== ========
24
The Company's 2005 total interest and dividend income on an FTE basis of
$22,016,000 was $4,283,000 or 24.15% more than the total interest and dividend
on an FTE basis of $17,733,000 in 2004. The increase was primarily attributable
to an increase in earning assets as well an economic environment experiencing a
slow increase in interest rates.
Interest expense on deposits in 2005 increased $1,432,000 or 52.28% to
$4,171,000 compared to $2,739,000 for the corresponding period in 2004 and
$2,866,000 in 2003. Interest expense for Federal Home Loan Bank advances
increased $261,000 to $3,181,000 in 2005 compared to $2,920,000 in 2004 and
$2,747,000 in 2003. The increase was primarily the result of an increase in
advances during the year. Although competition remained aggressive and interest
margins continued to be pressured, net interest and dividend income on an FTE
basis increased $2,590,000 or 21.45% over 2004 and totaled $14,664,000 at
December 31, 2005 compared to net interest and dividend income on an FTE basis
of $12,074,000 at December 31, 2004 and $11,112,000 in 2003.
The Company's 2005 net interest margin on an FTE basis was 3.89%. This compared
to a net interest margin of 3.63% for 2004. Actual tax exempt income in 2005 was
$2,329,000 with a yield of 4.44%. Actual tax exempt income in 2004 totaled
$2,294,000 with a yield of 4.68% and in 2003 actual tax exempt income was
$2,086,000 with a yield of 4.78%.
25
YIELD ANALYSIS
---------------------------------------------------------------------------------------------------------
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
---------------------------------------------------------------------------------------------------------
(dollars in thousands) 2005 2004 2003
---------------------------------------------------------------------------------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-Earning Assets:
Loans $ 208,786 $ 13,320 6.38% $ 160,382 $ 9,592 5.98% $ 142,752 $ 9,226 6.46%
Taxable Securities $ 112,746 $ 5,097 4.52% $ 117,535 $ 4,613 3.92% $ 101,931 $ 4,299 4.22%
Tax-Exempt Securities* $ 52,435 $ 3,529 6.73% $ 49,017 $ 3,475 7.09% $ 43,603 $ 3,161 7.25%
Federal Funds $ 1,840 $ 48 2.61% $ 3,455 $ 39 1.13% $ 3,125 $ 29 0.93%
Other Interest-Earning $ 1,096 $ 22 2.01% $ 1,809 $ 14 0.77% $ 1,359 $ 10 0.74%
---------------------- ---------------------- ----------------------
Total Interest-Earning
Assets $ 376,903 $ 22,016 5.84% $ 332,198 $ 17,733 5.34% $ 292,770 $ 16,725 5.71%
--------- --------- ---------
Allowance for Loan
Losses ($ 2,652) ($ 1,952) ($ 1,468)
Cash & Due From
Banks $ 8,189 $ 7,987 $ 6,425
Premises, Equipment $ 6,432 $ 3,865 $ 3,000
Net unrealized (loss)gain
on AFS Securities ($ 2,127) ($ 412) $ 2,316
Other Assets $ 19,707 $ 12,330 $ 6,403
--------- --------- ---------
Total Average Assets $ 406,452 $ 354,016 $ 309,446
========= ========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW/Money Market
Deposits $ 81,602 $ 1,229 1.51% $ 62,681 $ 382 0.61% $ 59,521 $ 363 0.61%
Savings Deposits $ 59,466 $ 456 0.77% $ 54,596 $ 373 0.68% $ 45,975 $ 450 0.98%
Time Deposits $ 86,794 $ 2,486 2.86% $ 75,241 $ 1,984 2.64% $ 68,898 $ 2,054 2.98%
Borrowed Funds $ 67,793 $ 3,181 4.69% $ 74,954 $ 2,920 3.90% $ 65,282 $ 2,746 4.21%
---------------------- ---------------------- ----------------------
Total Interest-Bearing
Liabilities $ 295,655 $ 7,352 2.49% $ 267,472 $ 5,659 2.12% $ 239,676 $ 5,613 2.34%
--------- --------- ---------
Demand Deposits $ 65,591 $ 51,649 $ 38,998
Other Liabilities $ 3,008 $ 2,329 $ 2,130
Shareholders' Equity $ 42,198 $ 32,566 $ 28,642
--------- --------- ---------
Total Liabilities and
Shareholders' Equity $ 406,452 $ 354,016 $ 309,446
========= ========= =========
Net Interest Income $ 14,664 $ 12,074 $ 11,112
========= ========= =========
Net Interest Spread 3.35% 3.22% 3.37%
Net Interest Margin 3.89% 3.63% 3.80%
* Presented on a fully taxable equivalent ("FTE") basis
26
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
dollars in thousands) 2005 over 2004 2004 over 2003
----------------------------- ----------------------------
Volume Rate Total Volume Rate Total
----------------------------- ----------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 2,895 $ 833 $ 3,728 $ 1,139 $ (773) $ 366
Taxable investment securities (188) 672 484 658 (344) 314
Tax-exempt investment securities 242 (188) 54 393 (79) 314
Other interest earning (23) 40 17 6 8 14
------- ------- ------- ------- ------- -------
Total interest and dividend income $ 2,926 $ 1,357 $ 4,283 $ 2,196 $(1,188) $ 1,008
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 115 $ 732 $ 847 $ 19 $ 0 19
Savings deposits 33 50 83 84 (161) (77)
Time deposits 305 197 502 189 (259) (70)
Borrowed funds (279) 540 261 407 (233) 174
------- ------- ------- ------- ------- -------
Total interest expense $ 174 $ 1,519 $ 1,693 $ 699 $ (653) $ 46
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 2,752 $ (162) $ 2,590 $ 1,497 $ (535) $ 962
======= ======= ======= ======= ======= =======
Noninterest Income
------------------
Noninterest income increased $110,000 or 2.31% and totaled $4,865,000 for the
year ended December 31, 2005 as compared to $4,755,000 for the year ended
December 31, 2004. Trust and investment services income increased $160,000 to
$1,571,000 primarily as a result of the efforts of new business development.
Service charges on deposit accounts totaled $642,000 for 2005. This was an
increase of $21,000 or 3.38% when compared to total service charges of $621,000
in 2004. The increase was attributed to an increase in deposit account
transactions. Gains on sales and writedowns of available-for-sale securities,
net totaled $1,210,000 in 2005 and represented a decrease of $280,000 or 18.79%
compared to $1,490,000 in 2004. This decrease reflected a writedown of
approximately $182,000, however, that was primarily attributed to movement in
the market which resulted in fewer opportunities for the Company to enhance the
return from the securities portfolio and at the same time realize gains on sales
of available-for-sale securities. Mortgage refinancing was active during 2005 as
rates remained attractive to consumers. Competition in the secondary mortgage
market was very aggressive. Gains on sales of loans held-for-sale totaled
$270,000 in 2005 compared to $304,000 in 2004, representing a decrease of
11.18%. Other income and loan commissions however, increased $243,000 or 26.16%
to $1,172,000 in 2005 compared to $929,000 in 2004. The increase was primarily
attributable to the increase in fees earned from activity in the secondary
mortgage market due to the change of investors.
Noninterest Expense
-------------------
Noninterest expense increased 17.36% for the year ended December 31, 2005 as
compared to the corresponding period in 2004. The increases in the noninterest
expenses listed below were primarily attributed to the Company's growth as a
result of the merger with Canaan National Bancorp, Inc. The decrease in other
expense was a reflection of non-recurring expenses in 2004 related to the
conversion of the Company's core processing system. The components of
noninterest expense and the changes in the period were as follows (amounts in
thousands):
2005 2004 $ Change % Change
-------------------------------------------------------------------------------
Salaries and employee benefits $ 7,355 $ 5,971 $ 1,384 23.18%
Occupancy expense 728 482 246 51.04
Equipment expense 777 600 177 29.50
Data processing 1,014 887 127 14.32
Insurance 148 122 26 21.31
Printing and stationery 278 262 16 6.11
Professional fees 307 279 28 10.04
Legal expense 264 173 91 52.60
Amortization of core deposit intangible 164 101 63 62.38
Other expense 1,409 1,726 (317) (18.37)
------- ------- -------
Total noninterest expense $12,444 $10,603 $ 1,841 17.36
======= ======= =======
27
Income Taxes
------------
In 2005, the Company's income tax provision totaled $1,114,000 that reflected an
effective tax rate of 19.63%. This compared to an income tax provision of
$775,000 and an effective tax rate of 16.16% for the same period in 2004. This
increase was primarily attributed to an increase in taxable income.
Net Income
----------
Overall, net income was $4,561,000 for the year ended December 31, 2005. This
compared to net income of $4,019,000 for the year ended December 31, 2004. This
was an increase of $542,000 or 13.49% and represented earnings per average share
outstanding of $2.71. Earnings per average share outstanding for the year ended
December 31, 2004 was $2.67. The increase in net income was primarily the result
of an increase in earning assets resulting from the merger with Canaan National
Bancorp, Inc.
FINANCIAL CONDITION
-------------------
Comparison of December 31, 2006 and 2005
----------------------------------------
Total assets at December 31, 2006 were $450,340,000 compared to $402,922,000 at
December 31, 2005. This is an increase of 11.77%. The increase is primarily the
result of an increase in loans and the securities portfolio that were funded by
an increase in deposits and advances from the Federal Home Loan Bank of Boston.
Securities Portfolio
--------------------
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2006, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $161,231,000. This represents an
increase of $10,063,000 or 6.66% over year-end 2005.
Securities are classified in the portfolio as either
securities-available-for-sale or securities-held-to-maturity. Securities for
which the Company has the ability and positive intent to hold until maturity are
reported as held-to-maturity. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Securities that are held
for indefinite periods of time and which management intends to use as part of
its asset/liability management strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, increases in capital
requirements or other similar factors, are classified as available-for-sale.
These securities are stated at fair value in the financial statements of the
Company. Temporary differences between available-for-sale securities' amortized
cost and fair market value (accumulated other comprehensive income or loss when
net of tax) are not included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized. The cost basis
of individual securities is written down to estimated fair value through a
charge to earnings when decreases in value below amortized cost are considered
to be other than temporary. This other than temporary impairment is charged to
securities gain on the Company's financial statements. At December 31, 2006, the
unrealized loss (accumulated other comprehensive loss) net of tax was
$1,190,000. This compares to an unrealized loss net of tax of $2,601,000 at
December 31, 2005. The Company monitors the market value fluctuations of its
securities portfolio on a monthly basis as well as associated credit ratings to
determine potential impairment of a security.
Federal Funds Sold
------------------
Federal funds sold at December 31, 2006 totaled $1,000,000. There were no
federal funds sold at December 31, 2005. This represents a normal operating
range of funds for daily cash needs.
Lending
-------
New business development during the year coupled with an increase in loan demand
resulted in an increase in net loans outstanding to $252,464,000 at December 31,
2006, as compared to $215,989,000 at December 31, 2005. This is an increase of
$36,475,000 or 16.89%. Although the largest dollar volumes of loan activity
continues to be in the residential mortgage area, the Company offers a wide
variety of loan types and terms along with competitive pricing to customers. At
December 31, 2006, the portfolio also included $12,000,000 in Term federal
funds, which are short term loans to other financial institutions. The Company's
credit function is designed to ensure adherence to prudent credit standards
despite competition for loans in the Company's market area.
28
The following table represents the composition of the loan portfolio comparing
December 31, 2006 December 31, 2005
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 16,465 $ 15,354
Real Estate-construction and land development 21,169 18,814
Real Estate-residential 145,395 135,619
Real Estate-commercial 50,859 40,889
Consumer 8,816 7,900
Term federal funds 12,000 0
Other 69 47
--------- ---------
254,773 218,623
Deferred costs, net 168 0
Unearned income (3) (8)
Allowance for loan losses (2,474) (2,626)
--------- ---------
Net loans $ 252,464 $ 215,989
========= =========
Provisions and Allowance for Loan Losses
----------------------------------------
Total loans outstanding at of December 31, 2006 were $254,773,000. Included in
the aforementioned figure is $12,000,000 in Term federal funds, which are short
term loans to other financial institutions and which are netted from total loans
for purposes of analysis of the ALLL. As a result, loans outstanding at December
31, 2006 was $242,773,000 net of term federal funds sold compared to net loans
outstanding of $218,623,000 at December 31, 2005. This is an increase of
$24,150,000 or 11.05%. This growth can be attributed primarily to an increase in
both residential and commercial real estate loan demand as well as the Bank's
new business development program. Approximately 90% of the Company's loan
portfolio continues to be real estate secured.
Credit risk is inherent in the business of extending loans. The Company monitors
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Because of the risk associated
with extending loans the Company maintains an allowance or reserve for loan and
lease losses through charges to earnings. The Company evaluates the adequacy of
the allowance on a monthly basis. Such evaluations are based on assessments of
credit quality and trends within the portfolio and "risk rating" of loans by
senior management, which is reviewed by the Company's Loan Committee on a
regular basis. Loans are initially risk rated when originated. If there is
deterioration in the credit quality, the risk rating is adjusted accordingly.
The Allowance for Loan and Lease Losses (ALLL) at December 31, 2006 totaled
$2,474,000 representing 256.91% of nonperforming loans of $963,000 and 1.02% of
total loans outstanding net of term federal funds sold or $242,773,000. This
compares to an ALLL of $2,626,000 which is 339.72% of nonperforming loans of
$773,000 and 1.20% of total loans outstanding of $218,623,000 at December 31,
2005. Management reduced the allowance by $87,488 that had previously been
expensed through the loan loss provision from prior years. This was justified by
positive trends in the loan portfolio and low levels of delinquencies and net
charge-offs as well as low levels of classified and nonperforming loans.
A separate component that is evaluated is the Allowance for Off Balance Sheet
Commitments which totaled $36,000 as of December 31, 2006. The two allowances
combined brought the total ALLL to $2,510,000 or 1.03% of total loans
outstanding. The December 31, 2005 comparison included $134,000 in the Allowance
for Off Balance Sheet Commitments bringing the total combined ALLL to $2,760,000
or 1.26% of total loans. A total of $132,000 in loans were charged-off during
the 2006 year compared to $134,000 during 2005. Recoveries of previously
charged-off loans totaled $67,000 during the 2006 year compared to $39,000 in
recoveries for 2005.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Company's Loan Policy
as commercial loans with balances outstanding of $100,000 or more and
residential real estate mortgages with balances of $300,000 or more. Such loans
are considered impaired when it is probable that the Company will not be able to
collect all principal and interest due according to the terms of the note.
Any such commercial loan and/or residential mortgage will be considered for
impairment under any of the following
29
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994;
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
as part of the periodic analysis of the Allowance for Loan and Lease Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
balances as well as recent delinquent percentage trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical averages of net losses by loan types
are examined as well as trends by type. The Bank's loan mix over the same period
of time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor.
While management estimates loan losses using the best available information, no
assurances can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
identification of additional problem loans or other factors. Additionally,
despite the excellent overall quality of the loan portfolio and with
expectations of the Company to continue to grow its existing portfolio, future
additions to the allowance may be necessary to maintain adequate reserve
coverage. Overall, management is of the opinion that the ALLL is adequate as of
December 31, 2006.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2006 totaled $313,586,000 compared to
$287,271,000 at year-end 2005. The Company continues its efforts to
competitively price products and develop and maintain relationship banking with
its customers. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and the aggressive competition from nonbanking entities. During the year, there
was a change in the mix of deposits.
Demand, NOW and savings balances which are lower cost core deposits, decreased,
and were replaced primarily by time deposits which as illustrated by the table
below, results in a significant increase in interest expense.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
(dollars in thousands) Year ended December 31
2006 2005 2004
---------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
---------------------------------------------------------
Demand $ 65,151 $ 65,591 $ 51,649
NOW 25,090 .26% 27,767 .25% 23,797 .01%
Money Market 54,266 3.22% 53,835 2.15% 38,884 .83%
Savings 48,882 1.31% 59,466 .77% 54,596 .68%
Time 106,395 4.17% 86,794 2.86% 75,241 2.64%
-------- -------- --------
$299,784 2.29% $293,453 1.42% $244,167 1.12%
======== ======== ========
30
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31 are summarized as follows:
(dollars in thousands) December 31
2006 2005 2004
---------------------------
Three months or less $12,045 $ 9,763 $ 9,540
Over three months through six months 8,946 1,057 1,011
Over six months through one year 24,791 8,774 7,517
Over one year 9,533 8,069 14,887
------- ------- -------
Total $55,315 $27,663 $32,955
======= ======= =======
Borrowings
----------
As part of its operating strategy, the Company utilizes advances from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At December 31, 2006, the Company had $87,093,000 in
outstanding advances from the Federal Home Loan Bank compared to $71,016,000 at
December 31, 2005. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
Interest Rate Risk
------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
The Bank uses asset/liability modeling software to develop scenario analyses
which measure the impact that changing interest rates have on net interest
income. These model simulations are projected out over a two year time horizon,
assuming proportional upward and downward interest rate movements of 100, 200
and 300 basis points. Simulations are projected out in two ways:
(1) using the same balance sheet as the Bank had on the simulation
date, and
(2) using a growing balance sheet based on recent growth patterns and
strategies.
As interest rates rise or fall, these simulations incorporate expected future
lending rates, current and expected future funding sources and cost, the
possible exercise of options, changes in prepayment rates, and other factors
which may be important in determining the future growth of net interest income.
The rates we earn on our assets and the rates we pay on our liabilities are
generally fixed for a contractual period of time. Imbalance in these contractual
maturities can create significant earnings volatility because market interest
rates change over time. In a period of rising interest rates, the interest
income earned on assets may not increase as rapidly as the interest paid on
liabilities. In a period of declining interest rates the interest income earned
on assets may decrease more rapidly than the interest paid on liabilities. This
would primarily be attributed to accelerated prepayments on loans and securities
that are significantly influenced by movements in market rates.
The net interest margin may be adversely affected by several possible interest
rate environments. Foremost, a continued flat or inverted yield curve which
results in shorter term market interest rates that equal or exceed those of
longer term rates. This could further increase the Bank's cost of
interest-bearing liabilities that continue to outpace its yield on earning
assets resulting in additional net interest rate spread compression.
31
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston that provides a
source of available borrowings for liquidity.
At December 31, 2006, the Company had approximately $60,046,000 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, 2006, the Company had $44,349,000 in shareholders' equity
compared to $41,442,000 at December 31, 2005. This represents an increase of
$2,907,000 or 7.01%. Several components contributed to the change since December
2005. Earnings for the year totaled $4,254,000. Securities in the portfolio that
are classified as available-for-sale are adjusted to fair value monthly and the
unrealized losses or gains are not included in earnings, but are reported as a
net amount (less expected tax) as a separate component of capital until
realized. Market fluctuations of fair value of the securities portfolio during
2006 resulted in other comprehensive income net of tax totaling $1,411,000. The
initial application of SFAS No. 158, as defined below in recent accounting
pronouncements, resulted in other comprehensive loss, net of tax of $1,038,000
in 2006. The Company declared dividends in 2006 resulting in a decrease in
capital of $1,751,000. The Company issued 840 new shares of common stock under
the terms of the Director Stock Retainer Plan during the second quarter of 2006
which resulted in an increase in capital of $32,000.
Under current regulatory definitions, the Company and the Bank are considered to
be "well capitalized" for capital adequacy purposes. As a result, the Bank pays
the lowest federal deposit insurance deposit premiums possible. One primary
measure of capital adequacy for regulatory purposes is based on the ratio of
risk-based capital to risk weighted assets. This method of measuring capital
adequacy helps to establish capital requirements that are sensitive to the
differences in risk associated with various assets. It takes into account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low risk assets. At year-end 2006, the Company
had a risk-based capital ratio of 15.28% compared to 15.76% at December 31,
2005. Maintaining strong capital is essential to bank safety and soundness.
However, the effective management of capital resources requires generating
attractive returns on equity to build value for shareholders while maintaining
appropriate levels of capital to fund growth, meet regulatory requirements and
be consistent with prudent industry practices. Management believes that the
capital ratios of the Company and Bank are adequate to continue to meet the
foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money, over time, due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result, interest rates tend to have a greater impact on the Company's
performance than do the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services, inflation could impact earnings
in future periods.
Recent Accounting Pronouncements
--------------------------------
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Instruments" (SFAS No. 155), which
permits, but does not require, fair value accounting for any hybrid financial
instrument that contains an embedded derivative that would otherwise require
bifurcation in accordance with SFAS 133. The statement also subjects beneficial
interests issued by securitization vehicles to the requirements of SFAS No. 133.
The statement is effective as of January 1, 2007. The adoption of SFAS No. 155
is not expected to have a material impact on the Company's financial condition
and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets- an amendment of FASB Statement No. 140" (SFAS No. 156). SFAS
No. 156 requires an entity to recognize a servicing asset or servicing liability
32
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract in specific situations. Additionally, the servicing
asset or servicing liability shall be initially measured at fair value; however,
an entity may elect the "amortization method" or "fair value method" for
subsequent balance sheet reporting periods. SFAS No. 156 is effective as of an
entity's first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the entity
has not yet issued financial statements, including interim financial statements,
for any period of that fiscal year. The Company does not expect the adoption of
this statement to have a material impact on its financial condition, results of
operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles (GAAP) and enhances
disclosures about fair value measurements. SFAS No. 157 retains the exchange
price notion and clarifies that the exchange price is the price that would be
received for an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants on the measurement date. SFAS
No. 157 is effective for the Company's consolidated financial statements for the
year beginning on January 1, 2008, with earlier adoption permitted. Management
is currently evaluating the effect of SFAS No. 157 on the Company's financial
condition and results of operations. The Company does not expect the adoption of
this statement to have a material impact on its financial condition and results
of operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and other Postretirement Plans - an amendment of FASB
Statements No 87, 88, 106 and 132(R)" (SFAS No. 158). SFAS No. 158 requires 1)
the recognition of an asset or liability for the over-funded or under-funded
status of a defined benefit plan, 2) the recognition of actuarial gains and
losses and prior service costs and credits in other comprehensive income, 3)
measurement of plan assets and benefit obligations as of the employer's balance
sheet date, rather than at interim measurement dates as currently allowed, and
4) disclosure of additional information concerning actuarial gains and losses
and prior service costs and credits recognized in other comprehensive income.
This statement is effective for financial statements with fiscal years ending
after December 15, 2006. The adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or cash
flows.
Off-Balance Sheet Arrangements
------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. In the
opinion of management, these off-balance sheet arrangements are not likely to
have a material effect on the Company's financial condition, results of
operations, or liquidity. (See Note 11 to the Financial Statements).
Forward Looking Statements
--------------------------
This Annual Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and the Bank, may include forward-looking
statements relating to such matters as:
(a) assumptions concerning future economic and business conditions and
their effect on the economy in general and on the markets in which the
Company and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and
Bank through growth resulting from acquisitions, attraction of new
deposit and loan customers and the introduction of new products and
services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking
industry generally and in the specific markets in which the Bank
operates;
33
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial
institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with
the Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Statement of Management's Responsibility
----------------------------------------
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization structure
providing for delegation of authority and establishment or responsibilities;
communication of requirements for compliance with approved accounting, control
and business practices throughout the organization; business planning and
review; and a program of internal audit. Management believes the internal
accounting controls in use provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and that financial records are reliable for the purpose of
preparing financial statements. Shatswell, MacLeod and Company, P.C. has been
engaged to provide an independent opinion on the fairness of the consolidated
financial statements. Their report appears in this Annual Report on Form 10-K.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The main components of market risk for the Company are credit risk, interest
rate risk and liquidity risk. The Company manages interest rate risk and
liquidity risk through an ALCO Committee comprised of outside Directors and
senior management. The committee monitors compliance with the Bank's
Asset/Liability Policy which establishes guidelines to meet various applicable
regulatory rules and statutes, measures the various risks facing the bank on a
consistent basis and coordinates the management of the bank's financial
position. Model simulation is used to measure earnings volatility under both
rising and falling interest rate scenarios. The Company's interest rate risk and
liquidity position has not significantly changed from year-end 2006.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
------------------------------------------
Report of Independent Registered Public
Accounting Firm, March 14, 2007....................................... F-1
Consolidated Balance Sheets at December 31, 2006 and 2005............... F-2
Consolidated Statements of Income for the Years Ended
December 31, 2006, 2005 and 2004....................................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2006, 2005 and 2004................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004....................................... F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2006, 2005 and 2004........................... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 2006 and 2005............................ F-27
Statements of Income for the Years Ended
December 31, 2006, 2005 and 2004...................................... F-27
Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004...................................... F-28
Quarterly Results of Operations (unaudited)............................. F-29
[SHATSWELL, MACLEOD & COMPANY, P.C. LETTERHEAD]
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2006 and 2005 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2006.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2006, 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
March 14, 2007
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2006 and 2005
--------------------------
ASSETS 2006 2005
------ ------------- -------------
Cash and due from banks $ 8,988,609 $ 8,431,844
Interest-bearing demand deposits with other banks 568,693 652,807
Money market mutual funds 1,199,881 1,119,724
Federal Funds sold 1,000,000 0
------------- -------------
Cash and cash equivalents 11,757,183 10,204,375
Investments in available-for-sale securities (at fair value) 156,492,547 145,608,297
Investments in held-to-maturity securities (fair values of $74,818 and $147,202
as of December 31, 2006 and 2005, respectively) 74,931 146,856
Federal Home Loan Bank stock, at cost 4,663,700 5,413,200
Loan held-for-sale 304,000 0
Loans, less allowance for loan losses of $2,474,118 and $2,626,170 as of
December 31, 2006 and 2005, respectively 252,464,430 215,989,149
Investment in real estate 75,000 75,000
Premises and equipment 6,135,546 6,451,979
Goodwill 9,509,305 9,509,305
Core deposit intangible 1,493,499 1,657,715
Accrued interest receivable 2,483,547 2,362,924
Cash surrender value of life insurance policies 3,554,995 3,424,186
Other assets 1,330,987 2,079,307
------------- -------------
Total assets $ 450,339,670 $ 402,922,293
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 70,502,249 $ 63,995,665
Interest-bearing 243,084,032 223,275,537
------------- -------------
Total deposits 313,586,281 287,271,202
Federal Home Loan Bank advances 87,093,402 71,015,614
Due to broker 1,579,611 0
Other liabilities 3,731,195 3,193,154
------------- -------------
Total liabilities 405,990,489 361,479,970
------------- -------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,684,181 shares in 2006 and 1,683,341 shares in 2005 168,418 168,334
Paid-in capital 13,099,881 13,068,045
Retained earnings 33,602,991 31,100,702
Accumulated other comprehensive loss (2,522,109) (2,894,758)
------------- -------------
Total shareholders' equity 44,349,181 41,442,323
------------- -------------
Total liabilities and shareholders' equity $ 450,339,670 $ 402,922,293
============= =============
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, 2006, 2005 and 2004
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Interest and dividend income:
Interest and fees on loans $ 15,686,978 $ 13,319,930 $ 9,592,478
Interest on debt securities:
Taxable 5,604,866 4,814,993 4,499,725
Tax-exempt 2,079,981 2,329,414 2,293,706
Dividends on equity securities 277,356 282,534 112,008
Other interest 80,412 69,512 53,101
------------ ------------ ------------
Total interest and dividend income 23,729,593 20,816,383 16,551,018
------------ ------------ ------------
Interest expense:
Interest on deposits 6,885,893 4,171,360 2,738,680
Interest on Federal Home Loan Bank advances 3,573,052 3,180,591 2,920,316
------------ ------------ ------------
Total interest expense 10,458,945 7,351,951 5,658,996
------------ ------------ ------------
Net interest and dividend income 13,270,648 13,464,432 10,892,022
(Benefit) provision for loan losses (87,488) 210,000 250,000
------------ ------------ ------------
Net interest and dividend income after (benefit) provision
for loan losses 13,358,136 13,254,432 10,642,022
------------ ------------ ------------
Noninterest income:
Trust department income 1,980,500 1,571,311 1,410,814
Loan commissions 117,298 260,997 239,139
Service charges on deposit accounts 707,431 642,268 620,771
Gain on sales and writedown of available-for-sale securities, net 517,326 1,209,724 1,489,905
Gain on sales of loans held-for-sale 357,628 270,061 304,354
Other income 902,394 910,743 690,198
------------ ------------ ------------
Total noninterest income 4,582,577 4,865,104 4,755,181
------------ ------------ ------------
Noninterest expense:
Salaries and employee benefits 7,150,746 7,355,316 5,970,639
Occupancy expense 751,670 728,302 482,516
Equipment expense 786,637 776,729 600,127
Data processing 1,134,078 1,013,785 886,618
Conversion expense 0 0 464,484
Insurance 154,562 148,317 121,959
Printing and stationery 239,617 277,640 261,898
Professional fees 554,686 306,753 278,709
Legal expense 151,414 263,575 173,333
Amortization of core deposit intangible 164,216 164,416 101,109
Other expense 1,157,534 1,408,949 1,261,921
------------ ------------ ------------
Total noninterest expense 12,245,160 12,443,782 10,603,313
------------ ------------ ------------
Income before income taxes 5,695,553 5,675,754 4,793,890
Income taxes 1,441,935 1,114,413 774,948
------------ ------------ ------------
Net income $ 4,253,618 $ 4,561,341 $ 4,018,942
============ ============ ============
Earnings per common share $ 2.53 $ 2.71 $ 2.67
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2006, 2005 and 2004
--------------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings (Loss) Income Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2003 1,424,078 $ 142,408 $ 2,327,151 $ 25,694,836 $ 685,817 $ 28,850,212
Comprehensive income:
Net income 4,018,942
Other comprehensive loss, net of
tax effect (1,408,496)
Comprehensive income 2,610,446
Shares issued for merger 257,483 25,748 10,672,670 10,698,418
Issuance of 840 shares for Directors'
fees 840 84 31,752 31,836
Dividends declared ($.96 per share) (1,491,312) (1,491,312)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2004 1,682,401 168,240 13,031,573 28,222,466 (722,679) 40,699,600
Comprehensive income:
Net income 4,561,341
Other comprehensive loss, net of tax
effect (2,172,079)
Comprehensive income 2,389,262
Issuance of 940 shares for Directors'
fees 940 94 36,472 36,566
Dividends declared ($1.00 per share) (1,683,105) (1,683,105)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2005 1,683,341 168,334 13,068,045 31,100,702 (2,894,758) 41,442,323
Comprehensive income:
Net income 4,253,618
Other comprehensive income, net of
tax effect 372,649
Comprehensive income 4,626,267
Issuance of 840 shares for Directors'
fees 840 84 31,836 31,920
Dividends declared ($1.04 per share) (1,751,329) (1,751,329)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 1,684,181 $ 168,418 $ 13,099,881 $ 33,602,991 $ (2,522,109) $ 44,349,181
============ ============ ============ ============ ============ ============
Reclassification disclosure for the years ended December 31:
2006 2005 2004
----------- ----------- -----------
Unrealized holding gains (losses) on available-for-sale securities
Net unrealized holding gains (losses) on available-for-sale securities $ 2,654,494 $(1,547,214) $(1,106,610)
Reclassification adjustment for net realized gains in net income (517,326) (1,209,724) (1,489,905)
----------- ----------- -----------
2,137,168 (2,756,938) (2,596,515)
Income tax (expense) benefit (726,637) 878,763 1,011,343
----------- ----------- -----------
Unrealized holding gains (losses) on available-for-sale securities, net of tax 1,410,531 (1,878,175) (1,585,172)
----------- ----------- -----------
Adjustment to initially apply SFAS No. 158 (1,572,548) 0 0
Minimum pension liability adjustment 0 (445,309) 289,396
Income tax benefit (expense) 534,666 151,405 (112,720)
----------- ----------- -----------
SFAS No. 158 pension liability or minimum pension liability, net of tax (1,037,882) (293,904) 176,676
----------- ----------- -----------
Other comprehensive income (loss), net of tax $ 372,649 $(2,172,079) $(1,408,496)
=========== =========== ===========
Accumulated other comprehensive loss consists of the following as of December
31:
2006 2005 2004
----------- ----------- -----------
Net unrealized holding losses on available-for-sale securities, net of taxes $(1,190,323) $(2,600,854) $ (722,679)
SFAS No. 158 pension liability, net of taxes (1,331,786) 0 0
Minimum pension liability adjustment, net of taxes 0 (293,904) 0
----------- ----------- -----------
Accumulated other comprehensive loss $(2,522,109) $(2,894,758) $ (722,679)
=========== =========== ===========
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, 2006, 2005 and 2004
--------------------------------------------
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 4,253,618 $ 4,561,341 $ 4,018,942
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 34,953 302,781 289,214
Gain on sales and writedown of available-for-sale securities, net (517,326) (1,209,724) (1,489,905)
(Benefit) provision for loan losses (87,488) 210,000 250,000
Change in loans held-for-sale (304,000) 375,000 (100,000)
Change in deferred loan costs, net (168,573) 0 0
(Decrease) increase in unearned income on loans (4,913) (10,473) 18,529
Net decrease (increase) in mortgage servicing rights 78,715 83,471 (41,253)
Write-off of equipment 0 0 9,399
Depreciation and amortization 538,449 529,238 357,645
Amortization of core deposit intangible 164,216 164,416 101,109
Amortization of fair value adjustment on loans 112,712 184,256 266,986
Accretion of fair value adjustments on deposits and borrowings (134,217) (154,287) (51,429)
(Increase) decrease in interest receivable (111,012) (110,482) 84,056
Deferred tax expense 396,418 67,273 143,691
(Increase) decrease in prepaid expenses (1,031,510) 14,242 270,965
Increase in cash surrender value of insurance policies (130,809) (130,638) (139,607)
Decrease (increase) in income tax receivable 181,005 336,288 (53,889)
Increase in other assets (91,796) (53,742) (71,917)
Decrease in accrued expenses (243,196) (268,051) (750,246)
Increase in interest payable 257,975 42,822 57,465
(Decrease) increase in other liabilities (57,050) 59,445 367,956
Issuance of shares for Directors' fees 31,920 36,566 31,836
------------ ------------ ------------
Net cash provided by operating activities 3,168,091 5,029,742 3,569,547
------------ ------------ ------------
Cash flows from investing activities:
Redemption of Federal Home Loan Bank stock 860,200 0 56,300
Purchases of Federal Home Loan Bank stock (110,700) 0 (351,000)
Purchases of available-for-sale securities (83,058,698) (87,783,193) (124,520,785)
Proceeds from sales of available-for-sale securities 62,356,620 83,572,466 98,347,353
Proceeds from maturities of available-for-sale securities 14,007,603 34,328,155 32,998,864
Proceeds from maturities of held-to-maturity securities 71,691 71,272 10,968
Loan originations and principal collections, net (36,142,073) (12,432,343) (8,191,577)
Purchases of loans (252,000) (2,001,184) 0
Recoveries of loans previously charged off 67,054 39,094 28,302
Capital expenditures (207,787) (1,017,056) (1,003,263)
Proceeds from sale of equipment 0 0 436
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc. net of expenses paid of $309,419 0 0 2,487,705
Cash paid to Canaan National Bancorp, Inc. shareholders 0 0 (6,020,163)
------------ ------------ ------------
Net cash (used in) provided by investing activities (42,408,090) 14,777,211 (6,156,860)
------------ ------------ ------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2006, 2005 and 2004
--------------------------------------------
(continued)
2006 2005 2004
------------ ------------ ------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and
savings accounts (5,638,393) (8,516,596) 6,920,818
Net increase (decrease) in time deposits 31,957,486 (3,029,964) (2,141,902)
Federal Home Loan Bank advances 25,000,000 10,000,000 5,000,000
Principal payments on advances from Federal Home Loan Bank (10,460,009) (1,346,521) (6,140,973)
Net change in short-term advances from Federal Home Loan Bank 1,668,000 (16,720,945) 0
Decrease in other borrowed funds 0 0 (86,863)
Dividends paid (1,734,277) (1,666,046) (1,415,074)
------------ ------------ ------------
Net cash provided by (used in) financing activities 40,792,807 (21,280,072) 2,136,006
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,552,808 (1,473,119) (451,307)
Cash and cash equivalents at beginning of year 10,204,375 11,677,494 12,128,801
------------ ------------ ------------
Cash and cash equivalents at end of year $ 11,757,183 $ 10,204,375 $ 11,677,494
============ ============ ============
Supplemental disclosures:
Interest paid $ 10,335,187 $ 7,463,416 $ 5,652,960
Income taxes paid 864,512 710,852 685,000
Transfer from equipment to other assets 2,815
Canaan National Bancorp, Inc. merger:
Cash and cash equivalents acquired $ 2,797,124
Available-for-sale securities 42,776,284
Federal Home Loan Bank stock 1,291,200
Federal Reserve Bank stock 56,300
Net loans acquired 54,787,421
Fixed assets acquired 2,355,970
Accrued interest receivable 460,550
Other assets acquired 1,173,549
Core deposit intangible 1,191,279
------------
106,889,677
Deposits assumed 75,613,508
Federal Home Loan Bank borrowings assumed 19,500,346
Other borrowings assumed 86,863
Other liabilities assumed 1,812,381
------------
97,013,098
Net assets acquired 9,876,579
Merger costs 17,028,000
------------
Goodwill $ 7,151,421
============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2006, 2005 and 2004
--------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank and Trust Company (Bank) operates as its wholly-owned subsidiary. Bancorp
and the Bank are referred to together as the (Company).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut and two banking offices located in
Massachusetts. The Bank is engaged principally in the business of attracting
deposits from the general public and investing those deposits in residential and
commercial real estate, consumer and small business loans. The Bank also offers
a full complement of trust and investment services.
As described in Note 15, on September 10, 2004 Canaan National Bancorp, Inc.
merged with and into the Company.
NOTE 2 - ACCOUNTING POLICIES
----------------------------
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and predominant
practices within the banking industry. The consolidated financial statements
were prepared using the accrual basis of accounting. The significant accounting
policies are summarized below to assist the reader in better understanding the
consolidated financial statements and other data contained herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Bancorp and its wholly-owned subsidiary, the Bank, and the Bank's
wholly-owned subsidiaries, SBT Realty, Inc., and SBT Mortgage Service
Corporation (the "PIC"). SBT Realty, Inc. holds and manages bank owned
real estate situated in New York state. The PIC operates as a passive
investment company and services residential mortgages. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand
deposits with other banks, money market mutual funds and federal funds
sold.
Cash and due from banks as of December 31, 2006 and 2005 includes
$650,000 and $649,000, respectively, which is subject to withdrawals
and usage restrictions to satisfy the reserve requirements of the
Federal Reserve Board.
F-7
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts so as to approximate the interest
method. Gains or losses on sales of investment securities are computed
on a specific identification basis.
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These
security classifications may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as
available-for-sale.
-- Held-to-maturity securities are carried at amortized cost in
the consolidated balance sheets. Unrealized holding gains
and losses are not included in earnings or in a separate
component of capital. They are merely disclosed in the notes
to the consolidated financial statements.
-- Available-for-sale securities are carried at fair value on
the consolidated balance sheets. Unrealized holding gains
and losses are not included in earnings but are reported as
a net amount (less expected tax) in a separate component of
capital until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings.
During the three years ended December 31, 2006 the Company
did not classify any securities as trading.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary
are reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff, are reported at their outstanding principal
balances adjusted for any charge-offs, the allowance for loan losses
and any deferred fees or costs on originated loans or unamortized
premiums or discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Residential real estate loans are generally placed on nonaccrual status
when reaching 90 days past due or in the process of foreclosure. Lines
of credit secured by real estate 90 days past due or in the process of
foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the
type of loan. Commercial real estate loans and commercial business
loans and leases which are 90 days or more past due are generally
placed on nonaccrual status, unless secured by sufficient cash or other
assets immediately convertible to cash. When a loan has been placed on
nonaccrual status, previously accrued and uncollected interest is
reversed against interest on loans. A loan can be returned to accrual
status when collectibility of principal is reasonably assured and the
loan has performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
F-8
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, the estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent. The Bank does not
separately identify individual consumer and residential loans for
impairment disclosures, but instead evaluates smaller groups of
homogeneous loans collectively for impairment.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with any
gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets. Estimated lives are 3 to
99 years for buildings and 2 to 20 years for furniture and equipment.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Statement of Financial Accounting Standards (SFAS) No.
15, "Accounting by Debtors and Creditors for Troubled Debt
Restructuring." These properties are carried at the lower of cost or
estimated fair value less estimated costs to sell. Any writedown from
cost to estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining these
assets and subsequent writedowns are included in other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," the Bank classifies loans as in-substance
repossessed or foreclosed if the Bank or its subsidiaries receives
physical possession of the debtor's assets regardless of whether formal
foreclosure proceedings take place. As of December 31, 2006 and
December 31, 2005, the Company does not have any other real estate
owned.
ADVERTISING:
The Bank directly expenses costs associated with advertising as they
are incurred.
F-9
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at tax rates
expected to be in effect when the amounts related to such temporary
differences are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair value for its
financial instruments. Fair value methods and assumptions used by the
Company in estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are
based on commitments on hand from investors or prevailing market
prices.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are,
by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that
applies interest rates currently being offered on advances to a
schedule of aggregated expected monthly maturities on Federal Home Loan
Bank advances.
Due to broker: The carrying amount of due to broker approximates its
fair value.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
STOCK BASED COMPENSATION:
Bancorp has a stock-based plan to compensate non-employee directors for
their services. This plan is more fully described in Note 14.
Compensation cost for these services is reflected in net income in an
amount equal to the fair value on the date of issuance of the shares of
Bancorp common stock issued to the directors.
F-10
EARNINGS PER SHARE (EPS):
Basic EPS excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of
common shares outstanding for the period. Weighted average common
shares outstanding were 1,683,893 in 2006, 1,683,031 in 2005 and
1,503,373 in 2004. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Diluted
EPS is not presented because there were no common stock equivalents in
the three year period ended December 31, 2006.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2006, the Financial Accounting Standards Board (FASB)
issued SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS
No. 155), which permits, but does not require, fair value accounting
for any hybrid financial instrument that contains an embedded
derivative that would otherwise require bifurcation in accordance with
SFAS 133. The statement also subjects beneficial interests issued by
securitization vehicles to the requirements of SFAS No. 133. The
statement is effective as of January 1, 2007. The adoption of SFAS No.
155 is not expected to have a material impact on the Company's
financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets- an amendment of FASB Statement No. 140" (SFAS No.
156). SFAS No. 156 requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specific
situations. Additionally, the servicing asset or servicing liability
shall be initially measured at fair value; however, an entity may elect
the "amortization method" or "fair value method" for subsequent balance
sheet reporting periods. SFAS No. 156 is effective as of an entity's
first fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. The Company
does not expect the adoption of this statement to have a material
impact on its financial condition, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS No. 157). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value under generally
accepted accounting principles (GAAP) and enhances disclosures about
fair value measurements. SFAS No. 157 retains the exchange price notion
and clarifies that the exchange price is the price that would be
received for an asset or paid to transfer a liability (an exit price)
in an orderly transaction between market participants on the
measurement date. SFAS No. 157 is effective for the Company's
consolidated financial statements for the year beginning on January 1,
2008, with earlier adoption permitted. Management is currently
evaluating the effect of SFAS No. 157 on the Company's financial
condition and results of operations.
The Company does not expect the adoption of this statement to have a
material impact on its financial condition and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting
for Defined Benefit Pension and other Postretirement Plans - an
amendment of FASB Statements No 87, 88, 106 and 132(R)" (SFAS No. 158).
SFAS No. 158 requires 1) the recognition of an asset or liability for
the over-funded or under-funded status of a defined benefit plan, 2)
the recognition of actuarial gains and losses and prior service costs
and credits in other comprehensive income, 3) measurement of plan
assets and benefit obligations as of the employer's balance sheet date,
rather than at interim measurement dates as currently allowed, and 4)
disclosure of additional information concerning actuarial gains and
losses and prior service costs and credits recognized in other
comprehensive income. This statement is effective for financial
statements with fiscal years ending after December 15, 2006. The
adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or cash flows.
F-11
NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------ ------------ ------------ ------------
Available-for-sale securities:
December 31, 2006:
Equity securities $ 3,031 $ 178,395 $ 0 $ 181,426
U.S. government agencies preferred stock 2,975,000 0 462,900 2,512,100
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 55,323,358 23,343 1,200,395 54,146,306
Debt securities issued by states of the
United States and political subdivisions
of the states 44,891,148 379,553 34,667 45,236,034
Money market mutual funds 1,199,881 0 0 1,199,881
Mortgage-backed securities 55,103,530 191,698 878,547 54,416,681
------------ ------------ ------------ ------------
159,495,948 772,989 2,576,509 157,692,428
Money market mutual funds included in
cash and cash equivalents (1,199,881) (1,199,881)
------------ ------------ ------------ ------------
$158,296,067 $ 772,989 $ 2,576,509 $156,492,547
============ ============ ============ ============
December 31, 2005:
Equity securities $ 3,031 $ 145,058 $ 0 $ 148,089
U.S. government agencies preferred stock 13,292,628 99,660 946,300 12,445,988
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 52,390,332 0 1,874,694 50,515,638
Debt securities issued by states of the
United States and political subdivisions
of the states 41,550,010 75,980 293,765 41,332,225
Money market mutual funds 1,119,724 0 0 1,119,724
Mortgage-backed securities 42,312,984 15,325 1,161,952 41,166,357
------------ ------------ ------------ ------------
150,668,709 336,023 4,276,711 146,728,021
Money market mutual funds included in
cash and cash equivalents (1,119,724) (1,119,724)
------------ ------------ ------------ ------------
$149,548,985 $ 336,023 $ 4,276,711 $145,608,297
============ ============ ============ ============
Held-to-maturity securities:
December 31, 2006:
Mortgage-backed securities $ 74,931 $ 0 $ 113 $ 74,818
============ ============ ============ ============
December 31, 2005:
Mortgage-backed securities $ 146,856 $ 346 $ 0 $ 147,202
============ ============ ============ ============
F-12
The scheduled maturities of debt securities were as follows as of December 31,
2006:
Available-For-Sale Held-To-Maturity
------------------ ---------------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ ------------ ------------
Due after five years through ten years $ 17,966,906 $ 0 $ 0
Due after ten years 81,415,434 0 0
Mortgage-backed securities 54,416,681 74,931 74,818
------------ ------------ ------------
$153,799,021 $ 74,931 $ 74,818
============ ============ ============
During 2006, proceeds from sales of available-for-sale securities amounted to
$62,356,620. Gross realized gains and gross realized losses on those sales
amounted to $724,286 and $206,960, respectively. During 2005, proceeds from
sales of available-for-sale securities amounted to $83,572,466. Gross realized
gains and gross realized losses on those sales amounted to $1,427,881 and
$35,657, respectively. During 2004, proceeds from sales of available-for-sale
securities amounted to $98,347,353. Gross realized gains and gross realized
losses on those sales amounted to $1,577,110 and $87,205, respectively. The tax
provision applicable to these net realized gains amounted to $175,891, $473,356
and $580,318, respectively. In 2005, a write down of $182,500 was recorded on an
available-for-sale security as management had deemed this particular security to
be other than temporarily impaired.
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of shareholders' equity as of December 31, 2006.
Total carrying amounts of $55,251,654 and $38,612,787 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, treasury tax
and loan and for other purposes as required by law as of December 31, 2006 and
2005, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are temporarily impaired, are as follows as of December 31,
2006:
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
U.S. government agencies preferred
stock $ 0 $ 0 $ 2,512,100 $ 462,900 $ 2,512,100 $ 462,900
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 792,581 57,553 49,159,124 1,142,842 49,951,705 1,200,395
Debt securities issued by states of the
United States and political
subdivisions of the states 1,809,175 12,100 2,094,013 22,567 3,903,188 34,667
Mortgage-backed securities 13,486,446 54,270 27,940,134 824,390 41,426,580 878,660
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired securities $ 16,088,202 $ 123,923 $ 81,705,371 $ 2,452,699 $ 97,793,573 $ 2,576,622
============ ============ ============ ============ ============ ============
F-13
Securities exhibiting unrealized losses are analyzed to determine that the
impairments are not other-than-temporary and the following information is
considered. U.S. Government securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S. Government agencies
securities, which have a significant impact in financial markets, have minimal
credit risk. All investments maintain a credit rating of at least investment
grade by one of the nationally recognized rating agencies. Mortgage-backed
securities are issued by federal government agencies or by private issuers with
minimum security ratings of AAA. The unrealized losses in the above table are
attributable to changes in market interest rates. As Company management has the
ability to hold securities until anticipated recovery to cost basis occurs, no
declines are deemed to be other than temporary.
NOTE 4 - LOANS
--------------
Loans consisted of the following as of December 31:
2006 2005
------------- -------------
Commercial, financial and agricultural $ 16,464,762 $ 15,354,328
Real estate - construction and land development 21,169,024 18,814,408
Real estate - residential 145,394,844 135,618,937
Real estate - commercial 50,859,332 40,889,007
Consumer 8,815,789 7,899,912
Term federal funds 12,000,000 0
Other 69,367 46,783
------------- -------------
254,773,118 218,623,375
Deferred costs, net 168,573 0
Unearned income (3,143) (8,056)
Allowance for loan losses (2,474,118) (2,626,170)
------------- -------------
Net loans $ 252,464,430 $ 215,989,149
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2006.
Total loans to such persons and their companies amounted to $681,984 as of
December 31, 2006. During 2006, principal advances of $366,942 were made and
repayments totaled $411,177.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2006 2005 2004
----------- ----------- -----------
Balance at beginning of period $ 2,626,170 $ 2,511,546 $ 1,664,274
(Benefit) provision for loan losses (87,488) 210,000 250,000
Recoveries of loans previously charged off 67,054 39,094 28,302
Loans charged off (131,618) (134,470) (69,742)
Allowance related to business combination 0 0 638,712
----------- ----------- -----------
Balance at end of period $ 2,474,118 $ 2,626,170 $ 2,511,546
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2006 2005
-------- --------
Total nonaccrual loans $886,377 $693,726
======== ========
Accruing loans which are 90 days or more overdue $ 77,525 $ 78,663
======== ========
F-14
Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:
2006 2005
--------------------------- ---------------------------
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 0 0
------------ ------------ ------------ ------------
Totals $ 0 $ 0 $ 0 $ 0
============ ============ ============ ============
Average recorded investment in impaired loans during the
year ended December 31 $ 0 $ 73,133
============ ============
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 0 $ 6,665
============ ============
Amount recognized using a cash-basis method of
accounting $ 0 $ 6,665
============ ============
In 2006, 2005 and 2004 the Bank capitalized mortgage servicing rights totaling
$147,353, $73,849 and $112,187, respectively, and amortized $225,732, $164,178
and $66,019, respectively. The balance of capitalized mortgage servicing rights
included in other assets at December 31, 2006 and 2005 was $336,185 and
$414,900, respectively. On September 10, 2004 the Bank acquired mortgage
servicing rights of $392,256, exclusive of $2,388 in valuation allowance,
through the acquisition of Canaan National Bancorp, Inc.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:
2006 2005
-------- --------
Balance, beginning of year $ 1,115 $ 7,973
Additions 19,392 16,077
Reductions (19,056) (22,935)
-------- --------
Balance, end of year $ 1,451 $ 1,115
======== ========
The fair value of the mortgage servicing rights was $671,145 and $525,209 as of
December 31, 2006 and 2005, respectively.
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage and other loans
serviced for others was $49,117,195 and $49,567,721 at December 31, 2006 and
2005, respectively.
F-15
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
The following is a summary of premises and equipment as of December 31:
2006 2005
----------- -----------
Land $ 775,844 $ 775,844
Buildings 5,721,601 5,629,513
Furniture and equipment 2,786,494 2,696,510
----------- -----------
9,283,939 9,101,867
Accumulated depreciation and amortization (3,148,393) (2,649,888)
----------- -----------
$ 6,135,546 $ 6,451,979
NOTE 6 - DEPOSITS
-----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2006 and 2005 was $55,315,326 and $27,662,727,
respectively.
The aggregate amount of brokered time deposits as of December 31, 2006 and 2005
was $19,538,000 and $0, respectively. Brokered time deposits are not included in
time deposit accounts in denominations of $100,000 or more above.
For time deposits as of December 31, 2006, the scheduled maturities for years
ended December 31 are as follows:
2007 $ 98,395,827
2008 10,090,092
2009 2,606,025
2010 2,105,190
2011 7,164,220
------------
$120,361,354
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2006. Total deposits of such persons and their companies amounted to $1,372,156
and $1,739,823 as of December 31, 2006 and 2005, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2006, and thereafter, are summarized as follows:
2007 $16,589,044
2008 11,577,699
2009 1,320,213
2010 21,202,309
2011 10,794,029
Thereafter 25,295,450
Fair value adjustment 314,658
-----------
$87,093,402
F-16
As of December 31, 2006, the following advances from the FHLB were redeemable at
par at the option of the FHLB:
MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT
------------- ------------------------ ------
1/25/2010 1/25/2007 and quarterly thereafter $19,000,000
4/27/2009 1/26/2007 and quarterly thereafter 500,000
4/27/2009 1/26/2007 and quarterly thereafter 500,000
2/8/2010 2/7/2007 and quarterly thereafter 600,000
2/28/2011 2/26/2007 and quarterly thereafter 10,000,000
12/15/2010 3/15/2007 and quarterly thereafter 800,000
12/16/2013 3/15/2007 and quarterly thereafter 10,000,000
12/20/2010 3/20/2007 and quarterly thereafter 500,000
3/1/2011 3/1/2007 and quarterly thereafter 500,000
12/12/2016 12/12/2007 and quarterly thereafter 15,000,000
The advances also include $400,000 borrowed in 2002 at 4.37% which is a
Knock-out Advance with a Strike Rate of 7%. If the three month LIBOR rate
exceeds the Strike Rate of 7% on January 8, 2007 and quarterly thereafter, the
FHLB will require that this borrowing become due immediately upon the Strike
Date as defined in the contract. As of December 31, 2006, the three month LIBOR
was 5.36%. The maturity date is April 9, 2007.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2006, the interest rates on FHLB advances ranged from 2.66
percent to 6.30 percent. At December 31, 2006, the weighted average interest
rate on FHLB advances was 4.97 percent.
NOTE 8 - EMPLOYEE BENEFITS
--------------------------
The Bank has an insured noncontributory defined benefit retirement plan
available to employees eligible as to age and length of service. Benefits are
based on a covered employee's final average compensation, primary social
security benefit and credited service. The Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.
In 2006 the plan was amended, effective September 1, 2006, to provide that
employees hired or rehired on or after September 1, 2006 are not eligible to
participate in the plan.
F-17
The following tables set forth information about the plan as of December 31 and
the years then ended, using a measurement date of December 31:
2006 2005 2004
----------- ----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 5,495,706 $ 4,108,971 $ 2,762,015
Adjustment 0 0 960,236
Actuarial (gain) loss (128,601) 783,390 (12,650)
Service cost 430,035 466,570 259,513
Interest cost 318,310 290,825 220,533
Benefits paid (87,521) (154,050) (80,676)
----------- ----------- -----------
Benefit obligation at end of year 6,027,929 5,495,706 4,108,971
----------- ----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 3,370,954 2,839,515 1,787,563
Actual return on plan assets 392,231 94,489 140,306
Contributions 1,341,000 591,000 992,322
Benefits paid (87,521) (154,050) (80,676)
----------- ----------- -----------
Fair value of plan assets at end of year 5,016,664 3,370,954 2,839,515
----------- ----------- -----------
Funded status (1,011,265) (2,124,752) (1,269,456)
Unrecognized net loss N/A 2,330,482 1,503,149
Unrecognized prior service cost N/A 2,696 3,589
Unamortized net obligation existing at date of adoption of
SFAS No. 87 N/A 0 2,771
Additional minimum liability N/A (448,005) 0
----------- ----------- -----------
(Funded status) (accrued) prepaid benefit cost,
respectively, included in the balance sheet $(1,011,265) $ (239,579) $ 240,053
=========== =========== ===========
Amounts recognized in accumulated other comprehensive loss, before tax effect,
consist of:
December 31, 2006
-----------------
Unrecognized net loss $2,016,054
Unrecognized prior service cost 1,803
----------
$2,017,857
==========
The $960,236 adjustment made to the 2004 beginning of year projected benefit
obligation is a result of a change in calculation methodology from the prior
actuary to the current actuary, hired by the Bank in April 2004, including the
effect of reflecting salary increases in the determination of liabilities. The
adjustment also includes liability gains and losses due to demographic
experience. Net periodic cost for the year ended December 31, 2004 of $490,190
includes additional amortization of the transition obligation and additional
amortization of prior service cost in the amounts of $46,921 and $89,172,
respectively, as a result of this adjustment. Net income for the year ended
December 31, 2004 was reduced by $83,085, net of tax benefit of $53,008, related
to this adjustment.
The following table illustrates the incremental effect of applying SFAS No. 158
on individual line items in the balance sheet as of December 31, 2006.
Before After
Application Application
of of
SFAS No. 158 Adjustments SFAS No. 158
------------ ------------ ------------
Prepaid benefit cost $ 1,006,592 $ (1,006,592) $ 0
Deferred income tax asset 0 5,635 5,635
Total Assets 451,340,627 (1,000,957) 450,339,670
Liability for pension benefits 0 1,011,265 1,011,265
Deferred income tax liability (680,436) 680,436 0
Total liabilities 405,659,660 330,829 405,990,489
Accumulated other comprehensive loss (1,190,323) (1,331,786) (2,522,109)
Total shareholders' equity 45,680,967 (1,331,786) 44,349,181
F-18
The accumulated benefit obligation for the plan was $4,179,551 and $3,610,533 at
December 31, 2006 and 2005, respectively.
Amounts recognized in the balance sheets as of December 31, 2005 consist of:
Accrued benefit cost $(239,579)
Additional minimum liability (448,005)
Intangible asset 2,696
Accumulated other comprehensive loss 445,309
---------
Net amount recognized $(239,579)
=========
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2006 and 2005. The rate of increase in
future compensation levels was based on the following graded table for 2006 and
2005:
AGE RATE
--- ----
25 4.75%
35 4.25%
45 3.75%
55 3.25%
65 3.00%
Components of net periodic cost are as follows for the years ended December 31:
2006 2005 2004
----------- ----------- -----------
Service cost $ 430,035 $ 466,570 $ 259,513
Interest cost on benefit obligation 318,310 290,825 220,533
Expected return on assets (295,598) (236,062) (196,448)
Amortization of transition obligation 0 2,771 55,593
Amortization of prior service cost 893 893 90,064
Recognized net loss 89,194 97,630 60,935
----------- ----------- -----------
Net periodic benefit cost 542,834 622,627 490,190
----------- ----------- -----------
Other changes in plan assets and benefit obligations recognized in other
comprehensive loss:
Net actuarial loss 2,016,054 0 0
Prior service cost 1,803 0 0
----------- ----------- -----------
Total recognized in other comprehensive loss 2,017,857 0 0
----------- ----------- -----------
Total recognized in net periodic cost and other comprehensive loss $ 2,560,691 $ 622,627 $ 490,190
=========== =========== ===========
The estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the
year ended December 31, 2007 are $77,101 and $893, respectively.
The discount rate used to determine the net periodic benefit cost was 6.00% for
2006, 2005 and 2004; and the expected return on plan assets was 7.50% for 2006
and 7.50% for 2005 and 7.25% for 2004.
The graded table was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2006, 2005 and 2004.
Pension expense is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on pension plan assets of 7.50%
for 2006. In developing the expected long-term rate of return assumption, asset
class return expectations were evaluated as well as long-term inflation
assumptions, and historical returns based on the current target asset
allocations of 60% equity and 40% fixed income. The Bank regularly reviews the
asset allocations and periodically rebalances investments when considered
appropriate. While all future forecasting contains some level of estimation
error, the Bank believes that 7.50% falls within a range of reasonable long-term
rate of return expectations for pension plan assets. The Bank will continue to
evaluate the actuarial assumptions, including expected rate of return, at least
annually, and will adjust as necessary.
F-19
Plan Assets:
The pension plan investments are co-managed by the Trust and Investment Services
division of the Bank and Bradley Foster and Sargent, Inc. The investments in the
plan are reviewed and approved by the Trust Committee. The asset allocation of
the plan is a balanced allocation. Debt securities are timed to mature when
employees are due to retire. Debt securities are laddered for coupon and
maturity. Equities are put in the plan to achieve a balanced allocation and to
provide growth of the principal portion of the plan and to provide
diversification. The Trust Committee reviews the policies of the plan. The
prudent investor rule and applicable ERISA regulations apply to the management
of the funds and investment selections.
The Bank's pension plan asset allocations by asset category are as follows:
December 31, 2006 December 31, 2005
----------------------- -----------------------
Asset Category Fair Value Percent Fair Value Percent
---------------------------------------------- ---------- ---------- ---------- ----------
Equity securities $2,537,994 50.6% $ 987,888 29.4%
U.S. Government treasury and agency securities 1,480,289 29.5 1,319,226 39.1
Corporate bonds 23,040 0.5 23,632 0.7
Mutual funds 200,503 4.0 583,354 17.3
Money market mutual funds 672,228 13.4 344,620 10.2
Certificates of deposit 102,610 2.0 112,234 3.3
---------- ---------- ---------- ----------
Total $5,016,664 100.0% $3,370,954 100.0%
========== ========== ========== ==========
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2006 and 2005.
Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate, the five years
thereafter:
2007 $ 171,000
2008 90,000
2009 123,000
2010 205,000
2011 195,000
2012 - 2016 4,260,000
The Bank expects to make a contribution of $670,000 in 2007.
The Bank adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute a percentage of their pay, subject to IRS
limitations. The Bank may make discretionary contributions to the Plan. The
Bank's contribution expense in the years ended December 31, 2006, 2005 and 2004
amounted to approximately $93,000, $91,212 and $60,000, respectively.
Discretionary contributions vest in full after five years.
In 2006 the 401(k) Plan was amended, effective September 1, 2006, to provide
that employees hired or rehired after September 1, 2006 are not eligible to
participate in the plan. The Company will be establishing, not later than
September 1, 2007, a second 401(k) Plan to provide a discretionary match to
employees hired or rehired, on or after September 1, 2006 who satisfy certain
eligibility requirements.
Fourteen of the Bank's officers have a change in control agreement ("agreement")
with the Bank. The agreements provide that if, within twelve (12) months after a
"change-in-control" has occurred, the officer's employment terminates or is
reassigned under defined circumstances, then the Bank and/or its successor shall
pay the officer a lump sum amount equal to the officer's most recent aggregate
base salary paid in the twelve (12) month period immediately preceding his or
her termination or reassignment less amounts previously paid from the date of
"change in control."
F-20
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended December
31:
2006 2005 2004
---------- ---------- ----------
Current:
Federal $ 990,839 $ 986,976 $ 631,007
State 54,678 60,164 250
---------- ---------- ----------
1,045,517 1,047,140 631,257
---------- ---------- ----------
Deferred:
Federal 217,852 12,873 131,788
State 0 0 11,903
Change in valuation allowance 178,566 54,400 0
---------- ---------- ----------
396,418 67,273 143,691
---------- ---------- ----------
Total income tax expense $1,441,935 $1,114,413 $ 774,948
========== ========== ==========
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended
December 31:
2006 2005 2004
------ ------ ------
% of % of % of
Income Income Income
------ ------ ------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (13.6) (15.8) (18.2)
Other items 1.2 (.3) 0.2
State tax, net of federal tax benefit 0.6 0.7 0.2
Change in valuation allowance 3.1 1.0 0.0
------ ------ ------
Effective tax rates 25.3% 19.6% 16.2%
====== ====== ======
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2006 2005
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 619,233 $ 704,341
Interest on non-performing loans 15,402 8,385
Accrued deferred compensation 26,288 22,429
Post-retirement benefits 22,440 27,880
Other real estate owned property writedown 22,101 22,101
Capital loss carryforward 398,191 89,250
Mark to market purchase accounting adjustments 8,373 323,515
Preferred stock amortization 0 3,991
SFAS No. 158 pension liability 686,071 0
Minimum pension liability 0 151,405
Net unrealized holding loss on available-for-sale securities 613,197 1,339,834
----------- -----------
Gross deferred tax assets 2,411,296 2,693,131
Valuation allowance (260,166) (81,600)
----------- -----------
2,151,130 2,611,531
Deferred tax liabilities:
Deferred loan costs, net (57,315) 0
Core deposit intangible asset (646,483) (633,725)
Accelerated depreciation (985,152) (998,515)
Discount accretion 0 (189)
Mortgage servicing rights (114,304) (141,067)
Prepaid pension (342,241) (244,011)
----------- -----------
Gross deferred tax liabilities (2,145,495) (2,017,507)
---------- ----------
Net deferred tax asset $ 5,635 $ 594,024
=========== ===========
F-21
A valuation allowance is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. Management has
determined that certain deferred tax assets require a valuation allowance.
As of December 31, 2006, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------
The Bank entered into an agreement with a third party in which the third party
is to provide the Bank with account processing services and other miscellaneous
services. Under the agreement, the Bank is obligated to pay monthly processing
fees through August 5, 2010. In the event the Bank chooses to cancel the
agreement prior to the end of the contract term a lump sum termination fee will
have to be paid. The fee shall be calculated as the average monthly billing,
exclusive of pass through costs for the past twelve months, multiplied by the
number of months and any portion of a month remaining in the contract term.
NOTE 11 - FINANCIAL INSTRUMENTS
-------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant
and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2006 and 2005, the
maximum potential amount of the Bank's obligation was $12,800 and $21,900,
respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Bank may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows as of December
31:
2006 2005
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 11,757,183 $ 11,757,183 $ 10,204,375 $ 10,204,375
Available-for-sale securities 156,492,547 156,492,547 145,608,297 145,608,297
Held-to-maturity securities 74,931 74,818 146,856 147,202
Federal Home Loan Bank stock 4,663,700 4,663,700 5,413,200 5,413,200
Loans held-for-sale 304,000 307,071 0 0
Loans, net 252,464,430 250,312,089 215,989,149 215,652,000
Accrued interest receivable 2,483,547 2,483,547 2,362,924 2,362,924
F-22
2006 2005
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial liabilities:
Deposits $313,586,281 $313,560,974 $287,271,202 $287,598,000
FHLB advances 87,093,402 87,478,836 71,015,614 71,362,000
Due to broker 1,579,611 1,579,611 0 0
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:
2006 2005
----------- -----------
Commitments to originate loans $10,540,525 $ 3,242,137
Standby letters of credit 12,800 21,900
Unadvanced portions of loans:
Home equity 26,599,791 24,847,998
Commercial lines of credit 8,642,393 8,495,283
Construction 7,322,201 4,521,483
Consumer 6,928,313 6,837,017
----------- -----------
$60,046,023 $47,965,818
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------
Most of the Bank's business activity is with customers located in northwestern
Connecticut and nearby New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and nearby New
York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
----------------------------
Bancorp and its subsidiary the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Their capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2006 and 2005, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
F-23
As of December 31, 2006, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. The Company's and the
Bank's actual capital amounts and ratios are also presented in the table. There
are no conditions or events since that notification that management believes
have changed the Bank's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)
Consolidated $38,030 15.28% $19,914 >8.0% N/A
-
Salisbury Bank and Trust Company 37,295 14.98 19,929 >8.0 $24,911 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 35,555 14.28 9,957 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 13.97 9,964 >4.0 14,946 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 35,555 8.43 16,879 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 8.26 16,848 >4.0 21,060 >5.0
- -
As of December 31, 2005:
Total Capital (to Risk Weighted Assets)
Consolidated 34,058 15.76 17,801 >8.0 N/A
-
Salisbury Bank and Trust Company 34,492 15.53 17,771 >8.0 22,213 >10.0
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 32,432 14.58 8,900 >4.0 N/A
-
Salisbury Bank and Trust Company 31,732 14.29 8,885 >4.0 13,328 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 32,432 8.27 15,687 >4.0 N/A
-
Salisbury Bank and Trust Company 31,732 8.11 15,649 >4.0 19,562 >5.0
- -
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of Bancorp will be entitled to dividends only when,
and if, declared by the Bancorp's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
Under Connecticut law, the Bank may pay dividends only out of net profits. The
Connecticut Banking Commissioner's approval is required for dividend payments
which exceed the current year's net profits and retained net profits from the
preceding two years. As of December 31, 2006, the Bank may declare dividends to
Bancorp in an amount not to exceed $1,797,009.
F-24
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
---------------------------------------
At the 2001 annual meeting the shareholders of Bancorp voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc." (the "Plan"). This
Plan provides non-employee directors of the Company with shares of restricted
stock of Bancorp as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the Plan is
15,000. The first grant date under this Plan preceded the 2002 annual meeting of
stockholders. Each director whose term of office begins with or continues after
the date the Plan was approved by the stockholders is issued an "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock of
Bancorp. In 2006, 2005 and 2004, 840, 940 and 840 shares, respectively, were
issued under the Plan and the related compensation expense amounted to $31,920,
$36,566 and $31,836, respectively.
NOTE 15 - MERGER AND ACQUISITIONS
---------------------------------
On October 3, 2006 the Bank entered into a Purchase and Assumption Agreement
with New York Community Bank to acquire certain assets and liabilities of a
small branch of New York Community Bank. Management expects the transaction to
be completed in the second quarter of 2007.
On September 10, 2004, Canaan National Bancorp, Inc. ("Canaan National") merged
(the "Merger") with and into the Company. Under the terms of the Merger, the
shareholders of Canaan National received a total of $6,020,163 in cash and
257,483 shares of Bancorp common stock in exchange for all shares of Canaan
National Bancorp, Inc. stock. The value of the 257,483 shares issued was
$10,698,418 and was determined based on the September 10, 2004 closing market
price of $41.55 of Bancorp's common stock.
The Merger was accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded by
the Company at their fair values at the consummation date. During the appraisal
process, an identifiable intangible asset of $1,191,279 was calculated and is
being amortized to expense over a period of 12 years. Goodwill recorded totaled
$7,151,421 and will be analyzed for impairment on at least an annual basis.
Financial statement amounts for Canaan National are included in the Company's
consolidated financial statements beginning on the acquisition date. A summary
of net assets acquired is included in the supplemental disclosures in the cash
flow statement.
The following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisition of Canaan National had occurred at January 1,
2004:
Year Ended
----------
December 31, 2004
-----------------
Gross revenues $25,291,875
Net income $ 4,870,000
Net income per share $ 2.89
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
F-25
NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------
The Company's assets as of December 31, 2006 and 2005 include goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001 and $7,151,421
of additional goodwill from the merger with Canaan National Bancorp, Inc. in
2004. Goodwill recognized in the 2004 merger is not deductible for tax purposes.
The Company evaluated its goodwill as of December 31, 2006 and 2005 and found no
impairment.
A summary of acquired amortizing intangible assets is as follows:
As of December 31, 2006
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Core deposit intangible-branch purchase $ 888,606 $ 361,709 $ 526,897
Core deposit intangible-Canaan National merger 1,191,279 224,677 966,602
--------------- --------------- ---------------
Total $ 2,079,885 $ 586,386 $ 1,493,499
=============== =============== ===============
As of December 31, 2005
---------------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
--------------- --------------- ---------------
Core deposit intangible-branch purchase $ 888,606 $ 293,354 $ 595,252
Core deposit intangible-Canaan National merger 1,191,279 128,816 1,062,463
--------------- --------------- ---------------
Total $ 2,079,885 $ 422,170 $ 1,657,715
=============== =============== ===============
Aggregate amortization expense was $164,216, $164,416 and $101,109 in 2006, 2005
and 2004, respectively. Amortization is being calculated on a straight-line
basis.
Estimated amortization expense for each of the five years succeeding 2006 is as
follows:
2007 $ 164,216
2008 164,216
2009 164,216
2010 164,216
2011 164,216
----------
$ 821,080
NOTE 17 - RECLASSIFICATION
--------------------------
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
F-26
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
BALANCE SHEETS
--------------
December 31, 2006 and 2005
--------------------------
ASSETS 2006 2005
------ ----------- -----------
Money market mutual funds $ 1,199,881 $ 1,119,724
Cash in Salisbury Bank and Trust Company 2,494 0
----------- -----------
Cash and cash equivalents 1,202,375 1,119,724
Investment in subsidiary 43,579,224 40,741,857
Other assets 5,469 1,577
----------- -----------
Total assets $44,787,068 $41,863,158
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable $ 437,887 $ 420,835
----------- -----------
Total liabilities 437,887 420,835
Total shareholders' equity 44,349,181 41,442,323
----------- -----------
Total liabilities and shareholders' equity $44,787,068 $41,863,158
=========== ===========
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2006, 2005 and 2004
--------------------------------------------
2006 2005 2004
----------- ----------- -----------
Dividend income from subsidiary $ 1,800,000 $ 1,780,000 $ 7,510,000
Taxable interest on securities 34,435 24,068 4,375
----------- ----------- -----------
1,834,435 1,804,068 7,514,375
----------- ----------- -----------
Legal expense 9,984 0 10,500
Supplies and printing 3,503 1,632 2,042
Other expense 37,517 27,559 24,167
----------- ----------- -----------
51,004 29,191 36,709
----------- ----------- -----------
Income before income tax benefit and equity in undistributed
(distributed) net income of subsidiary 1,783,431 1,774,877 7,477,666
Income tax benefit (5,469) (1,577) (5,647)
----------- ----------- -----------
Income before equity in undistributed (distributed) net
income of subsidiary 1,788,900 1,776,454 7,483,313
Equity in undistributed (distributed) net income of subsidiary 2,464,718 2,784,887 (3,464,371)
----------- ----------- -----------
Net income $ 4,253,618 $ 4,561,341 $ 4,018,942
=========== =========== ===========
F-27
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2006, 2005 and 2004
--------------------------------------------
2006 2005 2004
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 4,253,618 $ 4,561,341 $ 4,018,942
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in (undistributed) distributed net income of subsidiary (2,464,718) (2,784,887) 3,464,371
(Increase) decrease in taxes receivable (3,892) 4,070 (5,647)
Decrease in due from subsidiary 0 0 33,000
Decrease in other assets 0 29,837 189,807
Decrease in other liabilities 0 (3,677) (78,323)
Issuance of shares for Directors' fees 31,920 36,566 31,836
----------- ----------- -----------
Net cash provided by operating activities 1,816,928 1,843,250 7,653,986
----------- ----------- -----------
Cash flows from investing activities:
Cash paid to Canaan National Bancorp, Inc. shareholders 0 0 (6,020,163)
Cash and cash equivalents acquired from Canaan National
Bancorp, Inc., net of expenses paid of $309,419 0 0 222,868
----------- ----------- -----------
Net cash used in investing activities 0 0 (5,797,295)
----------- ----------- -----------
Cash flows from financing activities:
Dividends paid (1,734,277) (1,666,046) (1,415,074)
----------- ----------- -----------
Net cash used in financing activities (1,734,277) (1,666,046) (1,415,074)
----------- ----------- -----------
Net increase in cash and cash equivalents 82,651 177,204 441,617
Cash and cash equivalents at beginning of year 1,119,724 942,520 500,903
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,202,375 $ 1,119,724 $ 942,520
=========== =========== ===========
Supplemental disclosure:
Liability assumed in merger with Canaan National Bancorp, Inc. $ 0 $ 0 $ 82,000
F-28
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------
Summarized quarterly financial data for 2006 and 2005 follows:
(In thousands, except earnings per share)
2006 Quarters Ended
-------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 5,460 $ 5,789 $ 6,111 $ 6,369
Interest expense 2,167 2,531 2,754 3,007
------- ------- ------- -------
Net interest and dividend income 3,293 3,258 3,357 3,362
Benefit for loan losses 0 0 0 (87)
Other income 1,026 1,001 1,213 1,344
Other expense 2,837 2,992 3,101 3,315
------- ------- ------- -------
Income before income taxes 1,482 1,267 1,469 1,478
Income tax expense 335 261 309 537
------- ------- ------- -------
Net income $ 1,147 $ 1,006 $ 1,160 $ 941
======= ======= ======= =======
Earnings per common share $ .68 $ .60 $ .69 $ .56
======= ======= ======= =======
(In thousands, except earnings per share)
2005 Quarters Ended
-------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 5,034 $ 5,069 $ 5,272 $ 5,441
Interest expense 1,645 1,744 1,906 2,057
------- ------- ------- -------
Net interest and dividend income 3,389 3,325 3,366 3,384
Provision (benefit) for loan losses 90 90 90 (60)
Other income 1,389 1,226 1,275 975
Other expense 3,026 2,965 3,068 3,385
------- ------- ------- -------
Income before income taxes 1,662 1,496 1,483 1,034
Income tax expense 333 188 352 241
------- ------- ------- -------
Net income $ 1,329 $ 1,308 $ 1,131 $ 793
======= ======= ======= =======
Earnings per common share $ .79 $ .78 $ .67 $ .47
======= ======= ======= =======
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two (2) most recent fiscal years, the Company and the Bank have had
no changes in or disagreements with independent accountants on accounting and
financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of December 31, 2006, as required by 13a-15(b)
or 15d-15(b),the Company's disclosure controls and procedures, as defined in
ss.240.13a-15(e) or 15d-15(e), are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed is accumulated and
communicated to management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. During the fourth quarter ended December 31, 2006, there were no
changes in the Company's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding Directors and Executive Officers of the Registrant
required by this Item pursuant to Item 401 of Regulation S-K is omitted from
this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2007 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, under the Sections "Election of Directors" and "Executive Officers," and
the information included therein is incorporated by reference.
Information required by this Item pursuant to Item 405 of Regulation S-K
regarding compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, is omitted from this report on Form 10-K and is contained in the
Bank's Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on May 16, 2007 to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K under the Section "Section 16(a) Beneficial
Ownership Reporting Compliance," and the information included therein is
incorporated by reference.
Information required by this Item pursuant to Item 407(c)(3) of Regulation S-K
regarding material changes, if any, to procedures by which shareholders may
recommend nominees to the Board, is omitted from this report on Form 10-K and is
contained in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K, under the Section "Deadline
for Receipt of Shareholder Proposals," and the information included therein is
incorporated by reference.
Information required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding the audit committee and audit committee financial
expert(s), respectively, is omitted from this report on Form 10-K and is
contained in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K , under the Section "Corporate
Governance," and the information included therein is incorporated by reference.
Code of Ethics
--------------
The Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer and Chief Financial Officer. A copy of such Code of Ethics is
available upon request to any person, without charge, by writing to John F.
Foley, Chief Financial Officer and Secretary, Salisbury Bancorp, Inc., 5 Bissell
Street, P. O. Box 1868, Lakeville, CT 06039.
36
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item pursuant to Item 402 of Regulation S-K
regarding Directors and Executive Compensation, including the Compensation
Discussion & Analysis, is omitted from this report on Form 10-K and is contained
in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 16, 2007 to be filed within 120 days after the
end of the fiscal year covered by this Form 10-K, under the Sections "Board
Compensation" and "Executive Compensation," and the information included therein
is incorporated by reference.
Information required by this Item pursuant to Item 407(e)(4) of Regulation S-K
is omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Compensation Committee Interlocks
and Insider Participation," and the information included therein is incorporated
by reference.
Information required by this Item pursuant to Item 407(e)(5) is omitted from
this report on Form 10-K and is contained in the Company's Definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on May 16, 2007 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, under the Section "Compensation Committee Report," and the information
included therein is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
Information required by this Item pursuant to Item 403 of Regulation S-K
regarding Security Ownership of Certain Beneficial Owners and Management is
omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Security Ownership," and the
information included therein is incorporated by reference.
Information required by this Item pursuant to Item 201(d) of Regulation S-K
regarding securities authorized for issuance under equity compensation plans is
omitted from this report on Form 10-K and is contained in the Company's
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 16, 2007 to be filed within 120 days after the end of the fiscal year
covered by this Form 10-K, under the Section "Equity Compensation Plan
Information," and the information included therein is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this Item pursuant to Item 404 of Regulation S-K
regarding Certain Relationships and Related Transactions is omitted from this
report on Form 10-K and is contained in the Company's Definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 16, 2007 to be filed
within 120 days after the end of the fiscal year covered by this Form 10-K,
under the Section "Certain Relationships and Related Transactions," and the
information included therein is incorporated by reference.
Information required by this Item pursuant to Item 407(a) of Regulation S-K
regarding the independence of directors is omitted from this report on Form 10-K
and is contained in the Company's Definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 16, 2007 to be filed within 120 days
after the end of the fiscal year covered by this Form 10-K, under the Section
"Corporate Governance," and the information included therein is incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item regarding Principal Accounting Fees and
Services is omitted from this report on Form 10-K and is contained in the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on May 16, 2007 to be filed within 120 days after the end of the fiscal
year covered by this Form 10-K, under the Section "Independent Public
Accountants," and the information included therein is incorporated by reference.
Information required by this Item regarding pre-approval policies for audit and
non-audit services is omitted from this report on Form 10-K and is contained in
the Company's Definitive Proxy Statement for the Annual Meeting of Shareholders
to be held on May 16, 2007 to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, under the
37
Section "Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors," and the information included therein is
incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form l0-K.
1. Financial Statements:
The financial statements filed as part of this report are
listed in the index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or
the information is included in the consolidated financial
statements or notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
3.1 Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
3.2 Bylaws of Salisbury Bancorp, Inc., as amended (2)
10 Pension Supplement Agreement with John F. Perotti (3)
10.2 Form of Change in Control Agreement with Executive Officers (4)
10.3 Director Stock Retainer Plan (5)
11 Computation of Earnings per Share
21 Subsidiaries of the Company
31.1 Rule 13a-15(e) Certification
31.2 Rule 13a-15(e) Certification
32 Section 1350 Certifications
(1) Exhibit was filed on April 23, 1998 as Exhibit 3.1 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(2) Exhibit was filed on February 10, 2005 as Exhibit 3.2 to Company's Form
8-K/A and is incorporated herein by reference.
(3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's Registration
Statement on Form S-4 (No. 333-50857) and is incorporated herein by
reference.
(4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the Company's Annual
Report on Form 10-KSB/A for the fiscal year ended December 31, 2002 and is
incorporated herein by reference. Such agreements were extended on
September 29, 2006 as set forth in the Company's Form 8-K filed on October
20, 2006.
(5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the Company's Annual
Report on Form 10KSB for the fiscal year ended December 31, 2002 and is
incorporated herein by reference.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 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 30, 2007.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
-------------------
John F. Perotti
Chairman and
Chief Executive Officer
By: /s/ John F. Foley
-----------------
John F. Foley
Chief Financial Officer,
Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John F. Perotti Chairman, March 30, 2007
------------------------------ Chief Executive Officer
(John F. Perotti) and Director
/s/ Louis E. Allyn, II Director March 30, 2007
------------------------------
(Louis E. Allyn, II)
/s/ John R. H. Blum Director March 30, 2007
-----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 30, 2007
------------------------------
(Louise F. Brown)
/s/ Richard J. Cantele, Jr. Director March 30, 2007
------------------------------
(Richard J. Cantele, Jr.)
/s/ Robert S. Drucker Director March 30, 2007
------------------------------
(Robert S. Drucker)
/s/ Nancy F. Humphreys Director March 30, 2007
-----------------------------
(Nancy F. Humphreys)
/s/ Holly J. Nelson Director March 30, 2007
-----------------------------
(Holly J. Nelson)
/s/ Michael A. Varet Director March 30, 2007
------------------------------
(Michael A. Varet)
39