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, 2008
[ ] 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 Identification No.)
Incorporation or Organization)
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
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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: NYSE AMEX
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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 30, 2008: $47,326,639.
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 1,685,861 shares outstanding as of March 20, 2009.
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 27, 2009.
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 7
Item 1 A - Risk Factors- Not Applicable 11
Item 1 B - Unresolved Staff Comments- Not Applicable 11
Item 2 -Properties 11
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Part II
Item 5 - Market for Registrant's Common Equity, Related Shareholder
Matters and Issuer Purchases of Equity Securities 12
Item 6 - Selected Financial Data- Not Applicable 14
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operation 14
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
Not Applicable 23
Item 8 - Financial Statements and Supplementary Data 25
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 26
Item 9A(T)- Controls and Procedures 26
Item 9B - Other Information 26
Part III
Item 10 - Directors, Executive Officers and Corporate Governance 26
Item 11 - Executive Compensation 27
Item 12 - Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 27
Item 13 - Certain Relationships and Related Transactions,
and Director Independence 27
Item 14 - Principal Accountant Fees and Services 27
Part IV
Item 15 - Exhibits, Financial Statement Schedules 28
Signatures 29
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PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (NYSE AMEX:SAL) (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 (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
North Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and
Sheffield, Massachusetts and Dover Plains, New York and a Trust and Wealth
Advisory Services Division in Lakeville, Connecticut. In addition, the Bank has
received regulatory approval to operate a branch office in Millerton, New York,
which is expected to open in 2009.
(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
and plays a role in the interest rate risk management of the Company.
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, 2008, the portfolio totaled $155,916,000, which
represents approximately 31.45% of total assets, and it produced interest and
dividend income of $7,985,000 for the year 2008 as compared to $8,115,000 for
2007.
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Deposits and Borrowings
The Bank's primary sources of funds are it's core 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 $344,925,000 at December 31, 2008 as compared with $317,741,000
at December 31, 2007.
Advances from the FHLBB totaled $87,914,000 at December 31, 2008 as compared
with $95,011,000 at December 31, 2007.
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 (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 Litchfield County, Connecticut, 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 approximately 43 commercial banks and savings banks. The
Bank's 3.14% market share of deposits within these four counties suggests that
there is potential to further grow and expand the market share of the Bank.
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
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under "Legislation, Regulation and Supervision" and in certain respects may have
a competitive advantage over banks in providing certain services.
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut 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
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The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (BHCA). It is subject to the supervision and examination
of the Board of Governors of the Federal Reserve System (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
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consideration paid by the Company for all such purchases or redemptions during
the preceding twelve (12) months, is equal to ten percent (10%) or more of the
Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company generally
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. However, letters issued by the Federal Reserve Board to the industry
dated February 24, 2009 and March 27, 2009 advise bank holding companies to
inform the Federal Reserve Board of proposed stock repurchases resulting in a
net reduction of common or preferred stock below the amount of such instrument
outstanding at the beginning of the quarter in which the repurchase occurs. In
addition, as a recipient of TARP CPP funds, the Company must communicate with
the Treasury as well as the Federal Reserve Board in advance of any stock
redemptions. Generally, during the first three years the Company participates in
the TARP CPP, the approval of the Treasury will be required before the Company
could repurchase any common stock. The Company may redeem the TARP CPP Preferred
Stock at any time in consultation with the Treasury and its primary supervisory
agencies.
Gramm-Leach-Bliley Act
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The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (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 the GLBA because
many community banks lack the capital and management resources needed to
facilitate broad expansion of financial services.
Sarbanes-Oxley Act
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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 (Exchange Act)
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
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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)
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establish due diligence policies, procedures and controls with respect to its
private banking accounts and correspondent banking accounts involving foreign
individuals and certain foreign banks; and (iii) avoid establishing,
maintaining, administering, or managing correspondent accounts in the United
States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, IMLA contains a provision encouraging
cooperation among financial institutions, regulatory authorities and law
enforcement authorities with respect to individuals, entities and organizations
engaged in, or reasonably suspected of engaging in, terrorist acts or money
laundering activities. IMLA expands the circumstances under which funds in a
bank account may be forfeited and requires covered financial institutions to
respond under certain circumstances to requests for information from federal
banking agencies within 120 hours. IMLA also amends the BHCA and the Bank Merger
Act to require the federal banking agencies to consider the effectiveness of a
financial institution's anti-money laundering activities when reviewing an
application under these acts.
State Regulation
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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
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The Bank's deposits are insured under the Federal Deposit Insurance Act up to
maximum limits by the Deposit Insurance Fund (DIF) and are subject to deposit
insurance assessments.
Congress has temporarily increased FDIC deposit insurance from $100,000 to
$250,000 per depositor through December 31, 2009. 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. In
addition, the Bank participates in the Temporary Liquidity Guarantee Program,
whereby non-interest bearing checking accounts and NOW accounts with interest
rates no higher than 0.50 % will be FDIC insured in full.
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".
A few years ago the FDIC adopted a risk-based insurance assessment system
designed to tie what banks pay for deposit insurance more closely to the risks
they pose. The FDIC also adopted a schedule of rates that the FDIC could adjust
up or down, depending on the needs of the DIF.
Recently, the FDIC adopted a restoration plan that would increase the reserve
ratio to the 1.15% threshold within seven years.
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As part of that plan, in December, 2008, the FDIC voted to increase risk-based
assessment rates due to deteriorating financial conditions in the banking
industry. Changes to the risk-based assessment system include increasing
premiums for institutions that rely on excessive amounts of brokered deposits,
including CDARS, increasing premiums for excessive use of secured liabilities,
including Federal Home Loan Bank advances, lowering premiums for smaller
institutions with very high capital levels, and adding financial ratios and debt
issuer ratings to the premium calculations for banks with over $10 billion in
assets, while providing a reduction for their unsecured debt. It is generally
expected that rates will continue to increase in the near future due to the
significant cost of bank failures beginning in the third quarter of 2008 and the
increase in the number of troubled banks. The FDIC recently announced that, in
view of the significant decrease in the deposit insurance funds' reserves, it
will impose a special assessment in the second quarter of 2009. Banks must
continue to pay base premium rates on top of any special assessment.
Furthermore, banks may be subject to an "emergency" special assessment in 2009
in addition to other special assessments and regular premium rates. The amount
of an emergency special assessment imposed on a bank will be determined by the
FDIC if such amount is necessary to provide sufficient assessment income to
repay amounts borrowed from the U.S. Department of Treasury (Treasury); to
provide sufficient assessment income to repay obligations issued to and other
amounts borrowed from insured depository institutions; or for any other purpose
the FDIC may deem necessary.
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.
Recent Legislative and Regulatory Initiatives to Address Difficult Market and
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Economic Conditions
-------------------
On October 3, 2008, President Bush signed into law the Emergency Economic
Stabilization Act of 2008 (EESA) which, among other measures, authorizes the
Treasury to purchase from financial institutions and their holding companies up
to $700 billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies, under a Troubled Asset Relief Program
Capital Purchase Program (TARP CPP). The purpose of TARP CPP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. Under the
TARP CPP, the Treasury is purchasing equity securities from participating
institutions. The Series A Preferred Stock and warrant offered by this
prospectus were issued by the Company to the Treasury pursuant to the TARP CPP.
The EESA also increased federal deposit insurance on most deposit accounts from
$100,000 to $250,000. This increase is in place until the end of 2009 and is not
covered by deposit insurance premiums paid by the banking industry.
The EESA followed, and has been followed by, numerous actions by the Board of
Governors of the Federal Reserve System, the U.S. Congress, the Treasury, the
FDIC, the SEC and others to address the current liquidity and credit crisis that
has followed the sub-prime meltdown that commenced in 2007. These measures
include homeowner relief that encourage loan restructuring and modification; the
establishment of significant liquidity and credit facilities for financial
institutions and investment banks; the lowering of the federal funds rate;
emergency action against short selling practices; a temporary guaranty program
for money market funds; the establishment of a commercial paper funding facility
to provide back-stop liquidity to commercial paper issuers; and coordinated
international efforts to address illiquidity and other weaknesses in the banking
sector.
On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (ARRA)
was signed into law. ARRA, more commonly known as the economic stimulus bill or
economic recovery package, is intended to stimulate the economy and provides for
broad infrastructure, education and health spending.
On October 14, 2008, the FDIC announced the establishment of a temporary
liquidity guarantee program to provide full deposit insurance for all
non-interest bearing transaction accounts and guarantees of certain newly issued
senior unsecured debt issued by FDIC-insured institutions and their holding
companies. Insured institutions were automatically covered by this program from
October 14, 2008 until December 5, 2008, unless they opted out prior to that
date. Under the program, the FDIC will guarantee timely payment of newly issued
senior unsecured debt issued on or before June 30, 2009. The debt includes all
newly issued unsecured senior debt including promissory notes, commercial paper
and inter-bank funding. The aggregate coverage for an institution may not exceed
125% of its debt outstanding on September 30, 2008 that was scheduled to mature
before June 30, 2009, or, for certain insured institutions, 2% of liabilities as
of September 30, 2008. The guarantee will extend to June 30, 2012 even if the
maturity of the debt is after that date.
The purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system. The EESA, the ARRA and the other regulatory initiatives
described above may not have their desired effects. If the volatility in the
markets continues and economic conditions fail to improve or worsen, the
Company's business, financial condition, results of operations and cash
6
flows could be materially and adversely affected.
The Securities Purchase Agreement Between the Company and the Treasury Permits
the Treasury to Impose Certain Additional Restrictions on the Company So Long as
the Company Participates in the TARP CPP.
The securities purchase agreement the Company entered into with the Treasury in
connection with the Bank's participation in the TARP CPP permits the Treasury to
unilaterally amend the terms of the securities purchase agreement to comply with
any changes in federal statutes after the date of its execution. ARRA imposed
additional executive compensation and expenditure limits on all current and
future TARP recipients, including the Company, until the Company has repaid the
Treasury. These additional restrictions may impede the Company's ability to
attract and retain qualified executive officers. ARRA also permits TARP
recipients to repay the Treasury without penalty or requirement that additional
capital be raised, subject to the Treasury's consultation with the Company's
primary federal regulator while the securities purchase agreement required that,
for a period of three years, the Series A Preferred Stock could generally only
be repaid if the Company raised additional capital to repay the securities and
such capital qualified as Tier 1 capital. Additional unilateral changes in the
securities purchase agreement could have a negative impact on the Company's
financial condition and results of operations.
Capital Resources
-----------------
On March 13, 2009, under the TARP CPP, the Company sold 8,816 shares of senior
preferred stock to the Treasury, having a liquidation amount equal to $1,000 per
share, or $8,816,000. Although the Company is currently well-capitalized under
regulatory guidelines, the Board of Directors believed it was advisable to take
advantage of the TARP CPP to raise additional capital to ensure that during
these uncertain times, the Company is well-positioned to support the Company's
existing operations as well as anticipated future growth. Additional information
concerning the TARP CPP is included in Note 22 to the Consolidated Financial
Statements.
Employees
---------
The Company's current workforce at March 20, 2009 consists of 144 employees of
whom 127 were full time and 17 were part time. The employees are not represented
by a collective bargaining unit.
(d) Financial Information about Geographic Areas
The Company does not have any foreign business operations or export sales of its
own. However, the Company provides financial services including wire transfers
and foreign currency exchange to various 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 17
II. Investment Portfolio 8
III. Loan Portfolio 9
IV. Summary of Loan Loss Experience 10
V. Deposits 21
VI. Return on Equity and Assets 9
VII. Short-Term Borrowings 11
7
Investment Portfolio
The Company categorizes investments into three groups and further provides for
the accounting and reporting treatment of each group. Investments may be
classified as held-to-maturity, available-for-sale, or trading. The Bank does
not purchase or hold any investment securities for the purpose of trading such
investments. The following tables set forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands) 2008 2007 2006
------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 0 $ 160 $ 181
Preferred stock 20 1,825 2,512
U.S. Treasury securities and other U.S. government corporations
and agencies 41,271 46,859 54,146
Obligations of states and political subdivisions 55,696 56,979 45,236
Mortgage-backed securities 53,540 41,554 54,417
------------------------------
$150,527 $147,377 $156,492
==============================
Held-to-maturity securities
(at amortized cost)
Mortgage-backed securities $ 66 $ 71 $ 75
==============================
Federal Home Loan Bank stock $ 5,323 $ 5,176 $ 4,664
==============================
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,
2008:
(dollars in thousands)
Maturing Maturing
After 1 After 5 Maturing
but within but within After 10
5 Years 10 Years Years
Amount Yield Amount Yield Amount Yield Total
---------- ---------- --------
Held-to-maturity securities
---------------------------
(at amortized cost)
Mortgage-backed securities $ 0 $ 0 $ 66 5.35% $ 66
========== ========== ======== ========
Available-for-sale securities
-----------------------------
(at fair value)
U.S. Treasury
securities and other U.S. government corporations
and agencies $ 0 $ 1,001 5.50% $ 40,270 6.00% $ 41,271
Obligations of states and political subdivisions 0 0 55,696 4.43% 55,696
Mortgage-backed securities 1,435 2.30% 728 4.99% 51,377 5.52% 53,540
---------- ---------- -------- --------
$ 1,435 $ 1,729 $147,343 $150,507
========== ========== ======== ========
8
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2008 2007 2006 2005 2004
----------------------------------------------------------
Commercial, financial and
agricultural $ 20,785 $ 20,629 $ 16,465 $ 15,354 $ 15,127
Real Estate-construction and
land development 33,343 28,928 21,169 18,814 14,290
Real Estate - residential 177,048 158,600 145,395 135,619 130,414
Real Estate-commercial 62,796 53,823 50,859 40,889 35,487
Consumer 5,551 8,005 8,816 7,900 9,122
Term federal funds 0 0 12,000 0 0
Other 175 376 69 47 69
----------------------------------------------------------
299,698 270,361 254,773 218,623 204,509
Deferred costs, net 393 306 168 0 0
Allowance for loan losses (2,724) (2,475) (2,474) (2,626) (2,512)
Unearned income 0 (1) (3) (8) (19)
----------------------------------------------------------
Net loans $ 297,367 $ 268,191 $ 252,464 $ 215,989 $ 201,978
==========================================================
While a majority of the Bank's loans are secured by real estate located in the
Bank's market area, there are no specific 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, 2008. 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 $ 1,218 $ 7,120 $ 75,243
Real estate-construction and land development 32,758 585 0
---------------------------------------
$ 33,976 $ 7,705 $ 75,243
=======================================
Maturities after
one year with:
Fixed interest rates $ 3,761 $ 12,725
Variable interest rates 3,944 62,518
------------------------
$ 7,705 $ 75,243
========================
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,
-----------------------
2008 2007 2006
------ ----- ------
Return on average total assets
(net income divided by average total assets) .23% .85% 1.02%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 2.52% 8.50% 9.83%
Dividend payout ratio
(total declared dividends per share
divided by net income per share) 169.70% 47.79% 41.11%
Equity to assets ratio
(average shareholders' equity divided by
average total assets) 9.19% 9.94% 10.37%
Nonaccrual, Past Due and Restructured Loans
At December 31, 2008, there were eleven (11) nonaccrual loans aggregating $5
million in the Bank's portfolio, ten of which were secured by real estate,
compared with eleven (11) nonaccrual loans aggregating $1 million at December
31, 2007. While the increase in dollar amount of nonaccrual loans is a matter to
which management is devoting significant attention, it is important to note that
ten of the eleven nonaccrual loans are secured by real estate and are not
considered likely to ultimately result in losses based upon the current value of
real estate collateral.
9
However, the growth of nonaccrual loans is a concern, and will be closely
monitored. 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.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2008 2007 2006 2005 2004
-------------------------------------------------
Nonaccrual $5,075 $ 1,008 $ 886 $ 694 $ 1,739
90 days or more past due 100 816 78 79 528
-------------------------------------------------
Total nonperforming loans $5,175 $ 1,824 $ 964 $ 773 $ 2,267
=================================================
Total nonperforming loans as per-
centage of the loan portfolio 1.72% 0.67% 0.38% 0.35% 1.11%
Allowance for loan losses as a per-
centage of nonperforming loans 52.64% 135.69% 256.64% 339.72% 110.81%
Information with respect to nonaccrual and restructured loans at
December 31, 2008, 2007 and 2006 is as follows:
(dollars in thousands) Year Ended December 31
2008 2007 2006
----------------------
Interest income that would have been recorded under original terms $ 382 $ 77 $ 66
Less gross interest recorded 36 48 37
----------------------
Foregone interest $ 346 $ 29 $ 29
======================
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2008 2007 2006 2005 2004
------------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 2,475 $ 2,474 $ 2,626 $ 2,512 $ 1,664
Charge-offs:
Commercial, financial and
agricultural 924 20 25 7 0
Consumer 151 83 107 128 70
------------------------------------------------
Total charge-offs 1,075 103 132 135 70
------------------------------------------------
Recoveries:
Commercial, financial and
agricultural 18 55 6 0 0
Consumer 27 49 61 39 28
------------------------------------------------
Total recoveries 45 104 67 39 28
------------------------------------------------
Net charge-offs (recoveries) 1,030 (1) 65 96 42
Provision (benefit) charged to
operations 1,279 0 (87) 210 250
Balance acquired from CNB 0 0 0 0 640
------------------------------------------------
Balance at end of year $ 2,724 $ 2,475 $ 2,474 $ 2,626 $ 2,512
================================================
Ratio of net charge-offs
to average loans outstanding .36% .00% .02% .05% .03%
Ratio of allowance for loan losses
to year end loans .91% .92% .97% 1.20% 1.23%
10
Allocation of the Allowance for Loan Losses; Percentage of loans by type to
total loans*
(dollars in thousands)
December 31
2008 2007 2006 2005 2004
------------------ ------------------ ------------------ ------------------- ------------------
Amount Percent* Amount Percent* Amount Percent* Amount Percent * Amount Percent*
Commercial, financial and
agricultural $ 272 6.94% $ 505 7.63% $ 342 6.46% $ 495 7.02% $ 613 7.40%
Real estate construction
and land development 386 11.13% 118 10.70% 85 8.31% 95 8.61% 83 6.99%
Real estate mortgage 1,901 80.03% 1,615 78.57% 1,832 77.03% 1,761 80.74% 1,614 81.12%
Consumer 97 1.85% 201 2.96% 173 3.46% 247 3.61% 198 4.46%
Term Federal Funds 0 0% 0 0% 0 4.71% 0 0
Other loans 68 .05% 36 .14% 42 .03% 28 .02% 4 .03%
------- -------- ------- -------- ------- -------- ------- --------- ------- --------
$ 2,724 100.00% $ 2,475 100.00% $ 2,474 100.00% $ 2,626 100.00% $ 2,512 100.00%
======= ======== ======= ======== ======= ======== ======= ========= ======= ========
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
2008 2007 2006
-------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 3.35% 4.74% 4.97%
For the year 4.16% 4.30% 5.00%
Average amount outstanding during the year $ 94,698 $ 87,649 $ 71,471
Maximum amount outstanding at any month $ 107,878 $ 95,143 $ 90,403
Amount outstanding at year end $ 87,914 $ 95,011 $ 83,093
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
North 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. In addition, the Bank has
received approval to open a full-service branch office in Millerton, New York.
The Bank has purchased the property for the branch and expects to open the
branch in the third quarter of 2009.
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
11
Canaan Operations 94 Main Street
North Canaan, Connecticut
Canaan Office 100 Main Street
North Canaan, Connecticut
Millerton Branch Site 87 Main Street
(site of proposed branch office, Millerton, New York
which is expected to open in
2009)
ITEM 3. LEGAL PROCEEDINGS
The Bank individually and in its capacity as a former Co-trustee of a Revocable
Trust (Trust), has been named as a defendant in litigation currently pending in
Connecticut Complex Litigation Docket in Stamford, CT (Action).
The Action involves a dispute over title to certain real property located in
Westport, Connecticut that was conveyed by the grantor to the Trust on or about
August 8, 2007. Subsequent to this conveyance, the Bank granted a loan of
$3,386,609 to the Trust, which was secured by an open-end commercial mortgage in
favor of the Bank on the Westport property. The underlying loan is outstanding
as of December 31, 2008.
The gravamen of the plaintiff's claim in the Action is that he had an interest
in the Westport real property transferred to the Trust of which he was
wrongfully divested on account of the actions of the defendants. In the Action,
the plaintiff seeks to quiet title to the property and to recover money damages
from the defendants for the alleged wrongful divestiture of his claimed interest
in the property.
In addition to the mortgage on the property, the Bank, at the time of the
financing referenced above, acquired a lender's title insurance policy from the
Chicago Title and Insurance Company, which is providing a defense to the Bank
under a reservation of rights. The Bank denies any wrongdoing and is actively
defending the case. The Bank has filed a motion to dismiss and/or stay the
lawsuit pending resolution of a parallel action pending in New York Surrogate's
Court to which the Bank is not a party. No discovery has been taken to date. At
this time, the Company is unable to reasonably evaluate the likely outcome of
the Action, or to reasonably estimate the amount of any potential loss, if any.
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 2008 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 NYSE AMEX under the symbol "SAL".
The following table presents the high and low sales prices of the Company's
common stock.
2008 Quarters 2007 Quarters
------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------- -------------------------------------
Range of Stock prices:
High $ 29.25 $ 31.10 $ 34.45 $ 34.10 $ 34.95 $ 34.10 $ 36.90 $ 38.50
Low $ 21.50 $ 26.80 $ 28.65 $ 19.90 $ 30.75 $ 31.00 $ 32.30 $ 34.70
Holders
There were approximately 750 holders of record of the common stock of the
Company as of March 20, 2009. 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 considered four times a year, and the Company expects to
follow such practice in the future. During the year 2008, the Company declared a
cash dividend each quarter of $.28 per share. Dividends declared for the year
2008
12
totaled $1.12 per share which compared to total dividends of $1.08 that were
declared in the year 2007. At their March 27, 2009 meeting, the Directors of the
Company declared a cash dividend of $.28 per share for the first quarter of
2009. The dividend will be paid on April 30, 2009 to shareholders of record as
of April 16, 2009. 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. In addition, provided the Preferred Stock issued to the Treasury,
described in Note 22 to the Consolidated Financial Statements, is held by the
Treasury, the Common Stock dividend may not be increased without the consent of
the Treasury for three (3) years from the date of the investment by the
Treasury. On February 24, 2009, and March 27, 2009 the Federal Reserve Board
issued supervisory guidance to all bank holding companies regarding the payment
of dividends as well as stock redemptions and repurchases by bank holding
companies. Such guidance expressed the view that the Board of Directors should
ensure that dividends are prudent relative to the financial position of the
institution and that a bank holding company should inform the Federal Reserve
Board in advance of declaring a dividend that exceeds earnings for the period or
that could result in a material adverse change to an organization's capital
structure. The supervisory guidance further stated that dividends should be
eliminated, deferred, or limited if net income from the past four quarters is
not sufficient to fund the dividend or if prospective earnings retention is not
consistent with capital needs or the condition and future prospects of the
institution or if the bank holding company is in danger of not meeting minimum
regulatory capital returns.
The following table presents cash dividends declared per share for the last two
years:
2008 Quarters 2007 Quarters
------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------------------------------------- -------------------------------------
Cash dividends declared $ 0.28 $ 0.28 $ 0.28 $ 0.28 $ 0.27 $ 0.27 $ 0.27 $ 0.27
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 15 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, 2008) 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 27, 2009 under the Section "Equity Compensation Plan
Information".
Recent Sales of Unregistered Securities
The shareholders of the Company voted to approve the Directors Stock Retainer
Plan (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, 2008, 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 27, 2009, 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. In November, 2008, the Company
applied for participation in the Treasury TARP CPP under the EESA and the rules
and regulations promulgated thereunder (collectively, Act). On January 7, 2009,
the Treasury preliminarily approved the Company's application in the amount of
$8,816,000. At the time of Treasury preliminary approval, the Company's
Certificate of Incorporation did not permit the issuance of Preferred Stock.
Accordingly, a Special Meeting of Shareholders of the Company was held on March
10, 2009, and Shareholders voted to approve an amendment to the Company's
Certificate of Incorporation to authorize a class of 25,000 shares of preferred
stock, par value $0.01 per share.
The Company closed the TARP CPP transaction on March 13, 2009 in the amount of
$8,816,000. The Company issued to the Treasury 8,816 shares of Preferred Stock
together with a warrant to purchase 57,671 shares of Company common stock at
$22.93 per share, which warrant, if exercised in full, would dilute the
percentage ownership of the holders of Company common stock by approximately
3.3%. If the Company redeems all of the shares of Preferred Stock, it has first
refusal rights to buy back the warrant or the shares received upon exercise of
the warrant at their fair market value if they are then held by the Treasury. As
a condition of the closing, the Company amended the change in control agreements
described in Note 9 to Consolidated Financial Statements. The amendment
prohibits any payments relating to the change in control agreements to the
specified officers during the period in which any obligation arising under the
TARP CPP remains outstanding.
13
The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and
ranks senior to the Company's common stock in the payment of dividends or upon
liquidation. The Preferred Stock purchased by the Treasury pays a cumulative
dividend rate of 5% per annum for the first five years it is outstanding and
thereafter at a rate of 9% per annum. The Preferred Stock is non-voting, other
than voting rights on matters that could adversely affect the Preferred Stock
and in the event the Company is in arrears on six quarterly dividend payments on
the Preferred Stock, in which case, the holder of the Preferred Stock may elect
two directors to the Company's Board of Directors until all dividends have been
paid in full for four consecutive quarterly dividends. The Preferred Stock may
be redeemed by the Company at 100% of its issue price plus any accrued and
unpaid dividends. The Treasury's consent will be required for any increase in
Company common stock dividends per share or any repurchase of Company common
stock until the earlier of the third anniversary of the date of the investment
or the transfer by the Treasury of all of the shares of Preferred Stock. See
also the Form 8-K filed by the Company on March 19, 2009 with respect to the
sale of Series A Preferred Stock and Warrant to purchase Common Stock and Note
22 to Consolidated Financial Statements.
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. (Company), a Connecticut corporation, formed in 1998, is
the holding company for Salisbury Bank and Trust Company, (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 Wealth/Advisory 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.
14
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, 2008 and 2007
--------------------------------------------------------
Overview
--------
The Company's assets at December 31, 2008 totaled $495,754,000 compared to total
assets of $461,960,000 at December 31, 2007. Net loans outstanding, including
loans held-for-sale totaled $299,682,000 at December 31, 2008. This compares to
net loans outstanding of $268,311,000 at December 31, 2007, and represents an
increase of $31,371,000 or 11.69%. New business development efforts were
primarily attributable to the growth. This growth was primarily funded by an
increase in deposits. Deposits at December 31, 2008 totaled $344,925,000 and
compared to total deposits of $317,741,000 at December 31, 2007. This is an
increase of $27,184,000 or 8.56%.
The Company's earnings totaled $1,106,000 or $0.66 per average share outstanding
in 2008. This compares to earnings of $3,800,000 or $2.26 per average share
outstanding in 2007. Earnings were impacted as a result of the U.S. Government
placing FHLMC (Freddie Mac) into conservatorship during the quarter ended
September 30, 2008. This necessitated the Company to take a write-down of
Freddie Mac preferred stock during that quarter which totaled $2,856,000 and an
additional write-down of $99,365 in the quarter ended December 31, 2008 for an
overall total of $2,955,365. However, the total tax benefit in the amount of
$1,004,824 was recognized as a result of these charges in the quarter ended
December 31, 2008, because applicable law at the time forced financial
institutions to treat the loss as a capital loss. On October 3, 2008, the EESA
was enacted, which includes a provision permitting banks to recognize losses
relating to the Freddie Mac preferred stock as an ordinary loss, thereby
allowing a tax benefit for both tax and financial reporting purposes. The
overall tax effected impact for the year ended December 31, 2008 resulted in a
charge to earnings of $1,950,541.
The nation's economy is in a recession and the Bank's market area is beginning
to feel the effects of economic conditions. The Bank's 2008 loan loss provision
expense totaled $1,279,000 compared to $0 in 2007. Non-performing loans at
December 31, 2008 totaled $5,175,000 or 1.71% of total loans outstanding which
compares to $1,824,000 or 0.67% for the corresponding period in 2007. Net loans
charged-off during 2008 totaled $1,030,000 compared to net recoveries of loans
of $1 thousand dollars in 2007. At December 31, 2008, the allowance for loan
losses totaled $2,724,000 which represented 0.9% of total loans outstanding.
Other Real Estate Owned totaled $204,534 at December 31, 2008. The property has
since been sold.
During the fourth quarter of 2008, the Bank prepaid a $19 million advance from
the Federal Home Loan Bank of Boston at a cost of $674,000 net of tax. The Bank
took such action as part of a program to restructure a portion of the Bank's
borrowings. The borrowings which were at a rate of 5.97% are being replaced with
new Federal Home Loan Bank advances that have lower interest rates and a revised
maturity schedule. While the prepayment resulted in a one time after tax expense
in the fourth quarter of 2008, overall, the restructuring is expected to result
in a decrease in future borrowing expense which is intended to increase earnings
per share in 2009 and future years.
The Bank's risk-based capital ratios at December 31, 2008 were 10.53% for Tier 1
risk based capital and 11.34% for total risk based capital. The Bank's leverage
ratio was 7.52% at December 31, 2008. This compares to a Tier 1 risk based
capital ratio at December 31, 2007 of 13.74%, a total risk based capital ratio
of 14.69% and a leverage ratio of 8.06%. Dividends declared on the Company's
common stock amounted to $1.12 per share in 2008 compared to $1.08 per share in
2007.
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. A second source is fee income, which is discussed
in the noninterest income section of this analysis.
15
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,
2008 2007
-------------------
Interest and Dividend Income
(financial statements) $ 26,557 $ 26,152
Tax Equivalent Adjustment 1,260 1,202
-------- --------
Total Interest and Dividend
Income (on an FTE basis) 27,817 27,354
Interest Expense (10,825) (12,432)
-------- --------
Net Interest and Dividend Income-FTE $ 16,992 $ 14,922
======== ========
The Company's 2008 total interest and dividend income on an FTE basis for the
period ended December 31, 2008 increased $463,000 or 1.69% when compared to the
same period in 2007. The increase is primarily attributable to an increase in
earning assets.
Interest expense on deposits in 2008 decreased $1,567,000 or 19.11% to
$6,633,000 compared to $8,200,000 for the corresponding period in 2007. This
decrease reflects an economic environment of generally lower interest rates.
Interest expense for Federal Home Loan Bank advances decreased $146,000 to
$4,086,000 in 2007 compared to $4,232,000 in 2007. The decrease was the result
of a decrease in advances during the year. In addition, the Bank recorded
interest expense totaling $106,000 for interest on securities sold under
agreements to repurchase which was a new product that was introduced during
2008. Competition remains aggressive and interest margins continue to be
pressured, however, net interest and dividend income on an FTE basis increased
$2,070,000 or 13.87% over 2007 and totaled $16,992,000 for the year ended
December 31, 2008 compared to net interest and dividend income on an FTE basis
of $14,922,000 for the year ended December 31, 2007.
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 2008 net interest margin on an FTE basis
was 3.75%. This compares to a net interest margin of 3.54% for 2007. The
following table reflects average balances, interest earned or paid and rates for
the two years ended December 31, 2008 and 2007. 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
2008 was $2,446,000 with a yield of 4.32%. Actual tax exempt income in 2007
totaled $2,332,000 with a yield of 4.28%.
16
YIELD ANALYSIS
Average Balances, Interest Earned/Paid and Rates
Years Ended December 31
(dollars in thousands) 2008 2007
INTEREST INTEREST
AVERAGE EARNED/ YIELD AVERAGE EARNED/ YIELD
BALANCE PAID RATE BALANCE PAID RATE
ASSETS
Interest-Earning Assets:
Loans $ 287,924 $ 18,449 6.41% $ 258,714 $ 17,969 6.95%
Taxable Securities 104,070 5,538 5.32% 106,775 5,783 5.42%
Tax-Exempt Securities* 56,647 3,706 6.54% 54,541 3,533 6.48%
Federal Funds 3,758 99 2.63% 643 31 4.82%
Other Interest-Earning 1,332 25 1.88% 1,071 38 3.55%
-------------------- --------------------
Total Interest-Earning Assets 453,731 27,817 6.13% 421,744 27,354 6.49%
-------- --------
Allowance for Loan Losses (2,711) (2,467)
Cash & Due From Banks 6,479 6,554
Premises, Equipment 7,241 6,645
Net unrealized loss on AFS
Securities (7,232) (3,468)
Other Assets 20,555 20,619
--------- ---------
Total Average Assets $ 478,063 $ 449,627
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
NOW/Money Market Deposits $ 88,431 1,270 1.44% $ 80,180 1,854 2.31%
Savings Deposits 63,185 926 1.47% 47,063 814 1.73%
Time Deposits 116,959 4,437 3.79% 119,052 5,532 4.65%
Borrowed Funds 94,698 4,192 4.43% 87,649 4,232 4.83%
-------------------- --------------------
Total Interest-Bearing
Liabilities 363,273 10,825 2.98% 333,944 12,432 3.72%
-------- --------
Demand Deposits 67,681 66,304
Other Liabilities 3,193 4,673
Shareholders' Equity 43,916 44,706
--------- ---------
Total Liabilities and
Shareholders' Equity $ 478,063 $ 449,627
========= =========
Net Interest Income $ 16,992 $ 14,922
======== ========
Net Interest Spread 3.15% 2.77%
Net Interest Margin 3.75% 3.54%
* Presented on a fully taxable equivalent ("FTE") basis
17
Volume and Rate Variance Analysis of Net Interest and Dividend Income
(Taxable equivalent basis)
(dollars in thousands) 2008 over 2007 2007 over 2006
------------------------------ ---------------------------
Volume Rate Total Volume Rate Total
------------------------------ ---------------------------
Increase (decrease) in:
Interest income on:
Loans $ 2,030 $ (1,550) $ 480 $ 1,981 $ 301 $ 2,282
Taxable investment securities (147) (98) (245) (256) 156 (100)
Tax-exempt investment securities 136 37 173 489 (108) 381
Other interest income 136 (81) 55 (1) (10) (11)
------------------------------ ---------------------------
Total interest income $ 2,155 $ (1,692) $ 463 $ 2,213 $ 339 $ 2,552
Interest expense on:
NOW/Money Market deposits $ 191 $ (775) $ (584) $ 18 $ 24 $ 42
Savings deposits 279 (167) 112 (24) 198 174
Time deposits (97) (998) (1,095) 528 570 1,098
Borrowed funds 340 (380) (40) 808 (149) 659
------------------------------ ---------------------------
Total interest expense $ 713 $ (2,320) $ (1,607) $ 1,330 $ 643 $ 1,973
------------------------------ ---------------------------
Net interest margin $ 1,442 $ 628 $ 2,070 $ 883 $ (304) $ 579
============================== ===========================
Noninterest Income
------------------
Noninterest income totaled $2,241,000 for the year ended December 31, 2008
compared to $4,465,000 for the year ended December 31, 2007. This is a decrease
of $2,224,000 or 49.81%. While gains on sales and calls of available-for-sale
securities had a net increase of $305,000 or 104%, US Government actions
relating to Freddie Mac necessitated a write-down of Freddie Mac Preferred stock
totaling $2,955,000. Trust Wealth Advisory Services income increased $214,000 to
$2,264,000, primarily as a result of the efforts of new business development,
which has increased assets under management.
Service charges on deposit accounts totaled $830,000 for 2008. This is an
increase of $86,000 or 11.57% when compared to total service charges of $744,000
in 2007. The increase can be attributed to an increase in the number of deposit
accounts. Mortgage refinancing activity during 2008 generated revenues from
gains on sales of loans that totaled $292,000, which compares to revenues
totaling $317,000 for the corresponding period in 2007. Competition in the
secondary mortgage market continues to be very aggressive. Other income during
fiscal 2008 totaled $1,209,000. This compares to other income of $1,037,000 for
2007, representing an increase of $172,000 or 16.59%. This category of income
primarily consists of fees associated with the origination and servicing of
mortgage loans as well as gains reflecting the sale of mortgage loans.
Noninterest Expense
-------------------
Overall, noninterest expense increased 18.46% for the year ended December 31,
2008 as compared to 2007. The increases in salaries and employee benefits along
with the increases in occupancy and equipment expense are primarily a reflection
of additional staffing and operational costs associated with the operation of
our Dover Plains, New York branch which opened in August of 2007. The increase
in data processing and insurance costs are primarily attributable to increases
associated with growth in volumes of business of the Company, especially with
the addition of the new branch. Professional fees increased $338,000 or 36.25%.
This increase is primarily attributable to an increase in audit expense
resulting from additional services required due to compliance requirements such
as the Sarbanes-Oxley Act and other regulatory compliance. In addition, Legal
and Consultant fees also increased which is the result of various research and
marketing initiatives during the year. During the fourth quarter of 2008, the
Bank prepaid a $19 million advance from the FHLB of Boston at a cost of
$864,000.The Bank took such action as part of a program to restructure a portion
of the Bank's borrowings. The borrowings which were at a rate of 5.97% will be
replaced with new FHLB advances that have much lower interest rates and a
revised maturity schedule. While the prepayment resulted in a one time after tax
expense of $674,000 the restructuring is expected to result in a decrease in
future borrowing expense which is intended to positively impact earnings per
share in 2009 and future years. The increase in other expense is primarily
attributable to normal operational expenses associated with growth.
18
The components of noninterest expense and the changes in the period were as
follows (amounts in thousands):
2008 2007 $ Change % Change
-----------------------------------------------------------------------------------
Salaries and employee benefits $ 8,330 $ 7,724 $ 606 7.85%
Occupancy expense 961 802 159 19.82
Equipment expense 898 819 79 9.64
Data processing 1,339 1,194 145 12.14
Insurance 278 163 115 70.55
Printing and stationery 277 280 (3) (1.07)
Professional fees 1,269 931 338 36.30
Prepayment fee FHLB advance 864 0 864 100.00
Amortization of core deposit intangible 164 164 0 .00
Other expense 1,629 1,437 192 13.36
--------- -------- ------
Total noninterest expense $ 16,009 $ 13,514 $2,495 18.46
======== ======== ======
Income Taxes
------------
In 2008, the Company's income tax benefit totaled $421,000 and an effective tax
rate of (61.5)%. This compares to an income tax provision of $870,000 and an
effective tax rate of 18.63% for the same period in 2007. This decrease is
primarily attributable to a decrease in taxable income.
Net Income
----------
Overall, net income totaled $1,106,000 for the year ended December 31, 2008 and
represents earnings per average share outstanding of $0.66. This compares to net
income of $3,800,000 for the year ended December 31, 2007, which reflects
earnings per average share outstanding of $2.26.
FINANCIAL CONDITION
Comparison of December 31, 2008 and 2007
----------------------------------------
Total assets at December 31, 2008 were $495,754,000 compared to $461,960,000 at
December 31, 2007. This represented an increase of 7.32% or $33,794,000. Total
loans outstanding including loans held-for-sale increased $31,620,000 or 11.68%
to $302,406,000 at year-end 2008 as loan demand remained very active during
2008. Deposits increased 8.6% to $344,925,000 over the prior year, mainly due to
new business development initiatives implemented during the year which focused
on growing customer relationship deposits.
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 of the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2008, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $155,916,000. This represents a decrease
of $3,292,000 or 2.16% over year-end 2007.
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 are not included in earnings, but are reported as a
net amount (less expected tax) in a separate component of capital (accumulated
other comprehensive income or loss, net of tax) 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, 2008, the unrealized holding losses
on available-for-sale securities, net of taxes was $6,968,000. This compares to
an unrealized loss net of taxes of $2,273,000 at December 31, 2007. 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, 2008 totaled $200,000. Federal funds sold at
December 31, 2007 totaled $300,000. This variance represents a normal operating
range of funds for daily cash needs.
19
Lending
-------
Net loans, not including loans held-for-sale, represents approximately 60% of
total assets at December 31, 2008. The Company makes substantially all of its
loans to customers located within the Company's service area. New business
development during the year coupled with an increase in loan demand resulted in
an increase in net loans outstanding to $297,367,000 at December 31, 2008, as
compared to $268,191,000 at December 31, 2007. This is an increase of
$29,176,000 or 10.88%. 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. The
Company's credit function is designed to ensure adherence to prudent credit
standards despite competition for loans in the Company's market area.
The following table represents the composition of the loan portfolio comparing
December 31, 2008 to December 31, 2007:
December 31, 2008 December 31, 2007
----------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 20,785 $ 20,629
Real Estate-construction and land development 33,343 28,928
Real Estate-residential 177,048 158,600
Real Estate-commercial 62,796 53,823
Consumer 5,551 8,005
Other 175 376
--------- ---------
299,698 270,361
Deferred costs, net 393 306
Unearned income 0 (1)
Allowance for loan losses (2,724) (2,475)
--------- ---------
Net loans $ 297,367 $ 268,191
========= =========
Provisions and Allowance for Loan Losses
----------------------------------------
Total loans outstanding as of December 31, 2008 were $299,698,000 and compares
to total loans outstanding of $270,361,000 at December 31, 2007. 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 91% of the Company's loan portfolio continues to be real estate
secured.
Credit risk is inherent in the business of extending loans. The Company
continually 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, 2008 totaled
$2,724,000 representing 52.64% of nonperforming loans of $5,175,000 and 0.91% of
total loans outstanding of $299,698,000. This compares to an ALLL of $2,475,000
which was 135.69% of nonperforming loans of $1,824,000 and $0.92% of total loans
outstanding of $270,361,000 at December 31, 2007. A separate component that is
evaluated is the Allowance for Off Balance Sheet Commitments, which totaled
$34,000 at December 31, 2008 and 2007, respectively. A total of $1,075,000 in
loans were charged-off during 2008 compared to $103,000 during 2007. Recoveries
of previously charged-off loans totaled $45,000 during 2008 compared to $104,000
in recoveries for 2007. The ALLL 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.
20
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.
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, 2008.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year end 2008 totaled $344,925,000 compared to
$317,741,000 at year end 2007. 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 2008, there was a change in the mix of deposits. Money Market and savings
balances increased, as illustrated by the table below.
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
2008 2007
------------------------------------
Average Average
Balance Rate Balance Rate
------------------------------------
Demand $ 67,681 $ 66,304
NOW 24,517 .22% 24,822 .26%
Money Market 63,914 1.90% 55,358 3.23%
Savings 63,185 1.47% 47,063 1.73%
Time 116,959 3.79% 119,052 4.65%
--------- ---------
$ 336,256 1.97% $ 312,599 2.62%
========= =========
Maturities of time certificates of deposits of $100,000 or more outstanding at
December 31 are summarized as follows:
(dollars in thousands) December 31
2008 2007
-------------------
Three months or less $ 3,784 $ 7,603
Over three months through six months 3,982 17,429
Over six months through one year 13,063 15,114
Over one year 18,505 10,975
-------- --------
Total $ 39,334 $ 51,121
======== ========
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, 2008, the Company had $87,914,000 in
outstanding advances from the Federal Home Loan Bank compared to $95,011,000 at
21
December 31, 2007. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston. (See Note 8 of the Notes to Consolidated Financial Statements.)
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 and outpace the 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. Liquidity is essential to provide adequate funds to
meet anticipated financial and contractual obligations, including withdrawals by
depositors, debt service requirements as well as to fund customers' needs for
credit. The Company's primary funding sources are customer deposits, readily
marketable investment securities and loan payments. Wholesale funding is also
used to manage liquidity in the form of brokered deposits or borrowings. 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, 2008, the Company had approximately $47,859,000 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, 2008, the Company had $38,939,000 in shareholders' equity
compared to $45,564,000 at December 31, 2007. This represents a net decrease of
$6,625,000 or 14.54%. This decrease is primarily the result of recent
fluctuations in the securities market and reflects a change in net unrealized
holding losses on available-for-sale securities, net of taxes of $6,968,000 at
December 31, 2008, compared to unrealized holding losses of $2,273,000 at
December 31, 2007. Other components also contribute to the change in capital
since December 2007. Earnings for the year totaled $1,106,000. The application
of SFAS No.158, resulted in other comprehensive loss, net of tax of $892,000 in
2008. The Company declared dividends in 2008 resulting in a decrease in capital
of $1,888,000. The Company issued 840 new shares of common stock under the terms
of the Director Stock Retainer Plan during the second quarter of 2008, which
resulted in an increase in capital of $28,000.
Maintaining strong capital is essential to bank safety and soundness. However,
the effective management of capital resources
22
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.
Subsequent Event
----------------
The Company is participating in the TARP CPP under the EESA. On March 13, 2009,
the Company issued to the Treasury 8,816 shares of Preferred Stock and a Warrant
to purchase 57,671 shares of Common Stock at $22.93 per share for an aggregate
consideration of $8,816,000, which immediately became capital of the Company.
Such Warrant, if exercised in full, would dilute the percentage of ownership of
common shareholders by approximately 3.3%. If the Company redeems all of the
shares of Preferred Stock, it has the right of first refusal to buy back the
Warrant or the shares received upon exercise of the Warrant at fair market value
if such shares are then held by the Treasury. The Preferred Stock qualifies as
Tier 1 capital for regulatory purposes and ranks senior to the Company's common
stock in the payment of dividends or upon liquidation. The Preferred Stock
purchase by the Treasury pays a cumulative dividend rate of 5% per annum for the
first five years it is outstanding and thereafter at a rate of 9% per annum. The
Preferred Stock may be redeemed by the Company at 100% of its issue price plus
any accrued and unpaid dividends. The Treasury's consent will be required for
any increase in Company common stock dividends per share or any repurchase of
Company common stock until the earlier of the third anniversary of the date of
the investment or the transfer by the Treasury of all of the shares of Preferred
Stock. Additional information regarding this event is set forth in Note 22 of
the Notes to Consolidated Financial Statements included in Item 8 of this
report.
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 13 of the Notes to Consolidated 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, 2008, utilizing the
framework established in Internal Control -- Integrated Framework issued by the
Committee
23
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, 2008 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.
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
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
------------------------------------------
Report of Independent Registered Public
Accounting Firm, March 16, 2009 ...................................... F-1
Consolidated Balance Sheets at December 31, 2008 and 2007 ............... F-2
Consolidated Statements of Income for the Years Ended
December 31, 2008 and 2007 ........................................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 2008 and 2007 ....................... F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007 ........................................... F-5
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2008 and 2007 ............................... F-7
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet at December 31, 2008 and 2007 .......................... F-26
Statements of Income for the Years Ended
December 31, 2008 and 2007 ........................................... F-26
Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007 ........................................... F-27
Quarterly Results of Operations (unaudited) ............................. F-27
25
[SHATSWELL, MACLEOD & COMPANY, P.C. LOGO]
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, 2008 and 2007 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, 2008 and 2007, 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
March 16, 2009
83 PINE STREET o WEST PEABODY, MASSACHUSETTS 01960-3635
o TELEPHONE (978) 535-0206 o FACSIMILE (978) 535-9908
smc@shatswell.com www.shatswell.com
F-1
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2008 and 2007
--------------------------
2008 2007
------------- -------------
ASSETS
------
Cash and due from banks $ 7,082,317 $ 12,810,681
Interest-bearing demand deposits with other banks 900,487 726,623
Money market mutual funds 1,476,999 1,340,891
Federal Funds sold 200,000 300,000
------------- -------------
Cash and cash equivalents 9,659,803 15,178,195
Investments in available-for-sale securities (at fair value) 150,526,964 147,377,154
Investments in held-to-maturity securities (fair values of $66,502
and $71,435 as of December 31, 2008 and 2007, respectively) 66,443 70,798
Federal Home Loan Bank stock, at cost 5,323,000 5,176,100
Loans held-for-sale 2,314,250 120,000
Loans, less allowance for loan losses of $2,724,024 and $2,474,893
as of December 31, 2008 and 2007, respectively 297,367,434 268,191,275
Investment in real estate 75,000 75,000
Other real estate owned 204,534 0
Premises and equipment 7,123,671 6,803,198
Goodwill 9,828,712 9,828,712
Core deposit intangible 1,165,068 1,329,283
Accrued interest receivable 2,704,385 2,538,607
Cash surrender value of life insurance policies 3,824,653 3,688,021
Deferred taxes 4,196,819 381,162
Other assets 1,373,424 1,202,893
------------- -------------
Total assets $ 495,754,160 $ 461,960,398
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest bearing $ 65,479,271 $ 69,214,697
Interest-bearing 279,445,961 248,526,572
------------- -------------
Total deposits 344,925,232 317,741,269
Securities sold under agreements to repurchase 11,203,289 0
Federal Home Loan Bank advances 87,913,667 95,011,155
Due to broker 7,631,919 0
Other liabilities 5,140,721 3,644,376
------------- -------------
Total liabilities 456,814,828 416,396,800
------------- -------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000
shares; issued and outstanding, 1,685,861 shares in 2008
and 1,685,021 shares in 2007 168,586 168,502
Paid-in capital 13,157,883 13,130,247
Retained earnings 34,518,331 35,583,443
Accumulated other comprehensive loss (8,905,468) (3,318,594)
------------- -------------
Total shareholders' equity 38,939,332 45,563,598
------------- -------------
Total liabilities and shareholders' equity $ 495,754,160 $ 461,960,398
============= =============
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, 2008 and 2007
--------------------------------------
2008 2007
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 18,448,530 $ 17,968,801
Interest on debt securities:
Taxable 5,336,344 5,457,879
Tax-exempt 2,445,805 2,332,374
Dividends on equity securities 202,458 324,329
Other interest 124,129 68,762
------------ ------------
Total interest and dividend income 26,557,266 26,152,145
------------ ------------
Interest expense:
Interest on deposits 6,633,358 8,200,214
Interest on securities sold under agreements to repurchase 105,993 0
Interest on Federal Home Loan Bank advances 4,085,756 4,232,221
------------ ------------
Total interest expense 10,825,107 12,432,435
------------ ------------
Net interest and dividend income 15,732,159 13,719,710
Provision for loan losses 1,279,099 0
------------ ------------
Net interest and dividend income after provision
for loan losses 14,453,060 13,719,710
------------ ------------
Noninterest income:
Trust department income 2,263,735 2,050,000
Loan commissions 1,544 22,131
Service charges on deposit accounts 829,975 743,901
Gain on sales and calls of available-for-sale securities, net 600,331 294,984
Write-down of available-for-sale securities (2,955,365) 0
Gain on sales of loans held-for-sale 291,854 316,736
Other income 1,208,899 1,036,911
------------ ------------
Total noninterest income 2,240,973 4,464,663
------------ ------------
Noninterest expense:
Salaries and employee benefits 8,330,147 7,723,691
Occupancy expense 960,757 801,558
Equipment expense 897,597 819,474
Data processing 1,339,391 1,193,887
Insurance 277,910 163,024
Printing and stationery 277,310 280,172
Professional fees 1,269,013 931,352
Amortization of core deposit intangible 164,215 164,216
Prepayment fee on Federal Home Loan Bank advance 864,324 0
Other expense 1,628,773 1,436,945
------------ ------------
Total noninterest expense 16,009,437 13,514,319
------------ ------------
Income before income taxes 684,596 4,670,054
Income tax (benefit) expense (421,285) 870,006
------------ ------------
Net income $ 1,105,881 $ 3,800,048
============ ============
Earnings per common share $ .66 $ 2.26
============ ============
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, 2008 and 2007
--------------------------------------
Number Accumulated
of Other
Shares Common Paid-in Retained Comprehensive
Issued Stock Capital Earnings Loss Total
--------- ----------- ----------- ----------- ----------- -----------
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
Comprehensive loss:
Net income 1,105,881
Other comprehensive loss, net of tax
effect (5,586,874)
Comprehensive loss (4,480,993)
Cumulative effect of a change in
accounting principles - initial
application of EITF Issue No. 06-4 (283,065) (283,065)
Issuance of 840 shares for Directors' fees 840 84 27,636 27,720
Dividends declared ($1.12 per share) (1,887,928) (1,887,928)
--------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2008 1,685,861 $ 168,586 $13,157,883 $34,518,331 $(8,905,468) $38,939,332
========= =========== =========== =========== =========== ===========
Reclassification disclosure for the years ended December 31:
2008 2007
------------ ------------
Unrealized holding losses on available-for-sale securities
Net unrealized holding losses on available-for-sale securities $ (9,468,788) $ (1,344,871)
Reclassification adjustment for net realized losses (gains) in net income 2,355,034 (294,984)
------------ ------------
(7,113,754) (1,639,855)
Income tax benefit 2,418,675 557,551
------------ ------------
Unrealized holding losses on available-for-sale securities, net of tax (4,695,079) (1,082,304)
------------ ------------
Comprehensive (loss) income - defined benefit pension plan (1,351,205) 433,058
Income tax benefit (expense) 459,410 (147,239)
------------ ------------
Comprehensive (loss) income - defined benefit pension plan, net of tax (891,795) 285,819
------------ ------------
Other comprehensive loss, net of tax $ (5,586,874) $ (796,485)
============ ============
Accumulated other comprehensive loss consists of the following as of December
31:
2008 2007
------------ ------------
Net unrealized holding losses on available-for-sale securities, net of taxes $ (6,967,705) $ (2,272,627)
Unrecognized pension plan expense - SFAS No. 158, net of taxes (1,937,763) (1,045,967)
------------ ------------
Accumulated other comprehensive loss $ (8,905,468) $ (3,318,594)
============ ============
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, 2008 and 2007
--------------------------------------
2008 2007
-------------- ------------
Cash flows from operating activities:
Net income $ 1,105,881 $ 3,800,048
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 148,904 75,014
Gain on sales and calls of available-for-sale securities, net (600,331) (294,984)
Write-down of available-for-sale securities 2,955,365 0
Provision for loan losses 1,279,099 0
Change in loans held-for-sale (2,194,250) 184,000
Change in deferred loan costs, net (87,293) (137,362)
Change in unearned income on loans (554) (2,528)
Net decrease in mortgage servicing rights 116,984 110,515
Depreciation and amortization 687,177 565,267
Amortization of core deposit intangible 164,215 164,216
Amortization of fair value adjustment on loans 47,618 71,357
Accretion of fair value adjustments on borrowings (130,204) (130,203)
Increase in interest receivable (135,165) (64,671)
Deferred tax (benefit) provision (937,571) 34,785
Decrease (increase) in prepaid expenses 138,106 (4,594)
Increase in cash surrender value of insurance policies (136,632) (133,026)
(Increase) decrease in income tax receivable (347,144) 89,869
(Increase) decrease in other assets (182,974) 90,673
(Decrease) increase in accrued expenses (98,143) 102,293
(Decrease) increase in interest payable (239,662) 6,794
Increase in other liabilities 182,795 216,509
Issuance of shares for Directors' fees 27,720 30,450
-------------- ------------
Net cash provided by operating activities 1,763,941 4,774,422
-------------- ------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (146,900) (512,400)
Purchases of available-for-sale securities (111,560,110) (69,642,478)
Proceeds from sales of available-for-sale securities 76,524,048 63,597,747
Proceeds from maturities of available-for-sale securities 29,869,894 12,170,270
Proceeds from maturities of held-to-maturity securities 4,327 4,102
Loan originations and principal collections, net (27,367,179) (11,448,576)
Purchases of loans (3,297,434) (4,313,300)
Recoveries of loans previously charged off 45,050 103,564
Capital expenditures (903,154) (1,396,923)
Cash and cash equivalents acquired from New York Community
Bank, net of expenses paid of $119,407 0 176,653
-------------- ------------
Net cash used in investing activities (36,831,458) (11,261,341)
-------------- ------------
F-5
SALISBURY BANCORP, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2008 and 2007
--------------------------------------
(continued)
2008 2007
-------------- ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 17,712,746 8,467,718
Net increase (decrease) increase in time deposits 9,471,217 (4,805,216)
Federal Home Loan Bank advances 17,000,000 21,000,000
Principal payments on Federal Home Loan Bank advances (36,208,284) (16,589,044)
Net change in short-term Federal Home Loan Bank advances 12,241,000 3,637,000
Net change in securities sold under agreements to repurchase 11,203,289 0
Dividends paid (1,870,843) (1,802,527)
-------------- ------------
Net cash provided by financing activities 29,549,125 9,907,931
-------------- ------------
Net (decrease) increase in cash and cash equivalents (5,518,392) 3,421,012
Cash and cash equivalents at beginning of year 15,178,195 11,757,183
-------------- ------------
Cash and cash equivalents at end of year $ 9,659,803 $ 15,178,195
============== ============
Supplemental disclosures:
Interest paid $ 11,194,973 $ 12,559,418
Income taxes paid 863,430 745,352
Loans transferred to other real estate owned 204,534 0
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, 2008 and 2007
--------------------------------------
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
(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, 2008 and 2007 includes
$650,000, which is subject to withdrawals and usage restrictions to
satisfy the reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of premiums
and accretion of discounts 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.
F-7
-- 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, 2008 and 2007, 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.
On December 8, 2008, the Federal Home Loan Bank of Boston announced a
moratorium on the repurchase of excess stock held by its members. Until
the moratorium is lifted, the Bank is unable to redeem any excess shares
of Federal Home Loan Bank of Boston stock. The moratorium will remain in
effect indefinitely.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Residential real estate loans are generally placed on nonaccrual status
when reaching 90 days past due or in the process of foreclosure. Lines of
credit secured by real estate 90 days past due or in the process of
foreclosure are placed on nonaccrual status. Secured consumer loans are
written down to realizable value and unsecured consumer loans are
charged-off upon reaching 120 or 180 days past due depending on the type
of loan. Commercial real estate loans and commercial business loans and
leases which are 90 days or more past due are generally placed on
nonaccrual status, unless secured by sufficient cash or other assets
immediately convertible to cash. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when
collectibility of principal is reasonably assured and the loan has
performed for a period of time, generally six months.
Cash receipts of interest income on impaired loans are credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
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
borrowers' 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
F-8
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-downs are
included in other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Bank classifies loans as in-substance, repossessed or
foreclosed if the Bank or its subsidiaries receives physical possession of
the debtor's assets regardless of whether formal foreclosure proceedings
take place.
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 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.
F-9
Securities sold under agreements to repurchase: The carrying amounts
reported on the consolidated balance sheets for securities sold under
agreements to repurchase approximate their fair values.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
STOCK BASED COMPENSATION:
Bancorp has a stock-based plan to compensate non-employee directors for
their services. This plan is more fully described in Note 16. 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 1,685,549 in 2008 and 1,684,699 in 2007. 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, 2008 and 2007.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2006, the Financial Accounting Standards Board (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, 2007. The Company's adoption of FIN 48 did not have a
material impact on its financial statements.
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. The Company 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 adopted this Issue in 2008, and the impact is
described in Note 9 of the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles (GAAP)
and expands disclosures about fair value measurements. The FASB's FSP FAS
157-2, "Effective Date of FASB Statement No. 157", defers until January 1,
2009, the application of SFAS 157 to nonfinancial assets and nonfinancial
liabilities not recognized or disclosed at least annually at fair value.
This includes nonfinancial assets and nonfinancial liabilities initially
measured at fair value in a business combination or other new basis event,
but not measured at fair value in subsequent periods. The Company adopted
this statement on January 1, 2008. See Note 12 - Fair Value Measurements
for additional information.
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, at
specified election dates, to choose to measure certain financial
instruments at fair value that are not currently required to be measured
at fair value. The fair value option is applied on an
instrument-by-instrument basis, is irrevocable and can only be applied to
an entire instrument and not to specified risks, specific cash flows, or
portions of that instrument. Unrealized gains and losses on items for
which the fair value option has been elected will be
F-10
reported in earnings at each subsequent reporting date and upfront fees
and costs related to those items will be recognized in earnings as
incurred and not deferred. SFAS No. 159 is effective in fiscal years
beginning after November 15, 2007 and may not be applied retrospectively.
The Company adopted SFAS 159 effective January 1, 2008. See Note 12.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements and Amendment of ARB No. 51 ("SFAS
No. 160"). The new pronouncement requires all entities to report
noncontrolling (minority) interests in subsidiaries as a component of
shareholders' equity. SFAS No. 160 will be effective for fiscal years
beginning after December 15, 2008. Early adoption is prohibited.
Management anticipates that this statement will not have a material impact
on the Company's financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring
entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value
with limited exceptions. It also amends the accounting treatment for
certain specific items including acquisition costs and non controlling
minority interests and includes a substantial number of new disclosure
requirements. SFAS 141(R) applies prospectively to business combinations
for which the acquisition date is on or after January 1, 2009. 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 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions." This FSP
provides guidance on how the transferor and transferee should separately
account for a transfer of a financial asset and a related repurchase
financing if certain criteria are met. This guidance will be effective
January 1, 2009. The adoption of this new FSP is not expected to have a
material effect on the Company's results of operations or financial
position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133"
(SFAS 161). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. The guidance in
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. This statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company does not
expect the adoption of this statement to have a material impact on its
financial condition and results of operations.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful
Life of Intangible Assets." This FSP provides guidance as to factors
considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142,
"Goodwill and Other Intangible Assets." This guidance will be effective
January 1, 2009. The adoption is not expected to have a material effect on
the Company's results of operations or financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally
Accepted Accounting Principles." This standard formalizes minor changes in
prioritizing accounting principles used in the preparation of financial
statements that are presented in conformity with GAAP. This standard
became effective November 15, 2008.
F-11
NOTE 3 - INVESTMENTS IN SECURITIES
----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The amortized cost of securities and
their approximate fair values are as follows as of December 31:
Amortized Gross Gross
Cost Unrealized Unrealized Fair
Basis Gains Losses Value
------------- ------------ ------------ -------------
Available-for-sale securities:
December 31, 2008:
Equity securities $ 422 $ 0 $ 0 $ 422
Preferred stock 19,635 0 0 19,635
Debt securities issued by the U.S. Treasury and
other U. S. government corporations and
agencies 41,460,086 110,037 298,777 41,271,346
Debt securities issued by states of the United
States and political subdivisions of the states 63,513,972 134,913 7,953,357 55,695,528
Money market mutual funds 1,476,999 0 0 1,476,999
Mortgage-backed securities 56,089,978 501,180 3,051,125 53,540,033
------------- ------------ ------------ -------------
162,561,092 746,130 11,303,259 152,003,963
Money market mutual funds included in cash and
cash equivalents (1,476,999) (1,476,999)
------------- ------------ ------------ -------------
$ 161,084,093 $ 746,130 $ 11,303,259 $ 150,526,964
============= ============ ============ =============
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
============= ============ ============ =============
Held-to-maturity securities:
December 31, 2008:
Mortgage-backed securities $ 66,443 $ 59 $ 0 $ 66,502
============= ============ ============ =============
December 31, 2007:
Mortgage-backed securities $ 70,798 $ 637 $ 0 $ 71,435
============= ============ ============ =============
The scheduled maturities of debt securities were as follows as of December 31,
2008:
Available-For-Sale Held-To-Maturity
------------------ -----------------------
Fair Amortized Fair
Value Cost Basis Value
------------- ---------- ----------
Due after five years through ten years $ 1,000,532 $ 0 $ 0
Due after ten years 95,966,342 0 0
Mortgage-backed securities 53,540,033 66,443 66,502
------------- ---------- ----------
$ 150,506,907 $ 66,443 $ 66,502
============= ========== ==========
F-12
During 2008, proceeds from sales of available-for-sale securities amounted to
$76,524,048. Gross realized gains and gross realized losses on those sales
amounted to $572,014 and $75, respectively. 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. The tax provision applicable to these net realized gains amounted
to $194,459 and $100,295, respectively.
The aggregate amortized cost basis and fair value of securities of issuers which
exceeded 10% of shareholders' equity were as follows as of December 31, 2008.
Amortized
Issuer Cost Basis Fair Value
------ ----------- -----------
Wells Fargo Mortgage Backed Securities $ 9,670,772 $ 9,005,530
Total carrying amounts of $91,119,746 and $55,203,368 of debt securities were
pledged to secure Federal Home Loan Bank advances, public deposits, securities
sold under agreements to repurchase, treasury tax and loan and for other
purposes as required by law as of December 31, 2008 and 2007, 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, 2008
-------------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
-------------------------- -------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ----------- ------------ ----------- ------------ ------------
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies $ 15,701,224 $ 298,777 $ 0 $ 0 $ 15,701,224 $ 298,777
Debt securities issued by states
of the United States and political
subdivisions of the states 43,327,439 6,032,499 6,381,562 1,920,858 49,709,001 7,953,357
Mortgage-backed securities 24,195,458 2,513,223 5,570,852 537,902 29,766,310 3,051,125
------------ ----------- ------------ ----------- ------------ ------------
Total temporarily impaired securities $ 83,224,121 $ 8,844,499 $ 11,952,414 $ 2,458,760 $ 95,176,535 $ 11,303,259
============ =========== ============ =========== ============ ============
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
============ =========== ============ =========== ============= =============
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. The unrealized losses at December 31, 2008 are mainly attributable
to changes in market interest rates and current market inefficiencies. 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.
F-13
NOTE 4 - LOANS
--------------
Loans consisted of the following as of December 31:
2008 2007
------------- -------------
Commercial, financial and agricultural $ 20,784,842 $ 20,629,467
Real estate - construction and land development 33,342,610 28,927,954
Real estate - residential 177,048,233 158,599,546
Real estate - commercial 62,796,469 53,822,693
Consumer 5,551,172 8,004,931
Other 174,965 376,257
------------- -------------
299,698,291 270,360,848
Deferred costs, net 393,228 305,935
Unearned income (61) (615)
Allowance for loan losses (2,724,024) (2,474,893)
------------- -------------
Net loans $ 297,367,434 $ 268,191,275
============= =============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were loan customers of the Bank during
2008. Total loans to such persons and their companies amounted to $1,146,982 as
of December 31, 2008. During 2008, principal advances of $696,784 were made and
repayments totaled $293,964 on such loans.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2008 2007
------------- -------------
Balance at beginning of period $ 2,474,893 $ 2,474,118
Provision for loan losses 1,279,099 0
Recoveries of loans previously charged off 45,050 103,564
Loans charged off (1,075,018) (102,789)
------------- -------------
Balance at end of period $ 2,724,024 $ 2,474,893
============= =============
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2008 2007
------------- -------------
Total nonaccrual loans $ 5,074,619 $ 1,007,890
============= =============
Accruing loans which are 90 days or more
overdue $ 99,982 $ 816,581
============= =============
Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:
2008 2007
------------------------ ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
Loans for which there is a related allowance
for credit losses $ 797,467 $ 82,592 $ 0 $ 0
Loans for which there is no related allowance
for credit losses 3,709,479 0 0 0
----------- ---------- ----------- ----------
Totals $ 4,506,946 $ 82,592 $ 0 $ 0
=========== ========== =========== ==========
Average recorded investment in impaired loans
during the year ended December 31 $ 3,674,242 $ 0
=========== ===========
Related amount of interest income recognized
during the time, in the year ended
December 31, that the loans were impaired
Total recognized $ 16,234 $ 0
=========== ===========
Amount recognized using a cash-basis
method of accounting $ 16,234 $ 0
=========== ===========
F-14
In 2008 and 2007, the Bank capitalized mortgage-servicing rights totaling
$132,437 and $59,882 respectively, and amortized $131,806 and $171,034,
respectively. The balance of capitalized mortgage servicing rights included in
other assets at December 31, 2008 and 2007 was $108,685 and $225,669,
respectively.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the years ended December 31:
2008 2007
--------- -------
Balance, beginning of year $ 814 $ 1,451
Additions 127,648 2,451
Reductions (10,033) (3,088)
--------- -------
Balance, end of year $ 118,429 $ 814
========= =======
The fair value of the mortgage servicing rights was $134,547 and $562,911 as of
December 31, 2008 and 2007, 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 $54,072,990 and $48,696,731 at December 31, 2008 and
2007, respectively.
NOTE 5 - PREMISES AND EQUIPMENT
-------------------------------
The following is a summary of premises and equipment as of December 31:
2008 2007
------------ ------------
Land $ 775,844 $ 775,844
Buildings 6,619,537 6,281,851
Furniture and equipment 3,822,961 3,385,608
------------ ------------
11,218,342 10,443,303
Accumulated depreciation and amortization (4,094,671) (3,640,105)
------------ ------------
$ 7,123,671 $ 6,803,198
============ ============
NOTE 6 - DEPOSITS
-----------------
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2008 and 2007 was $39,334,415 and $36,440,424,
respectively.
There were no brokered time deposits outstanding as of December 31, 2008. The
aggregate amount of brokered time deposits as of December 31, 2007 was
$14,681,000. 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, 2008, the scheduled maturities for years
ended December 31, are as follows:
2009 $ 73,026,261
2010 33,851,618
2011 9,159,329
2012 1,882,833
2013 7,599,798
-------------
$ 125,519,839
=============
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were deposit customers of the Bank
during 2008. Total deposits of such persons and their companies amounted to
$1,973,772 and $1,847,657 as of December 31, 2008 and 2007, respectively.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
-------------------------------------------------------
The securities sold under agreements to repurchase as of December 31, 2008 are
securities sold on a short term basis by the Bank that have been accounted for
not as sales but as borrowings. The securities consisted of bonds and
mortgage-backed securities issued by Government-sponsored enterprises. The
securities are pledged to the purchasers of the securities. The purchasers have
agreed to sell to the Bank substantially identical securities at the maturity of
the agreements.
F-15
NOTE 8 - 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, 2008, and thereafter, are summarized as follows:
2009 $ 23,495,766
2010 3,551,427
2011 12,196,777
2012 6,635,584
2013 11,569,201
Thereafter 30,410,661
Fair value adjustment 54,251
------------
$ 87,913,667
============
As of December 31, 2008, 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 1/26/2009 $ 500,000
4/27/2009 1/26/2009 500,000
2/8/2010 2/6/2009 and quarterly thereafter 600,000
12/15/2010 3/16/2009 and quarterly thereafter 800,000
12/20/2010 3/20/2009 and quarterly thereafter 500,000
2/28/2011 2/26/2009 and quarterly thereafter 10,000,000
3/1/2011 3/2/2009 and quarterly thereafter 500,000
3/2/2012 3/2/2009 and quarterly thereafter 5,000,000
12/16/2013 3/16/2009 and quarterly thereafter 10,000,000
12/12/2016 3/12/2009 and quarterly thereafter 15,000,000
7/31/2017 2/2/2009 and quarterly thereafter 6,000,000
7/2/2018 6/30/2011 7,000,000
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, 2008, the interest rates on FHLB advances ranged from .0625
percent to 6.30 percent. At December 31, 2008, the weighted average interest
rate on FHLB advances was 3.35 percent.
NOTE 9 - 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-16
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:
2008 2007
------------ ------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 6,359,101 $ 6,027,929
Actuarial gain (266,905) (229,821)
Service cost 403,808 437,740
Interest cost 366,950 342,022
Benefits paid (187,408) (218,769)
------------ ------------
Benefit obligation at end of year 6,675,546 6,359,101
------------ ------------
Change in plan assets:
Plan assets at estimated fair value at
beginning of year 5,800,945 5,016,664
Actual return on plan assets (1,236,871) 503,050
Contributions by employer 500,000 500,000
Benefits paid (187,408) (218,769)
------------ ------------
Fair value of plan assets at end of year 4,876,666 5,800,945
------------ ------------
Funded status and recognized liability
included in other liabilities on the
balance sheet $ (1,798,880) $ (558,156)
============ ============
Amounts recognized in accumulated other comprehensive loss, before tax effect,
consist of:
December 31,
---------------------------
2008 2007
------------ ------------
Net loss $ 2,935,986 $ 1,583,889
Prior service cost 18 910
------------ ------------
$ 2,936,004 $ 1,584,799
============ ============
The accumulated benefit obligation for the plan was $4,958,716 and $4,602,777 at
December 31, 2008 and 2007, respectively.
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.0% for 2008 and 2007. The rate of increase in
future compensation levels was based on the following graded table for 2008 and
2007:
AGE RATE
--- -----
25 4.75%
35 4.25%
45 3.75%
55 3.25%
65 3.00%
Components of net periodic cost are as follows for the years ended December 31:
2008 2007
------------ ------------
Service cost $ 403,808 $ 437,740
Interest cost on benefit obligation 366,950 342,022
Expected return on plan assets (426,992) (368,942)
Amortization of prior service cost 892 893
Recognized net loss 44,861 68,236
------------ ------------
Net periodic benefit cost 389,519 479,949
------------ ------------
Other changes in plan assets and benefit
obligations recognized in other
comprehensive loss:
Net actuarial loss (gain) 1,396,958 (363,929)
Amortization of net loss (44,861) (68,236)
Prior service cost (892) (893)
------------ ------------
Total recognized in other comprehensive loss 1,351,205 (433,058)
------------ ------------
Total recognized in net periodic cost and other
comprehensive loss $ 1,740,724 $ 46,891
============ ============
F-17
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, 2009 are $123,150 and $18, respectively.
The discount rate used to determine the net periodic benefit cost was 6.00% for
2008 and 2007; and the expected return on plan assets was 7.50% for 2008 and
2007.
The graded table above was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2008 and 2007.
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 2008. 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.
The Bank's pension plan asset allocations by asset category are as follows:
December 31, 2008 December 31, 2007
--------------------- ---------------------
Asset Category Fair Value Percent Fair Value Percent
----------------------------------------------- ----------- ------- ----------- -------
Equity securities $ 2,899,682 59.5% $ 3,407,281 58.7%
U.S. Government treasury and agency securities 517,327 10.6 1,252,945 21.6
Corporate bonds 560,643 11.5 122,687 2.1
Mutual funds 266,438 5.5 296,365 5.1
Money market mutual funds 566,812 11.6 617,567 10.7
Certificates of deposit 65,764 1.3 104,100 1.8
----------- ------- ----------- -------
Total $ 4,876,666 100.0% $ 5,800,945 100.0%
=========== ======= =========== =======
There were no securities of the Bancorp and related parties included in plan
assets as of December 31, 2008 and 2007.
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:
2009 $ 1,109,000
2010 212,000
2011 117,000
2012 304,000
2013 356,000
2014 - 2018 2,809,000
The Bank expects to make a contribution of $485,000 in 2009.
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, 2008 and 2007 amounted to $105,000 and $99,983, respectively. Discretionary
contributions vest in full after five years.
F-18
The Bank entered into a Supplemental Retirement Plan Agreement with its Chief
Executive Officer that provides for supplemental post retirement payments for a
ten year period as described in the agreement. The related liability was
$163,281 and $90,641 at December 31, 2008 and 2007, respectively. The related
expense amounted to $72,640 and $12,643 for the years ended December 31, 2008
and 2007, respectively.
As of December 31, 2008, 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." See Note 22, Subsequent
Events.
In 2008, the Company adopted EITF Issue 06-4 and recognized a liability for the
Company's future postretirement benefit obligations under endorsement
split-dollar life insurance arrangements. The Company recognized this change in
accounting principle as a cumulative effect adjustment to retained earnings of
$283,065. The total liability for the arrangements included in other liabilities
was $325,470 at December 31, 2008. Expense under this arrangement was $42,405
for 2008.
NOTE 10 - INCOME TAX (BENEFIT) EXPENSE
--------------------------------------
The components of income tax (benefit) expense are as follows for the years
ended December 31:
2008 2007
----------- ---------
Current:
Federal $ 398,088 $ 774,753
State 118,198 60,468
----------- ---------
516,286 835,221
----------- ---------
Deferred:
Federal (1,016,671) 24,785
State 0 0
Change in valuation allowance 79,100 10,000
----------- ---------
(937,571) 34,785
----------- ---------
Total income tax (benefit) expense $ (421,285) $ 870,006
=========== =========
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:
2008 2007
------ ------
% 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 (135.4) (19.1)
Other items 16.9 2.6
State tax, net of federal tax benefit 11.4 0.9
Change in valuation allowance 11.6 0.2
------ ------
Effective tax rates (61.5)% 18.6%
====== ======
F-19
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2008 2007
------------ -----------
Deferred tax assets:
Allowance for loan losses $ 703,472 $ 618,527
Interest on non-performing loans 135,288 22,710
Accrued deferred compensation 55,284 30,584
Post-retirement benefits 21,420 22,440
Other real estate owned property write-down 22,100 22,100
Capital loss carry forward 349,266 398,191
Unrecognized pension expense - FASB No. 158 998,241 538,832
Write-down of securities 1,004,827 0
Net unrealized holding loss on
available-for-sale securities 3,589,424 1,170,748
------------ -----------
Gross deferred tax assets 6,879,322 2,824,132
Valuation allowance (349,266) (270,166)
------------ -----------
6,530,056 2,553,966
------------ -----------
Deferred tax liabilities:
Deferred loan costs, net (133,698) (104,018)
Goodwill and core deposit intangible asset (682,255) (662,257)
Accelerated depreciation (1,039,137) (957,538)
Mark-to-market purchase accounting adjustments (54,571) (23,204)
Mortgage servicing rights (36,953) (76,728)
Prepaid pension (386,623) (349,059)
------------ -----------
Gross deferred tax liabilities (2,333,237) (2,172,804)
------------ -----------
Net deferred tax asset $ 4,196,819 $ 381,162
============ ===========
As of December 31, 2008, the Company had no operating loss and tax credit
carryovers for tax purposes.
In assessing the ability to realize deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the reversal of deferred tax liabilities and generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon such information, management believes it is
more likely than not the Company will realize the benefits of the deferred tax
assets, net of the valuation allowance provided, as of December 31, 2008.
The Company adopted FASB interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement 109" (FIN 48) as of December
31, 2008. It is the Company's policy to provide for uncertain tax positions and
the related interest and penalties based upon management's assessment of whether
a tax benefit is more likely than not to be sustained upon examination by tax
authorities. There was no effect on the Company's balance sheet or income
statement from adoption of FIN 48.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
------------------------------------------------
Commitments
The Bank has 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.
Contingent Liabilities
The Bank individually and in its capacity as a former Co-trustee of a Revocable
Trust (Trust), has been named as a defendant in litigation currently pending in
Connecticut Complex Litigation Docket in Stamford, CT (Action).
The Action involves a dispute over title to certain real property located in
Westport, Connecticut that was conveyed by the grantor to the Trust on or about
August 8, 2007. Subsequent to this conveyance, the Bank granted a loan of
$3,386,609 to the Trust, which was secured by an open-end commercial mortgage in
favor of the Bank on the Westport property. The underlying loan is outstanding
as of December 31, 2008.
The gravamen of the plaintiff's claim in the Action is that he had an interest
in the Westport real property transferred to the
F-20
Trust of which he was wrongfully divested on account of the actions of the
defendants. In the Action, the plaintiff seeks to quiet title to the property
and to recover money damages from the defendants for the alleged wrongful
divestiture of his claimed interest in the property.
In addition to the mortgage on the property, the Bank, at the time of the
financing referenced above, acquired a lender's title insurance policy from the
Chicago Title and Insurance Company, which is providing a defense to the Bank
under a reservation of rights. The Bank denies any wrongdoing and is actively
defending the case. The Bank has filed a motion to dismiss and/or stay the
lawsuit pending resolution of a parallel action pending in New York Surrogate's
Court to which the Bank is not a party. No discovery has been taken to date. At
this time, the Company is unable to reasonably evaluate the likely outcome of
the Action, or to reasonably estimate the amount of any potential loss, if any.
NOTE 12 - FAIR VALUE MEASUREMENTS
---------------------------------
Effective January 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157 (SFAS 157), Fair Value Measurements, which provides a
framework for measuring fair value under generally accepted accounting
principles. The Company also adopted SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115. SFAS No. 159 allows an entity the irrevocable option to elect
fair value for the initial and subsequent measurement for certain financial
assets and liabilities on a contract-by-contract basis. The Company did not
elect fair value treatment for any financial assets or liabilities upon
adoption.
In accordance with SFAS 157, the Company groups its financial assets and
financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value.
Level 1 - Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange. Level 1 also includes U.S.
Treasury, other U.S. Government and agency mortgage-backed securities that are
traded by dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 - Valuations for assets and liabilities traded in less active dealer or
broker markets. Valuations are obtained from third party pricing services for
identical or comparable assets or liabilities.
Level 3 - Valuations for assets and liabilities that are derived from other
methodologies, including option pricing models, discounted cash flow models and
similar techniques, are not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and projections
in determining the fair value assigned to such assets and liabilities.
A financial instrument's level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement.
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of the Company's financial assets and financial liabilities
carried at fair value for December 31, 2008.
The Company's cash instruments are generally classified within level 1 or level
2 of the fair value hierarchy because they are valued using quoted market
prices, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency.
The Company's investments in debt securities and mortgage-backed securities
available-for-sale are generally classified within level 2 of the fair value
hierarchy. For these securities, the Company obtains fair value measurements
from independent pricing services. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the
U.S. treasury yield curve, trading levels, market consensus prepayment speeds,
credit information and the instrument's terms and conditions.
Level 3 is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management's best estimate is
used. Subsequent to inception, management only changes level 3 inputs and
assumptions when corroborated by evidence such as transactions in similar
instruments, completed or pending third-party transactions in the underlying
investment or comparable entities, subsequent rounds of financing,
recapitalization and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash flows.
F-21
The Company's impaired loans are reported at the fair value of the underlying
collateral if repayment is expected solely from the collateral. Collateral
values are estimated using level 2 inputs based upon appraisals of similar
properties obtained from a third party.
The following summarizes assets measured at fair value for the period ending
December 31, 2008.
Assets measured at Fair Value on a recurring basis:
Fair Value Measurements at Reporting Date Using:
------------------------------------------------------------------------
Quoted Prices in Significant Significant
Active Markets for Other Observable Unobservable
Identical Assets Inputs Inputs
December 31, 2008 Level 1 Level 2 Level 3
----------------- ------------------ ---------------- ------------
Securities available-for-sale $ 150,526,964 $ 19,635 $ 148,747,605 $ 1,759,724
Impaired loans 714,875 0 714,875 0
------------- -------- ------------- ------------
Totals $ 151,241,839 $ 19,635 $ 149,462,480 $ 1,759,724
============= ======== ============= ============
Fair Value Measurements
Using Significant Unobservable Inputs
Level 3
-------------------------------------
Available-for-Sale
Securities Total
------------------ -----------
Beginning balance January 1, 2008 $ 1,700,281 $ 1,700,281
Total gains or losses (realized/unrealized)
Included in earnings
Included in other comprehensive loss (674,335) (674,335)
Amortization of securities, net (6,287) (6,287)
Transfers in and/or out of Level 3 740,065 740,065
------------ -----------
Ending balance, December 31, 2008 $ 1,759,724 $ 1,759,724
============ ===========
The amount of total gains or losses for the
period included in earnings attributable to
the change in unrealized gains or losses relating
to assets still held at the reporting date $ 0 $ 0
============ ===========
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:
2008 2007
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Financial assets:
Cash and cash equivalents $ 9,659,803 $ 9,659,803 $ 15,178,195 $ 15,178,195
Available-for-sale securities 150,526,964 150,526,964 147,377,154 147,377,154
Held-to-maturity securities 66,443 66,502 70,798 71,435
Federal Home Loan Bank stock 5,323,000 5,323,000 5,176,100 5,176,100
Loans held-for-sale 2,314,250 2,330,092 120,000 121,403
Loans, net 297,367,434 287,062,745 268,191,275 264,217,484
Accrued interest receivable 2,704,385 2,704,385 2,538,607 2,538,607
Financial liabilities:
Deposits $ 344,925,232 $ 346,035,072 $ 317,741,269 $ 318,498,739
Securities sold under agreements
to repurchase 11,203,289 11,203,289 0 0
FHLB advances 87,913,667 90,205,661 95,011,155 95,183,700
Due to broker 7,631,919 7,631,919 0 0
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
NOTE 13 - 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
F-22
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, 2008 and 2007, the
maximum potential amount of the Bank's obligation was $2,800 and $12,800,
respectively, for financial and standby letters of credit. The Bank's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Bank may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Bank may take possession of the collateral, if any, securing the
line of credit.
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2008 2007
------------ ------------
Commitments to originate loans $ 5,450,832 $ 9,002,416
Standby letters of credit 2,800 12,800
Unadvanced portions of loans:
Home equity 25,496,268 26,511,813
Commercial lines of credit 10,423,342 10,482,619
Construction 4,740,207 6,178,958
Consumer 1,745,694 7,129,237
------------ ------------
$ 47,859,143 $ 59,317,843
============ ============
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 14 - 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 15 - 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.
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,
2008 and 2007, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2008, 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
F-23
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 categorization.
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, 2008:
Total Capital (to Risk Weighted Assets)
Consolidated $ 39,610 11.59% $ 27,336 >=8.0% N/A
Salisbury Bank and Trust Company 38,593 11.34 27,233 >=8.0 $34,042 >=10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 36,851 10.78 13,668 >=4.0 N/A
Salisbury Bank and Trust Company 35,835 10.53 13,617 >=4.0 20,425 >=6.0
Tier 1 Capital (to Average Assets)
Consolidated 36,851 7.74 19,049 >=4.0 N/A
Salisbury Bank and Trust Company 35,835 7.52 19,049 >=4.0 23,811 >=5.0
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
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, 2008, the Bank may declare dividends to
Bancorp in an amount not to exceed $3,475,791.
NOTE 16 - 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. (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 2008 and 2007, 840 shares were issued under the Plan and the related
compensation expense amounted to $27,720 and $30,450, respectively.
NOTE 17 - ACQUISITION
---------------------
On August 1, 2007, the Bank opened a full service branch office in Dover Plains,
New York. The opening of the branch reflects 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.
F-24
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 18 - GOODWILL AND INTANGIBLE ASSETS
----------------------------------------
The Company's assets as of December 31, 2008 and 2007 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. See Note 17.
The Company evaluated its goodwill and intangible assets as of December 31, 2008
and 2007 and found no impairment.
A summary of acquired amortizing intangible assets is as follows:
As of December 31, 2008
------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
----------- ------------ -----------
Core deposit intangible-People's Bank branch purchase $ 888,606 $ 498,418 $ 390,188
Core deposit intangible-Canaan National merger 1,191,279 416,399 774,880
----------- ------------ -----------
Total $ 2,079,885 $ 914,817 $ 1,165,068
=========== ============ ===========
As of December 31, 2007
------------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
----------- ------------ -----------
Core deposit intangible-People's Bank 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
=========== ============ ===========
Amortization expense was $164,215 and $164,216, respectively, for the years
ending December 31, 2008 and 2007. Amortization is being calculated on a
straight-line basis.
Estimated amortization expense for each of the five years succeeding 2008 and
thereafter is as follows:
2009 $ 164,216
2010 164,216
2011 164,216
2012 164,216
2013 164,216
Thereafter 343,988
-----------
$ 1,165,068
===========
NOTE 19 - RECLASSIFICATION
--------------------------
Certain amounts in the prior year have been reclassified to be consistent with
the current year's statement presentation.
F-25
NOTE 20 - 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, 2008 and 2007
--------------------------
2008 2007
------------ ------------
ASSETS
------
Money market mutual funds $ 1,476,999 $ 1,340,891
Cash in Salisbury Bank and Trust Company 709 6,316
------------ ------------
Cash and cash equivalents 1,477,708 1,347,207
Investment in subsidiary 37,923,873 44,668,437
Other assets 9,792 2,910
------------ ------------
Total assets $ 39,411,373 $ 46,018,554
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Dividends payable $ 472,041 $ 454,956
------------ ------------
Total liabilities 472,041 454,956
Total shareholders' equity 38,939,332 45,563,598
------------ ------------
Total liabilities and shareholders' equity $ 39,411,373 $ 46,018,554
============ ============
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF INCOME
--------------------
Years Ended December 31, 2008 and 2007
--------------------------------------
2008 2007
------------ ------------
Dividend income from subsidiary $ 2,000,000 $ 1,920,000
Taxable interest on securities 16,452 48,487
------------ ------------
2,016,452 1,968,487
------------ ------------
Professional fees 10,756 33,950
Supplies and printing 4,900 380
Other expense 30,082 22,716
------------ ------------
45,738 57,046
------------ ------------
Income before income tax benefit and equity in
net (loss) income of subsidiary 1,970,714 1,911,441
Income tax benefit (9,792) (2,909)
------------ ------------
Income before equity in net (loss) income of subsidiary 1,980,506 1,914,350
Equity in net (loss) income of subsidiary (874,625) 1,885,698
------------ ------------
Net income $ 1,105,881 $ 3,800,048
============ ============
F-26
SALISBURY BANCORP, INC.
-----------------------
(Parent Company Only)
STATEMENTS OF CASH FLOWS
------------------------
Years Ended December 31, 2008 and 2007
--------------------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net income $ 1,105,881 $ 3,800,048
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net loss (income) of subsidiary 874,625 (1,885,698)
(Increase) decrease in taxes receivable (6,882) 2,559
Issuance of shares for Directors' fees 27,720 30,450
----------- -----------
Net cash provided by operating activities 2,001,344 1,947,359
----------- -----------
Cash flows from financing activities:
Dividends paid (1,870,843) (1,802,527)
----------- -----------
Net cash used in financing activities (1,870,843) (1,802,527)
----------- -----------
Net increase in cash and cash equivalents 130,501 144,832
Cash and cash equivalents at beginning of year 1,347,207 1,202,375
----------- -----------
Cash and cash equivalents at end of year $ 1,477,708 $ 1,347,207
=========== ===========
NOTE 21 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------
Summarized quarterly financial data for 2008 and 2007 follows:
(In thousands, except earnings per share)
2008 Quarters Ended
------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 6,668 $ 6,591 $ 6,712 $ 6,586
Interest expense 3,008 2,710 2,587 2,520
-------- ------- -------- -------
Net interest and dividend income 3,660 3,881 4,125 4,066
Provision for loan losses 60 110 520 589
Other income (charge) 1,433 1,153 (1,345) 1,000
Other expense 3,651 3,696 3,835 4,827
-------- ------- -------- -------
Income (loss) before income taxes 1,382 1,228 (1,575) (350)
Income tax expense (benefit) 301 245 337 (1,304)
-------- ------- -------- -------
Net income (loss) $ 1,081 $ 983 $ (1,912) $ 954
======== ======= ======== =======
Earnings (loss) per common share $ .64 $ .58 $ (1.13) $ .57
======== ======= ======== =======
(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
======== ======= ======== =======
F-27
NOTE 22 - SUBSEQUENT EVENT
--------------------------
On November 13, 2008, the Company applied for participation in the Treasury TARP
CPP under the EESA and the rules and regulations promulgated thereunder
(collectively, the Act). On January 7, 2009, the Treasury preliminarily approved
the Company's application in the amount of $8,816,000. At the time of Treasury
preliminary approval, the Company's Certificate of Incorporation did not permit
the issuance of preferred stock. A Special Meeting of Shareholders of the
Company was held on March 10, 2009, and Shareholders voted to approve an
amendment to the Company's Certificate of Incorporation to authorize a class of
25,000 shares of preferred stock, par value $0.01 per share.
The Company closed the TARP CPP transaction on March 13, 2009 in the amount of
$8,816,000. The Company issued to the Treasury 8,816 shares of Preferred Stock
together with a warrant to purchase 57,671 shares of Company common stock at
$22.93 per share, which warrant, if exercised in full, would dilute the
percentage ownership of the holders of Company common stock by approximately
3.3%. If the Company redeems all of the shares of Preferred Stock, it has first
refusal rights to buy back the warrant or the shares received upon exercise of
the warrant at their fair market value if they are then held by the Treasury. As
a condition of the closing, the Company amended the change in control agreements
described in Note 9. The amendment prohibits any payments relating to the change
in control agreements to the specified officers during the period in which any
obligation arising under the TARP CPP remains outstanding.
The Preferred Stock qualifies as Tier 1 capital for regulatory purposes and
ranks senior to the Company's common stock in the payment of dividends or upon
liquidation. The Preferred Stock purchased by the Treasury pays a cumulative
dividend rate of 5% per annum for the first five years it is outstanding and
thereafter at a rate of 9% per annum. The Preferred Stock is non-voting, other
than voting rights on matters that could adversely affect the Preferred Stock
and in the event the Company is in arrears on six quarterly dividend payments on
the Preferred Stock, in which case, the holder of the Preferred Stock may elect
two directors to the Company's Board of Directors until all dividends have been
paid in full for four consecutive quarterly dividends. The Preferred Stock may
be redeemed by the Company at 100% of its issue price plus any accrued and
unpaid dividends. The Treasury's consent will be required for any increase in
Company common stock dividends per share or any repurchase of Company common
stock until the earlier of the third anniversary of the date of the investment
or the transfer by the Treasury of all of the shares of Preferred Stock.
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, 2008, as required by Rule
13a-15(b) of 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, 2008, 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 (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 (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.
As an institution participating in the TARP CPP, the Company and its executives
modified the Company's change in control agreements to preclude the possibility
that a golden parachute payment could be made by the Company that may violate
the new limits on executive compensation, which were enacted as part of the
ARRA, which amended the EESA. The Company is pleased that each officer of the
Company, who is a party to a change in control agreement with the Company,
voluntarily agreed to such changes in order to enable the Company to participate
in the TARP CPP. A form of these Agreements was filed on March 28, 2009 on Form
8-K. See also Notes 9 and 22 of the Notes to Consolidated Financial Statements.
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 27, 2009 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 Exchange Act, 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 27,
2009 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
26
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 27, 2009 to
be filed within 120 days after the end of the fiscal year covered by this Form
10-K, under the Section "Deadline for Receipt of Shareholder Proposals," and the
information included therein is incorporated by reference.
Information required by this Item pursuant to Item 407(d)(4) and Item 407(d)(5)
of Regulation S-K regarding the audit committee and audit committee financial
expert(s), respectively, is omitted from this report on Form 10-K and is
contained in the Company's Definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 27, 2009 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 27, 2009 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 27, 2009 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 27, 2009 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 27, 2009 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 27, 2009 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 ACCOUNTANT 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 27, 2009 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 27, 2009 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
27
therein is incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report on Form l0-K.
1. Financial Statements:
The financial statements filed as part of this report are
listed in the index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or
the information is included in the consolidated financial
statements or notes thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Salisbury Bancorp, Inc. (1)
3.1.1 Amendment to Certificate of Incorporation of Salisbury Bancorp, Inc. (2)
3.1.2 Amendment to Certificate of Incorporation of Salisbury Bancorp, Inc. (3)
3.2 Bylaws of Salisbury Bancorp, Inc., as amended and restated as of March 13, 2009 (4)
4.1 Warrant to purchase Common Stock dated March 13, 2009 (5)
10 Amended and Restated Supplemental Retirement Plan Agreement with John F. Perotti dated
January 25, 2008 (6)
10.2 Form of Change in Control Agreement with Executive Officers dated March 10, 2009 (7)
10.3 Form of First Amendment to Change in Control Agreement with Executive Officers dated
March 13, 2009 (8)
10.3 Director Stock Retainer Plan (9)
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 March 11, 2009 as Exhibit 3.1 to Company's Current
Report on Form 8-K and is incorporated herein by reference.
(3) Exhibit was filed on March 19, 2009 as Exhibit 3.1 to Company's Current
Report Form 8-K and is incorporated herein by reference.
(4) Exhibit was filed on March 19, 2009 as Exhibit 3.2 to Company's Current
Report on Form 8-K and is incorporated herein by reference.
(5) Exhibit was filed on March 19, 2009 as Exhibit 4.1 to Company's Current
Report on Form 8-K and is incorporated herein by reference.
(6) Exhibit was filed on January 30, 2009 as Exhibit 10.1 to the Company's
Current Report on Form 8-K and is incorporated herein by reference.
(7) Exhibit was filed on March 19, 2009 as Exhibit 10.1 to Company's Current
Report on Form 8-K and is incorporated herein by reference.
(8) Exhibit was filed on March 19, 2009 as Exhibit 3.2 to Company's Current
Report on Form 8-K and is incorporated herein by reference.
(9) 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.
28
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 27, 2009.
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 27, 2009
-------------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ Louis E. Allyn, II Director March 27, 2009
--------------------------------
(Louis E. Allyn, II)
/s/ John R. H. Blum Director March 27, 2009
--------------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 27, 2009
--------------------------------
(Louise F. Brown)
/s/ Richard J. Cantele, Jr. Director March 27, 2009
--------------------------------
(Richard J. Cantele, Jr.)
/s/ Robert S. Drucker Director March 27, 2009
--------------------------------
(Robert S. Drucker)
/s/ Nancy F. Humphreys Director March 27, 2009
--------------------------------
(Nancy F. Humphreys)
/s/ Holly J. Nelson Director March 27, 2009
--------------------------------
(Holly J. Nelson)
/s/ Michael A. Varet Director March 27, 2009
--------------------------------
(Michael A. Varet)
29