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, 2007
|_| 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
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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. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_|
Smaller reporting company |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 29, 2007: $51,713,897.
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 1,685,021 shares outstanding as of March 21, 2008.
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 14, 2008.
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 Geographic Areas 6
Item 1 A - Risk Factors- Not Applicable 10
Item 1 B - Unresolved Staff Comments- Not Applicable 10
Item 2 -Properties 10
Item 3 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Part II
Item 5 - Market for Registrant's Common Equity, Related Shareholder Matters
and Issuer Purchases of Equity Securities 11
Item 6 - Selected Financial Data- Not Applicable 12
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation 12
Item 7A - Quantitative and Qualitative Disclosures about Market Risk 21
Not Applicable
Item 8 - Financial Statements and Supplementary Data 23
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
Item 9A(T) - Controls and Procedures 24
Item 9B - Other Information 24
Part III
Item 10 - Directors, Executive Officers and Corporate Governance 24
Item 11 - Executive Compensation 25
Item 12 - Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters 25
Item 13 - Certain Relationships and Related Transactions, 25
and Director Independence
Item 14 - Principal Accounting Fees and Services 25
Part IV
Item 15 - Exhibits, Financial Statement Schedules 26
Signatures 27
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank"),
which accounts for most of the Company's net income. The Bank assumed its
present name in 1925 following the acquisition by the Robbins Burrall Trust
Company of the Salisbury Savings Society. The Robbins Burrall Trust Company was
incorporated in 1909 as the successor to a private banking firm established in
1874. The Salisbury Savings Society was incorporated in 1848. The Bank is
chartered as a state bank and trust company by the State of Connecticut, and its
deposits are insured by the Federal Deposit Insurance Corporation in accordance
with the Federal Deposit Insurance Act. The Bank's main office is at 5 Bissell
Street, Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801,
and its website address is: www.salisburybank.com. The 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, Audit Committee and Human Resources and Compensation
Committee.
The Bank currently operates seven (7) full service offices, which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and
Sheffield, Massachusetts and Dover Plains, New York and a Trust and Investment
Services Division in Lakeville, Connecticut.
(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 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, 2007, the portfolio totaled $152,624,000, which
represents approximately 33.04% of total assets, and it produced interest and
dividend income of $8,115,000 for the year 2007 as compared to $7,962,000 for
2006.
1
Deposits and Borrowings
The Bank's primary sources of funds are deposits, Federal Home Loan Bank of
Boston ("FHLBB") advances 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
$317,741,000 at December 31, 2007 as compared with $313,586,000 at December 31,
2006.
Advances from the FHLBB totaled $95,011,000 at December 31, 2007 as compared
with $87,093,000 at December 31, 2006.
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, south Berkshire County, Massachusetts and Dutchess County,
New York. The Bank maintains seven (7) banking offices within these three
counties and also attracts customers from nearby Columbia 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.
2
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 grants 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.
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
shares 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
3
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 of this Act because
many community banks lack the capital and management resources needed to
facilitate broad expansion of financial services.
Sarbanes-Oxley Act
------------------
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. The Sarbanes-Oxley Act, among other things, also
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. Pursuant to the
Sarbanes-Oxley Act the SEC has adopted rules to require:
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
4
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.
State Regulation
----------------
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes. As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of 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. In addition, the Bank is
subject to some supervision and regulations by the Commonwealth of Massachusetts
and the State of New York in connection with its branch offices in such states.
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.
The Bank 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 the Bank to identify the
communities served by its 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 banks 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
a bank 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 the Bank to maintain a CRA
rating of "Satisfactory" or better would preclude it or the Company from
engaging in any new financial activities pursuant to the GLBA.
Employees
---------
The Company's current workforce at March 14, 2008 consists of 137 employees of
whom 122 were full time and 15 were part time. The employees are not represented
by a collective bargaining unit.
5
(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.
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, are presented on the following pages of this Report on Form 10-K.
Page(s) of
Item of Guide 3 This Report
--------------- -----------
I. Distribution of Assets, Liabilities and Shareholders'
Equity; Interest Rates and Interest Differential 15
II. Investment Portfolio 7
III. Loan Portfolio 8
IV. Summary of Loan Loss Experience 9
V. Deposits 19
VI. Return on Equity and Assets 8
VII. Short-Term Borrowings 10
6
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) 2007 2006 2005
----------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 160 $ 181 $ 148
U.S. government agencies preferred stock 1,825 2,512 12,446
U.S. Treasury securities and other
U.S. government corporations and agencies 46,859 54,146 50,516
Obligations of states and political subdivisions 56,979 45,236 41,332
Mortgage-backed securities 41,554 54,417 41,166
----------------------------------
$147,377 $156,492 $145,608
==================================
Held-to-maturity securities
(at amortized cost)
Mortgage-backed securities $ 71 $ 75 $ 147
==================================
Federal Home Loan Bank stock $ 5,176 $ 4,664 $ 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,
2007:
(dollars in thousands)
Maturing Maturing Maturing
-------- -------- --------
After 1 Yield After 5 Yield After 10 Yield Total
------- ------- --------
but within but within Years
---------- ---------- Amount
5 Years 10 Years ------
Amount Amount
------ ------
Held-to-maturity securities
---------------------------
(at amortized cost)
Mortgage-backed
securities $ 0 $ 0 $ 71 6.36% $ 71
====== ======= ======== ========
Available-for-sale securities
-----------------------------
(at fair value)
U.S. Treasury
securities
and other U.S.
government
corporations and
agencies $ 993 4.52% $21,812 5.18% $ 24,053 6.48% $ 46,858
Obligations of states and
political subdivisions 0 176 3.55% 56,803 4.29% 56,979
Mortgage-backed
securities 464 4.43% 857 4.88% 40,233 5.18% 41,554
------ ------- -------- --------
$1,457 $22,845 $121,089 $145,391
====== ======= ======== ========
7
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2007 2006 2005 2004 2003
---------------------------------------------------------------------
Commercial, financial and
agricultural $ 20,629 $ 16,465 $ 15,354 $ 15,127 $ 9,149
Real Estate-construction and
land development 28,928 21,169 18,814 14,290 15,307
Real Estate - residential 158,600 145,395 135,619 130,414 90,807
Real Estate-commercial 53,823 50,859 40,889 35,487 19,199
Consumer 8,005 8,816 7,900 9,122 6,692
Term federal funds 0 12,000 0 0 0
Other 376 69 47 69 73
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270,361 254,773 218,623 204,509 141,227
Deferred costs, net 306 168 0 0 0
Allowance for loan losses (2,475) (2,474) (2,626) (2,512) (1,664)
Unearned income (1) (3) (8) (19) (0)
---------------------------------------------------------------------
Net loans $ 268,191 $ 252,464 $ 215,989 $ 201,978 $ 139,563
=====================================================================
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 and land
development loans outstanding as of December 31, 2007. 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 $ 938 $14,240 $59,274
Real estate-construction and land development 28,484 444 0
-----------------------------------------------
$29,422 $14,684 $59,274
===============================================
Maturities after one year with:
Fixed interest rates $ 6,218 $10,478
Variable interest rates 8,466 48,796
-----------------------------
$14,684 $59,274
=============================
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,
-----------------------
2007 2006 2005
---- ---- ----
Return on average total assets
(net income divided by average total assets) .85% 1.02% 1.12%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 8.50% 9.83% 10.81%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 47.79% 41.11% 36.90%
Equity to assets ratio
(average shareholders' equity divided by
average total assets) 9.94% 10.37% 10.38%
8
Nonaccrual, Past Due and Restructured Loans
At December 31, 2007, there were eleven (11) nonaccrual loans in the Bank's
portfolio, ten 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
2007 2006 2005 2004 2003
---------------------------------------------------------------------
Nonaccrual $ 1,008 $ 886 $ 694 $ 1,739 $ 75
90 days or more past due 816 78 79 528 535
---------------------------------------------------------------------
Total nonperforming loans $ 1,824 $ 964 $ 773 $ 2,267 $ 610
=====================================================================
Total nonperforming loans as per-
centage of the loan portfolio 0.67% 0.38% 0.35% 1.11% 0.43%
Allowance for loan losses as a per-
centage of nonperforming loans 135.69% 256.64% 339.72% 110.81% 272.79%
Information with respect to nonaccrual and restructured loans
at December 31, 2007, 2006 and 2005 is as follows:
(dollars in thousands) Year Ended December 31
2007 2006 2005
----------------------------------
Interest income that would have been recorded under original terms $ 77 $ 66 $ 157
Less gross interest recorded 48 37 133
----------------------------------
Foregone interest $ 29 $ 29 $ 24
==================================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2007 2006 2005 2004 2003
----------------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 2,474 $ 2,626 $2,512 $1,664 $1,458
Charge-offs:
Commercial, financial and
agricultural 20 25 7 0 71
Consumer 83 107 128 70 84
----------------------------------------------------------
Total charge-offs 103 132 135 70 155
----------------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 55 6 0 0 25
Consumer 49 61 39 28 24
----------------------------------------------------------
Total recoveries 104 67 39 28 49
----------------------------------------------------------
Net charge-offs (1) 65 96 42 106
(Benefit) provision charged to
operations 0 (87) 210 250 312
Balance acquired from CNB 0 0 0 640 0
----------------------------------------------------------
Balance at end of year $ 2,475 $ 2,474 $2,626 $2,512 $1,664
==========================================================
Ratio of net charge-offs
to average loans outstanding .00% .02% .05% .03% .07%
Ratio of allowance for loan losses
to year end loans .92% .97% 1.20% 1.23% 1.18%
9
Allocation of the Allowance for Loan Losses; Percentage of loans by type to
total loans*
(dollars in thousands)
December 31
2007 2006 2005 2004 2003
Amount Percent* Amount Percent* Amount Percent* Amount Percent* Amount Percent*
Commercial, financial and
agricultural $ 505 7.63% $ 342 6.46% $ 495 7.02% $ 613 7.40% $ 441 6.47%
Real estate construction
and land development 118 10.70% 85 8.31% 95 8.61% 83 6.99% 112 10.82%
Real estate mortgage 1,615 78.57% 1,832 77.03% 1,761 80.74% 1,614 81.12% 749 77.94%
Consumer 201 2.96% 173 3.46% 247 3.61% 198 4.46% 357 4.72%
Term Federal Funds 0 0% 0 4.71% 0 0 0
Other loans 36 .14% 42 .03% 28 .02% 4 .03% 5 .05%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,475 100.00% $2,474 100.00% $2,626 100.00% $2,512 100.00% $1,664 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Provisions to the allowance for loan losses are charged to operating expenses
and are based on past experience, current economic conditions and management's
judgment 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
2007 2006 2005
---------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.74% 4.97% 4.90%
For the year 4.30% 5.00% 4.69%
Average amount outstanding during the year $87,649 $71,471 $67,793
Maximum amount outstanding at any month $95,143 $90,403 $75,536
Amount outstanding at year end $95,011 $83,093 $71,016
ITEM 1A. RISK FACTORS - Not Applicable
ITEM 1B. UNRESOLVED STAFF COMMENTS - Not Applicable
ITEM 2. PROPERTIES
The Bank serves its customers from its seven (7) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut, Sheffield and South
Egremont, Massachusetts and Dover Plains, New York. The Bank's trust and wealth
advisory services division is located in a separate building adjacent to the
main office of the Bank in Lakeville, Connecticut.
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 a branch office at 5 Dover Village Plaza, Dover Plains, New
York. 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 Wealth Advisory 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
10
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 2007 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.
2007 Quarters 2006 Quarters
--------------------------------------- ---------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------------- ---------------------------------------
Range of Stock prices:
High $34.95 $34.10 $36.90 $38.50 $39.25 $39.70 $39.50 $38.25
Low $30.75 $31.00 $32.30 $34.70 $37.50 $37.50 $35.50 $36.50
Holders
There were approximately 780 holders of record of the common stock of the
Company as of March 14, 2008. 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 practice in the future. During the year 2007, the Company declared a
cash dividend each quarter of $.27 per share. Dividends declared for the year
2007 totaled $1.08 per share which compared to total dividends of $1.04 that
were declared in the year 2006. At their February 29, 2008 meeting, the
Directors of the Company declared a cash dividend of $.28 per share for the
first quarter of 2008. The dividend will be paid on April 30, 2008 to
shareholders of record as of March 31, 2008. 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:
2007 Quarters 2006 Quarters
--------------------------------------------- -------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------------------- -------------------------------------------
Cash dividends
declared $0.27 $0.27 $0.27 $0.27 $0.26 $0.26 $0.26 $0.26
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.
Equity Compensation Plan Information
The information required by this item pursuant to Item 201(d) of Regulation S-K
regarding securities authorized for issuance under equity compensation plans (as
of December 31, 2007) is contained in, and incorporated by reference to, the
Company's Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on May 14, 2008 under the Section "Equity Compensation Plan
Information".
11
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 16, 2007, 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 14, 2008, and will be in the amount of 120 shares per
director. All such issuances are exempt from registration under the Securities
Act of 1933, as amended pursuant to Section 4(2), as they are transactions by a
company not involving any public offering.
ITEM 6. SELECTED FINANCIAL DATA - Not Applicable
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS Salisbury Bancorp, Inc.
OF FINANCIAL CONDITION AND RESULTS OF OPERATION and Subsidiary
Salisbury Bancorp, Inc. (the "Company"), a Connecticut corporation, formed in
1998, is the holding company for Salisbury Bank and Trust Company, (the "Bank").
The Company's sole subsidiary is the Bank, formed in 1848 which has seven (7)
full service offices located in the towns of North Canaan, Lakeville, Salisbury
and Sharon, Connecticut, South Egremont and Sheffield, Massachusetts, and Dover
Plains, New York. A full Trust and Investment Services Division is also located
in Lakeville, Connecticut. The Management's Discussion and Analysis of Results
of Operations and Financial Condition that follows presents Management's
comments on the consolidated operating results of the Company. In order to
provide a foundation for building shareholder value and servicing customers, the
Company remains committed to investing in the technological and human resources
necessary for developing and delivering new personalized financial products and
services in order to better serve both current and future customers in the
tri-state area. The following discussion should be read in conjunction with the
Company's consolidated financial statements and the notes to the consolidated
financial statements that are presented as part of this Annual Report on Form
10-K.
Forward Looking Statements
--------------------------
This Annual Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and the Bank, may include forward-looking
statements relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact the Company and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances; and
(e) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
12
Critical Accounting Estimates
-----------------------------
In preparing the Company's financial statements, management selects and applies
numerous accounting policies. In applying these policies, management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on a determination of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of future loan losses, relating to both the specific characteristics
of the loan portfolio and general economic conditions nationally and locally.
While management carefully considers these factors in determining the amount of
the allowance for loan losses, future adjustments may be necessary due to
changed conditions, which could have an adverse impact on reported earnings in
the future. (See "Provisions and Allowance for Loan Losses".)
RESULTS OF OPERATION
--------------------
Comparison of the Years Ended December 31, 2007 and 2006
--------------------------------------------------------
Overview
--------
The reported earnings for the Company totaled $3,800,000 in 2007, which yielded
earnings per average share outstanding of $2.26. This compares to earnings of
$4,254,000 or $2.53 per average share outstanding in 2006. The decrease in
earnings is primarily attributable to an increase in noninterest expense due to
additional staff to support new marketing strategies, growth, and expansion into
New York State. The Company's assets at December 31, 2007 totaled $461,960,000
compared to total assets of $450,340,000 at December 31, 2006. New business
development efforts have resulted in the growth of net loans outstanding, which
totaled $268,191,000 at December 31, 2007. This compares to net loans
outstanding of $252,464,000 at December 31, 2006, and represents an increase of
$15,727,000 or 6.23%. This growth was funded by an increase in deposits as well
as an increase in advances from the Federal Home Loan Bank of Boston. Deposits
at December 31, 2007 totaled $317,741,000 and compared to total deposits of
$313,586,000 at December 31, 2006. Advances from the Federal Home Loan Bank
totaled $95,011,000 at December 31, 2007, which compared to advances totaling
$87,093,000 at December 31, 2006. The Bank continues to monitor the quality of
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Nonperforming loans totaled
$1,824,000 at December 31, 2007 as compared to nonperforming loans totaling
$964,000 at December 31, 2006. While the level of nonperforming loans increased,
such loans represent less than one percent (1%) of total loans outstanding.
Accordingly, while the overall quality of the loan portfolio remains high,
management continues to monitor the portfolio for trends in light of current
economic conditions.
The Bank is "well capitalized". The Bank's risk-based capital ratios at December
31, 2007 were 13.74% for Tier 1 risk based capital and 14.69% for total risk
based capital. The Bank's leverage ratio was 8.06% at December 31, 2007. This
compares to a Tier 1 risk based capital ratio at December 31, 2006 of 13.97%, a
total risk based capital ratio of 14.98% and a leverage ratio of 8.26%. As a
result of the Company's financial performance, the Board of Directors increased
total dividends declared on the Company's common stock to $1.08 per share in
2007. This compares to a $1.04 per share dividend declared in 2006.
Net Interest and Dividend Income
--------------------------------
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors and
borrows funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.
13
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest-earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on an FTE basis. FTE interest income restates reported
interest income on tax exempt loans and securities as if such interest were
taxed at the applicable State and Federal income tax rates for all periods
presented.
(dollars in thousands) December 31,
2007 2006
--------------------------
Interest and Dividend Income
(financial statements) $ 26,152 $ 23,730
Tax Equivalent Adjustment 1,202 1,072
-------- --------
Total Interest and Dividend
Income (on an FTE basis) 27,354 24,802
Interest Expense (12,432) (10,459)
-------- --------
Net Interest and Dividend Income-FTE $ 14,922 $ 14,343
======== ========
The Company's 2007 total interest and dividend income on an FTE basis for the
period ended December 31, 2007 increased $2,552,000 or 10.29% when compared to
the same period in 2006. The increase is primarily attributable to an increase
in earning assets as well an economic environment experiencing an increase in
interest rates.
Interest expense on deposits in 2007 increased $1,314,000 or 19.09% to
$8,200,000 compared to $6,886,000 for the corresponding period in 2006. The
increase is primarily attributable to generally higher interest rates during the
period as well as an increase in interest bearing deposits. Interest expense for
Federal Home Loan Bank advances increased $659,000 to $4,232,000 in 2007
compared to $3,573,000 in 2006. The increase was the result of an increase in
advances during the year. Competition remains aggressive and interest margins
continue to be pressured, however, net interest and dividend income on an FTE
basis increased $579,000 or 4.04% over 2006 and totaled $14,922,000 for the year
ended December 31, 2007 and compared to net interest and dividend income on an
FTE basis of $14,343,000 for the year ended December 31, 2006.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, the Company must manage the relationship between
interest earned and paid. The Company's 2007 net interest margin on an FTE basis
was 3.54%. This compares to a net interest margin of 3.67% for 2006. The
following table reflects average balances, interest earned or paid and rates for
the two years ended December 31, 2007 and 2006. The average loan balances
include non-accrual loans and loans currently past due 90 days and still
accruing. Interest earned on loans also includes fees on loans such as late
charges that are not deemed to be material. Interest earned on tax exempt
securities in the table is presented on an FTE basis. A federal tax rate of 34%
was used in performing these calculations. Actual tax exempt income earned in
2007 was $2,332,000 with a yield of 4.28%. Actual tax exempt income in 2006
totaled $2,080,000 with a yield of 4.41%.
14
YIELD ANALYSIS
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
(dollars in thousands) 2007 2006
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-Earning Assets:
Loans $ 258,714 $17,969 6.95% $ 229,704 $15,687 6.83%
Taxable Securities 106,775 5,783 5.42% 111,635 5,883 5.27%
Tax-Exempt Securities* 54,541 3,533 6.48% 47,215 3,152 6.68%
Federal Funds 643 31 4.82% 1,154 56 4.85%
Other Interest-Earning 1,071 38 3.55% 703 24 3.41%
---------------------- ----------------------
Total Interest-Earning
Assets 421,744 27,354 6.49% 390,411 24,802 6.35%
------- -------
Allowance for Loan
Losses (2,467) (2,603)
Cash & Due From
Banks 6,554 6,949
Premises, Equipment 6,645 6,388
Net unrealized loss
on AFS Securities (3,468) (4,106)
Other Assets 20,619 20,348
--------- ---------
Total Average Assets $ 449,627 $ 417,387
========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Interest-Bearing
Liabilities:
NOW/Money Market
Deposits $ 80,180 1,854 2.31% $ 79,356 1,812 2.28%
Savings Deposits 47,063 814 1.73% 48,882 640 1.31%
Time Deposits 119,052 5,532 4.65% 106,395 4,434 4.17%
Borrowed Funds 87,649 4,232 4.83% 71,471 3,573 5.00%
---------------------- ----------------------
Total Interest-Bearing
Liabilities 333,944 12,432 3.72% 306,104 10,459 3.42%
------- -------
Demand Deposits 66,304 65,151
Other Liabilities 4,673 2,842
Shareholders' Equity 44,706 43,290
--------- ---------
Total Liabilities and
Shareholders' Equity $ 449,627 $ 417,387
========= =========
Net Interest Income $14,922 $14,343
======= =======
Net Interest Spread 2.77% 2.93%
Net Interest Margin 3.54% 3.67%
* Presented on a fully taxable equivalent ("FTE") basis
15
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2007 over 2006 2006 over 2005
--------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
--------------------------------- ---------------------------------
Increase (decrease) in:
Interest and dividend income on:
Loans $ 1,981 $ 301 $ 2,282 $ 1,335 $ 1,032 $ 2,367
Taxable investment securities (256) 156 (100) (50) 836 786
Tax-exempt investment securities 489 (108) 381 (351) (26) (377)
Other interest earning (1) (10) (11) (26) 36
------- ------- ------- ------- ------- -------
10
Total interest and dividend income $ 2,213 $ 339 $ 2,552 $ 908 $ 1,878 $ 2,786
------- ------- ------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ 18 $ 24 $ 42 $ (34) $ 617 $ 583
Savings deposits (24) 198 174 (81) 265 184
Time deposits 528 570 1,098 561 1,387 1,948
Borrowed funds 808 (149) 659 172 220 392
------- ------- ------- ------- ------- -------
Total interest expense $ 1,330 $ 643 $ 1,973 $ 618 $ 2,489 $ 3,107
------- ------- ------- ------- ------- -------
Net interest and dividend income $ 883 $ (304) $ 579 $ 290 $ (611) $ (321)
======= ======= ======= ======= ======= =======
Noninterest Income
------------------
Noninterest income totaled $4,465,000 for the year ended December 31, 2007 and
compared to $4,583,000 for the year ended December 31, 2006. This is a decrease
of $118,000 or 2.57%. Gains on sales of available-for-sale securities, net
decreased $222,000 or 42.94%. This decrease is primarily the result of movement
in market rates during the year, which limited opportunities to generate gains
on sales of available-for-sale securities. Trust and investment services income
increased $70,000 to $2,050,000 primarily as a result of the efforts of new
business development, which has increased assets under management. Service
charges on deposit accounts totaled $744,000 for 2007. This is an increase of
$37,000 or 5.23% when compared to total service charges of $707,000 in 2006. The
increase can be attributed to an increase in the number of deposit accounts.
Mortgage refinancing remained active during 2007 resulting in revenues from
gains on sales of loans that totaled $317,000, which compares to revenues
totaling $358,000 for the corresponding period in 2006. Competition in the
secondary mortgage market continues to be very aggressive. Other income during
fiscal 2007 totaled $1,037,000. This compares to other income of $902,000 for
2006 and represents an increase of $135,000 or 14.97%. This category of income
primarily consists of fees associated with transaction accounts and fees related
to the origination and servicing of mortgage loans as well as gains reflecting
the sale of mortgage loans.
Noninterest Expense
-------------------
Overall, noninterest expense increased 10.36% for the year ended December 31,
2007 as compared to the corresponding period in 2006. Professional fees which
are included in noninterest expenses increased $225,000 or 31.87%. This increase
is primarily attributable to the Company's trust and investment services
division's working partnership with Bradley Foster and Sargent, Inc., an
independent investment advisory firm which assists in providing a broader scope
of highly personalized professional investment services to clients. In addition,
internal audit expense increased, which is the result of additional services
required due to compliance requirements of the Sarbanes-Oxley Act. Although some
increases in the described noninterest expenses in the table below are
attributable to normal volumes of business, the largest contribution to the
increases in noninterest expense, including other expense, reflect non-recurring
expenses associated with the Bank's entry into New York State. A branch office
was established in Dover Plains, New York, which opened its doors for business
on August 1, 2007.
The components of noninterest expense and the changes in the period were as
follows (amounts in thousands):
2007 2006 $ Change % Change
---------------------------------------------------------------------------------------
Salaries and employee benefits $ 7,724 $ 7,151 $ 573 8.01%
Occupancy expense 802 752 50 6.65
Equipment expense 819 787 32 4.07
Data processing 1,194 1,134 60 5.29
Insurance 163 154 9 5.84
Printing and stationery 280 240 40 16.67
Professional fees 931 706 225 31.87
Amortization of core deposit intangible 164 164 0 .00
Other expense 1,437 1,157 280 24.20
------- ------- -------
Total noninterest expense $13,514 $12,245 $ 1,269 10.36
======= ======= =======
16
Income Taxes
------------
In 2007, the Company's income tax provision totaled $870,000 which reflects an
effective tax rate of 18.63%. This compares to an income tax provision of
$1,442,000 and an effective tax rate of 25.32% for the same period in 2006. This
decrease is primarily attributable to a decrease in taxable income.
Net Income
----------
Overall, net income totaled $3,800,000 for the year ended December 31, 2007 and
represents earnings per average share outstanding of $2.26. This compares to net
income of $4,254,000 for the year ended December 31, 2006, which reflects
earnings per average share outstanding of $2.53.
FINANCIAL CONDITION
Comparison of December 31, 2007 and 2006
----------------------------------------
Total assets at December 31, 2007 were $461,960,000 compared to $450,340,000 at
December 31, 2006. This is an increase of 2.58%. The increase is primarily the
result of an increase in earning assets that were funded by an increase in
deposits and advances from the Federal Home Loan Bank of Boston.
Securities Portfolio
--------------------
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2007, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $152,624,000. This represents a decrease
of $8,607,000 or 5.34% over year-end 2006. This decrease reflects a change in
asset mix as securities portfolio assets were used to fund the growth in loan
demand during the year.
Securities are classified in the portfolio as either
securities-available-for-sale or securities-held-to-maturity. Securities for
which the Company has the ability and positive intent to hold until maturity are
reported as held-to-maturity. These securities are carried at cost adjusted for
amortization of premiums and accretion of discounts. Securities that are held
for indefinite periods of time and which management intends to use as part of
its asset/liability management strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk, increases in capital
requirements or other similar factors, are classified as available-for-sale.
These securities are stated at fair value in the financial statements of the
Company. Temporary differences between available-for-sale securities' amortized
cost and fair market value (accumulated other comprehensive income or loss when
net of tax) are not included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized. The cost basis
of individual securities is written down to estimated fair value through a
charge to earnings when decreases in value below amortized cost are considered
to be other than temporary. At December 31, 2007, the unrealized holding losses
on available-for-sale securities, net of taxes was $2,273,000. This compares to
an unrealized loss net of taxes of $1,190,000 at December 31, 2006. The Company
monitors the market value fluctuations of its securities portfolio on a monthly
basis as well as associated credit ratings to determine potential impairment of
a security.
Federal Funds Sold
------------------
Federal funds sold at December 31, 2007 totaled $300,000. Federal funds sold at
December 31, 2006 totaled $1,000,000. This variance represents a normal
operating range of funds for daily cash needs.
Lending
-------
New business development during the year coupled with an increase in loan demand
resulted in an increase in net loans outstanding to $268,191,000 at December 31,
2007, as compared to $252,464,000 at December 31, 2006. This is an increase of
$15,727,000 or 6.23%. Although the largest dollar volumes of loan activity
continue to be in the residential mortgage area, the Company offers a wide
variety of loan types and terms along with competitive pricing to customers. At
December 31, 2006, the portfolio also 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.
17
The following table represents the composition of the loan portfolio comparing
December 31, 2007 to December 31, 2006:
December 31, 2007 December 31, 2006
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 20,629 $ 16,465
Real Estate-construction and land development 28,928 21,169
Real Estate-residential 158,600 145,395
Real Estate-commercial 53,823 50,859
Consumer 8,005 8,816
Term federal funds 0 12,000
Other 376 69
270,361 254,773
Deferred costs, net 306 168
Unearned income (1) (3)
Allowance for loan losses (2,475) (2,474)
--------- ---------
Net loans $ 268,191 $ 252,464
========= =========
Provisions and Allowance for Loan Losses
----------------------------------------
Total loans outstanding as of December 31, 2007 were $270,361,000 and compares
to total loans outstanding of $254,773,000 at December 31, 2006. This growth can
be attributed primarily to an increase in both residential and commercial real
estate loan demand as well as the Bank's new business development program.
Approximately 90% of the Company's loan portfolio continues to be real estate
secured.
Credit risk is inherent in the business of extending loans. The Company monitors
the loan portfolio to ensure that loan quality will not be sacrificed for growth
or otherwise compromise the Company's objectives. Because of the risk associated
with extending loans, the Company maintains an allowance or reserve for loan and
lease losses through charges to earnings. The Company evaluates the adequacy of
the allowance on a monthly basis. Such evaluations are based on assessments of
credit quality and trends within the portfolio and "risk rating" of loans by
senior management, which is reviewed by the Company's Loan Committee on a
regular basis. Loans are initially risk rated when originated. If there is
deterioration in the credit quality, the risk rating is adjusted accordingly.
The Allowance for Loan and Lease Losses (ALLL) at December 31, 2007 totaled
$2,475,000 representing 135.69% of nonperforming loans of $1,824,000 and .92% of
total loans outstanding of $270,361,000. This compares to an ALLL of $2,474,000
which is 256.64% of nonperforming loans of $964,000 and .97% of total loans
outstanding of $254,773,000 at December 31, 2006. A separate component that is
evaluated is the Allowance for Off Balance Sheet Commitments, which totaled
$34,000 as of December 31, 2007. The December 31, 2006 allowance for off balance
sheet commitments was $36,000. A total of $103,000 in loans were charged-off
during 2007 compared to $132,000 during 2006. Recoveries of previously
charged-off loans totaled $104,000 during 2007 compared to $67,000 in recoveries
for 2006. The allowance also includes a component resulting from the application
of the measurement criteria of Statements of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"). Impaired
loans receive individual evaluation of the allowance necessary on a monthly
basis. Loans to be considered for impairment are defined in the Company's Loan
Policy as commercial loans with balances outstanding of $100,000 or more and
residential real estate mortgages with balances of $300,000 or more. Such loans
are considered impaired when it is probable that the Company will not be able to
collect all principal and interest due according to the terms of the note.
Any such commercial loan and/or residential mortgage will be considered for
impairment under any of the following circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994;
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
as part of the periodic analysis of the Allowance for Loan and Lease Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
balances as well as recent delinquent percentage trends.
18
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical averages of net losses by loan types
are examined as well as trends by type. The Bank's loan mix over the same period
of time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor.
While management estimates loan losses using the best available information, no
assurances can be given that future additions to the allowance will not be
necessary based on changes in economic and real estate market conditions,
identification of additional problem loans or other factors. Additionally,
despite the excellent overall quality of the loan portfolio and expectations of
the Company to continue to grow its existing portfolio, future additions to the
allowance may be necessary to maintain adequate reserve coverage. Overall,
management is of the opinion that the ALLL is adequate as of December 31, 2007.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2007 totaled $317,741,000 compared to
$313,586,000 at year-end 2006. The Company continues its efforts to
competitively price products and develop and maintain relationship banking with
its customers. The flow of deposits is influenced significantly by general
economic conditions, changes in money market rates, prevailing interest rates
and the aggressive competition from nonbanking entities.
During 2007, there was a change in the mix of deposits. Demand, NOW and savings
balances, which are lower cost core deposits, decreased and were replaced
primarily by time deposits, which, as illustrated by the table below, results in
a significant increase in interest expense.
The average daily amount of deposits by category and the average rates paid on
such deposits are summarized in the following table:
(dollars in thousands) Year ended December 31
2007 2006
-----------------------------------------------------
Average Average
Balance Rate Balance Rate
-----------------------------------------------------
Demand $ 66,304 $ 65,151
NOW 24,822 .26% 25,090 .26%
Money Market 55,358 3.23% 54,266 3.22%
Savings 47,063 1.73% 48,882 1.31%
Time 119,052 4.65% 106,395 4.17%
---------- ----------
$ 312,599 2.62% $ 299,784 2.29%
========== ==========
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31 are summarized as follows:
(dollars in thousands) December 31
2007 2006
-------------------
Three months or less $ 7,603 $12,045
Over three months through six months 17,429 8,946
Over six months through one year 15,114 24,791
Over one year 10,975 9,533
------- -------
Total $51,121 $55,315
======= =======
Borrowings
----------
As part of its operating strategy, the Company utilizes advances from the
Federal Home Loan Bank to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At December 31, 2007, the Company had $95,011,000 in
outstanding advances from the Federal Home Loan Bank compared to $87,093,000 at
December 31, 2006. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston. (See Note 7 to the Financial Statements.)
19
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 the Company earns on its assets and the rates it pays on its
liabilities are generally fixed for a contractual period of time. Imbalance in
these contractual maturities can create significant earnings volatility because
market interest rates change over time. In a period of rising interest rates,
the interest income earned on assets may not increase as rapidly as the interest
paid on liabilities. In a period of declining interest rates the interest income
earned on assets may decrease more rapidly than the interest paid on
liabilities. This would primarily be attributed to accelerated prepayments on
loans and securities that are significantly influenced by movements in market
rates.
The net interest margin may be adversely affected by several possible interest
rate environments. Foremost, a continued flat or inverted yield curve may result
in shorter term market interest rates that equal or exceed those of longer term
rates. This could further increase the Bank's cost of interest-bearing
liabilities that continue to outpace its yield on earning assets resulting in
additional net interest rate spread compression.
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston, which provides a source of available
borrowings for liquidity.
At December 31, 2007, the Company had approximately $59,318,000 in loan
commitments outstanding. Management believes that the current level of liquidity
is ample to meet the Company's needs for both the present and foreseeable
future.
Capital
-------
At December 31, 2007, the Company had $45,564,000 in shareholders' equity
compared to $44,349,000 at December 31, 2006. This represents an increase of
$1,215,000 or 2.74%. Several components contributed to the change since December
2006. Earnings for the year totaled $3,800,000. Securities in the portfolio that
are classified as available-for-sale are adjusted to fair value monthly and the
unrealized losses or gains are not included in earnings, but are reported as a
net amount (less expected tax) as a separate component of capital until
realized. Market fluctuations of fair value of the securities portfolio during
2007 resulted in other comprehensive loss net of tax totaling $1,082,000. The
initial application of SFAS No. 158, as described in Note 2 to the Financial
Statements, resulted in other comprehensive income, net of tax of $286,000 in
2007. The Company declared dividends in 2007 resulting in a decrease in capital
of $1,820,000. The Company issued 840 new shares of common stock under the terms
of the Director Stock Retainer Plan during the second quarter of 2007, which
resulted in an increase in capital of $30,000.
Under current regulatory definitions, the Bank is considered to be "well
capitalized" for capital adequacy purposes. As a result, the Bank pays the
lowest federal deposit insurance deposit premiums possible. One primary measure
of capital adequacy for regulatory purposes is based on the ratio of risk-based
capital to risk weighted assets. This method of measuring capital adequacy helps
to establish capital requirements that are sensitive to the differences in risk
associated with various assets. It
20
takes into account off-balance sheet exposure in assessing capital adequacy and
it minimizes disincentives to holding liquid, low risk assets. At year-end 2007,
the Bank had a total risk-based capital ratio of 14.69% compared to 14.98% at
December 31, 2006. Maintaining strong capital is essential to bank safety and
soundness. However, the effective management of capital resources requires
generating attractive returns on equity to build value for shareholders while
maintaining appropriate levels of capital to fund growth, meet regulatory
requirements and be consistent with prudent industry practices. Management
believes that the capital ratios of the Company and Bank are adequate to
continue to meet the foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America which
require the measurement of financial condition and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money, over time, due to inflation. Unlike most industrial companies,
virtually all of the assets and liabilities of the Company are monetary and as a
result, interest rates tend to have a greater impact on the Company's
performance than do the effects of general levels of inflation. Although
interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services, inflation could impact earnings
in future periods.
Off-Balance Sheet Arrangements
------------------------------
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. In the
opinion of management, these off-balance sheet arrangements are not likely to
have a material effect on the Company's financial condition, results of
operations, or liquidity. (See Note 11 to the Financial Statements).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -
---------------------------------------------------------------------
Not Applicable.
---------------
Statement of Management's Responsibility
----------------------------------------
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization structure
providing for delegation of authority and establishment or responsibilities;
communication of requirements for compliance with approved accounting, control
and business practices throughout the organization; business planning and
review; and a program of internal audit. Management believes the internal
accounting controls in use provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and that financial records are reliable for the purpose of
preparing financial statements. Shatswell, MacLeod and Company, P.C. has been
engaged to provide an independent opinion on the fairness of the consolidated
financial statements. Their report appears in this Annual Report on Form 10-K.
Management's Report on Internal Control Over Financial Reporting
----------------------------------------------------------------
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control process
has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007, utilizing the
framework established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has determined that the Company's internal
control over financial reporting as of December 31, 2007 is effective.
Our internal control over financial reporting includes policies and procedures
that (1) pertain to the maintenance of records that accurately and fairly
reflect, in reasonable detail, the transactions and dispositions of assets of
the Company; (2) provide reasonable assurances that: (a) transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America and (b) receipts and expenditures are being made only in accordance with
authorizations of management and the directors of the Company; and (3) provide
reasonable assurance regarding the prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets that could
have a material effect on the Company's financial statements.
21
This Annual Report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the SEC that
permit the Company to provide only management's report in this Annual Report.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ John F. Perotti /s/ Richard J. Cantele, Jr. /s John F. Foley
------------------- --------------------------- ---------------------------
John F. Perotti Richard J. Cantele, Jr. John F. Foley
Chairman & CEO President & COO CFO, Treasurer & Secretary
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
------------------------------------------
Report of Independent Registered Public
Accounting Firm, February 29, 2008....................................... F-1
Consolidated Balance Sheets at December 31, 2007 and 2006.................. F-2
Consolidated Statements of Income for the Years Ended
December 31, 2007 and 2006................................................ F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2007 and 2006............................ F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007 and 2006................................................ F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2007 and 2006.................................... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 2007 and 2006.............................. F-26
Statements of Income for the Years Ended
December 31, 2007 and 2006.............................................. F-27
Statements of Cash Flows for the Years Ended
December 31, 2007 and 2006.............................................. F-27
Quarterly Results of Operations (unaudited)............................... F-28
23
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows of the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
February 21, 2008
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2007 and 2006
--------------------------
ASSETS 2007 2006
------ ------------- -------------
Cash and due from banks $ 12,810,681 $ 8,988,609
Interest-bearing demand deposits with other banks 726,623 568,693
Money market mutual funds 1,340,891 1,199,881
Federal Funds sold 300,000 1,000,000
------------- -------------
Cash and cash equivalents 15,178,195 11,757,183
Investments in available-for-sale securities (at fair value) 147,377,154 156,492,547
Investments in held-to-maturity securities (fair values of $71,435 and $74,818
as of December 31, 2007 and 2006, respectively) 70,798 74,931
Federal Home Loan Bank stock, at cost 5,176,100 4,663,700
Loan held-for-sale 120,000 304,000
Loans, less allowance for loan losses of $2,474,893 and $2,474,118 as of
December 31, 2007 and 2006, respectively 268,191,275 252,464,430
Investment in real estate 75,000 75,000
Premises and equipment 6,803,198 6,135,546
Goodwill 9,828,712 9,509,305
Core deposit intangible 1,329,283 1,493,499
Accrued interest receivable 2,538,607 2,483,547
Cash surrender value of life insurance policies 3,688,021 3,554,995
Other assets 1,584,055 1,330,987
------------- -------------
Total assets $ 461,960,398 $ 450,339,670
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing $ 69,214,697 $ 70,502,249
Interest-bearing 248,526,572 243,084,032
------------- -------------
Total deposits 317,741,269 313,586,281
Federal Home Loan Bank advances 95,011,155 87,093,402
Due to broker 0 1,579,611
Other liabilities 3,644,376 3,731,195
------------- -------------
Total liabilities 416,396,800 405,990,489
------------- -------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding, 1,685,021 shares in 2007
and 1,684,181 shares in 2006 168,502 168,418
Paid-in capital 13,130,247 13,099,881
Retained earnings 35,583,443 33,602,991
Accumulated other comprehensive loss (3,318,594) (2,522,109)
------------- -------------
Total shareholders' equity 45,563,598 44,349,181
------------- -------------
Total liabilities and shareholders' equity $ 461,960,398 $ 450,339,670
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 17,968,801 $ 15,686,978
Interest on debt securities:
Taxable 5,457,879 5,604,866
Tax-exempt 2,332,374 2,079,981
Dividends on equity securities 324,329 277,356
Other interest 68,762 80,412
------------ ------------
Total interest and dividend income 26,152,145 23,729,593
------------ ------------
Interest expense:
Interest on deposits 8,200,214 6,885,893
Interest on Federal Home Loan Bank advances 4,232,221 3,573,052
------------ ------------
Total interest expense 12,432,435 10,458,945
------------ ------------
Net interest and dividend income 13,719,710 13,270,648
Benefit for loan losses 0 (87,488)
------------ ------------
Net interest and dividend income after benefit
for loan losses 13,719,710 13,358,136
------------ ------------
Noninterest income:
Trust department income 2,050,000 1,980,500
Loan commissions 22,131 117,298
Service charges on deposit accounts 743,901 707,431
Gain on sales of available-for-sale securities, net 294,984 517,326
Gain on sales of loans held-for-sale 316,736 357,628
Other income 1,036,911 902,394
------------ ------------
Total noninterest income 4,464,663 4,582,577
------------ ------------
Noninterest expense:
Salaries and employee benefits 7,723,691 7,150,746
Occupancy expense 801,558 751,670
Equipment expense 819,474 786,637
Data processing 1,193,887 1,134,078
Insurance 163,024 154,562
Printing and stationery 280,172 239,617
Professional fees 931,352 706,100
Amortization of core deposit intangible 164,216 164,216
Other expense 1,436,945 1,157,534
------------ ------------
Total noninterest expense 13,514,319 12,245,160
------------ ------------
Income before income taxes 4,670,054 5,695,553
Income taxes 870,006 1,441,935
------------ ------------
Net income $ 3,800,048 $ 4,253,618
============ ============
Earnings per common share $ 2.26 $ 2.53
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings Loss Total
---------- ----------- ----------- ----------- ------------- -----------
Balance, December 31, 2005 1,683,341 $ 168,334 $13,068,045 $31,100,702 $(2,894,758) $41,442,323
Comprehensive income:
Net income 4,253,618
Other comprehensive income, net of tax
effect 1,410,531
Comprehensive income 5,664,149
Adjustment to initially apply SFAS No. 158,
net of tax effect (1,037,882) (1,037,882)
Issuance of 840 shares for Directors' fees 840 84 31,836 31,920
Dividends declared ($1.04 per share) (1,751,329) (1,751,329)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2006 1,684,181 168,418 13,099,881 33,602,991 (2,522,109) 44,349,181
Comprehensive income:
Net income 3,800,048
Other comprehensive loss, net of tax
effect (796,485)
Comprehensive income 3,003,563
Issuance of 840 shares for Directors' fees 840 84 30,366 30,450
Dividends declared ($1.08 per share) (1,819,596) (1,819,596)
---------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 1,685,021 $ 168,502 $13,130,247 $35,583,443 $(3,318,594) $45,563,598
========== =========== =========== =========== =========== ===========
Reclassification disclosure for the years ended December 31:
2007 2006
----------- -----------
Unrealized holding (losses) gains on available-for-sale securities
Net unrealized holding (losses) gains on available-for-sale securities $(1,344,871) $ 2,654,494
Reclassification adjustment for net realized gains in net income (294,984) (517,326)
----------- -----------
(1,639,855) 2,137,168
Income tax benefit (expense) 557,551 (726,637)
----------- -----------
Unrealized holding (losses) gains on available-for-sale securities, net of tax (1,082,304) 1,410,531
----------- -----------
Comprehensive income - defined benefit pension plan 433,058 0
Income tax expense (147,239) 0
----------- -----------
Comprehensive income - defined benefit pension plan, net of tax 285,819 0
----------- -----------
Other comprehensive (loss) income, net of tax $ (796,485) $ 1,410,531
=========== ===========
Accumulated other comprehensive loss consists of the following as of December
31:
2007 2006
----------- -----------
Net unrealized holding losses on available-for-sale securities, net of taxes $(2,272,627) $(1,190,323)
Unrecognized pension plan expense - SFAS No. 158, net of taxes (1,045,967) (1,331,786)
----------- -----------
Accumulated other comprehensive loss $(3,318,594) $(2,522,109)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
------------ ------------
Cash flows from operating activities:
Net income $ 3,800,048 $ 4,253,618
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 75,014 34,953
Gain on sales of available-for-sale securities, net (294,984) (517,326)
Benefit for loan losses 0 (87,488)
Change in loans held-for-sale 184,000 (304,000)
Change in deferred loan costs, net (137,362) (168,573)
Change in unearned income on loans (2,528) (4,913)
Net decrease in mortgage servicing rights 110,515 78,715
Depreciation and amortization 565,267 538,449
Amortization of core deposit intangible 164,216 164,216
Amortization of fair value adjustment on loans 71,357 112,712
Accretion of fair value adjustments on deposits and borrowings (130,203) (134,217)
Increase in interest receivable (64,671) (111,012)
Deferred tax provision 34,785 396,418
Increase in prepaid expenses (4,594) (1,031,510)
Increase in cash surrender value of insurance policies (133,026) (130,809)
Decrease in income tax receivable 89,869 181,005
Decrease (increase) in other assets 90,673 (91,796)
Increase (decrease) in accrued expenses 102,293 (243,196)
Increase in interest payable 6,794 257,975
Increase (decrease) in other liabilities 216,509 (57,050)
Issuance of shares for Directors' fees 30,450 31,920
------------ ------------
Net cash provided by operating activities 4,774,422 3,168,091
------------ ------------
Cash flows from investing activities:
Redemption of Federal Home Loan Bank stock 0 860,200
Purchases of Federal Home Loan Bank stock (512,400) (110,700)
Purchases of available-for-sale securities (69,642,478) (83,058,698)
Proceeds from sales of available-for-sale securities 63,597,747 62,356,620
Proceeds from maturities of available-for-sale securities 12,170,270 14,007,603
Proceeds from maturities of held-to-maturity securities 4,102 71,691
Loan originations and principal collections, net (11,448,576) (36,142,073)
Purchases of loans (4,313,300) (252,000)
Recoveries of loans previously charged off 103,564 67,054
Capital expenditures (1,396,923) (207,787)
Cash and cash equivalents acquired from New York Community
Bank, net of expenses paid of $119,407 176,653 0
------------ ------------
Net cash used in investing activities (11,261,341) (42,408,090)
------------ ------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
(continued)
2007 2006
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 8,467,718 (5,638,393)
Net (decrease) increase in time deposits (4,805,216) 31,957,486
Federal Home Loan Bank advances 21,000,000 25,000,000
Principal payments on Federal Home Loan Bank advances (16,589,044) (10,460,009)
Net change in short-term Federal Home Loan Bank advances 3,637,000 1,668,000
Dividends paid (1,802,527) (1,734,277)
------------ ------------
Net cash provided by financing activities 9,907,931 40,792,807
------------ ------------
Net increase in cash and cash equivalents 3,421,012 1,552,808
Cash and cash equivalents at beginning of year 11,757,183 10,204,375
------------ ------------
Cash and cash equivalents at end of year $ 15,178,195 $ 11,757,183
============ ============
Supplemental disclosures:
Interest paid $ 12,559,418 $ 10,335,187
Income taxes paid 745,352 864,512
New York Community Bank Branch Acquisition:
Cash and cash equivalents acquired $ 296,060
------------
296,060
------------
Deposits assumed 492,486
Accrued interest payable assumed 3,574
------------
496,060
------------
Net liabilities assumed 200,000
Acquisition costs
119,407
------------
Goodwill $ 319,407
============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
NOTE 1 - NATURE OF OPERATIONS
-----------------------------
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank and Trust Company (Bank) operates as its wholly-owned subsidiary. Bancorp
and the Bank are referred to together as the (Company).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut, two banking offices located in
Massachusetts, and one banking office in Dover Plains, New York. The Bank is
engaged principally in the business of attracting deposits from the general
public and investing those deposits in residential and commercial real estate,
consumer and small business loans. The Bank also offers a full complement of
trust and investment services.
NOTE 2 - ACCOUNTING POLICIES
----------------------------
The accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and predominant
practices within the banking industry. The consolidated financial statements
were prepared using the accrual basis of accounting. The significant accounting
policies are summarized below to assist the reader in better understanding the
consolidated financial statements and other data contained herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Bancorp
and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiaries, SBT Realty, Inc., and SBT Mortgage Service Corporation (the
"PIC"). SBT Realty, Inc. holds and manages bank owned real estate situated
in New York state. The PIC operates as a passive investment company, which
owns and services residential and commercial mortgages. All significant
intercompany accounts and transactions have been eliminated in the
consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand deposits
with other banks, money market mutual funds and federal funds sold.
Cash and due from banks as of December 31, 2007 and 2006 includes
$650,000, which is subject to withdrawals and usage restrictions to
satisfy the reserve requirements of the Federal Reserve Bank.
F-7
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts to approximate the interest method. Gains or
losses on sales of investment securities are computed on a specific
identification basis.
The Company may classify debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These
security classifications may be modified after acquisition only under
certain specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Held-to-maturity securities are carried at amortized cost in
the consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings or in a separate component
of capital. They are disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings but are reported as a net
amount (less expected tax) in a separate component of capital
until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings. During
the two years ended December 31, 2007 and 2006, the Company
did not classify any securities as trading.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Residential real estate loans are generally placed on nonaccrual status
when reaching 90 days past due or in the process of foreclosure. Lines of
credit secured by real estate 90 days past due or in the process of
foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the
F-8
loan at the contractual interest rate. Any cash interest payments received
in excess of the limit and not applied to reduce the net carrying amount
of the loan are recorded as recoveries of charge-offs until the
charge-offs are fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent. The Bank does not separately identify individual
consumer and residential loans for impairment disclosures, but instead
evaluates smaller groups of homogeneous loans collectively for impairment.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 3 to 99 years for buildings and 2 to 20
years for furniture and equipment.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any write-down from cost to estimated fair value required
at the time of foreclosure or classification as in-substance foreclosure
is charged to the allowance for loan losses. Expenses incurred in
connection with maintaining these assets and subsequent write-down are
included in other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Bank classifies loans as in-substance repossessed or
foreclosed if the Bank or its subsidiaries receives physical possession of
the debtor's assets regardless of whether formal foreclosure
F-9
proceedings take place. As of December 31, 2007 and December 31, 2006, the
Company does not have any other real estate owned.
ADVERTISING:
The Bank directly expenses costs associated with advertising as they are
incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at tax rates expected to be in
effect when the amounts related to such temporary differences are realized
or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair value for its financial
instruments. Fair value methods and assumptions used by the Company in
estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair
values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are based
on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
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.
F-10
STOCK BASED COMPENSATION:
Bancorp has a stock-based plan to compensate non-employee directors for
their services. This plan is more fully described in Note 14. Compensation
cost for these services is reflected in net income in an amount equal to
the fair value on the date of issuance of the shares of Bancorp common
stock issued to the directors.
EARNINGS PER SHARE (EPS):
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common shares
outstanding for the period. Weighted average common shares outstanding
were 1,684,699 in 2007 and 1,683,893 in 2006. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted EPS is not presented because there were no common
stock equivalents in the years ended December 31, 2007 and 2006.
RECENT ACCOUNTING PRONOUNCEMENTS:
In February 2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS No. 155),
which permits, but does not require, fair value accounting for any hybrid
financial instrument that contains an embedded derivative that would
otherwise require bifurcation in accordance with SFAS 133. The statement
also subjects beneficial interests issued by securitization vehicles to
the requirements of SFAS No. 133. The statement is effective as of January
1, 2007. The adoption of SFAS No. 155 did not have an impact on the
Company's financial condition and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140" (SFAS No. 156).
SFAS No. 156 requires an entity to recognize a servicing asset or
servicing liability each time it undertakes an obligation to service a
financial asset by entering into a servicing contract in specific
situations. Additionally, the servicing asset or servicing liability shall
be initially measured at fair value; however, an entity may elect the
"amortization method" or "fair value method" for subsequent balance sheet
reporting periods. SFAS No. 156 is effective as of an entity's first
fiscal year beginning after September 15, 2006. Early adoption is
permitted as of the beginning of an entity's fiscal year, provided the
entity has not yet issued financial statements, including interim
financial statements, for any period of that fiscal year. The adoption of
this statement did not have a material impact on the Company's financial
condition, results of operations or cash flows.
In June 2006 the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109"
("FIN 48"). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken, or expected to be taken, in a tax return and provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The adoption
of FIN 48 did not have a material impact on the Company's financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value under generally accepted accounting principles
(GAAP) and enhances disclosures about fair value measurements. SFAS No.
157 retains the exchange price notion and clarifies that the exchange
price is the price that would be received for an asset or paid to transfer
a liability (an exit price) in an orderly transaction between market
participants on the measurement date. SFAS No. 157 is effective for the
Company's consolidated financial statements for the year beginning on
January 1, 2008, with earlier adoption permitted. The Company does not
expect the adoption of this statement to have a material impact on its
financial condition and results of operations.
F-11
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") on Issue No. 06-4 "Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements," ("EITF Issue 06-4"). EITF 06-4
requires companies with an endorsement split-dollar life insurance
arrangement to recognize a liability for future postretirement benefits.
The effective date is for fiscal years beginning after December 15, 2007,
with earlier application permitted. Companies should recognize the effects
of applying this issue through either (a) a change in accounting principle
through a cumulative effect adjustment to retained earnings or (b) a
change in accounting principle through retrospective application to all
periods. The Company does not expect the adoption of this statement to
have a material impact on its financial condition and results of
operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. This Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. The new standard is effective
at the beginning of the Company's fiscal year beginning January 1, 2008,
and early application may be elected in certain circumstances. The Company
does not expect the adoption of this statement to have a material impact
on its financial condition and results of operations.
F-12
NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2007:
Equity securities $ 3,031 $ 157,453 $ 0 $ 160,484
Preferred stock 2,975,000 0 1,149,730 1,825,270
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 47,224,654 4,492 370,330 46,858,816
Debt securities issued by states of the
United States and political subdivisions
of the states 58,707,327 11,409 1,739,673 56,979,063
Money market mutual funds 1,340,891 0 0 1,340,891
Mortgage-backed securities 41,910,517 99,631 456,627 41,553,521
------------- ------------- ------------- -------------
152,161,420 272,985 3,716,360 148,718,045
Money market mutual funds included in
cash and cash equivalents (1,340,891) (1,340,891)
------------- ------------- ------------- -------------
$ 150,820,529 $ 272,985 $ 3,716,360 $ 147,377,154
============= ============= ============= =============
December 31, 2006:
Equity securities $ 3,031 $ 178,395 $ 0 $ 181,426
Preferred stock 2,975,000 0 462,900 2,512,100
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 55,323,358 23,343 1,200,395 54,146,306
Debt securities issued by states of the
United States and political subdivisions
of the states 44,891,148 379,553 34,667 45,236,034
Money market mutual funds 1,199,881 0 0 1,199,881
Mortgage-backed securities 55,103,530 191,698 878,547 54,416,681
------------- ------------- ------------- -------------
159,495,948 772,989 2,576,509 157,692,428
Money market mutual funds included in
cash and cash equivalents (1,199,881) (1,199,881)
------------- ------------- ------------- -------------
$ 158,296,067 $ 772,989 $ 2,576,509 $ 156,492,547
============= ============= ============= =============
Held-to-maturity securities:
December 31, 2007:
Mortgage-backed securities $ 70,798 $ 637 $ 0 $ 71,435
============= ============= ============= =============
December 31, 2006:
Mortgage-backed securities $ 74,931 $ 0 $ 113 $ 74,818
============= ============= ============= =============
F-13
The scheduled maturities of debt securities were as follows as of December 31,
2007:
Available-For-Sale Held-To-Maturity
------------------ ----------------------------------
Amortized
Fair Cost Fair
Value Basis Value
------------ ------------ ------------
Due after one year through five years $ 992,952 $ 0 $ 0
Due after five years through ten years 21,988,592 0 0
Due after ten years 80,856,335 0 0
Mortgage-backed securities 41,553,521 70,798 71,435
------------ ------------ ------------
$145,391,400 $ 70,798 $ 71,435
============ ============ ============
During 2007, proceeds from sales of available-for-sale securities amounted to
$63,597,747. Gross realized gains and gross realized losses on those sales
amounted to $305,726 and $10,742, respectively. During 2006, proceeds from sales
of available-for-sale securities amounted to $62,356,620. Gross realized gains
and gross realized losses on those sales amounted to $724,286 and $206,960,
respectively. The tax provision applicable to these net realized gains amounted
to $100,295 and $175,891 respectively.
There were no securities of issuers whose aggregate carrying amount exceeded 10%
of shareholders' equity as of December 31, 2007.
Total carrying amounts of $55,203,368 and $55,251,654 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, treasury tax
and loans and for other purposes as required by law as of December 31, 2007 and
2006, respectively.
The aggregate fair value and unrealized losses of securities that have been in a
continuous unrealized loss position for less than twelve months and for twelve
months or more, and are temporarily impaired, are as follows as of December 31:
December 31, 2007
--------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Preferred stock $ 0 $ 0 $ 1,825,270 $ 1,149,730 $ 1,825,270 $ 1,149,730
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 8,963,668 20,009 33,518,205 350,321 42,481,873 370,330
Debt securities issued by states of the
United States and political
subdivisions of the states 46,754,407 1,684,443 1,314,923 55,230 48,069,330 1,739,673
Mortgage-backed securities 4,501,563 48,263 20,534,104 408,364 25,035,667 456,627
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired securities $60,219,638 $ 1,752,715 $57,192,502 $ 1,963,645 $117,412,140 $ 3,716,360
=========== =========== =========== =========== ============ ===========
December 31, 2006
--------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------- -------------------------- --------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ----------- ----------- ----------- -----------
Preferred stock $ 0 $ 0 $ 2,512,100 $ 462,900 $ 2,512,100 $ 462,900
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 792,581 57,553 49,159,124 1,142,842 49,951,705 1,200,395
Debt securities issued by states of the
United States and political
subdivisions of the states 1,809,175 12,100 2,094,013 22,567 3,903,188 34,667
Mortgage-backed securities 13,486,446 54,270 27,940,134 824,390 41,426,580 878,660
----------- ----------- ----------- ----------- ----------- -----------
Total temporarily impaired securities $16,088,202 $ 123,923 $81,705,371 $ 2,452,699 $97,793,573 $ 2,576,622
=========== =========== =========== =========== =========== ===========
F-14
Securities exhibiting unrealized losses are analyzed to determine that the
impairments are not other-than-temporary and the following information is
considered. U.S. Government securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S. Government agency
securities, which have a significant impact in financial markets, have minimal
credit risk. Preferred stock securities are issued by the Federal Home Mortgage
Corporation, a U.S. government sponsored or chartered enterprise. All
investments maintain a credit rating of at least investment grade by one of the
nationally recognized rating agencies. Mortgage-backed securities are issued by
federal government agencies or by private issuers with minimum security ratings
of AAA. The unrealized losses in the above table are mainly attributable to
changes in market interest rates. As Company management has the ability and
intent to hold securities until anticipated recovery to cost basis occurs, no
declines are deemed to be other than temporary.
NOTE 4 - LOANS
--------------
Loans consisted of the following as of December 31:
2007 2006
------------- -------------
Commercial, financial and agricultural $ 20,629,467 $ 16,464,762
Real estate - construction and land development 28,927,954 21,169,024
Real estate - residential 158,599,546 145,394,844
Real estate - commercial 53,822,693 50,859,332
Consumer 8,004,931 8,815,789
Term federal funds 0 12,000,000
Other 376,257 69,367
------------- -------------
270,360,848 254,773,118
Deferred costs, net 305,935 168,573
Unearned income (615) (3,143)
Allowance for loan losses (2,474,893) (2,474,118)
------------- -------------
Net loans $ 268,191,275 $ 252,464,430
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2007.
Total loans to such persons and their companies amounted to $1,218,271 as of
December 31, 2007. During 2007, principal advances of $487,004 were made and
repayments totaled $334,057.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2007 2006
------------- -------------
Balance at beginning of period $ 2,474,118 $ 2,626,170
Benefit for loan losses 0 (87,488)
Recoveries of loans previously charged off 103,564 67,054
Loans charged off (102,789) (131,618)
------------- -------------
Balance at end of period $ 2,474,893 $ 2,474,118
============= =============
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2007 2006
------------- -------------
Total nonaccrual loans $ 1,007,890 $ 886,377
============= =============
Accruing loans which are 90 days or more overdue $ 816,581 $ 77,525
============= =============
As of December 31, 2007 and 2006, and during the years ended, there were no
loans that met the definition of an impaired loan in SFAS No. 114.
F-15
In 2007 and 2006, the Bank capitalized mortgage servicing rights totaling
$59,882 and $147,353 respectively, and amortized $171,034 and $225,732
respectively. The balance of capitalized mortgage servicing rights included in
other assets at December 31, 2007 and 2006 was $225,670 and $336,185,
respectively.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:
2007 2006
-------- --------
Balance, beginning of year $ 1,451 $ 1,115
Additions 2,451 19,392
Reductions (3,088) (19,056)
-------- --------
Balance, end of year $ 814 $ 1,451
======== ========
The fair value of the mortgage servicing rights was $562,911 and $671,145 as of
December 31, 2007 and 2006, respectively.
Loans serviced for others are not included in the accompanying consolidated
balance sheets. The unpaid principal balance of mortgage and other loans
serviced for others was $48,696,731 and $49,117,195 at December 31, 2007 and
2006, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
The following is a summary of premises and equipment as of December 31:
2007 2006
------------ ------------
Land $ 775,844 $ 775,844
Buildings 6,281,851 5,721,601
Furniture and equipment 3,385,608 2,786,494
------------ ------------
10,443,303 9,283,939
Accumulated depreciation and amortization (3,640,105) (3,148,393)
------------ ------------
$ 6,803,198 $ 6,135,546
============ ============
NOTE 6 - DEPOSITS
-----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2007 and 2006 were $36,440,424 and $35,777,326
respectively.
The aggregate amount of brokered time deposits as of December 31, 2007 and 2006
was $14,681,000 and $19,538,000, respectively. Brokered time deposits are not
included in time deposit accounts in denominations of $100,000 or more above.
For time deposits as of December 31, 2007, the scheduled maturities for years
ended December 31, are as follows:
2008 $ 93,821,737
2009 10,670,809
2010 2,078,871
2011 7,987,502
2012 1,489,704
-------------
$ 116,048,623
=============
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2007. Total deposits of such persons and their companies amounted to $2,075,350
and $1,372,156 as of December 31, 2007 and 2006, respectively.
F-16
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2007, and thereafter, are summarized as follows:
2008 $25,214,699
2009 1,320,213
2010 21,202,309
2011 10,794,029
2012 5,178,531
Thereafter 31,116,919
Fair value adjustment 184,455
-----------
$95,011,155
===========
As of December 31, 2007, the following advances from the FHLB were redeemable at
par at the option of the FHLB:
MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT
------------- ------------------------ ------
4/27/2009 1/28/2008 and quarterly thereafter $ 500,000
4/27/2009 1/28/2008 and quarterly thereafter 500,000
1/25/2010 1/25/2008 and quarterly thereafter 19,000,000
2/8/2010 2/7/2008 and quarterly thereafter 600,000
12/15/2010 3/17/2008 and quarterly thereafter 800,000
12/20/2010 3/20/2008 and quarterly thereafter 500,000
2/28/2011 2/26/2008 and quarterly thereafter 10,000,000
3/1/2011 3/3/2008 and quarterly thereafter 500,000
3/2/2012 3/3/2008 and quarterly thereafter 5,000,000
12/16/2013 3/17/2008 and quarterly thereafter 10,000,000
12/12/2016 3/12/2008 and quarterly thereafter 15,000,000
7/31/2017 1/31/2008 and quarterly thereafter 6,000,000
Amortizing advances are repaid in equal monthly payments and are amortized from
the date of the advance to the maturity date on a direct reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2007, the interest rates on FHLB advances ranged from 2.66
percent to 6.30 percent. At December 31, 2007, the weighted average interest
rate on FHLB advances was 4.74 percent.
NOTE 8 - EMPLOYEE BENEFITS
--------------------------
The Bank has an insured noncontributory defined benefit retirement plan
available to employees eligible as to age and length of service. Benefits are
based on a covered employee's final average compensation, primary social
security benefit and credited service. The Bank makes annual contributions which
meet the Employee Retirement Income Security Act minimum funding requirements.
In 2006, the plan was amended, effective September 1, 2006, to provide that
employees hired or rehired on or after September 1, 2006 are not eligible to
participate in the plan.
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:
2007 2006
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 6,027,929 $ 5,495,706
Actuarial gain (229,821) (128,601)
Service cost 437,740 430,035
Interest cost 342,022 318,310
Benefits paid (218,769) (87,521)
----------- -----------
Benefit obligation at end of year 6,359,101 6,027,929
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 5,016,664 3,370,954
Actual return on plan assets 503,050 392,231
Contributions by employer 500,000 1,341,000
Benefits paid (218,769) (87,521)
----------- -----------
Fair value of plan assets at end of year 5,800,945 5,016,664
----------- -----------
Funded status and recognized liability
included in the balance sheet $ (558,156) $(1,011,265)
=========== ===========
Amounts recognized in accumulated other comprehensive loss, before tax effect,
consist of:
December 31,
------------
2007 2006
---------- ----------
Net loss $1,583,889 $2,016,054
Prior service cost 910 1,803
---------- ----------
$1,584,799 $2,017,857
========== ==========
The accumulated benefit obligation for the plan was $4,602,777 and $4,179,551 at
December 31, 2007 and 2006, respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2007 and 2006. The rate of increase in
future compensation levels was based on the following graded table for 2007 and
2006:
AGE RATE
--- ----
25 4.75%
35 4.25%
45 3.75%
55 3.25%
65 3.00%
F-18
Components of net periodic cost are as follows for the years ended December 31:
2007 2006
--------- ---------
Service cost $ 437,740 $ 430,035
Interest cost on benefit obligation 342,022 318,310
Expected return on plan assets (368,942) (295,598)
Amortization of prior service cost 893 893
Recognized net loss 68,236 89,194
--------- ---------
Net periodic benefit cost 479,949 542,834
--------- ---------
Other changes in plan assets and benefit obligations recognized in other
comprehensive loss:
Net actuarial gain (363,929) 0
Amortization of net loss (68,236) 0
Prior service cost (893) 0
--------- ---------
Total recognized in other comprehensive loss (433,058) 0
--------- ---------
Total recognized in net periodic cost and other
comprehensive loss $ 46,891 $ 542,834
========= =========
The estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive loss into net periodic benefit cost over the
year ended December 31, 2008 are $56,833 and $893, respectively.
The discount rate used to determine the net periodic benefit cost was 6.00% for
2007 and 2006; and the expected return on plan assets was 7.50% for 2007 and
2006.
The graded table above was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2007 and 2006.
Pension expense is calculated based upon a number of actuarial assumptions,
including an expected long-term rate of return on pension plan assets of 7.50%
for 2007. In developing the expected long-term rate of return assumption, asset
class return expectations were evaluated as well as long-term inflation
assumptions, and historical returns based on the current target asset
allocations of 55% equity and 40% fixed income and 5% cash equivalents. The Bank
regularly reviews the asset allocations and periodically rebalances investments
when considered appropriate. While all future forecasting contains some level of
estimation error, the Bank believes that 7.50% falls within a range of
reasonable long-term rate of return expectations for pension plan assets. The
Bank will continue to evaluate the actuarial assumptions, including expected
rate of return, at least annually, and will adjust as necessary.
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.
F-19
The Bank's pension plan asset allocations by asset category are as follows:
December 31, 2007 December 31, 2006
--------------------------- ---------------------------
Asset Category Fair Value Percent Fair Value Percent
---------------------------------------------- ---------- ---------- ---------- ----------
Equity securities $3,407,281 58.7% $2,537,994 50.6%
U.S. Government treasury and agency securities 1,252,945 21.6 1,480,289 29.5
Corporate bonds 122,687 2.1 23,040 0.5
Mutual funds 296,365 5.1 200,503 4.0
Money market mutual funds 617,567 10.7 672,228 13.4
Certificates of deposit 104,100 1.8 102,610 2.0
---------- ---------- ---------- ----------
Total $5,800,945 100.0% $5,016,664 100.0%
========== ========== ========== ==========
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2007 and 2006.
Based on current data and assumptions, the following benefits are expected to be
paid for each of the following five years and, in the aggregate, the five years
thereafter:
2008 $ 87,000
2009 120,000
2010 205,000
2011 216,000
2012 1,980,000
2013 - 2017 2,978,000
The Bank expects to make a contribution of $500,000 in 2008.
The Bank offers a 401(k) Plan to eligible employees. Under the Plan, eligible
participants may contribute a percentage of their pay subject to IRS
limitations. The Bank may make discretionary contributions to the Plan.
Effective September 1, 2006, the 401(k) Plan was amended to provide that
employees hired or rehired after September 1, 2006 are not eligible to
participate in the plan. The Bank has established a second 401(k) Plan to
provide a discretionary match to employees hired or rehired, on or after
September 1, 2006 who satisfy certain eligibility requirements.
The Bank's contribution expense for the 401(k) Plans in the years ended December
31, 2007 and 2006 amounted to approximately $100,000 and $93,000 respectively.
Discretionary contributions vest in full after five years.
Fifteen of the Bank's officers have a change in control agreement ("agreement")
with the Bank. The agreements provide that if, within twelve (12) months after a
"change-in-control" has occurred, the officer's employment terminates or is
reassigned under defined circumstances, then the Bank and/or its 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:
2007 2006
---------- ----------
Current:
Federal $ 774,753 $ 990,839
State 60,468 54,678
---------- ----------
835,221 1,045,517
---------- ----------
Deferred:
Federal 24,785 217,852
State 0 0
Change in valuation allowance 10,000 178,566
---------- ----------
34,785 396,418
---------- ----------
Total income tax expense $ 870,006 $1,441,935
========== ==========
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows for the years ended
December 31:
2007 2006
---- ----
% of %of
Income Income
------ ------
Federal income tax at statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income and dividends received deduction (19.1) (13.6)
Other items 2.6 1.2
State tax, net of federal tax benefit 0.9 0.6
Change in valuation allowance 0.2 3.1
---- ----
Effective tax rates 18.6% 25.3%
==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2007 2006
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 618,527 $ 619,233
Interest on non-performing loans 22,710 15,402
Accrued deferred compensation 30,584 26,288
Post-retirement benefits 22,440 22,440
Other real estate owned property write-down 22,100 22,101
Capital loss carry forward 398,191 398,191
Mark to market purchase accounting adjustments 0 8,373
Unrecognized pension expense - FASB No. 158 538,832 686,071
Net unrealized holding loss on available-for-sale securities 1,170,748 613,197
----------- -----------
Gross deferred tax assets 2,824,132 2,411,296
Valuation allowance (270,166) (260,166)
----------- -----------
2,553,966 2,151,130
----------- -----------
Deferred tax liabilities:
Deferred loan costs, net (104,018) (57,315)
Goodwill and core deposit intangible asset (662,257) (646,483)
Accelerated depreciation (957,538) (985,152)
Mark-to-market purchase accounting adjustments (23,204) 0
Mortgage servicing rights (76,728) (114,304)
Prepaid pension (349,059) (342,241)
----------- -----------
Gross deferred tax liabilities (2,172,804) (2,145,495)
----------- -----------
Net deferred tax asset $ 381,162 $ 5,635
=========== ===========
As of December 31, 2007, the Company had no operating loss and tax credit
carryovers for tax purposes.
F-21
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------
The Bank entered into an agreement with a third party in which the third party
is to provide the Bank with account processing services and other miscellaneous
services. Under the agreement, the Bank is obligated to pay monthly processing
fees through August 5, 2010. In the event the Bank chooses to cancel the
agreement prior to the end of the contract term a lump sum termination fee will
have to be paid. The fee shall be calculated as the average monthly billing,
exclusive of pass through costs for the past twelve months, multiplied by the
number of months and any portion of a month remaining in the contract term.
Commitments to purchase securities on a when issued basis totaled $1,410,241 at
December 31, 2007.
NOTE 11 - FINANCIAL INSTRUMENTS
-------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to originate loans, standby letters of
credit and unadvanced funds on loans. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amounts of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
secured interests in mortgages, accounts receivable, inventory, property, plant
and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2007 and 2006, the
maximum potential amount of the Bank's obligation was $12,800 for financial and
standby letters of credit. The Bank's outstanding letters of credit generally
have a term of less than one year. If a letter of credit is 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.
F-22
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, are as follows as of December
31:
2007 2006
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 15,178,195 $ 15,178,195 $ 11,757,183 $ 11,757,183
Available-for-sale securities 147,377,154 147,377,154 156,492,547 156,492,547
Held-to-maturity securities 70,798 71,435 74,931 74,818
Federal Home Loan Bank stock 5,176,100 5,176,100 4,663,700 4,663,700
Loans held-for-sale 120,000 121,403 304,000 307,071
Loans, net 268,191,275 264,217,484 252,464,430 250,312,089
Accrued interest receivable 2,538,607 2,538,607 2,483,547 2,483,547
Financial liabilities:
Deposits $317,741,269 $318,498,739 $313,586,281 $313,560,974
FHLB advances 95,011,155 95,183,700 87,093,402 87,478,836
Due to broker 0 0 1,579,611 1,579,611
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2007 2006
----------- -----------
Commitments to originate loans $ 9,002,416 $10,540,525
Standby letters of credit 12,800 12,800
Unadvanced portions of loans:
Home equity 26,511,813 26,599,791
Commercial lines of credit 10,482,619 8,642,393
Construction 6,178,958 7,322,201
Consumer 7,129,237 6,928,313
----------- -----------
$59,317,843 $60,046,023
=========== ===========
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
---------------------------------------------------------
Most of the Bank's business activity is with customers located in northwestern
Connecticut and nearby New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and nearby New
York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
----------------------------
Bancorp and its subsidiary, the Bank, are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Their capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
F-23
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2007 and 2006, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. The Company's and the
Bank's actual capital amounts and ratios are also presented in the table.
There are no conditions or events since that notification that management
believes have changed the Bank's category.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar amounts in thousands)
As of December 31, 2007:
Total Capital (to Risk Weighted Assets)
Consolidated $39,545 15.00% $21,087 >8.0% N/A
-
Salisbury Bank and Trust Company 38,683 14.69 21,069 >8.0 $26,336 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 37,070 14.06 10,544 >4.0 N/A
-
Salisbury Bank and Trust Company 36,174 13.74 10,534 >4.0 15,801 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 37,070 8.24 17,988 >4.0 N/A
-
Salisbury Bank and Trust Company 36,174 8.06 17,945 >4.0 22,431 >5.0
- -
As of December 31, 2006:
Total Capital (to Risk Weighted Assets)
Consolidated $38,030 15.28% $19,914 >8.0% N/A
-
Salisbury Bank and Trust Company 37,295 14.98 19,929 >8.0 $24,911 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 35,555 14.28 9,957 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 13.97 9,964 >4.0 14,946 >6.0
- -
Tier 1 Capital (to Average Assets)
Consolidated 35,555 8.43 16,879 >4.0 N/A
-
Salisbury Bank and Trust Company 34,785 8.26 16,848 >4.0 21,060 >5.0
- -
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of Bancorp will be entitled to dividends only when,
and if, declared by the Bancorp's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
Under Connecticut law, the Bank may pay dividends only out of net profits. The
Connecticut Banking Commissioner's approval is required for dividend payments
which exceed the current year's net profits and retained net profits from the
preceding two years. As of December 31, 2007, the Bank may declare dividends to
Bancorp in an amount not to exceed $7,135,303.
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 2007 and 2006, 840 shares were issued under the Plan and the related
compensation expense amounted to $30,450 and $31,920 respectively.
Note 15- ACQUISITION
--------------------
On August 1, 2007, the Bank opened a full service branch office in Dover Plains,
New York. The opening of the branch reflected consummation on July 31, 2007 of
the purchase of a branch office in Mt. Vernon, New York by the Bank pursuant to
the Purchase and Assumption Agreement dated October 3, 2006 by and between the
Bank and New York Community Bank. Such branch was relocated to Dover Plains, New
York and opened for business August 1, 2007.
The assets acquired and liabilities assumed have been recorded by the Company at
their fair values at the consummation date. Goodwill recorded totaled $319,407
and will be analyzed for impairment on at least an annual basis. Financial
statement amounts for the transaction are included in the Company's consolidated
financial statements beginning on the acquisition date. A summary is included in
the supplemental disclosure in the cash flow statement.
NOTE 16 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------
The Company's assets as of December 31, 2007 and 2006 include goodwill of
$2,357,884 relating to the purchase of a branch of a bank in 2001 and $7,151,421
of additional goodwill from the 2004 merger with Canaan National Bancorp, Inc.
In 2007, the Company recorded $319,407 of additional goodwill from the purchase
of a branch of a bank in Mt. Vernon, NY.
The Company evaluated its goodwill and intangible assets as of December 31, 2007
and 2006 and found no impairment.
A summary of acquired amortizing intangible assets is as follows:
As of December 31, 2007
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 430,064 $ 458,542
Core deposit intangible-Canaan National merger 1,191,279 320,538 870,741
---------- ---------- ----------
Total $2,079,885 $ 750,602 $1,329,283
========== ========== ==========
As of December 31, 2006
--------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- ---------- ----------
Core deposit intangible-branch purchase $ 888,606 $ 361,709 $ 526,897
Core deposit intangible-Canaan National merger 1,191,279 224,677 966,602
---------- ---------- ----------
Total $2,079,885 $ 586,386 $1,493,499
========== ========== ==========
F-25
Amortization expense was $164,216 for the years ending December 31, 2007 and
2006. Amortization is being calculated on a straight-line basis.
Estimated amortization expense for each of the five years succeeding 2007 is as
follows:
2008 $ 164,216
2009 164,216
2010 164,216
2011 164,216
2012 164,216
----------
$ 821,080
==========
NOTE 17 - RECLASSIFICATION
--------------------------
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
NOTE 18 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
--------------------------------------------------
The following condensed financial statements are for Salisbury Bancorp, Inc.
(Parent Company Only) and should be read in conjunction with the Consolidated
Financial Statements of Salisbury Bancorp, Inc. and Subsidiary.
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
BALANCE SHEETS
--------------
December 31, 2007 and 2006
--------------------------
ASSETS 2007 2006
------ ----------- -----------
Money market mutual funds $ 1,340,891 $ 1,199,881
Cash in Salisbury Bank and Trust Company 6,316 2,494
----------- -----------
Cash and cash equivalents 1,347,207 1,202,375
Investment in subsidiary 44,668,437 43,579,224
Other assets 2,910 5,469
----------- -----------
Total assets $46,018,554 $44,787,068
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable $ 454,956 $ 437,887
----------- -----------
Total liabilities 454,956 437,887
Total shareholders' equity 45,563,598 44,349,181
----------- -----------
Total liabilities and shareholders' equity $46,018,554 $44,787,068
=========== ===========
F-26
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
----------- -----------
Dividend income from subsidiary $ 1,920,000 $ 1,800,000
Taxable interest on securities 48,487 34,435
----------- -----------
1,968,487 1,834,435
----------- -----------
Legal expense 5,485 9,984
Supplies and printing 380 3,503
Other expense 51,181 37,517
----------- -----------
57,046 51,004
----------- -----------
Income before income tax benefit and equity in undistributed
net income of subsidiary 1,911,441 1,783,431
Income tax benefit (2,909) (5,469)
----------- -----------
Income before equity in undistributed net income of subsidiary 1,914,350 1,788,900
Equity in undistributed net income of subsidiary 1,885,698 2,464,718
----------- -----------
Net income $ 3,800,048 $ 4,253,618
=========== ===========
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2007 and 2006
--------------------------------------
2007 2006
----------- -----------
Cash flows from operating activities:
Net income $ 3,800,048 $ 4,253,618
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary (1,885,698) (2,464,718)
Decrease (increase) in taxes receivable 2,559 (3,892)
Issuance of shares for Directors' fees 30,450 31,920
----------- -----------
Net cash provided by operating activities 1,947,359 1,816,928
----------- -----------
Cash flows from financing activities:
Dividends paid (1,802,527) (1,734,277)
----------- -----------
Net cash used in financing activities (1,802,527) (1,734,277)
----------- -----------
Net increase in cash and cash equivalents 144,832 82,651
Cash and cash equivalents at beginning of year 1,202,375 1,119,724
----------- -----------
Cash and cash equivalents at end of year $ 1,347,207 $ 1,202,375
=========== ===========
F-27
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------
Summarized quarterly financial data for 2007 and 2006 follows:
(In thousands, except earnings per share)
2007 Quarters Ended
-------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 6,437 $ 6,360 $ 6,602 $ 6,753
Interest expense 3,071 2,997 3,167 3,197
------- ------- ------- -------
Net interest and dividend income 3,366 3,363 3,435 3,556
Provision for loan losses 0 0 0 0
Other income 1,124 1,115 1,060 1,165
Other expense 3,319 3,305 3,401 3,489
------- ------- ------- -------
Income before income taxes 1,171 1,173 1,094 1,232
Income tax expense 237 224 177 232
------- ------- ------- -------
Net income $ 934 $ 949 $ 917 $ 1,000
======= ======= ======= =======
Earnings per common share $ .55 $ .56 $ .54 $ .59
======= ======= ======= =======
(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
======= ======= ======= =======
F-28
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(T). CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation as of December 31, 2007, as required by Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's disclosure controls and procedures, as defined in Rule 13a-15(e) of
the Exchange Act, are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act 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, 2007, 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
On October 1, 2007, the Bank, by mutual agreement, entered Change of Control
Agreements (the "Agreements") with the following officers of the Bank: John F.
Perotti, Richard J. Cantele, Jr., John F. Foley, Todd M. Clinton, Diane E.R.
Johnstone, Joseph C. Law, Lana J. Morrison, Sharon A. Pilz, Geoffrey A. Talcott,
Melanie K. Neely, Gerard J. Baldwin, Darrell S. Long, Elizabeth A. Summerville,
Diane Farrell and Roberta Reed (the "Executives").
The Agreements provide that if following a "Change in Control" (as defined in
the Agreements) of the Company or the Bank, an Executive is terminated or is
reassigned under certain circumstances defined in the Agreements within a period
of twelve (12) months following such Change in Control, such Executive will be
entitled to a lump sum payment equal to his or her annual compensation based
upon the most recent aggregate base salary paid to the Executive in the twelve
(12) month period immediately preceding his or her termination or reassignment.
In addition, for twelve (12) months following a Change in Control, certain
specified insurance benefits shall continue in effect on terms and conditions at
least as favorable to the Executive as maintained immediately prior to the
Change in Control. In no event shall such payments be made in an amount that
would cause them to be deemed non-deductible to the Bank by reason of the
operation of Section 280G of the Internal Revenue Code. The purpose of the
Agreements is to provide certain potential benefits to the Executives solely in
the event of a Change in Control and do not provide a contract for employment.
The Agreements will expire on September 30, 2010, provided that if a "Change in
Control" occurs prior to September 30, 2010, the Agreements shall remain in
effect for twelve (12) months after the date on which any such Change in Control
is consummated.
The Agreements were superseded by Change in Control Agreements dated March 28,
2008 filed on Form 8-K dated March 28, 2008.
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 14, 2008 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 14, 2008 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 14, 2008 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.
24
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 14, 2008 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.
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 14, 2008 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.
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 14, 2008 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 14, 2008 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 14, 2008 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 14, 2008 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 14, 2008 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 14, 2008 to be filed within 120 days after the end of the
fiscal year covered by this Form 10-K, under the Section "Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors," and the information included therein is incorporated by reference.
25
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 dated October 1, 2007
10.3 Director Stock Retainer Plan (4)
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 the 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 10.3 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2002 and is
incorporated herein by reference.
26
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 28, 2008.
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 28, 2008
-----------------------------
(John F. Perotti) Chief Executive Officer
and Director
/s/ Louis E. Allyn, II Director March 28, 2008
-----------------------------
(Louis E. Allyn, II)
/s/ John R. H. Blum Director March 28, 2008
-----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 28, 2008
-----------------------------
(Louise F. Brown)
/s/ Richard J. Cantele, Jr. Director March 28, 2008
-----------------------------
(Richard J. Cantele, Jr.)
/s/ Robert S. Drucker Director March 28, 2008
-----------------------------
(Robert S. Drucker)
/s/ Nancy F. Humphreys Director March 28, 2008
-----------------------------
(Nancy F. Humphreys)
/s/ Holly J. Nelson Director March 28, 2008
-----------------------------
(Holly J. Nelson)
/s/ Michael A. Varet Director March 28, 2008
-----------------------------
(Michael A. Varet)
27