As filed with the Securities and Exchange Commission on July 6, 2004
Registration No. 333-116333
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT No. 1
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
Salisbury Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Connecticut 6035 06-1514263
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
------------------------
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039
(860) 435-9801
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
John F. Perotti
President and Chief Executive Officer
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039
(860) 435-9801
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
Copies to:
J. J. Cranmore, Esq. Robert M. Taylor, III, Esq.
Thomas A. Klee, Esq. Day, Berry & Howard
Cranmore, FitzGerald & Meaney 185 Asylum Street
49 Wethersfield Ave. CityPlace I
Hartford, Connecticut 06114-1102 Hartford, CT 06103
(860) 522-9100 (860) 275-0368
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
SALISBURY BANCORP, INC. CANAAN NATIONAL BANCORP, INC.
5 Bissell Street 100 Main Street
Lakeville, CT 06039 Canaan, CT 06018
(860) 435-9801 (860) 824-5423
------------- -------------
PROSPECTUS PROXY STATEMENT
The Boards of Directors of Salisbury Bancorp, Inc. ("Salisbury") and
Canaan National Bancorp, Inc. ("Canaan") each have approved an agreement and
plan of merger. This agreement provides that Canaan will merge into Salisbury,
subject to customary conditions such as shareholder and regulatory approvals.
If the merger takes place, you will receive a combination of 1.3371 shares
of Salisbury's common stock and $31.20 in cash for each share of Canaan common
stock you own, unless you exercise your dissenter's rights. As to the stock
received in the merger, in general we expect that for Federal income tax
purposes, Canaan shareholders will not have to recognize gain upon the merger.
Cash received for shares of Canaan common stock and in payment for fractional
shares of Salisbury common stock is typically fully taxable to the extent it
represents gain. Salisbury's common stock is traded on the American Stock
Exchange under the symbol "SAL".
This is a prospectus of Salisbury relating to its offering of up to
192,708 shares of Salisbury common stock to Canaan shareholders in the proposed
merger and a proxy statement of Canaan. This document contains important
information about Salisbury, Canaan, the merger and the conditions that must be
satisfied before the merger can occur. Please give all the information your
careful attention.
Your vote is very important. The merger agreement and the merger must be
approved by the holders of at least a majority of the outstanding shares of
Canaan's common stock. To vote your shares, you may use the enclosed proxy card
or attend the special shareholders meeting we will hold to allow you to consider
and vote on the merger. To approve the merger agreement, you MUST vote FOR the
proposal by following the instructions on the enclosed proxy card. If you do not
vote at all, that will, in effect, count as a vote against the proposal. We urge
you to vote FOR this proposal.
Gerard J. Baldwin
President and Chief Executive Officer
Canaan National Bancorp, Inc.
------------------------
Salisbury's common stock has not been approved or disapproved by the
Securities and Exchange Commission, any state securities commission, nor have
they passed upon the accuracy or adequacy of this proxy statement/prospectus.
Any representation to the contrary is a criminal offense. The shares of
Salisbury common stock are not savings deposit accounts or other obligations of
any bank or savings association, and are not insured by the Federal Deposit
Insurance Corporation or any other governmental agency.
The date of this proxy statement/prospectus is July 9, 2004
and first mailed to shareholders on July 9, 2004
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT
SALISBURY THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE TO YOU IF YOU CALL OR WRITE TO JOHN F.
PEROTTI, PRESIDENT AND CHIEF EXECUTIVE OFFICER, SALISBURY BANCORP, INC., 5
BISSELL STREET, P.O. BOX 1868, LAKEVILLE, CONNECTICUT 06039, TELEPHONE (860)
435-9801. IN ORDER TO OBTAIN TIMELY DELIVERY OF DOCUMENTS YOU SHOULD REQUEST
INFORMATION AS SOON AS POSSIBLE, BUT NO LATER THAN JULY 30, 2004.
CANAAN NATIONAL BANCORP, INC.
100 Main Street
Canaan, CT 06018
------------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
August 17, 2004
------------------------
A special meeting of shareholders of Canaan National Bancorp, Inc.
("Canaan") will be held on August 17, 2004, at 4:00 p.m. at Geer Woods, 99 South
Canaan Road, Canaan, Connecticut, for the following purposes:
1. To consider and vote on a proposal to approve and adopt the
agreement and plan of merger, dated as of November 17, 2003, by and
between Salisbury Bancorp, Inc. ("Salisbury") and Canaan, the merger
of Canaan into Salisbury and the other transactions contemplated by
the merger agreement, as described in the attached proxy
statement/prospectus.
2. To transact any other business that properly comes before the
special meeting, or any adjournments or postponements of the
meeting, including, without limitation, a motion to adjourn the
special meeting to another time and/or place for the purpose of
soliciting additional proxies in order to approve the merger
agreement and the merger or otherwise.
You are entitled to notice of and to vote at the special meeting or any
adjournments or postponements of the meeting only if you were a holder of record
of Canaan's common stock at the close of business on June 28, 2004.
Canaan's Board of Directors has determined that the merger is advisable
and is fair to and in the best interest of Canaan's shareholders, has approved
the merger agreement and the merger, and recommends that you vote to approve the
merger agreement and the merger.
The affirmative vote of a majority of the shares of Canaan's common stock
outstanding on June 28, 2004 is required to approve the merger agreement and the
merger. The required vote of Canaan's shareholders is based on the total number
of shares of Canaan's common stock outstanding and not on the number of shares
which are actually voted. Not returning a proxy card, not voting in person at
the special meeting or abstaining from voting will have the same effect as
voting AGAINST the merger agreement and the merger.
If you hold Canaan common stock on the record date, you are entitled to
dissent from the merger under Section 262 of the Delaware General Corporation
Law. A copy of this section is attached to the proxy statement/prospectus.
It is very important that your shares be represented at the special
meeting. Whether or not you plan to attend the special meeting, please complete,
date and sign the enclosed proxy card and return it as soon as possible in the
enclosed postage-paid envelope. A shareholder who executes a proxy may revoke it
at any time before it is exercised by giving written notice to Gerard J.
Baldwin, President and Chief Executive Officer, by subsequently filing another
proxy or by attending the special meeting and voting in person.
By order of the Board of Directors
Gerard J. Baldwin
President and Chief Executive Officer
Canaan, Connecticut
July 9, 2004
Your vote is important. Please complete, sign, date and return your proxy card.
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE MERGER................................ 1
SUMMARY............................................................... 3
SHARE INFORMATION AND MARKET PRICES................................... 5
Comparative Per Share Data......................................... 5
SELECTED FINANCIAL DATA............................................... 6
Selected Consolidated Financial and Statistical Data - Salisbury... 7
Selected Consolidated Financial and Statistical Data - Canaan...... 8
SHAREHOLDER MEETING................................................... 9
Matters to be Considered at the Special Meeting.................... 9
Record Date and Voting............................................. 9
Required Vote; Revocability of Proxies............................. 10
Solicitation of Proxies............................................ 10
THE MERGER............................................................ 11
The Parties........................................................ 11
Salisbury....................................................... 11
Canaan.......................................................... 11
Background of the Merger........................................... 11
Recommendation of the Canaan
Board of Directors and Reasons for the Merger................... 13
Purpose and Effects of the Merger.................................. 14
Structure.......................................................... 14
Merger Consideration............................................... 14
Surrender of Stock Certificates.................................... 15
Options............................................................ 16
Regulatory Approvals............................................... 16
Conditions to the Merger........................................... 17
Conduct of Business Pending the Merger............................. 18
Third Party Proposals.............................................. 19
Expenses; Breakup Fee.............................................. 19
Fairness Opinion of HAS Associates, Inc............................ 20
Analysis of Selected Merger Transactions........................ 21
Discounted Cash Flow Analysis................................... 22
Compensation.................................................... 22
Representations and Warranties..................................... 23
Termination and Amendment of the Merger Agreement.................. 24
Material Federal Income Tax Consequences........................... 25
Accounting Treatment............................................... 29
Resales of Salisbury's Common Stock Received in the Merger......... 29
Employee Benefits.................................................. 29
Dissenters' Appraisal Rights....................................... 29
Interests of Canaan Directors and Executive Officers in the Merger
That are Different Than Yours................................... 31
Shareholder's Agreement............................................ 33
Stock Option Agreement............................................. 33
MARKET PRICES AND DIVIDENDS........................................... 35
Salisbury's Common Stock........................................... 35
Canaan's Common Stock.............................................. 35
INFORMATION REGARDING CANAAN.......................................... 36
General Development of the Business................................ 36
Information Regarding Industry Segments............................ 36
Lending......................................................... 36
Investments..................................................... 36
Deposits and Borrowings......................................... 36
Fiduciary....................................................... 37
All Others...................................................... 37
Narrative Description of Business.................................. 37
Competition..................................................... 37
Legislation, Regulation and Supervision General.................... 38
Federal Reserve Board Regulation................................ 38
Office of the Comptroller of the Currency Regulation............ 39
FDIC Regulation................................................. 39
Other........................................................... 39
Employees.......................................................... 41
Statistical Disclosure Required Pursuant to Industry Guide 3....... 41
Investment Portfolio............................................ 41
Loan Portfolio Analysis by Category............................. 42
Return on Equity and Assets..................................... 43
Nonaccrual, Past Due and Restructured Loans..................... 43
Summary of Loan Loss Experience................................. 44
Allocation of the Allowance for Loan Losses..................... 44
Short Term Borrowings........................................... 45
Description of Properties.......................................... 45
Legal Proceedings.................................................. 45
Submission of Matters to a Vote of Security Holders................ 45
Market for Canaan Common Stock and Related Shareholder Matters..... 45
i
Page
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CANAAN............................................... 46
Business........................................................... 46
Results of Operations.............................................. 46
Overview........................................................ 46
Net Interest and Dividend Income................................ 46
Yield Analysis.................................................. 48
Volume and Rate Variance Analysis of Net Interest Income........ 49
Noninterest Income.............................................. 49
Noninterest Expense............................................. 49
Income Taxes.................................................... 49
Net Income...................................................... 50
Financial Condition................................................ 50
Securities Portfolio............................................ 50
Federal Funds Sold and FHLB Overnight Deposits.................. 50
Lending......................................................... 50
Provisions and Allowance for Loan Losses........................ 50
Deposits........................................................ 52
Borrowings...................................................... 52
Interest Rate Risk.............................................. 52
Liquidity....................................................... 53
Capital......................................................... 53
Impact of Inflation and Changing Prices......................... 53
Impact of New Accounting Standards.............................. 54
Forward Looking Statements......................................... 54
Statement of Management's Responsibility........................... 55
Quantitative and Qualitative Disclosures About Market Risk......... 55
CANAAN FINANCIAL STATEMENTS.............................................. 56
CANAAN UNAUDITED QUARTERLY FINANCIAL INFORMATION......................... 86
Results of Operations.............................................. 90
Overview........................................................ 90
Net Interest and Dividend Income................................ 90
Noninterest Income.............................................. 91
Noninterest Expense............................................. 91
Income Taxes.................................................... 91
Net Income...................................................... 91
Financial Condition................................................ 91
Securities Portfolio............................................ 91
Lending......................................................... 92
Provisions and Allowance for Loan Losses........................ 92
Deposits........................................................ 93
Borrowings...................................................... 93
Interest Rate Risk.............................................. 93
Liquidity....................................................... 94
Capital......................................................... 94
DIRECTORS AND EXECUTIVE OFFICERS OF CANAAN............................... 95
Management and Board of Directors.................................. 95
Board of Directors................................................. 95
Directors' Fees.................................................... 96
Executive Compensation............................................. 96
Insurance.......................................................... 97
Stock Option and Incentive Plans................................... 97
401(k) Plan........................................................ 97
Change in Control Plan............................................. 97
Securities Ownership of Directors and Executive Officers........... 98
Principal Shareholders of Canaan................................... 99
Certain Relationships and Related Transactions..................... 99
Controls and Procedures............................................ 100
DESCRIPTION OF CAPITAL STOCK AND COMPARISON OF
SHAREHOLDER RIGHTS.................................................... 100
Salisbury's Common Stock........................................... 100
Canaan's Common Stock.............................................. 101
Certificate of Incorporation and Bylaw Provisions.................. 101
Applicable Law..................................................... 107
INFORMATION REGARDING SALISBURY.......................................... 108
WHERE YOU CAN FIND MORE INFORMATION...................................... 108
INCORPORATION OF DOCUMENTS BY REFERENCE.................................. 109
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS..................... 109
OTHER MATTERS............................................................ 110
EXPERTS.................................................................. 110
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 110
LEGAL MATTERS............................................................ 110
ii
Page
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Appendix A
Agreement and Plan of Merger.......................................... A-1
Appendix B
Opinion of HAS Associates, Inc........................................ B-1
Appendix C
Section 262 of the Delaware General Corporation Law................... C-1
Appendix D
Salisbury Form 10-K................................................... D-1
Appendix E
Salisbury Form 10-Q................................................... E-1
iii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are Salisbury and Canaan proposing the transaction?
A: Salisbury and Canaan have a shared commitment to providing exceptional
service to customers. Canaan believes that the proposed merger will enable
Canaan to align with a partner who will enhance the services available to
its customers without sacrificing the personal attention and dedication
that Canaan has always offered.
Q: What will I receive in the merger?
A: If the merger takes place, each share of Canaan common stock (other than
shares of dissenting shareholders) will be converted into a combination of
(i) 1.3371 shares of Salisbury common stock and (ii) $31.20 in cash
without interest. Salisbury will pay cash instead of issuing fractional
shares. However, if the price of Salisbury's common stock falls below
thresholds established in the merger agreement, Canaan may terminate the
merger unless Salisbury decides to increase the merger consideration.
Dissenting shares will be treated differently.
Q: What happens to my future dividends?
A: Before the merger takes place, Canaan expects to pay its regular quarterly
cash dividends on its common stock for the first fiscal quarter of 2004,
which currently is $0.18 per share, and a special dividend of $0.12 per
share. After the merger, any dividends will be based on what Salisbury
pays. Salisbury presently pays dividends at a quarterly dividend rate of
$0.24 per share of Salisbury common stock.
Q: How many votes are needed to approve the merger?
A: A majority of the outstanding shares of Canaan's common stock must vote in
favor of the merger agreement in order for it to be adopted and the merger
approved. Accordingly, the failure to vote on this proposal will have the
same effect as a vote against the proposal.
Each of the directors of Canaan individually have entered into an
agreement with Salisbury to vote their shares of Canaan stock in favor of
the merger agreement and against any competing proposal. These
shareholders hold approximately 8.43% of Canaan's outstanding common stock
as of June 1, 2004.
Q: What do I need to do now?
A: Just indicate on the enclosed proxy card how you want to vote, and sign,
date and return it as soon as possible in the enclosed envelope. If you
sign and send in your proxy card and do not indicate how you want to vote,
your proxy card will be voted FOR approval of the merger agreement and the
merger. Not returning a proxy card, or not voting in person at the special
meeting or abstaining from voting, will have the same effect as voting
AGAINST the merger agreement and the merger.
You can choose to attend the special meeting and vote your shares in
person instead of completing and returning a proxy card. If you do
complete and return a proxy card, you may change your vote at any time up
to and including the time of the vote on the day of the special meeting by
following the directions on pages 1 and 10.
Q: Who can vote?
A: You are entitled to vote at the Canaan special meeting if you owned shares
of Canaan common stock at the close of business on June 28, 2004. You will
have one vote for each share of Canaan common stock that you owned at that
time.
Q: If my shares are held in street name by my broker, will my broker vote my
shares for me?
A: Your broker does not have discretion to vote your shares for you on the
proposal. Your broker will be able to vote your shares only if you provide
instructions on how to vote. You should instruct your broker to vote your
shares, following the directions your broker provides. Shares that are not
voted because you do not instruct your broker effectively will be counted
as votes against the merger.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. There are three ways for you to revoke your proxy and change your
vote. First, you may send a written notice to Canaan stating that you
would like to revoke your proxy. Second, you may complete and submit a new
proxy card. Third, you may vote in person at the special meeting. If you
have instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
1
Q: When will the merger close?
A: The merger is expected to close as soon as possible after the receipt of
Canaan shareholder and regulatory approvals.
Q: Should I send in my stock certificates now?
A: No. Please DO NOT send your stock certificates with your proxy card.
Rather, you should send your Canaan common stock certificates to the
exchange agent in accordance with instructions you will receive.
Q: What needs to be done to complete the merger?
A: Completion of the merger depends on a number of conditions being met. In
addition to compliance with the merger agreement, these include:
1. Approval of the merger agreement and merger by Canaan shareholders.
2. Approval of the merger by federal and state regulatory authorities.
3. Approval by the American Stock Exchange of listing of Salisbury's
common stock to be issued in the merger.
4. The absence of any injunction or legal restraint blocking the merger
or government proceedings trying to block the merger.
When the law permits, Salisbury or Canaan could decide to complete the
merger even though one or more of these conditions hasn't been met. We
can't be certain when, or if, the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
Q: Whom can I call with questions or to obtain copies of this proxy
statement/prospectus and other documents?
A: Gerard J. Baldwin, President and Chief Executive Officer
Canaan National Bancorp, Inc.
100 Main Street
Canaan, CT 06018
telephone: (860) 824-5423
A copy of the merger agreement including each of its exhibits and the
other documents described in this proxy statement/prospectus will be
provided to you promptly without charge if you call or write to John F.
Perotti, President and Chief Executive Officer, Salisbury Bancorp, Inc., 5
Bissell Street, P.O. Box 1868, Lakeville, Connecticut 06039, telephone
(860) 435-9801. Such documents were also filed as exhibits to the
registration statement filed with the SEC to register the shares of
Salisbury's common stock to be issued in the merger. See "Where You Can
Find More Information."
2
SUMMARY
The following is a brief summary of information located elsewhere in this
document. It does not contain all of the information that is important to you.
Before you vote, you should give careful consideration to all of the information
contained in or incorporated by reference into this document to fully understand
the merger. See "Where You Can Find More Information" on page 108. Each item in
this summary refers to the page where that subject is discussed in more detail.
Material Federal Income Tax Consequences (page 25)
Salisbury will not be required to complete the merger unless it receives a legal
opinion to the effect that the merger will qualify as a "reorganization" for
United States federal income tax purposes. Canaan shareholders will receive both
Salisbury common stock and cash for their Canaan common stock and will generally
recognize gain equal to the lesser of (1) the amount of cash received and (2)
the excess of the "amount realized" in the transaction (i.e., the fair market
value of the Salisbury common stock at the effective time of the merger plus
amount of cash received), over their tax basis in their Canaan common stock.
Different tax consequences may apply to you because of your individual
circumstances or because special tax rules apply to you, for example, if you:
o are a tax-exempt organization;
o are a mutual fund;
o are a dealer in securities or foreign currencies;
o are a bank or other financial institution;
o are an insurance company;
o are a non-United States person;
o are subject to the alternative minimum tax;
o are a trader in securities who elects to apply a market-to-market method
of accounting;
o acquired your shares of Canaan's common stock from the exercise of options
or otherwise as compensation or through a qualified retirement plan;
o hold shares of Canaan's common stock as part of a straddle, hedge,
constructive sale or conversion transaction; or
o do not hold shares of Canaan's common stock as capital assets.
Tax matters are very complicated. You should consult your tax advisor for a full
explanation of the tax consequences of the merger to you.
Canaan Board Of Directors Recommend Approval (page 13)
The Canaan Board of Directors unanimously approved the merger agreement and the
merger and unanimously recommends that you vote FOR approval of these matters.
Canaan's Financial Advisor Says Consideration Is Fair, From a Financial Point of
View, to Canaan Shareholders (page 20)
In deciding to approve the merger, Canaan's Board of Directors considered the
opinion of HAS Associates, Inc., Canaan's financial advisor. The opinion
concluded that the proposed consideration to be received by the holders of
Canaan's common stock in the merger is fair to the shareholders from a financial
point of view. This opinion is attached as Appendix B to this document. We
encourage you to read this opinion carefully in order to completely understand
the assumptions made, matters considered and limitation of the review made by
HAS Associates in providing this opinion.
Dissenters' Appraisal Rights in the Merger (page 29)
Under Delaware law, you are entitled to dissenters' rights of appraisal in
connection with the merger. If you want to assert your appraisal rights, you
must follow carefully the procedures described at Appendix C, and summarized at
page 29 of this document.
Differences in the Rights of Shareholders (page 100)
The rights of Canaan shareholders after the merger who continue as Salisbury
shareholders will be governed by the certificate of incorporation and bylaws of
Salisbury rather than the certificate of incorporation and bylaws of Canaan.
These rights will be governed by the laws of Connecticut, as the state of
Salisbury's incorporation, rather than the laws of Delaware, the state where
Canaan is organized.
Canaan Management's Monetary Interest in the Merger (page 31)
At the close of business on June 28, 2004, excluding all options to purchase
Canaan common stock, Canaan's directors and executive officers and their
affiliates owned a total of 18,605 shares of Canaan's common stock, which was
approximately 10.48% of the total number of shares of Canaan's common stock that
were outstanding on that date. Each of Canaan directors has agreed to vote his
or her shares in favor of the merger agreement and merger.
3
Some of Canaan's directors and executive officers may have interests in the
merger as directors and employees that may be different from yours as a Canaan
shareholder. These interests are described on page 31.
Regulatory Approvals We Must Obtain For the Merger (page 16)
For the merger to take place, we need to receive the regulatory approvals of the
United States Federal Deposit Insurance Corporation and the Connecticut Banking
Commissioner. We have filed applications with these regulators.
As of the date of this document, we have received approval from the Federal
Deposit Insurance Corporation and the Federal Reserve Bank. We cannot be certain
when or if we will obtain all other required approvals.
Termination of the Merger Agreement (page 24)
The merger agreement specifies a number of situations when Salisbury and Canaan
may terminate the agreement, which are described on page 24. The merger
agreement may be terminated at any time prior to the effective time by our
mutual consent and by either of us under specified circumstances, including if
the merger is not consummated by November 17, 2004, if we do not receive the
needed shareholder or regulatory approvals or if the other party breaches its
agreements. Canaan may terminate if Salisbury's common stock price falls below
thresholds set forth in the merger agreement and Salisbury does not increase the
exchange ratio pursuant to a prescribed formula.
Stock Option Agreement To Discourage Other Parties From Making Other Proposals
to Acquire Canaan (page 33)
In connection with the merger agreement, Canaan granted Salisbury a stock option
to purchase up to 48,000 shares of Canaan common stock at an exercise price of
$55.00. The stock option is intended to discourage other parties from making
alternative cquisition-related proposals to Canaan.
Information About the Special Meeting (page 9)
A special meeting of Canaan shareholders will be held on August 17, 2004, at
4:00 p.m. at Geer Woods, 77 South Canaan Road, North Canaan, Connecticut for the
following purposes:
o to vote on the merger agreement, the merger and the other transactions
contemplated by the merger agreement; and
o to address any other matters that properly come before the special
meeting, or any adjournments or postponements of the meeting, including a
motion to adjourn the special meeting to another time and/or place to
solicit additional proxies in favor of the merger agreement and the merger
or otherwise.
The Companies Involved In The Merger (page 11)
Salisbury Bancorp, Inc.
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039
(860) 435-9801
Salisbury is a Connecticut corporation and the holding company of Salisbury Bank
and Trust Company. Salisbury is headquartered in Lakeville, Connecticut. At
March 31, 2004, Salisbury had total consolidated assets of $327.8 million, total
deposits of $218.6 million, and shareholders' equity of $30.4 million, or 9.3%
of total assets.
Canaan National Bancorp, Inc.
100 Main Street
Canaan, CT 06018
(860) 824-5423
Canaan is a Delaware corporation and the holding company of The Canaan National
Bank. Canaan is headquartered in Canaan, Connecticut. At March 31, 2004, Canaan
had total consolidated assets of $108.7 million, total deposits of $73.7
million, and shareholders' equity of $8.7 million, or 8.0% of total assets.
4
SHARE INFORMATION AND MARKET PRICES
Salisbury's common stock is traded on the American Stock Exchange under
the trading symbol "SAL". Canaan's common stock is not traded on any market. The
table below presents the per share closing prices of Salisbury's and Canaan's
common stock as of the dates specified and the equivalent per share price for
Canaan common stock. November 17, 2003 was the last trading date before public
announcement of the merger agreement. The equivalent price per share column is
calculated by valuing the Salisbury common stock at $36.85 per share,
multiplying this value by the estimated 257,670 shares of Salisbury common stock
being issued in the merger, and adding to this amount the estimated aggregate
cash consideration of $6,012,490. This total consideration is then divided by
the total number of shares of Canaan common stock outstanding plus options as of
November 17, 2003 (192,708 shares). For more information about the exchange
ratio and how it may be increased, see "The Merger - Merger Consideration," and
for more information about the stock prices and dividends of Salisbury and
Canaan, see "Market Prices and Dividends."
Last Reported Sale Price
---------------------------
Salisbury's Canaan's Equivalent Per Share
Date Common Stock Common Stock Data
---------------------- ------------ ------------ --------------------
November 17, 2003..... $ 36.85 $ 48.00 $ 80.47
June 30, 2004......... $ 36.25 $ NA* $ 79.67
* No shares of Canaan's Common Stock have traded since November 17, 2003.
Canaan's shareholders are advised to obtain current market quotations for
Salisbury's common stock. The market price of Salisbury's common stock will
fluctuate between the date of this proxy statement/prospectus and the date on
which the merger takes place. No assurance can be given as to the market price
of Salisbury's common stock at the time of the merger, although Canaan may
terminate the merger agreement if Salisbury's common stock price falls below
certain thresholds and Salisbury does not increase the merger consideration
pursuant to a prescribed formula. See "The Merger -- Termination and Amendment
to the Merger Agreement."
Comparative Per Share Data
The following table shows historical information about net income per
share, cash dividends per share and book value per share, and similar
information reflecting the merger, which we refer to as "pro forma" information.
In presenting the comparative pro forma information for the time periods shown,
we assumed that we had been merged throughout those periods. The pro forma
information reflects the purchase method of accounting.
The information listed as "equivalent pro forma" was obtained by
multiplying the pro forma amounts by the exchange ratio of 1.3371 shares of
Salisbury common stock for each share of Canaan common stock.
We expect that we will incur merger and integration charges as a result of
combining our companies. We also anticipate that the merger will provide the
combined company with financial benefits that include reduced operating
expenses. These changes and benefits are not reflected in the pro forma data.
While helpful in illustrating the financial characteristics of the combined
company under one set of assumptions, the pro forma information does not reflect
these anticipated financial benefits and, accordingly, does not attempt to
predict or suggest future results. It also does not necessarily reflect what the
historical results of the combined company would have been had our companies
been combined. In addition, the pro forma information assumes that the cash used
as part of the consideration in the merger has a pre-tax cost of 5.00% and that
the combined entity has a tax rate of 25.80%. A price of $37.70 was used for
Salisbury Common Stock.
The information in the following table is based on, and you should read it
together with, the historical financial information that Salisbury has filed
with the SEC which is incorporated into this document by reference and which is
attached as Appendices D and E.
5
At or for the At or for the
Year Ended Quarter Ended
December 31, March 31,
2003 2004
------------- -------------
Net Income per Common Share (Basic):
Salisbury - historical................ $ 2.70 $ 0.75
Canaan - historical .................. 4.13 1.10
Pro Forma Combined ................... 2.58 0.72
Equivalent Pro Forma ................. 3.45 0.96
Net Income per Common Share (Diluted):
Salisbury - historical................ 2.70 0.75
Canaan - historical................... 4.07 1.06
Pro Forma Combined.................... 2.58 0.72
Equivalent Pro Forma ................. 3.45 0.96
Cash Dividends per Common Share:
Salisbury - historical................ 0.92 0.24
Canaan - historical................... 0.46 0.00
Pro Forma Combined.................... 0.92 0.24
Equivalent Pro Forma ................. 1.23 0.33
Book Value per Common Share:
Salisbury - historical................ 20.26 21.34
Canaan - historical................... 47.07 48.96
Pro Forma Combined.................... 22.93 23.85
Equivalent Pro Forma ................. 30.66 31.89
SELECTED FINANCIAL DATA
The tables below present summary historical financial and other data for
Salisbury and Canaan as of the dates and for the periods indicated. The summary
data for Salisbury is based on, and should be read in conjunction with,
Salisbury's historical consolidated financial statements and related notes which
are presented in its prior filings with the SEC, and which are incorporated by
reference into this document. For historical information, see "Where You Can
Find More Information." The summary data for Canaan is based on, and should be
read in conjunction with, Canaan's historical consolidated financial statements
and the notes thereto, which are included herein. All adjustments necessary for
a fair presentation of financial position and results of operations have been
included. All per share data of Salisbury and Canaan have been adjusted
retroactively to give effect to stock dividends and stock splits.
6
Selected Consolidated Financial and Statistical Data - Salisbury
(dollars in thousands except per share data)
At or For the Quarters
Ended March 31 At or For the Years Ended December 31
---------------------- ---------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
--------- ---------- --------- --------- --------- --------- ---------
(unaudited)
Statement of Condition Data:
Loans, Net .................................. $ 137,359 $ 139,980 $ 139,563 $ 135,632 $ 143,066 $ 138,270 $ 124,313
Allowance For Loan Losses ................... 1,708 1,480 1,664 1,458 1,445 1,292 1,160
Investments ................................. 167,559 154,810 147,021 138,435 105,593 91,922 77,745
Total Assets ................................ 327,763 311,043 311,100 293,107 283,602 249,054 215,385
Deposits .................................... 218,569 208,732 218,457 211,037 201,351 166,436 154,358
Borrowings .................................. 75,635 71,631 60,897 51,891 53,004 47,357 39,712
Shareholders' Equity ........................ 30,388 27,949 28,850 27,345 23,363 22,460 19,895
Nonperforming Assets ........................ 814 1,112 685 1,400 587 521 495
Statement of Income Data:
Interest and Fees on Loans .................. $ 2,163 $ 2,287 $ 9,226 $ 9,677 $ 11,344 $ 10,494 $ 9,621
Interest and Dividends on Securities
and Other Interest Income ................ 1,592 1,763 6,423 6,481 5,746 6,015 4,903
Interest Expense ............................ 1,269 1,526 5,613 6,898 8,301 8,284 6,683
Net Interest Income ......................... 2,486 2,524 10,036 9,260 8,789 8,225 7,841
Provision for Loan Losses ................... 60 37 313 300 150 180 120
Trust Department Income ..................... 354 290 1,252 1,100 1,070 1,108 1,121
Other Income ................................ 382 355 1,674 1,388 1,187 914 860
Net Gain (Loss) on Sales of Securities ...... 356 337 1,058 634 130 (64) (2)
Other Expenses .............................. 2,077 2,042 8,599 7,775 6,755 5,797 5,523
Pre Tax Income .............................. 1,441 1,427 5,108 4,307 4,271 4,206 4,177
Income Taxes ................................ 369 398 1,268 1,108 1,370 1,357 1,484
Net Income .................................. $ 1,072 $ 1,029 $ 3,840 $ 3,199 $ 2,901 $ 2,849 $ 2,693
Per Share Data:
Earnings per common share ................... $ 0.75 $ 0.72 $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Earnings per common share, assuming
dilution ................................. $ 0.75 $ 0.72 $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Cash Dividends per share .................... $ 0.24 $ 0.23 $ 0.92 $ 0.88 $ 0.84 $ 0.77 $ 0.70
Book Value (at period end) .................. $ 21.34 $ 19.64 $ 20.26 $ 19.21 $ 16.43 $ 15.40 $ 13.23
Tangible book value per common share ........ $ 19.18 $ 17.43 $ 18.09 $ 16.99 $ 14.16 $ 15.40 $ 13.23
Selected Statistical Data:
Diluted weighted average shares (000's) ..... 1,424 1,423 1,424 1,423
Return on Average Assets(1) ................. 1.37% 1.39% 1.24% 1.13% 1.14% 1.23% 1.25%
Return on Average Shareholders' Equity(1) ... 14.45% 16.24% 13.47% 12.63% 12.25% 13.64% 12.96%
Dividend Payout Ratio ....................... 32.00% 31.94% 34.07% 39.11% 41.38% 39.72% 39.16%
Average Shareholders' Equity to Average
Assets ................................... 9.38% 8.56% 9.21% 8.92% 9.27% 8.98% 9.67%
Net Interest Spread(1) ...................... 3.31% 3.39% 3.23% 3.13% 2.91% 2.83% 3.07%
Net Interest Margin(1) ...................... 3.70% 3.84% 3.65% 3.72% 3.71% 3.79% 3.93%
Nonperforming assets to total assets ........ 0.25% 0.36% 0.22% 0.48% 0.21% 0.21% 0.23%
Allowance for loan losses to total loans .... 1.23% 1.05% 1.18% 1.07% 1.01% 0.93% 0.93%
----------
(1) Annualized
7
Selected Consolidated Financial and Statistical Data - Canaan
(dollars in thousands except per share data)
At or For the Quarters
Ended March 31 At or For the Years Ended December 31
---------------------- ---------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
--------- ---------- --------- --------- --------- --------- ---------
(unaudited) (2001, 2000 and 1999 unaudited)
Statement of Condition Data:
Loans, Net .................................. $ 56,451 $ 59,946 $ 56,328 $ 60,111 $ 59,892 $ 55,480 $ 50,204
Allowance For Loan Losses ................... 694 696 698 680 643 605 624
Investments ................................. 47,307 37,817 46,184 36,691 33,480 31,348 23,391
Total Assets ................................ 108,660 102,151 107,087 103,435 98,586 90,446 78,035
Deposits .................................... 73,678 72,117 74,983 72,935 64,307 60,199 54,702
Borrowings .................................. 25,927 21,476 23,417 21,874 25,912 22,785 17,008
Shareholders' Equity ........................ 8,687 8,286 8,350 8,274 7,731 6,966 6,211
Nonperforming Assets (1) .................... 372 618 838 840 1,306 776 766
Statement of Income Data:
Interest and Fees on Loans .................. $ 957 $ 1,132 $ 4,048 $ 4,540 $ 4,930 $ 4,771 $ 4,239
Interest and Dividends on Securities and
Other Interest Income .................... 404 364 1,458 1,587 1,891 1,791 1,331
Interest Expense ............................ 497 579 2,201 2,644 3,331 3,483 2,590
Net Interest Income ......................... 864 917 3,305 3,483 3,490 3,079 2,980
Provision for Loan Losses ................... 3 5 36 70 74 14 21
Other Income ................................ 130 102 1,052 575 319 302 288
Net Gain (Loss) on Sales of Securities ...... -- -- -- 68 -- -- (9)
Other Expenses .............................. 722 796 3,284 3,020 2,726 2,458 2,406
Pre Tax Income .............................. 269 218 1,037 1,036 1,009 909 832
Income Taxes ................................ 74 50 311 297 287 275 287
Net Income .................................. $ 195 $ 168 $ 726 $ 739 $ 722 $ 634 $ 545
Per Share Data:
Earnings per common share ................... $ 1.10 $ 0.96 $ 4.13 $ 4.20 $ 4.08 $ 3.55 $ 2.99
Earnings per common share, assuming
dilution ................................. $ 1.06 $ 0.94 $ 4.04 $ 4.13 $ 4.05 $ 3.54 $ 2.99
Cash Dividends per share .................... $ 0.30 $ 0.28 $ 0.46 $ 0.43 $ 0.40 $ 0.37 $ 0.34
Book Value (at period end) .................. $ 48.96 $ 47.26 $ 47.07 $ 47.14 $ 43.77 $ 39.25 $ 34.34
Tangible book value per common share ........ $ 48.96 $ 47.26 $ 47.07 $ 47.14 $ 43.77 $ 39.25 $ 34.34
Selected Statistical Data:
Diluted weighted average shares (000's) ..... 184 179 180 179 177 179 182
Return on Average Assets(2) ................. 0.73% 0.65% 0.68% 0.72% 0.76% 0.75% 0.73%
Return on Average Shareholders' Equity(2) ... 9.16% 8.12% 8.68% 9.32% 9.80% 9.75% 8.78%
Dividend Payout Ratio ....................... 27.27% 29.17% 11.12% 10.30% 9.82% 10.49% 11.41%
Average Shareholders' Equity to Average
Assets ................................... 7.96% 8.04% 7.89% 7.76% 7.78% 7.69% 8.30%
Net Interest Spread(2) ...................... 3.05% 3.43% 2.93% 3.11% 3.14% 2.94% 3.51%
Net Interest Margin(2) ...................... 3.54% 3.90% 3.43% 3.66% 3.92% 3.85% 4.25%
Nonperforming assets to total assets ........ % % 0.78% 0.81% 1.32% 0.86% 0.98%
Allowance for loan losses to total loans .... 1.22% 1.15% 1.22% 1.12% 1.06% 1.08% 1.23%
----------
(1) Includes nonaccrual loans, loans 90 days or more past due and still
accruing, troubled debt restructured loans and other real estate owned.
(2) Annualized.
8
SHAREHOLDER MEETING
Matters to be Considered at the Special Meeting
We are first mailing this document to the holders of Canaan's common stock
on or about July 9, 2004. It is accompanied by a proxy card furnished in
connection with the solicitation of proxies by the Canaan Board of Directors for
use at the special meeting of Canaan's shareholders on August 17, 2004, at 4:00
p.m., at Geer Woods, 77 South Canaan Road, Canaan, Connecticut. At the special
meeting, the holders of Canaan's common stock will consider and vote on:
o the proposal to approve and adopt the agreement and plan of merger,
dated as of November 17, 2003, by and between Salisbury and Canaan,
the merger of Canaan into Salisbury and the other transactions
contemplated by the merger agreement; and
o any other business that properly comes before the special meeting,
or any adjournments or postponements of the meeting, including,
without limitation, a motion to adjourn the special meeting to
another time and/or place for the purpose of soliciting additional
proxies in order to approve the merger agreement and the merger or
otherwise.
Record Date and Voting
The Canaan Board of Directors has fixed the close of business on June 28,
2004 as the record date for determining the Canaan shareholders entitled to
receive notice of and to vote at the special meeting. Only holders of record of
Canaan's common stock at the close of business on that day will be entitled to
vote at the special meeting or at any adjournment or postponement of the
meeting. At the close of business on June 28, 2004, there were 177,418 shares of
Canaan's common stock outstanding and entitled to vote at the special meeting,
held by 355 shareholders of record.
Each holder of Canaan's common stock on June 28, 2004 will be entitled to
one vote for each share held of record on each matter that is properly submitted
at the special meeting or any adjournment or postponement of the meeting. The
presence, in person or by proxy, of the holders of a majority of Canaan's common
stock issued and outstanding and entitled to vote at the special meeting is
necessary to constitute a quorum. Abstentions and broker non-votes will be
included in the calculation of the number of shares represented at the special
meeting in order to determine whether a quorum has been achieved. Since approval
of the merger agreement requires the affirmative vote of the holders of at least
a majority of the shares of Canaan's common stock issued and outstanding,
abstentions and broker non-votes will have the same effect as a vote against the
merger agreement.
If a quorum is not obtained, or if fewer shares of Canaan's common stock
are voted in favor of the proposal for approval of the merger agreement than the
number required for approval, it is expected that the special meeting will be
adjourned to allow additional time for obtaining additional proxies. In that
event, proxies will be voted to approve an adjournment, except for proxies as to
which instructions have been given to vote against the merger agreement. The
holders of shares entitled to vote at the special meeting and present at the
special meeting shall have the power to adjourn the special meeting.
If your proxy card is properly executed and received by Canaan in time to
be voted at the special meeting, the shares represented by the proxy card will
be voted in accordance with the instructions marked on the proxy card. Executed
proxies with no instructions indicated on the proxy card will be voted FOR the
merger agreement and the merger.
The Canaan Board of Directors is not aware of any other matters that may
properly come before the special meeting. If any other matters properly come
before the special meeting, the persons named in the accompanying proxy will
vote the shares represented by all properly executed proxies on those matters as
determined by a majority of the Canaan Board of Directors.
9
You are requested to complete, date and sign the accompanying proxy form
and to return it promptly in the enclosed postage-paid envelope. To vote on the
merger agreement, you need to complete the proxy card properly and return it in
the enclosed envelope or attend the special meeting and vote in person.
You should not forward any stock certificates with your proxy card. If you
complete an election form, you should forward your Canaan stock certificates to
the exchange agent. If you do not complete an election form, if the merger takes
place, Canaan stock certificates should be delivered in accordance with
instructions that will be sent to you by Salisbury's exchange agent promptly
after the effective time of the merger.
Required Vote; Revocability of Proxies
In order to approve and adopt the merger agreement, the merger of Canaan
National Bank and Salisbury Bank and the other transactions contemplated by the
merger agreement, the holders of at least a majority of the shares of Canaan's
common stock issued and outstanding on June 28, 2004, must affirmatively vote
FOR the merger agreement and the merger.
The required vote of Canaan's shareholders is based on the total number of
outstanding shares of Canaan's common stock and not on the number of shares
which are actually voted. Not returning a proxy card, not voting in person at
the special meeting and abstaining from voting will have the same effect as
voting AGAINST the merger agreement and the merger.
All of the directors and executive officers of Canaan beneficially owned
as of June 1, 2004, excluding all options to purchase shares of Canaan's common
stock, a total of 18,605 shares of Canaan's common stock, which was
approximately 10.48% of the outstanding shares of Canaan's common stock on that
date. All directors, who collectively held approximately 8.43% of the
outstanding shares of Canaan on that date, have agreed to vote their shares in
favor of the merger agreement and the merger.
If you submit a proxy card, attending the special meeting will not
automatically revoke your proxy. However, you may revoke a proxy at any time
before it is voted by:
o delivering to Gerard J. Baldwin, President and Chief Executive
Officer, Canaan National Bancorp, Inc., 100 Main Street, Canaan,
Connecticut 06018, a written notice of revocation before the special
meeting;
o delivering to Canaan a duly executed proxy bearing a later date
before the special meeting; or
o attending the special meeting and voting in person.
Simply attending the special meeting without voting will not automatically
revoke your proxy.
Canaan and Salisbury cannot complete the merger unless, among other
things, the merger agreement and the merger are approved by the affirmative vote
of the holders of at least a majority of the shares of Canaan's common stock
issued and outstanding on June 28, 2004. For a description of the conditions to
the merger, see "The Merger -- Conditions to the Merger."
Solicitation of Proxies
In addition to solicitation by mail, directors, officers and employees of
Canaan may solicit proxies for the special meeting from shareholders personally
or by telephone or telecopier without receiving additional compensation for
these activities. The cost of soliciting proxies will be paid by Canaan. Canaan
also will make arrangements with brokerage firms and other custodians, nominees
and fiduciaries to send proxy materials to their principals and will reimburse
those parties for their expenses in doing so.
10
THE MERGER
The information in this section is qualified in its entirety by reference
to the full text of the Agreement and Plan of Merger, dated as of November 17,
2003, a copy of which is attached to this proxy statement/prospectus as Appendix
A and which is incorporated by reference into this document.
The Parties
Salisbury and Canaan have entered into an agreement and plan of merger.
Under this agreement, Salisbury will acquire Canaan through the merger of Canaan
into Salisbury.
Salisbury
Salisbury, through its subsidiary, Salisbury Bank, delivers financial
services to individuals, families and businesses located primarily in Litchfield
County, Connecticut and Dutchess and Columbia Counties, New York. Salisbury Bank
provides business and consumer banking, asset-based lending, mortgage lending,
trust, investment and insurance services through 4 banking offices in Litchfield
County, Connecticut and 4 ATMs.
At December 31, 2003, Salisbury had total consolidated assets of $311.1
million, total deposits of $218.5 million, and shareholders' equity of $28.9
million or 9.3% of total assets. At that date, Salisbury also had loans
receivable, net, of $139.6 million. At that date, Salisbury's allowance for loan
losses was $1.7 million, or 273% of nonperforming loans and 1.2% of total loans.
For additional information about Salisbury that is incorporated by reference
into this document, see "Incorporation of Documents by Reference."
Salisbury, as a bank holding company, is regulated by the Board of
Governors of the Federal Reserve System (the "FRB"). Salisbury Bank, as a
Connecticut bank and trust company, is regulated by the Connecticut Department
of Banking and to some extent by the Federal Deposit Insurance Corporation (the
"FDIC").
Canaan
Canaan's subsidiary, Canaan National Bank ("Canaan Bank"), is a full
service commercial bank and offers the services generally performed by
commercial banks of similar size and character, including checking, savings and
time deposit accounts, safe deposit boxes, secured and unsecured personal and
commercial loans, residential and commercial real estate loans and letters of
credit. Canaan Bank operates out of its main office in Canaan, Connecticut and
one branch office in Great Barrington, Massachusetts.
At December 31, 2003, Canaan had total consolidated assets of $107.1
million, total deposits of $75.0 million, and shareholders' equity of $8.4
million or 7.8% of total assets. At that date, Canaan also had loans receivable,
net of $56.3 million. At that date, Canaan's allowance for loan losses was $.7
million, 83.3% of nonperforming loans and 1.2% of total loans. For additional
information about Canaan, see "Information Regarding Canaan."
Canaan, as a bank holding company, is regulated by the FRB. Canaan Bank,
as a national bank, the deposits of which are insured by the FDIC, is regulated
by both the Office of the Comptroller of the Currency (the "OCC") and the FDIC.
Background of the Merger
Many of the officers, directors and employees of Canaan and Salisbury know
and respect one another and their respective institutions. At various times
throughout at least the past twenty (20) years, there have been occasional
communications between officers or directors of Salisbury and Canaan regarding
the potential for combining the institutions. However, until the events leading
to the pending transaction, such occasional informal inquiries did not result in
any discussions regarding the potential terms or structure for such a possible
combination.
11
Richard Cantele, an executive officer of Salisbury, and Jody Law, an
executive officer and director of Canaan until March, 2003, have known each
other for more than 30 years through a wide range of community activities and
personal and professional interests. In late 2002, Mr. Law and Mr. Cantele
initially informally discussed the possibility of working together, including
Mr. Law potentially joining the Salisbury organization, which had recently
acquired a full service branch office in North Canaan. During late December 2002
and early January 2003, Mr. Cantele and Mr. Law had several informal discussions
regarding the Salisbury organization and areas in which Mr. Law might further
strengthen the Salisbury franchise.
On January 16, 2003, Mr. Law informed Mr. Baldwin, President and Chief
Executive Officer of Canaan, of his assessment of Salisbury and the fact that he
was considering joining Salisbury. Mr. Baldwin and Mr. Law discussed these
issues and then arranged a meeting with Mr. Cantele and John Perotti, President
and Chief Executive Officer of Salisbury, to explore the potential of combining
the organizations.
At such meeting on January 19, 2003, the four executives discussed how the
organizations might be combined in ways which would benefit the shareholders of
each and which might result in a stronger franchise with greater resources to
serve the financial needs of their customers throughout an expanded geographic
area. At that meeting, they reached a consensus that they would report to their
respective Boards their personal recommendations that such a combination be
explored in order to see if a transaction could be structured on mutually
beneficial terms.
Thereafter, the management and Boards of each institution conferred with
their respective legal counsel and executed Confidentiality Agreements. After
engaging financial advisors, the institutions exchanged preliminary due
diligence request lists and, throughout February and early March, the advisors
and the parties endeavored to quantify the probable costs, savings and benefits
to a potential combination. Following meetings involving the executive
management and financial and legal advisors regarding these issues, each Board
reached a consensus that it would be in the best interest of each institution to
proceed with more formal due diligence and explore the potential for negotiation
of a combination on terms which would be beneficial to the shareholders of each
institution.
In March 2003, the executive management of both institutions met to
discuss the potential savings which could reasonably be expected to be derived
from the combination and communicated their issues to their Boards. On March 17,
2003, Salisbury provided Canaan with a non-binding expression of its interest.
Following a Board meeting, Canaan informed Salisbury that in light of the
parties inability to agree regarding the costs and savings of a potential
combination, no reasonable agreement regarding the transaction would be
possible, and each should go their separate ways. Following a telephone
conversation between Jean R. Perotti and John R.H. Blum, the Chairpersons of the
Board of each institution, Salisbury met with its financial advisors to explore
the strategies for reducing the uncertainties associated with the anticipated
cost savings of the transactions. The most significant of these uncertainties
involved the range of potential change in control expenses which could be
incurred depending upon the number of Canaan employees who would join the
resulting institution. In addition, the Board of both institutions directed
their legal counsel to prepare and submit information to the federal bank
supervisory agencies and the Department of Justice regarding the substantial
absence of any prohibited anti-competitive effect for the proposed combination.
Subsequently, each Board met with their executive management team, legal
counsel and financial advisors to discuss the benefits and obstacles to
proceeding. The proximity of the two franchises and the extent to which they
overlap presented potential benefits, but also raised issues with respect to the
potential competitive effects in the market area. These issues were evaluated by
each organization with legal counsel and informally discussed with federal bank
supervisory agencies. In May 2003, counsel for both institutions met with
representatives of the Federal Reserve Bank of Boston to discuss issues
regarding the relevant geographic market for measuring the competitive impact of
the transaction. In response to such meeting, further analysis was prepared and
submitted by legal counsel to federal bank supervisory agencies and the
Department of Justice for each institution and the relevant geographic market
for assessing the competitive impact of the transaction was determined to be the
Metropolitan Banking Market.
During July and August 2003, after the parties and their legal counsel had
verified that the transaction would not be considered to be anti-competitive,
the parties worked to determine the staffing needs of the resulting institution
and how the employees of both institutions would be integrated into the
resulting institution, as well as the reasonably foreseeable costs and savings
associated with the transaction. Initial drafts of the documents were discussed
by the Salisbury legal counsel and financial advisors with executive management.
12
Draft documents were reviewed by Canaan and its advisors in late August
and September. Issues regarding the opportunities and staffing of the resulting
institution, the cost of change in control expenses for many Canaan employees
and the amount and nature of consideration which would be appropriate to make
the transaction beneficial to the shareholders of each institution were raised
and discussed by the advisors and representatives of each institution.
In early November 2003, the Board of each institution and their advisors
and legal counsel focused attention regarding the amount and balance of the cash
and stock consideration which could be consistent with the objectives of each
entity. On November 17, 2003, each entity met with their legal and financial
advisors and the final price and mixture of cash and stock consideration was
negotiated. The financial advisors of each entity advised their respective
Boards that the terms of the agreement were fair to the shareholders from a
financial point of view and the Board of each institution, after considering
relevant factors, determined that the transaction was in the best interests of
their respective institutions and shareholders, customers and employees and the
communities which they serve. Definitive agreements were executed on November
17, 2003. A press release announcing the merger agreement was issued on November
18, 2003.
Recommendation of the Canaan Board of Directors and Reasons for the Merger
The Board of Directors of Canaan has approved the merger agreement and has
determined that the merger is fair to and in the best interests of Canaan and
its shareholders. Canaan's Board of Directors believes that the merger will
enable holders of Canaan's common stock to realize increased value due to the
premium over Canaan's market price and book value per share offered by
Salisbury. The Board of Directors also believes that the merger may enable
Canaan shareholders to participate in opportunities for appreciation of
Salisbury's common stock. In reaching its decision to approve the merger
agreement, the Board of Directors consulted with its outside counsel regarding
the legal terms of the merger and the Board of Directors' fiduciary obligations
in its consideration of the proposed merger, its financial advisor, HAS
Associates, Inc., regarding the financial aspects and fairness of the proposed
merger agreement, as well as with the management of Canaan. Without assigning
any relative or specific weight, Canaan's Board of Directors considered the
following factors, which are all the material factors considered, both from a
short-term and long-term perspective:
o Canaan Board of Directors' familiarity with, and review of, the
business, financial condition, results of operations and prospects
of Canaan, including, but not limited to, its potential growth,
development, productivity and profitability and the business risks
associated with the merger;
o The current and prospective environment in which Canaan operates,
including national and local economic conditions, the highly
competitive environment for financial institutions, the increased
regulatory burden on financial institutions, and the trend toward
consolidation in the financial services industry;
o The potential appreciation in market and book value of Canaan's
common stock on both a short- and long-term basis as a stand-alone
entity;
o The merger consideration to be paid to Canaan shareholders in
relation to market value, book value and earnings per share of
Canaan common stock;
o Information concerning Salisbury's business, financial condition,
results of operations, asset quality and prospects, including the
long-term growth potential of Salisbury's common stock, the future
growth prospects of Salisbury combined with Canaan following the
proposed merger, the potential synergies expected from the merger
and the business risks associated with the merger;
o The fact that the cash/stock combination feature of the merger
consideration offers Canaan shareholders both the opportunity to
participate in the growth and opportunities of Salisbury through the
stock component and to realize cash for the value of their shares
through the cash component;
o The oral presentation of HAS Associates, Inc. that the terms of the
merger agreement are fair to the holders of Canaan's common stock
from a financial point of view;
13
o The advantages and disadvantages of Canaan remaining an independent
institution or affiliating with a larger institution;
o The short- and long-term interests of Canaan and its shareholders,
the interests of the employees, customers, creditors and suppliers
of Canaan, and the interests of Canaan's communities, all of which
can be served to advantage by an appropriate affiliation with a
larger institution with increased economies of scale and with a
greater capacity to serve all of the banking needs of the community;
and
o The compatibility of the businesses and management philosophies of
Canaan and Salisbury, and Salisbury's strong commitment to the
communities it serves.
On the basis of these considerations, the merger agreement was unanimously
approved by Canaan's Board of Directors.
Purpose and Effects of the Merger
The purpose of the merger is to enable Salisbury to acquire the assets and
business of Canaan through the merger of Salisbury Bank and Canaan Bank. After
the merger, it is expected that Canaan's main office will be consolidated with
Salisbury's Canaan office and Canaan's South Egremont office will remain open
and will be operated as a banking office of Salisbury Bank.
Salisbury expects to achieve reductions in the current operating expenses
of Canaan upon the consolidation of Canaan's operations into Salisbury. Upon
completion of the merger, except as discussed below, the issued and outstanding
shares of Canaan's common stock will automatically be converted into the merger
consideration. See "Merger Consideration."
Structure
Canaan will merge into Salisbury, with Salisbury as the surviving
corporation. When the merger takes place, except as discussed below, each issued
and outstanding share of Canaan's common stock will be converted into the right
to receive cash and shares of Salisbury's common stock based on the merger
consideration, as described below. Cash will be paid instead of fractional
shares of Salisbury common stock. Shares of Canaan's common stock held as
treasury stock or held directly or indirectly by Canaan, Salisbury or any of
their subsidiaries, other than trust account shares and shares related to a
previously contracted debt, will be canceled and shall cease to exist.
Salisbury and Canaan expect that the merger will take place in the fourth
quarter of 2004, or as soon as possible after all required regulatory and
shareholder approvals are received and all regulatory waiting periods expire. If
the merger does not take place by November 17, 2004, the merger agreement may be
terminated by either party unless both parties agree to extend it.
Merger Consideration
The merger agreement provides that at the effective time of the merger,
except as discussed below, each outstanding share of Canaan's common stock
automatically will be converted into the right to receive a combination of (i)
1.3371 shares of Salisbury's common stock and (ii) $31.20 in cash, representing
a value of $76.10 per share of Canaan common stock based on the average closing
price of Salisbury's common stock for the 30 consecutive trading days prior to
November 17, 2003, the date the agreement and plan of merger was executed.
However, if the price of Salisbury's common stock falls below thresholds set
forth in the merger agreement, Canaan may terminate the merger unless Salisbury
decides to increase the 1.3371 exchange ratio, which would result in Salisbury
issuing more shares of its common stock to complete the merger. See
"--Termination and Amendment of the Merger Agreement."
Any shares of Canaan's common stock held as treasury stock and any shares
held directly or indirectly by Canaan, Salisbury or any of their subsidiaries,
other than trust account shares and shares related to a previously contracted
debt, will be canceled. If, prior to the effective time, Salisbury should split
its common stock, or pay a dividend or other distribution in its common stock,
then the exchange ratio will be adjusted to reflect the split, combination,
dividend or distribution.
14
Certificates for fractions of shares of Salisbury's common stock will not
be issued. Instead of a fractional share of Salisbury's common stock, a Canaan
shareholder will be entitled to receive an amount of cash equal to the fraction
of a share of Salisbury's common stock to which the shareholder would otherwise
be entitled multiplied by the average of the daily closing prices per share for
Salisbury's common stock for the 15 consecutive trading days on which shares of
Salisbury's common stock are actually traded as reported on the American Stock
Exchange ending on the third trading day before the closing date of the merger.
The conversion of Canaan's common stock into merger consideration will
occur automatically upon completion of the merger. Under the merger agreement,
after the effective time of the merger, Salisbury will cause its exchange agent
to pay the "purchase price" to each Canaan shareholder who surrenders the
appropriate documents to the exchange agent. In this document, we use the term
"purchase price" to refer to the (i) shares of Salisbury's common stock (ii)
cash and (iii) any cash to be paid instead of a fraction of a share of
Salisbury's common stock, payable to each holder of Canaan's common stock.
Surrender of Stock Certificates
Salisbury will deposit with the exchange agent the certificates
representing Salisbury's common stock and cash to be issued to Canaan
shareholders in exchange for Canaan's common stock. As soon as practicable after
the completion of the merger, the exchange agent will mail to Canaan
shareholders a letter of transmittal, together with instructions for the
exchange of their Canaan stock certificates for the merger consideration. Upon
surrendering his or her certificate(s) representing shares of Canaan's common
stock, together with the signed letter of transmittal, the Canaan shareholder
shall be entitled to receive, as applicable (i) certificate(s) representing a
number of whole shares of Salisbury's common stock determined in accordance with
the exchange ratio, (ii) a check representing the amount of cash to which such
holder shall have become entitled and (iii) a check representing the amount of
cash in lieu of fractional shares, if any. Until you surrender your Canaan stock
certificates for exchange after completion of the merger, you will not be paid
dividends or other distributions declared after the merger with respect to any
Salisbury common stock into which your shares have been converted. No interest
will be paid or accrued to Canaan shareholders on the cash consideration, cash
instead of fractional shares or unpaid dividends and distributions, if any.
After the completion of the merger, there will be no further transfers of common
stock. Canaan stock certificates presented for transfer after the completion of
the merger will be canceled and exchanged for the merger consideration.
If your stock certificates have been lost, stolen or destroyed, you will
have to prove your ownership of these certificates and that they were lost,
stolen or destroyed before you receive any consideration for your shares. Upon
request, the exchange agent will send you instructions on how to provide
evidence of ownership.
If any certificate representing shares of Salisbury's common stock is to
be issued in a name other than that in which the certificate for shares
surrendered in exchange is registered, or cash is to be paid to a person other
than the registered holder, it will be a condition of issuance or payment that
the certificate so surrendered be properly endorsed or otherwise be in proper
form for transfer and that the person requesting the exchange either:
o pay to the exchange agent in advance any transfer or other taxes
required by reason of the issuance of a certificate or payment to a
person other than the registered holder of the certificate
surrendered, or
o establish to the satisfaction of the exchange agent that the tax has
been paid or is not payable.
Any portion of the purchase price made available to the exchange agent
that remains unclaimed by Canaan shareholders for six months after the effective
time of the merger will be returned to Salisbury. Any Canaan shareholder who has
not exchanged shares of Canaan's common stock for the purchase price in
accordance with the merger agreement before that time may look only to Salisbury
for payment of the purchase price for these shares and any unpaid dividends or
distributions after that time. Nonetheless, Salisbury, Canaan, the exchange
agent or any other person will not be liable to any Canaan shareholder for any
amount properly delivered to a public official under applicable abandoned
property, escheat or similar laws.
15
Options
As of the record date, there were outstanding options to purchase 15,290
shares of Canaan's common stock at a weighted average exercise price of $39.40
per share. Under the merger agreement, shares of Canaan's common stock issued
before the merger takes place upon the exercise of outstanding Canaan options
will be converted into the merger consideration. Each Canaan option that is
outstanding and unexercised immediately before the effective time shall
terminate and expire and thereafter shall be of no effect or value.
Regulatory Approvals
For the merger of Salisbury and Canaan to take place, we must receive
approvals of the FRB, the FDIC and the Connecticut Commissioner of Banking. In
this section, we refer to these approvals as the "required regulatory
approvals."
Salisbury Bank filed with the FDIC and the Connecticut Banking
Commissioner applications for approval of the merger of Salisbury Bank and
Canaan Bank. We refer to that merger in this section as the "bank merger". The
bank merger is subject to the approval of the FDIC under the Bank Merger Act
provisions of the Federal Deposit Insurance Act and related FDIC regulations.
The FDIC approved the merger on February 27, 2004. These approvals required
consideration by the FDIC of various factors, including assessments of the
competitive effect of the contemplated transaction, the managerial and financial
resources and future prospects of the resulting institution, the effectiveness
of the institutions involved in combating money laundering, and the effect of
the contemplated transaction on the convenience and needs of the communities to
be served. The Community Reinvestment Act of 1977, commonly referred to as the
"CRA", also required that the FDIC, in deciding to approve the bank merger, to
assess the records of performance of Salisbury Bank and Canaan Bank in meeting
the credit needs of the communities they serve, including low- and
moderate-income neighborhoods. Both Salisbury Bank and Canaan Bank currently
have an "outstanding" CRA rating. The FDIC approval is subject to the following
conditions: (1) that all necessary and final approvals have been obtained from
the Connecticut Banking Department; (2) that the transaction shall not be
consummated before the fifteenth (15) calendar day following the effective date
of the FDIC's approval or later than six (6) months after the date of the FDIC's
approval, unless such period is extended for good cause; and (3) that until the
proposed transaction becomes effective, the FDIC has the right to alter,
suspend, or withdraw its approval, if warranted. In addition, commencement of an
antitrust action would stay the effectiveness of any approval granted by the
FDIC unless a court specifically orders otherwise. Since the Department of
Justice did not start a legal action during the waiting period, it may not
challenge the transaction afterward, except in an action under Section 2 of the
Sherman Antitrust Act.
On April 30, 2004, the Connecticut Banking Commissioner approved the
merger of Salisbury Bank and Canaan Bank. In making this determination, the
Connecticut Commissioner reviewed and considered, among other things, whether
the investment and lending policies of Salisbury Bank and Canaan Bank are
consistent with safe and sound banking practices and will benefit the economy of
the State, whether the services or proposed services of Salisbury Bank are
consistent with safe and sound banking practices and will benefit the economy of
the State, the competitive effects of the transaction, and whether the financial
and managerial resources of Salisbury and Salisbury Bank are adequate. The
Connecticut Commissioner also reviewed the records of Salisbury Bank and Canaan
Bank under the CRA.
Salisbury has also filed a Notification on Form FR Y-3N with the Federal
Reserve Bank of Boston pursuant to Section 3(a)(5) of the Bank Holding Company
Act in connection with Salisbury's acquisition of Canaan. On April 9, 2004, the
Federal Reserve Board approved the acquisition of Canaan by Salisbury, subject
to the approval of the Connecticut Department of Banking of the proposed
transaction. In reviewing Salisbury's Notification, the Federal Reserve Board
reviewed the effect of the transaction on the Banking Market of Salisbury and
Canaan, the effect of the transaction on the convenience and needs of the
communities to be served and the actions being taken by Salisbury to improve CRA
performance of Salisbury Bank. In addition, Salisbury's Board of Directors was
required to submit a Certification that the transaction met certain criteria set
forth in 12 C.F.R. Section 225.14(c).
Salisbury and Canaan are not aware of any other material governmental
approvals that are required for the merger or the bank merger to take place that
are not described above. If any other approval or action is required, we expect
that we would seek the approval or take the necessary action.
16
Conditions to the Merger
Under the merger agreement, Salisbury and Canaan are not required to
complete the merger unless the following conditions are satisfied:
o the merger agreement is not terminated on or before the effective
time of the merger;
o the merger agreement and the merger are approved by the affirmative
vote of the holders of at least a majority of the outstanding shares
of Canaan's common stock entitled to vote at the special meeting;
o Salisbury's common stock to be issued in the merger (including stock
which may be issued upon the exercise of stock options) is
authorized for trading on the American Stock Exchange;
o all required regulatory approvals are obtained and remain in full
force and effect, all statutory waiting periods related to these
approvals expire, and none of the regulatory approvals or statutory
waiting periods contain a non-customary provision that materially
alters the benefits for which Salisbury bargained in the merger
agreement;
o the registration statement (of which this prospectus is a part)
filed with the Securities and Exchange Commission to cover the
shares of Salisbury's common stock to be issued in the merger is
effective and is not subject to a stop order or any initiated or
threatened stop order;
o no order, injunction or decree preventing the merger from taking
place is in effect and the completion of the merger continues to be
legal;
o a favorable tax opinion from Salisbury's counsel that is reasonably
satisfactory to Salisbury and Canaan shall have been received; and
o Salisbury has received an opinion from Shatswell, MacLeod & Company,
P.C. that the merger will be accounted for as a purchase
transaction.
Salisbury is not required to complete the merger unless the following
additional conditions are satisfied or waived:
o the representations and warranties of Canaan contained in the merger
agreement are true and correct in all material respects as of the
date of the merger agreement and as of the effective time of the
merger;
o Canaan performs in all material respects all covenants and
agreements contained in the merger agreement to be performed by
Canaan by the effective time;
o Canaan obtains the consents, approvals or waivers of other persons
that are required to permit Salisbury to succeed to any obligations,
rights or interests of Canaan under any agreement, except where the
failure to obtain consents, approvals or waivers would not have a
material adverse effect on Salisbury;
o no proceeding initiated by any governmental entity seeking an
injunction preventing the merger from taking place is pending;
o no changes, other than changes contemplated by the merger agreement,
in the business, operations, condition, assets or liabilities of
Canaan or any of its subsidiaries occur that have or would have a
material adverse effect on Canaan;
o Salisbury receives an opinion of counsel to Canaan as of the date of
the merger as to customary matters;
o Salisbury receives appropriate assurance that Canaan's obligations
pursuant to the Canaan ESOP are fully satisfied, that all action has
been taken to terminate the ESOP and that there are no unfunded
obligations with respect to the ESOP or any other Canaan benefit
plan; and
o Salisbury receives waivers from 8 officers of Canaan waiving their
rights under the Canaan change in control plan.
17
Canaan is not required to complete the merger unless the following
additional conditions are satisfied or waived:
o the representations and warranties of Salisbury contained in the
merger agreement are true and correct in all material respects as of
the date of the merger agreement and as of the effective time of the
merger;
o Salisbury performs in all material respects all covenants and
agreements contained in the merger agreement required to be
performed by it by the effective time;
o Salisbury obtains the consents, approvals or waivers of other
persons that are required in connection with the transaction
contemplated by the merger;
o no proceeding initiated by any governmental entity seeking an
injunction preventing the merger from taking place is pending;
o there shall have been no material adverse change with respect to
Salisbury; and
o Canaan receives an opinion of counsel to Salisbury as of the date of
the merger as to customary matters, including the authorization and
validity of the Salisbury common stock to be issued in the merger.
Conduct of Business Pending the Merger
The merger agreement contains various restrictions on the operations of
Canaan before the effective time of the merger. In general, the merger agreement
obligates Canaan to continue to carry on its businesses in the ordinary course
consistent with past practices and with prudent banking practices, with specific
limitations on the lending activities and other operations of Canaan. The merger
agreement prohibits Canaan from:
o declaring any dividends or other distributions on its capital stock,
other than a regular quarterly cash dividend in the first quarter of
$0.18 per share and a special dividend of $0.12 per share on
Canaan's common stock and dividends by any Canaan subsidiary to
Canaan;
o splitting, combining or reclassifying any of its capital stock;
o issuing, authorizing or proposing the issuance of any securities,
other than the issuance of additional shares of Canaan's common
stock upon the exercise or fulfillment of rights or options issued
or existing under Canaan's stock option plan in accordance with
their present terms;
o repurchasing, redeeming or otherwise acquiring any shares of
Canaan's capital stock;
o amending its certificate of incorporation or bylaws;
o making capital expenditures aggregating in excess of $5,000;
o entering any new line of business;
o acquiring an equity interest in the assets of other business
organizations except in connection with foreclosures, settlements or
troubled loan restructurings, or in the ordinary course of business
consistent with prudent banking practices;
o taking any action that would result in any of its representations or
warranties in the merger agreement becoming untrue or would result
in a violation of the merger agreement or the related agreements;
o changing its methods of accounting in effect at December 31, 2002,
except as required by changes in regulatory or generally accepted
accounting principles;
o adopting or amending any employment agreements between Canaan or its
subsidiaries and their current or former officers, employees and
directors;
o increasing compensation or benefits of any employee or director not
required by any plan or agreement;
o entering into, modifying or renewing any agreement or arrangement
providing for the payment to any director, officer or employer of
compensation or benefits;
18
o hiring any new employee;
o promoting any employee to a rank of assistant vice president or
higher;
o paying any retention payment to any employee;
o incurring any indebtedness for borrowed money or assuming the
obligations of a third party, except for Federal Home Loan Bank
borrowings in the ordinary course consistent with past practices;
o selling, opening or closing any banking or other office;
o making any equity investments in real estate or real estate
development project, other than in connection with foreclosures or
settlements in lieu of foreclosures or troubled loan restructurings,
in the ordinary course of business consistent with past banking
practices;
o making any new loans or modifying the terms of any existing loans
with any affiliated person of Canaan, except consistent with past
practices;
o making any investment, or incurring deposit liabilities, other than
in the ordinary course of business consistent with past practice;
o purchasing any loans or selling, purchasing or leasing any real
property other than consistent with past practices;
o originating any loans except in accordance with existing lending
policies of Canaan Bank, unsecured consumer loans in excess of
$15,000 or commercial business loans or commercial real estate loans
in excess of $800,000 as to any loan or $1,000,000 in the aggregate
as to related loans or to loans to related persons or land
acquisition loans in excess of the lesser of 60% of the appraised
value or $150,000;
o except consistent with past practices, making any investment in an
equity, debt or derivative security issued or guaranteed by an
entity exempt from federal, state or local taxation;
o engaging in any forward commitment, futures transaction, financial
options transaction, hedging or arbitrage transaction or covered
trading activities or making an investment in any investment
security with a maturity of more than one year;
o selling or purchasing any mortgage loan servicing rights; or
o agreeing to do any of the above.
Third Party Proposals
Under the merger agreement, Canaan generally may not authorize or permit
any of its officers, directors, employees or agents to solicit, initiate or
encourage any inquiries relating to any third party proposal relating to a
tender offer or exchange offer, acquisition of a substantial equity interest in
or acquisition of a substantial portion of the assets of or any merger or
consolidation with Canaan (an "Acquisition Transaction"). There is also a
prohibition against holding substantive discussions or negotiations and
providing confidential information regarding an Acquisition Transaction.
Nevertheless, the Canaan Board of Directors may disregard these restrictions if,
based on advice of counsel, it reasonably determines in the exercise of its
fiduciary duty that this kind of information must be furnished and discussions
and negotiations must be entered into.
Expenses; Breakup Fee
The merger agreement generally provides that all costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated by the merger agreement shall be paid for by the party incurring
such expense. However, if the merger agreement is terminated by Salisbury or
Canaan as a result of a material breach of a representation, warranty, covenant
or other agreement contained in the merger agreement by the other party, or is
terminated by Salisbury as a result of Canaan's failure to hold the special
meeting within a specified time period, the merger agreement provides for the
non-terminating party to pay all documented reasonable expenses of the
terminating party up to $400,000. In the event the merger agreement is
terminated by Salisbury due to Canaan's shareholders not having approved the
merger agreement and any director, officer, 5% or greater shareholder or
affiliate of Canaan publicly communicated opposition to the merger or otherwise
acts to influence the vote against the merger, Canaan shall pay all documented,
reasonable costs of Salisbury up to $400,000, plus a breakup fee of $500,000. In
the event the merger agreement is terminated by Salisbury or Canaan due to the
other party's willful material breach of a representation, warranty, covenant or
other agreement contained in the merger agreement, the breaching party shall pay
all documented reasonable costs of the other party up to $400,000, plus a
breakup fee of $500,000. In the event the merger agreement is terminated by
Salisbury because Canaan has agreed to enter any acquisition transaction other
than the transaction contemplated by the merger agreement, Canaan shall also pay
all documented reasonable costs of Salisbury up to $400,000, plus a breakup fee
of $500,000.
19
Fairness Opinion of HAS Associates, Inc.
HAS Associates, Inc. ("HAS") was retained by Canaan as its financial
advisor based on its qualifications and experience in the financial analysis of
banking and financial service firms. HAS was also chosen because of its
knowledge of the Connecticut and New England banking industries. In the
preceding two years, HAS provided services to Canaan, including providing advice
on branch location and valuation analysis, for which it received compensation of
approximately $4,320.
HAS has delivered to the Canaan Board its written opinion, as of November
17, 2003, and reconfirmed such opinion as of the date of this Proxy
Statement-Prospectus, that the financial terms of the transaction with Salisbury
are fair, from a financial point of view, to the shareholders of Canaan. The
full text of the opinion of HAS, which sets forth assumptions made, matters
considered and limits on the review undertaken by HAS, is attached hereto as
Appendix B. Canaan shareholders are urged to read the opinion in its entirety.
HAS's opinion is directed only to the valuation by Canaan of the Salisbury price
per share and does not constitute a recommendation to any holder of Canaan
common stock as to how such holder should vote at the Canaan special meeting.
The summary of the opinion of HAS set forth in this Proxy Statement-Prospectus
was provided by HAS and is qualified in its entirety by reference to the full
text of the opinion itself. HAS's opinion was necessarily based upon conditions
as they existed and should be evaluated on the date thereof and the information
made available to HAS through the date hereof.
In order to determine the financial fairness of the terms of the proposed
merger, HAS reviewed, analyzed and relied upon material relating to the
financial and operating conditions of Canaan including, among other things, the
following: (i) the Agreement; (ii) Annual Reports to Stockholders for the three
years ended December 31, 2000, 2001 and 2002, of Canaan; (iii) certain interim
reports to stockholders and Quarterly Reports of Canaan and certain other
communications from Canaan to its stockholders; (iv) other financial information
concerning the business and operations of Canaan furnished to HAS by Canaan for
purposes of its analysis, including certain internal financial analyses and
forecasts for Canaan prepared by the senior management of Canaan; (v) certain
publicly available information concerning the trading of, and the trading market
for, the Common Stock of Canaan; (vi) audit reports of Canaan for three years;
(vii) regulatory filings of Canaan for three years; (viii) Canaan policies and
procedures, certain loan files, its investment portfolio; and (ix) certain
publicly available information with respect to banking companies and the nature
and terms of certain other transactions that HAS considered relevant to its
inquiry. In addition, HAS reviewed certain market information concerning Canaan,
analyzed data concerning private and publicly owned banks in New England,
reviewed stock market data of other banks generally deemed comparable whose
securities are publicly traded, publicly available information concerning
certain recent business combinations, and such additional financial and other
information as HAS deemed necessary. Furthermore, HAS reviewed the same type of
financial information available concerning Salisbury. In addition, HAS reviewed
certain internal reports and documents including loan lists grouped by risk
rating, past due and non-accrual loan reports, internal watch list loan
relationship reports, restructured loan reports, OREO and ISF reports, loan loss
reserve analysis reports, audited financial statements (most recent three
years), regulatory reports (most recent three years), 2002 operating results,
securities portfolio-book value and market value reports, and schedule of
threatened or pending litigations. HAS also held discussions with senior
management concerning their past and current operations, financial condition and
prospects, as well as the results of regulatory examinations.
In connection with rendering its opinion of November 17, 2003, HAS
performed a variety of financial analyses, consisting of those summarized below.
The summary set forth below does not purport to be a complete description of the
analyses performed by HAS in this regard, although it describes all material
analyses performed by HAS. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to a
partial analysis or summary description.
20
Accordingly, notwithstanding the separate factors summarized below, HAS
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors considered by it, without considering all
analyses and factors, or attempting to ascribe relative weights to some or all
such analyses and factors, could create an incomplete view of the evaluation
process underlying HAS' opinion.
In performing its analyses, HAS made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Canaan, Salisbury and HAS. The
analyses performed by HAS are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses. Such analyses were prepared solely as part of HAS' analysis of
the fairness to the shareholders of Canaan of the Conversion Ratio and were
provided to the Canaan Board in connection with the delivery of HAS' opinion.
HAS gave the various analyses described below approximately similar weight and
did not draw any specific conclusions from or with regard to any one method of
analysis. With respect to the comparison of selected companies' analysis and the
analysis of selected merger transactions summarized below, no company utilized
as a comparison is identical to Canaan or Salisbury.
Accordingly, an analysis of comparable companies and comparable business
combinations is not mathematical; rather it involves complex considerations and
judgments concerning the differences in financial and operating characteristics
of the companies and other factors that could affect the public trading values
or announced merger transaction values, as the case may be, of the companies
concerned. The analyses do no purport to be appraisals or to reflect the process
at which Canaan and Salisbury might actually be sold or the prices at which any
securities may trade at the present time or at any time in the future. In
addition, as described above, HAS' opinion is just one of many factors taken
into consideration by the Canaan Board.
The following is a summary of the material analyses presented by HAS to
the Canaan Board in connection with its opinion
Analyses of Selected Merger Transactions
HAS reviewed certain financial data related to deal transactions in the
country as a whole and in New England and New York. On a national scale, twenty
comparable merger and acquisition transaction of both pending and completed bank
deals comparing the transaction to tangible book value and last twelve month
earnings per share ("EPS") were reviewed. These deals were valued at less than
$25 million and the asset size of were between $100 million and $250 million
with a return on average assets of greater than 50 basis points. The following
price ratios were identified:
Price to Tangible Price to Last 12
Book Value months EPS
----------------- ----------------
Minimum 110.6% 7.6X
Median 186.0% 16.1X
Maximum 316.4% 30.4X
Proposed Transaction 190.8% 21.3X
21
HAS also reviewed recent New England and New York transactions were the
deal value was less than $100 million. Eleven deals were examined and the
following ratios were identified:
Price to Tangible Price to Last 12
Book Value months EPS
----------------- ----------------
Minimum 124.0% 14.6X
Median 207.6% 20.6X
Maximum 301.0% 25.4X
Proposed Transaction 190.8% 21.3X
HAS believes the aforementioned criteria are appropriate in deriving a
comparable transaction value for Canaan. No company or transaction used as a
comparison in the above analyses is identical to Canaan, Salisbury or the
merger. Accordingly, an analysis of the foregoing is not mathematical; rather it
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading value, however they do demonstrate the fairness,
from a financial point of view, of the transaction, in the opinion of HAS.
Discounted Cash Flow Analysis
HAS estimated the present value of the future cash flows that would accrue
to a holder of Canaan's common stock assuming the shareholder held the stock
through the year 2008 and then sold it at the end of that period.
HAS based this discounted cash flow analysis on several assumptions. These
included, but were not limited to, earnings per share of $3.84 in 2003 and $4.42
in 2004 and a 15% earnings per share growth rate thereafter. A 25% dividend
payout ratio was assumed for Canaan through the year 2008. A terminal value was
calculated at December 31, 2008 by multiplying Canaan's projected 2008 earnings
by a price/earnings multiple of 15X for the trailing twelve month earnings. A
similar analysis was also done using a terminal value of 13X to16X and EPS
growth rates in a range of 13% to 16% for comparative purposes. The range of
values was at a low of $56.26 to a high of $77.71. The final analysis of the
discounted cash flow relied upon the 15X multiple. The terminal valuation and
the estimated dividends were discounted at a rate of 15% producing a present
value of $70.08. These values were determined by adding the present value of the
estimated future dividends stream that Canaan could generate over the period
beginning January 1, 2003 and ending December 31, 2008.
HAS stated that the discounted cash flow analysis is a widely used
valuation methodology but noted that it relies on numerous assumptions,
including asset and earnings growth rates, dividend payout rates, terminal
values and discount rates. The analysis did not purport to be indicative of the
actual values or expected values of Canaan Common Stock.
In connection with its opinion dated as of the date of this Proxy
Statement, HAS performed procedures to update, as necessary, certain of the
analyses described above and reviewed the assumptions on which such analyses
described above were based and the factors considered in connection therewith.
Some ratios did change due to updated information and pricing, but such changes
were immaterial.
HAS has been retained by the Canaan Board as an independent contractor to
act as financial adviser to Canaan with respect to the Merger. HAS, as part of
its investment banking business, is engaged in the valuation of banking
businesses and their securities in connection with mergers and acquisitions, and
valuations for estate, corporate and other purposes. As specialists in the
securities of banking companies, HAS has experience in, and knowledge of, the
valuation of banking enterprises.
Compensation
As compensation for HAS' services in advising Canaan with respect to the
merger, HAS has received $55,000. Upon the mailing of the Definitive Proxy
material to Canaan shareholders including HAS' Fairness Opinion, HAS will
receive $35,000. Upon closing of the merger, HAS will receive a fee of 1% of the
total transaction value, less the fees previously paid. Canaan also agreed to
reimburse HAS for expenses incurred by HAS in performing its services.
22
Representations and Warranties
In the merger agreement, Canaan made representations and warranties to
Salisbury. The material representations and warranties of Canaan are the
following:
o the proper organization and good standing of Canaan;
o insurance of Canaan's deposit accounts by the FDIC;
o capitalization of Canaan;
o existence of corporate power and authority of Canaan to execute,
deliver and perform its various obligations under the transaction
documents;
o a listing of all consents and approvals required to complete the
merger;
o accurate disclosure of loan portfolio and timely filing of reports;
o proper presentation of financial statements;
o Canaan's filings with the FDIC comply in all material respects with
applicable requirements;
o no broker's fees other than a financial advisor fee to HAS
Associates, Inc.;
o absence of any material adverse change in Canaan;
o absence of legal proceedings;
o timely filing of tax returns and absence of tax claims;
o existence of employee benefit plans and material compliance with
applicable law;
o existence of material contracts and their effectiveness;
o absence of regulatory agreements with banking regulators;
o board approval of the merger agreement;
o material compliance with environmental laws;
o adequacy of loss reserves;
o existence of properties and assets, absence of encumbrances, and
existence of good title;
o existence of insurance policies;
o operations in material compliance with applicable laws;
o existence of loans, their material compliance with applicable laws,
proper organization of loan information, and proper perfection of
security interests;
o no liability with respect to any intellectual property used in the
business;
o accuracy of information regarding Canaan to be included in this
document; and
o receipt of the fairness opinion of HAS Associates, Inc.
In the merger agreement, Salisbury made representations and warranties to
Canaan. The material representations and warranties of Salisbury are the
following:
o the proper organization and good standing of Salisbury and Salisbury
Bank;
o capitalization of Salisbury and ownership of shares of Salisbury
Bank;
23
o existence of corporate power and authority to execute, deliver and
perform Salisbury's and Salisbury Bank's obligations under the
transaction documents;
o a listing of all regulatory consents and approvals to complete the
merger;
o proper presentation of financial statements;
o absence of material regulatory agreements or legal proceedings;
o accuracy of information regarding Salisbury to be included in this
document;
o absence of material adverse change in Salisbury;
o operations in compliance with applicable laws;
o absence of any fact that would cause the merger not to be treated as
a reorganization;
o receipt of the fairness opinion of Salisbury's financial advisor;
o a listing of all consents and approvals required to complete the
merger;
o no broker's fees other than to Salisbury's financial advisor;
o timely filing of tax returns and absence of tax claims;
o existence of employee benefit plans and material compliance with
applicable laws;
o material compliance with environmental laws;
o adequacy of loss reserves;
o existence of properties and assets, absence of encumbrances, and
existence of good title; and
o existence of insurance policies.
Termination and Amendment of the Merger Agreement
Before or after Canaan shareholders approve the merger agreement, it may
be terminated:
o by mutual written consent of Salisbury and Canaan;
o by Salisbury or Canaan upon written notice if 60 days pass after any
required regulatory approval is denied or regulatory application is
withdrawn at a regulator's request unless action is taken during the
60-day period for a rehearing or to file an amended application,
unless such denial or recommendation for withdrawal is due to the
terminating party's failure to perform its obligations in the merger
agreement;
o by Salisbury or Canaan if the merger has not taken place on or
before November 17, 2004, unless the failure to complete the merger
by that date is due to the terminating party's failure to perform
its obligations in the merger agreement; or
o by Salisbury or Canaan if Canaan's shareholders do not approve the
merger agreement;
o by either Salisbury or Canaan (provided that the terminating party
is not then in breach of any representation, warranty, covenant or
other agreement contained in the merger agreement that, individually
or in the aggregate, would give the other party the right to
terminate the merger agreement) if there shall have been a breach of
any of the representations or warranties set forth in the merger
agreement on the part of the other party, if such breach,
individually or in the aggregate, has had or is likely to have a
material adverse effect on the breaching party, and such breach
shall not have been cured within 60 days following receipt by the
breaching party of written notice of such breach from the other
party thereto or such breach, by its nature, cannot be cured prior
to the closing;
24
o by either Salisbury or Canaan (provided that the terminating party
is not then in breach of any representation, warranty, covenant or
other agreement contained in the merger agreement that, individually
or in the aggregate, would give the other party the right to
terminate the merger agreement) if there shall have been a material
breach of any of the covenants or agreements set forth in the merger
agreement on the part of the other party, and such breach shall not
have been cured within 60 days following receipt by the breaching
party of written notice of such breach from the other party thereto
or such breach, by its nature, cannot be cured prior to the closing;
o by Salisbury, if Canaan fails to call and hold within 40 days of the
effectiveness of the registration statement filed with the SEC a
meeting of Canaan shareholders to approve the merger agreement,
fails to recommend that Canaan shareholders approve the merger and
merger agreement or fails to oppose a competing third party proposal
that is inconsistent with the transactions contemplated by the
merger agreement;
o by Salisbury, if Canaan engages in any of the activities described
under "--Third Party Proposals"; and
o by Salisbury or Canaan, if Canaan has complied with its obligations
described under "--Third Party Proposals" and has given notice to
Salisbury that Canaan has entered into an Acquisition Transaction
with another party, if Canaan complies with the requirements stated
under "--Expenses; Breakup Fees" and has acknowledged that the
Option Agreement is exercisable.
In addition, the merger agreement provided Canaan with a termination right
during the five-day period starting two days after receipt of final approval of
the merger from the FDIC (which was dated February 27, 2004) of the FRB (which
was dated April 9, 2004), as applicable, if certain conditions relating to the
stock price of Salisbury were met: The conditions were not met and this right of
termination has expired.
The merger agreement also permits, subject to applicable law, the Boards
of Directors of Salisbury and Canaan to:
o amend the merger agreement except as provided below;
o extend the time for performance of any of the obligations or other
acts of the other party;
o waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered under
the merger agreement; or
o waive compliance with any of the agreements or conditions contained
in the merger agreement.
After approval of the merger agreement by Canaan's shareholders, no
amendment of the merger agreement may be made without further shareholder
approval if the amendment would reduce the amount or change the form of the
consideration to be delivered to Canaan's shareholders under the merger
agreement.
Material Federal Income Tax Consequences
The following summary discusses the material federal income tax
consequences of the merger, and of holding Salisbury common stock received in
the merger, to Canaan shareholders. The summary is based on the Internal Revenue
Code of 1986, as amended, referred to in this section as the Code, the U.S.
Treasury regulations promulgated under the Code and related administrative
interpretations and judicial decisions, all as in effect as of the effective
time of the merger, and all of which are subject to change, possibly with
retroactive effect. The summary assumes that the holders of shares of Canaan's
common stock hold their shares as capital assets. The summary applies only to
holders of shares of Canaan common stock that are U.S. persons. For purposes
hereof, a U.S. person is:
o a U.S. citizen or resident, as determined for U.S. federal income
tax purposes;
o a corporation created or organized in or under the laws of the
United States or any political subdivision thereof;
o an estate whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
o a trust whose administration is subject to the primary supervision
of a U.S. court and which has one or more U.S. persons who have the
authority to control all substantial decisions of the trust.
25
This summary is not binding on the Internal Revenue Service and there can
be no assurance that the Internal Revenue Service will not take a position
contrary to one or more of the positions reflected in this summary or that these
positions will be upheld by the courts if challenged by the Internal Revenue
Service. No ruling from the Internal Revenue Service has been or will be
requested with respect to the merger.
The summary does not address the tax consequences that may be applicable
to particular Canaan shareholders in light of their individual circumstances or
to Canaan shareholders who are subject to special tax rules, including:
o tax-exempt organizations;
o mutual funds;
o dealers in securities or foreign currencies;
o banks or other financial institutions;
o insurance companies;
o non-United States persons;
o shareholders who acquired shares of Canaan's common stock through
the exercise of options or otherwise as compensation or through a
qualified retirement plan;
o shareholders who are subject to the alternative minimum tax;
o shareholders who hold shares of Canaan's common stock as part of a
straddle, hedge, constructive sale or conversion transaction;
o traders in securities who elect to apply a mark-to-market method of
accounting; and
o holders that do not hold their Canaan common stock as capital
assets.
This summary is for general information purposes only. It is not a
complete analysis or discussion of all potential effects of the merger and
holding Salisbury common stock. It also does not address any consequences
arising under the tax laws of any state, locality, or foreign jurisdiction or
under any federal laws other than those pertaining to the federal income tax.
One of the conditions for the merger to take place is that Salisbury and
Canaan must receive an opinion from counsel designated by Salisbury, after
consultation with Canaan, that the merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code.
The opinion of counsel will be based on the Code, the U.S. Treasury regulations
promulgated under the Code and related administrative interpretations and
judicial decisions, all as in effect as of the effective time of the merger, and
all of which are subject to change, possibly with retroactive effect. The
opinion will be based on the assumption that the merger takes place as described
in the merger agreement, and on representations to be provided to counsel by
Salisbury that relate to the satisfaction of specific requirements to a
reorganization within the meaning of Section 368(a) of the Code, including
limitations on repurchases by Salisbury of shares of Salisbury common stock to
be issued upon the merger. Unlike a ruling from the Internal Revenue Service, an
opinion of counsel is not binding on the Internal Revenue Service and there can
be no assurance that the Internal Revenue Service will not take a position
contrary to one or more of the positions reflected in the opinion or that these
positions will be upheld by the courts if challenged by the Internal Revenue
Service. If this opinion (or any similar opinion of other tax counsel) is not
received, or if the material tax consequences described in the opinion
materially differ from the consequences stated below, the merger will not occur.
If this opinion cannot be obtained because of a concern that the merger would
not satisfy the "continuity of interest" requirement for reorganization
treatment, the number of shares of Salisbury common stock will be increased to
the minimum extent necessary to enable such opinion to be issued and the amount
of cash consideration will be decreased accordingly. The remainder of this
discussion assumes that the merger will qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
26
Exchange for Salisbury Common Stock and Cash. If, pursuant to the merger,
a holder exchanges all of the shares of Canaan common stock actually owned by it
for a combination of Salisbury common stock and cash, the holder will generally
recognize gain (but not loss) in an amount equal to the lesser of (1) the amount
of gain realized (i.e., the excess of the sum of the amount of cash and the fair
market value of the Salisbury common stock received pursuant to the merger over
that holder's adjusted tax basis in its shares of Canaan common stock
surrendered) and (2) the amount of cash received pursuant to the merger. For
this purpose, gain or loss must be calculated separately for each identifiable
block of shares surrendered in the exchange, and a loss realized on one block of
shares may not be used to offset a gain realized on another block of shares. Any
recognized gain will generally be long-term capital gain if the holder's holding
period with respect to the Canaan common stock surrendered is more than one year
at the effective time of the merger, and otherwise will be short-term capital
gain. For the rate of tax on capital gains, see below under "-- Tax Rate
Changes." If, however, the cash received has the effect of the distribution of a
dividend, the gain will be treated as a dividend to the extent of the holder's
ratable share of Canaan's accumulated earnings and profits as calculated for
United States federal income tax purposes. See " -- Possible Treatment of Cash
as a Dividend" below.
The aggregate tax basis of Salisbury common stock received (including
fractional shares deemed received and redeemed as described below) by a holder
that exchanges its shares of Canaan common stock for a combination of Salisbury
common stock and cash pursuant to the merger will be equal to the aggregate
adjusted tax basis of the shares of Canaan common stock surrendered, reduced by
the amount of cash received by the holder pursuant to the merger (excluding any
cash received instead of a fractional share of Salisbury common stock), and
increased by the amount of gain (including any portion of the gain that is
treated as a dividend as described below but excluding any gain or loss
resulting from the deemed receipt and redemption of fractional shares described
below), if any, recognized by the holder on the exchange. The holding period of
the Salisbury common stock (including fractional shares deemed received and
redeemed as described below) will include the holding period of the shares of
Canaan common stock surrendered.
Possible Treatment of Cash as a Dividend. In general, the determination of
whether the gain recognized in the exchange will be treated as capital gain or
has the effect of a distribution of a dividend depends upon whether and to what
extent the exchange reduces the holder's deemed percentage stock ownership of
Salisbury. For purposes of this determination, the holder is treated as if it
first exchanged all of its shares of Canaan common stock solely for Salisbury
common stock and then Salisbury immediately redeemed (the "deemed redemption") a
portion of the Salisbury common stock in exchange for the cash the holder
actually received. The gain recognized in the deemed redemption will be treated
as capital gain if the deemed redemption is (1) "substantially disproportionate"
with respect to the holder or (2) "not essentially equivalent to a dividend."
The deemed redemption will generally be "substantially disproportionate"
with respect to a holder if the percentage of the voting power and value of the
Salisbury common stock actually or constructively owned by such holder
immediately after the deemed redemption is less than 80% of both the voting
power and the value of the Salisbury common stock actually or constructively
owned by such holder immediately before the deemed redemption.
Whether the deemed redemption is "not essentially equivalent to a
dividend" with respect to a holder will depend upon the holder's particular
circumstances. At a minimum, however, in order for the deemed redemption to be
"not essentially equivalent to a dividend," the deemed redemption must result in
a "meaningful reduction" in the holder's deemed percentage stock ownership of
Salisbury. In general, that determination requires a comparison of (1) the
percentage of the voting power and value of the Salisbury common stock actually
or constructively owned by such holder immediately before the deemed redemption
and (2) the voting power and the value of the Salisbury common stock actually or
constructively owned by such holder immediately after the deemed redemption. The
Internal Revenue Service has ruled that a minority shareholder in a publicly
held corporation whose relative stock interest is minimal and who exercises no
control with respect to corporate affairs is generally considered to have a
"meaningful reduction" even if that shareholder has a relatively minor reduction
in its percentage stock ownership under the above analysis.
If the tests above for capital gain treatment are not met, the recognized
gain will be treated as dividend income to the extent of the holder's ratable
share of Canaan's accumulated earnings and profits. See below under "-- Tax Rate
Changes" for information regarding the relative rates of tax on dividends and
capital gains.
27
In applying the foregoing tests, the constructive ownership rules of
section 318 of the Code apply in comparing the holder's ownership interest in
Salisbury both immediately after the merger (but before the hypothetical
redemption) and after the hypothetical redemption. Under these constructive
ownership rules, a holder is deemed to own Salisbury common stock that is
actually owned (and in some cases constructively owned) by certain related
individuals and entities, and is also deemed to own Salisbury common stock that
may be acquired by such holder or such related individuals or entities by
exercising an option, including an employee stock option. Moreover, the tests
are applied after taking into account any related transactions undertaken by a
stockholder under a single, integrated plan. Thus, dispositions or acquisitions
by a holder of Salisbury common stock before or after the merger that are part
of such holder's plan may be taken into account. As these rules are complex,
each holder that may be subject to these rules should consult its tax advisor.
Cash Received Instead of a Fractional Share. A holder who receives cash
instead of a fractional share of Salisbury common stock will generally be
treated as having received such fractional share and then as having received
such cash in redemption of the fractional share. Gain or loss generally will be
recognized based on the difference between the amount of cash received instead
of the fractional share and the portion of the holder's aggregate adjusted tax
basis of the share of Canaan common stock surrendered which is allocable to the
fractional share. Such gain or loss generally will be long-term capital gain or
loss if the holding period for such shares of Canaan common stock is more than
one year at the effective time of the merger.
Reporting Requirements. A holder of Canaan common stock receiving
Salisbury common stock as a result of the merger may be required to retain
records related to such holder's Canaan common stock and file with its United
States federal income tax return a statement setting forth facts relating to the
merger.
Holding Salisbury Common Stock. The following discussion describes the
U.S. federal income tax consequences to a holder of Salisbury common stock after
the merger. Any cash distribution paid by Salisbury out of earnings and profits,
as determined under U.S. federal income tax law, will be subject to tax as
ordinary dividend income and will be includible in the gross income of a holder
in accordance with such holder's method of accounting. See below under "-- Tax
Rate Changes" for information regarding the rate of tax on dividends. Cash
distributions paid by Salisbury in excess of its earnings and profits will be
treated as (i) a tax-free return of capital to the extent of the holder's
adjusted basis in its Salisbury common stock (reducing such adjusted basis, but
not below zero), and (ii) thereafter as gain from the sale or exchange of a
capital asset.
Upon the sale, exchange or other disposition of Salisbury common stock, a
holder will generally recognize gain or loss equal to the difference between the
amount realized upon the disposition and its adjusted tax basis in the shares of
Salisbury common stock surrendered. Any such gain or loss generally will be
long-term capital gain or loss if the holder's holding period with respect to
the Salisbury common stock surrendered is more than one year at the effective
time of the disposition. For the adjusted tax basis and holding period of
Salisbury common stock received in exchange for Canaan common stock in the
merger, see the section above entitled "-- Exchange for Salisbury Common Stock
and Cash". For the rate of tax on capital gains, see below under "-- Tax Rate
Changes."
Tax Rate Changes. Under the recently enacted Jobs and Growth Tax Relief
Reconciliation Act of 2003, the individual tax rates on capital gains and
dividend income have been reduced. The top individual rate for capital gains
from sales or exchanges on or after May 6, 2003 is 15 percent. The top
individual rate for "qualified dividend income" received after December 31, 2002
is also 15 percent. To be considered "qualified dividend income" to a particular
holder, the holder must have held the common stock for more than 60 days during
the 120 day period beginning 60 days before the ex-dividend period as measured
under section 246(c) of the Code. Dividend income that is not qualified dividend
income will be taxed at ordinary income rates. You are urged to consult your tax
advisor to determine whether a dividend, if any, would be treated as qualified
dividend income.
Information Reporting and Backup Withholding. Unless an exemption applies,
the exchange agent will be required to withhold, and will withhold, 28% of any
cash payments to which a Canaan shareholder or other payee is entitled pursuant
to the merger, unless the shareholder or other payee provides his or her tax
identification number (social security number or employer identification number)
and certifies that the number is correct. Each shareholder and, if applicable,
each other payee, is required to complete and sign the Form W-9 that will be
included as part of the transmittal letter to avoid being subject to backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to Salisbury and the exchange agent.
28
The federal income tax consequences set forth above are based upon present
law and do not purport to be a complete analysis or listing of all potential tax
effects that may apply to a holder of Canaan's common stock. The tax effects
that are applicable to a particular holder of Canaan common stock may be
different from the tax effects that are applicable to other holders of Canaan
common stock, including the application and effect of state, local and other tax
laws other than those pertaining to the federal income tax, and thus, holders of
Canaan common stock are urged to consult their own tax advisors.
Accounting Treatment
The merger, if completed, will be treated as a purchase by Salisbury of
Canaan for accounting purposes. Accordingly, under accounting principles
generally accepted in the United States, the assets and liabilities of Canaan
will be recorded on the books of Salisbury at their respective fair values at
the time of the consummation of the merger.
Resales of Salisbury's Common Stock Received in the Merger
Salisbury is registering the issuance of the shares of its common stock to
be exchanged in the merger under the Securities Act. The shares will be freely
transferable under the Securities Act, except for shares received by Canaan
shareholders who are affiliates of Canaan or Salisbury at the time of the
special meeting. These affiliates only may resell their shares pursuant to an
effective registration statement under the Securities Act covering the shares,
in compliance with Securities Act Rule 145 or under another exemption from the
Securities Act's registration requirements. This proxy statement/prospectus does
not cover any resales of Salisbury's common stock by Salisbury or Canaan
affiliates. Affiliates will generally include individuals or entities who
control, are controlled by or are under common control with Canaan or Salisbury,
and may include officers or directors, as well as principal shareholders of
Canaan or Salisbury.
Employee Benefits
To the extent permissible under applicable law, Canaan employees who
execute waivers of their benefits under the Canaan Change in Control Plan and
who become employees of Salisbury or Salisbury Bank at the effective time will
be given credit for service at Canaan for eligibility to participate in and the
satisfaction of vesting requirements (but not for pension benefit accrual
purposes) under the defined benefit pension plan and employee welfare benefit
plans maintained by Salisbury or Salisbury Bank, as applicable.
Employees of Canaan who execute waivers of their benefits under the Canaan
Change in Control Plan and who become employees of Salisbury or Salisbury Bank
after the merger will be immediately eligible to participate in the employee
health and welfare plans maintained by Salisbury or Salisbury Bank, as the case
may be, on the same basis as they were eligible to participate in the
corresponding plans of Canaan or Canaan Bank, and restrictions relating to
preexisting conditions will be waived for such employees and their covered
dependents.
Salisbury has agreed to cause Salisbury Bank to retain a majority of
Canaan Bank employees who execute waivers of their benefits under the Canaan
Change in Control Plan in reasonably comparable positions and compensation.
Dissenters' Appraisal Rights
If the merger is consummated, a holder of record of Canaan common stock on
the date of making a demand for appraisal, as described below, who continues to
hold such shares through the effective time and who strictly complies with the
procedures set forth under Section 262 of the Delaware General Corporation Law
("Section 262") will be entitled to have such shares appraised by the Delaware
Court of Chancery under Section 262 and to receive payment of the "fair value"
of such shares in lieu of the consideration provided for in the merger
agreement. This proxy statement/prospectus is being sent to all holders of
record of Canaan common stock at the record date and constitutes notice of the
appraisal rights available to such holders under Section 262. THE STATUTORY
RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT COMPLIANCE WITH THE
PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY OF SUCH PROCEDURES
MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS' RIGHTS UNDER SECTION 262.
The following is a summary of certain of the provisions of Section 262 and is
qualified in its entirety by reference to the full text of Section 262, a copy
of which is attached to this document as Appendix D.
29
A holder of Canaan common stock electing to exercise appraisal rights
under Section 262 must deliver a written demand for appraisal of such
stockholder's shares to Canaan prior to the vote on the approval of the Merger
Agreement. Such written demand must reasonably inform Canaan of the identity of
the stockholder of record and of such shareholder's intention to demand
appraisal of his shares. All such demands should be delivered to Salisbury
Bancorp, Inc., Attention: John F. Perotti, President and Chief Executive
Officer, 5 Bissell Street, Lakeville, Connecticut 06039.
Only a holder of shares of Canaan common stock on the date of making such
written demand for appraisal who continuously holds such shares throughout the
effective time of the merger is entitled to seek appraisal. Demand for appraisal
must be executed by or for the holder of record, fully and correctly, as such
holder's name appears on the holder's stock certificates representing shares of
Canaan common stock. If Canaan common stock is owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, the demand should be made
in that capacity, and if Canaan common stock is owned by record by more than one
person, as in a joint tenancy or tenancy in common, the demand should be made by
or for all owners of record. An authorized agent, including one or more joint
owners, may execute the demand for appraisal for a holder of record; however,
such agent must identify the record owner or owners and expressly disclose in
such demand that the agent is acting as agent for the record owner or owners of
such shares.
A record holder, such as a broker who holds shares of Canaan common stock
as a nominee for beneficial owners, some of whom desire to demand appraisal,
must exercise appraisal rights on behalf of such beneficial owners with respect
to the shares of Canaan common stock held for such beneficial owners. In such
case, the written demand for appraisal should set forth the number of shares of
Canaan common stock covered by it. Unless a demand for appraisal specifies a
number of shares, such demand will be presumed to cover all shares of Canaan
common stock held in the name of such record owner. BENEFICIAL OWNERS WHO ARE
NOT RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT
THE RECORD OWNER TO COMPLY WITH THE STATUTORY REQUIREMENTS WITH RESPECT TO THE
EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF THE SHAREHOLDERS' MEETING.
Within ten days after the effective time of the merger, Salisbury is
required to send notice of the effectiveness of the merger to each shareholder
of Canaan who prior to the effective time complied with the requirements of
Section 262.
Within 120 days after the effective time of the merger, Salisbury or any
shareholder who has complied with the requirements of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares of Canaan common stock held by all shareholders seeking
appraisal. A dissenting shareholder must serve a copy of a such petition on
Salisbury. If no petition is filed by either Salisbury or a dissenting
shareholder within such 120 day period, the rights of all dissenting
shareholders to appraisal shall cease. Canaan shareholders seeking to exercise
appraisal rights should not assume that Salisbury will file a petition with
respect to the appraisal of the fair value of their shares or that Salisbury
will initiate any negotiations with respect to the fair value of such shares.
Salisbury is under no obligation to and has no present intention to take any
action in this regard. Accordingly, Canaan shareholders who wish to seek
appraisal of their shares should initiate all necessary action with respect to
the perfection of their appraisal rights within the time periods and in the
manner prescribed in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS
WILL CAUSE THE SHAREHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
Within 120 days after the effective time of the merger, any shareholder
who has complied with subsections (a) and (d) of Section 262 is entitled, upon
written request, to receive from Salisbury a statement setting forth the
aggregate number of shares of Canaan common stock with respect to which demands
for appraisal have been received by Canaan and the number of holders of such
shares. Such statement must be mailed within 10 days after the written request
therefore has been received by Salisbury or within 10 days after expiration of
the time for delivery of demands for appraisal under Section 262, whichever is
later.
30
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court of Chancery will determine which shareholders are
entitled to appraisal rights and will appraise the shares of Canaan Common Stock
owned by such shareholder, determining the fair value of such shares, exclusive
of any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest to be paid, if any, upon the
amount determined to be fair value. In determining fair value, the court is to
take into account all relevant factors. The Delaware Supreme Court has stated
that "proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered in the appraisal proceedings. The Delaware Supreme Court has
stated that, in making this determination of fair value, the court must consider
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which could be ascertained as
of the date of the merger which throw any light on future prospects of the
merged corporation." The Delaware Supreme Court has also held that "elements of
future value, including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the product of
speculation, may be considered." In addition, Delaware courts have decided that
the statutory appraisal remedy depending on factual circumstances, may or may
not be a dissenter's exclusive remedy.
Shareholders considering seeking appraisal should consider that the fair
value of their shares determined under Section 262 could be more, the same, or
less than the value of the consideration to be received pursuant to the merger
agreement without the exercise of appraisal rights, and that investment banking
opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value as determined under Section 262. The cost of the
appraisal proceeding may be determined by the Court of Chancery and assessed
against the parties as the Court deems equitable in the circumstances. Upon
application of a dissenting shareholder, the court may order that all or a
portion of the expenses incurred by any dissenting shareholder in connection
with the appraisal proceeding (including without limitation reasonable
attorney's fees and the fees and expenses of experts) be charged pro rata
against the value of shares of Canaan common stock entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
Any shareholder who has fully demanded appraisal in compliance with
Section 262 will not, after the effective time of the merger, be entitled to
receive payment of dividends or other distributions on the Canaan common stock,
except for dividends or distributions payable to shareholders of record at a
date prior to the effective time.
A Canaan shareholder may withdraw a demand for appraisal and accept the
terms of the merger at any time within 60 days after the effective time of the
merger, or thereafter may withdraw such demand with the written approval of
Salisbury. In the event an appraisal proceeding is properly instituted, such
proceeding may not be dismissed as to any shareholder without the approval of
the Delaware Court of Chancery, and any such approval may be conditioned on the
terms the Court of Chancery deems just.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF DELAWARE LAW, ANY HOLDER
OF THE CANAAN COMMON STOCK WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD
CONSULT HIS OR HER LEGAL ADVISOR.
Interests of Canaan Directors and Executive Officers in the Merger That are
Different Than Yours
In considering the recommendation of the Canaan Board of Directors, the
Canaan shareholders should be aware that certain members of Canaan's senior
management and of the Canaan Board of Directors have interests in the
transaction that are different from, or in addition to, the interests of
shareholders generally. The Canaan Board of Directors knew about these
additional interests and considered them when approving the merger agreement.
Existing Change in Control Plan. As described below under "Information
Regarding Canaan - Executive Compensation - Change in Control Plan," the
executive officers of Canaan are entitled to payments following a termination of
employment or specified other events after a change in control, such as the
merger, occurs.
Each of the executive officers of Canaan named below has entered an
"Agreement, Release and Waiver of Participation in Change of Control Plan." In
exchange for releasing Canaan and Salisbury from their obligations to the
executive officer under the Change in Control Plan, which included a potential
severance payment of 24 months as described under "Information Regarding Canaan
- Executive Compensation - Change in Control Plan," Salisbury agreed to hire
such executive officers in a position substantially equivalent to that they held
at Canaan, as described below, without any adverse change in the nature or scope
of their duties and without any reduction in the level of their pay and the
value of their benefits. Executive officers of Canaan will become at-will
employees of Salisbury.
31
In addition, each such executive officer will receive a bonus, payable
one-third upon closing of the merger, one-third twelve months thereafter, and
one-third twenty-four months after the closing of the merger. The bonus will be
paid if the executive officer remains an employee of Salisbury at each
respective payment date. If the executive officer terminates their employment
with Salisbury or if Salisbury terminates their employment for "Cause", no
further bonus will be paid. If the executive officer is terminated by Salisbury
for other than Cause, the remainder of the bonus will be paid in full. "Cause"
is defined to include (i) a conviction of, or plea of nolo contendere to, a
felony or crime involving moral turpitude; (ii) the commission of an act of
personal dishonesty or breach of fiduciary duty; (iii) the commission of an act
which the Board of Directors of Salisbury Bank by at least a two-third vote
determines involved willful misconduct or gross negligence and causes material
embarrassment to Salisbury Bank; (iv) habitual absenteeism, chronic alcoholism
or any other form of addiction which prevents the executive officer from
performing the essential functions of their position; and (v) entry of a final
order of a court or regulatory agency directing the suspension, removal from
office or imposition of remedial action or sanctions with respect to the
executive officer.
The following executive officers of Canaan have signed such an agreement,
will hold the position and will receive the compensation and bonus described
below:
Name Position Salary Bonus
----------------- ------------------------- --------- --------
Gerard J. Baldwin Executive Vice $ 112,000 --
President/Development
and Commercial Lending
Darrel S. Long Vice President/Operations $ 80,000 $ 73,900
Melanie K. Neely Vice President/Finance $ 55,000 $ 51,900
Mr. Randy Brintnell, another executive officer of Canaan, has not entered
such an agreement, and will not be employed by Salisbury or Salisbury Bank and
will be entitled to benefits under the Change in Control Plan.
In addition, Mr. Baldwin has entered an employment agreement with
Salisbury Bank to be effective upon the merger. Mr. Baldwin will be employed as
an Executive Vice President of Salisbury Bank for a period of four years from
the merger at the base salary of $112,000, which sum may be increased at the
discretion of the Board of Directors of Salisbury Bank. In addition, Mr. Baldwin
is entitled to a bonus payable in cash or other form of compensation, as set by
the Board of Directors of Salisbury Bank. Further, the employment agreement
provides that Mr. Baldwin will (i) receive health insurance comparable to that
provided for other executive officers of Salisbury Bank; (ii) participate in any
long-term disability insurance plan and pension plan maintained by Salisbury
Bank; and (iii) receive at least four weeks paid vacation per year.
Mr. Baldwin's employment agreement terminates upon the earlier to occur of
(i) four years from the merger; (ii) termination of Mr. Baldwin's employment by
Salisbury Bank for "Cause"; (iii) termination of employment by Mr. Baldwin other
than for "Good Reason"; (iv) Mr. Baldwin's disability or death; (v) Mr.
Baldwin's retirement in accordance with Salisbury Bank's retirement policy; or
(vi) termination of employment by Salisbury Bank for "Cause" or by Mr. Baldwin
for "Good Reason". Salisbury Bank will not be obligated to pay any further sums
to Mr. Baldwin under the employment agreement if (i) Mr. Baldwin's employment is
terminated for "Cause"; (ii) Mr. Baldwin terminates his employment for other
than "Good Reason" and (iii) Mr. Baldwin's disability, death or retirement, but
disability benefits, life insurance proceeds and pension benefits will be
payable. If Salisbury Bank terminates Mr. Baldwin other than for "Cause", or Mr.
Baldwin terminates his employment for "Good Reason", Salisbury Bank will be
obligated to (i) pay Mr. Baldwin his salary as in effect immediately prior to
the termination for the lesser of two years or the remainder of the term of the
employment agreement, less any payments under the Salisbury Bank severance plan;
(ii) provide additional service credit for purposes of vesting of any
compensation; and (iii) provide COBRA benefits payable by Salisbury Bank and Mr.
Baldwin at the same ratio as such benefits were paid by each while he was
employed. "Cause" as used in the employment agreement has the same meaning as
described above with respect to the Agreement, Release and Waiver of
Participation in Change in Control Plan. "Good Reason" means the occurrence of
any of the following without Mr. Baldwin's consent: (i) removal of or change in
his title to a lower title or material reduction in his job responsibilities or
base salary; (ii) significant worsening of his working conditions; or (iii)
change in his place of employment that increases his commute by more than 30
miles. The employment agreement also contains confidentiality and
non-competition provisions.
32
In addition, Salisbury has agreed, at the time of the merger, to invite
two of the independent directors of Canaan to serve on the Boards of Directors
of Salisbury and Salisbury Bank until the annual meeting to be held in 2005 and
to nominate such directors to serve for a period ending not earlier than the
second anniversary of the merger. Such directors have not been designated by
Salisbury.
Shareholder's Agreement
In connection with the execution of the merger agreement, Salisbury and
each director of Canaan have entered into a shareholder's agreement. Under the
shareholder's agreement, all directors of Canaan agreed to vote all shares of
Canaan common stock owned by them, including any shares acquired upon the
exercise of options, for the approval of the merger agreement and against the
approval of any agreement for a merger, consolidation, sale of assets or other
business combination of Canaan with any person or entity other than Salisbury.
They also agreed not to solicit or encourage, or initiate any communication
with, any other person or entity with respect to any proposal for a merger,
consolidation, sale of assets or other business combination involving Canaan or
any subsidiary of Canaan or for the acquisition of any capital stock of Canaan.
They further agreed that for a period of one year after the effective date
of the merger, they will (i) use their reasonable best efforts to assist in the
development and growth of the business, prospects and operations of Salisbury at
least at levels and in respects consistent with efforts made by them on behalf
of Canaan, (ii) continue to do their personal and business banking with
Salisbury to the same extent they did with Canaan, and encourage others to do
so, (iii) not solicit business for or encourage others to provide business to
any other bank in the area which Salisbury will serve, and (iv) not serve on the
board of any bank which competes with Salisbury and has its headquarters or more
than 25% of its assets in the area which Salisbury will serve.
The directors of Canaan collectively beneficially own 12,739 shares of
Canaan common stock and options to purchase 5,650 shares of Canaan stock, which
shares, assuming the exercise of all such options, would represent approximately
8.43% of the outstanding shares of Canaan common stock.
Stock Option Agreement
Canaan granted Salisbury a stock option, referred to in this section as
the "Canaan option," which entitles Salisbury to purchase, subject to the terms
of the stock option agreement, up to 48,000 shares of Canaan's common stock,
which is equal to approximately 19.9% of the total number of shares of Canaan's
common stock outstanding, at a price per share of $55.00. The Canaan option is
intended to discourage the making of alternative acquisition-related proposals
and, under specified circumstances, may significantly increase the cost to a
potential third party of acquiring Canaan compared to its cost had Canaan not
entered into the Canaan option. Therefore, the Canaan option is likely to
discourage third parties from proposing a competing offer to acquire Canaan even
if the offer involves a higher price per share for Canaan's common stock than
the per share consideration to be paid under the merger agreement.
Subject to applicable law and regulatory restrictions, Salisbury may
exercise the Canaan option, in whole or in part and from time to time, during
the 90-day period following the occurrence of both an "Initial Triggering Event"
and a "Subsequent Triggering Event." An "Initial Triggering Event" is any of the
following:
o Canaan or any of its subsidiaries entering an agreement to engage in an
"Acquisition Transaction" or its Board of Directors recommending that
Canaan shareholders approve an Acquisition Transaction without Salisbury's
prior written consent. An "Acquisition Transaction" is a merger or
consolidation of Canaan or Canaan Bank, a purchase, lease or other
acquisition or assumption of all or a substantial portion of the assets or
deposits of Canaan or Canaan Bank, a purchase or other acquisition of
securities with more than 10% of the voting power of Canaan, or any
similar transaction;
33
o Canaan or any of its subsidiaries authorizing, recommending, proposing or
announcing its intention to authorize, recommend or proposed, or engaging
in, any Acquisition Transaction with any person other than Salisbury;
o The Board of Directors of Canaan publicly withdrawing or modifying, or
publicly announcing its intent to withdraw or modify, its recommendation
that Canaan shareholders approve the transactions contemplated by the
merger agreement in anticipation of engaging in an Acquisition
Transaction;
o Any person other than Salisbury acquiring beneficial ownership or the
right to acquire the beneficial ownership of 10% or more of the shares of
Canaan common stock;
o Any person other than Salisbury publicly making a bona fide proposal to
Canaan to engage in an Acquisition Transaction;
o After an overture is made by a third party to Canaan or its shareholders
to engage in an Acquisition Transaction, Canaan breaching any covenant or
obligation in the merger agreement that would entitle Salisbury to
terminate the merger agreement and which is not cured prior to Salisbury
notifying Canaan it wishes to exercise the option; or
o Any person other than Salisbury filing an application with the FRB, the
FDIC, the OCC or the Connecticut Department of Banking for approval to
engage in an Acquisition Transaction.
A "Subsequent Triggering Event" is either of the following:
o The acquisition by any person of more than 20% of the Canaan common stock;
or
o The occurrence of the first Initial Triggering Event above, except that
the stock ownership percentage shall be 20%.
The foregoing brief summaries of the shareholder's agreement and stock
option agreement are qualified in their entirety by reference to the agreements.
A copy of the agreements, as well as the other documents described in this
document, will be provided to you without charge if you call or write to John F.
Perotti, President and Chief Executive Officer of Salisbury Bank and Trust
Company, 5 Bissell Street, P.O. Box 1868, Lakeville, Connecticut 06039, (860)
435-9801.
34
MARKET PRICES AND DIVIDENDS
Salisbury's Common Stock
The table below sets forth the range of high and low sale prices of
Salisbury's common stock as reported on the American Stock Exchange under the
symbol "SAL", as well as cash dividends paid during the periods indicated:
Market Price
----------------- Cash
Quarter Ended: High Low Dividends Paid
---------------------------------- ------- ------- --------------
March 31, 2002............... $ 25.25 $ 21.25 $ 0.22
June 30, 2002................ 26.75 24.10 0.22
September 30, 2002........... 25.25 22.51 0.22
December 31, 2002............ 28.01 25.00 0.22
March 31, 2003............... 30.00 26.00 0.23
June 30, 2003................ 29.50 26.00 0.23
September 30, 2003........... 32.25 29.00 0.23
December 31, 2003............ 38.95 29.50 0.23
March 31, 2004............... 41.55 38.50 0.24
June 30, 2004................ 38.80 36.25 0.24
On November 17, 2003, the last trading day before the public announcement
of the merger, the closing price of Salisbury's common stock on the American
Stock Exchange was $36.85. On June 30, 2004, the most recent practicable date
before the printing of this document, the closing price of Salisbury's common
stock on the American Stock Exchange was $36.25.
Canaan's Common Stock
The table below sets forth the range of high and low sale prices of
Canaan's common stock as reported on the OTC Bulletin Board, as well as cash
dividends paid during the periods indicated:
Market Price
----------------- Cash
Quarter Ended: High Low Dividends Paid
---------------------------------- ------- ------- --------------
March 31, 2002............... $ 47.50 $ 42.75 $ 0.26
June 30, 2002................ 47.50 42.75
September 30, 2002........... 47.50 42.75 0.17
December 31, 2002............ 47.50 42.75
March 31, 2003............... 48.00 42.75 0.28
June 30, 2003................ 48.00 48.00
September 30, 2003........... 48.00 48.00 0.18
December 31, 2003............ 48.00 48.00
March 31, 2004............... NA NA 0.30
June 30, 2004................ NA NA
On November 17, 2003, the last trading day for Canaan's common stock
before the public announcement of the merger, the closing price of Canaan's
common stock was $48.00. No shares of Canaan's Common Stock have traded since
November 17, 2003.
35
INFORMATION REGARDING CANAAN
General Development of the Business
Canaan is a Delaware corporation that was formed in 1988. Its primary
activity is to act as the holding company for its sole subsidiary, The Canaan
Bank ("Canaan Bank"), which accounts for most of the Company's net income.
Canaan Bank assumed its present name in 1907. Canaan Bank is chartered as a
national bank and its deposits are insured by the FDIC in accordance with the
Federal Deposit Insurance Act. Canaan Bank's main office is at 100 Main Street,
Canaan, Connecticut 06018. Its telephone number is (860) 824-5423.
Canaan Bank serves its customers from two (2) offices, which are located
in Canaan, Connecticut and South Egremont, Massachusetts. The majority of Canaan
Bank's customers reside in or maintain their principal offices in Litchfield
County, Connecticut or in Berkshire County, Massachusetts.
Information Regarding Industry Segments
Canaan's products and services are all of the nature of a commercial bank.
Lending
Lending is a principal business of Canaan Bank and loans represent a large
portion of Canaan 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 that 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
Canaan 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 Canaan Bank's portfolio as
well as sold to the Federal Home Loan Bank of Boston ("FHLB") with servicing
rights maintained. This provides customers the opportunity to choose from a wide
array of competitive mortgage products and rate structures.
Canaan 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, Canaan 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
Canaan's investment portfolio is also an important component of the
balance sheet. It provides a source of earnings in the form of interest and
dividends. It also plays a role in the interest rate risk management of Canaan
and it provides a source of liquidity.
The portfolio is comprised of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities, corporate bonds, preferred stock, and
securities of political subdivisions. At December 31, 2003, securities totaled
$46,184,000, which represents approximately 43.13% of total assets, and produced
interest and dividend income of $1,442,000 for the year 2003 as compared with
$1,569,000 for 2002 and $1,848,000 for 2001, respectively.
Deposits and Borrowings
Canaan Bank's primary sources of funds are deposits, borrowings and
principal payments on loans. Although competition for funds from non-banking
institutions remains aggressive, Canaan Bank continues its efforts to build
multiple account relationships with its customers. As a result, average deposits
increased 6.11% to $75,699,000 during 2003.
36
Canaan Bank is a member of the Federal Home Loan Bank of Boston (the
"FHLB"). Borrowings from FHLB totaled $23,319,000 at December 31, 2003 as
compared with $21,774,000 at December 31, 2002.
For additional information relating to the asset, deposit and borrowing
components of Canaan, see Management's Discussion and Analysis and the
accompanying Consolidated Financial Statements.
Fiduciary
Canaan Bank does not exercise fiduciary powers. It previously operated a
trust department but transferred and sold its interest in same.
All Others
Canaan offers safe deposit rentals, foreign exchange, and a full menu of
elective fund transfer services and other ancillary services to businesses and
individuals.
Narrative Description of Business
Canaan is a bank holding company, which as described above, has one
subsidiary, Canaan Bank.
Canaan 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. Canaan Bank owns and operates one subsidiary, CNB Insurance
Agency, Inc., which is incorporated under the laws of the State of Connecticut.
CNB Insurance Agency, Inc. markets a variety of personal and commercial
insurance products to the Bank's customers and to the general public.
Competition
Canaan and Canaan Bank encounter competition in all phases of their
business. There are numerous financial institutions that have offices in the
areas in which Canaan and Canaan Bank compete in Northwestern Connecticut and
Southwestern Massachusetts.
The main office of Canaan Bank is located in the northwest corner of
Litchfield County, designated by the Federal Reserve Banks of Boston and New
York to be within the "Metro Banking Market". Canaan Bank maintains one (1)
banking offices within the Metro Banking Market, which is served by 277
commercial banks and savings banks. The Bank has less than a 1% market share of
deposits in such Market.
Based on information published by the Federal Reserve Bank of Boston,
using June 30, 2003 deposit data, the Great Barrington, Massachusetts banking
market is served by six (6) commercial banks and savings banks. Canaan Bank has
a 4.9% market share of deposits in the Great Barrington banking market, which
includes South Egremont and three (3) Massachusetts towns, which are contiguous
with South Egremont (North Egremont, Great Barrington, and Sheffield).
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. Many non-bank competitors are not subject to the extensive
regulation described below under "LEGISLATION, REGULATION AND SUPERVISION" and
in certain respects may have a competitive advantage over banks in providing
certain services.
In marketing its services, Canaan Bank emphasizes its position as a
hometown bank with personal service, flexibility and prompt responsiveness to
the needs of its customers. Moreover, Canaan 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, Canaan
Bank is a member of the automated teller machine networks and offers internet
banking and telephone banking services, which allow Canaan Bank to deliver
certain financial services to customers regardless of their proximity to the
primary service area of Canaan Bank.
37
The Connecticut Interstate Banking 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 Canaan
Bank. Some of these competitors, by virtue of their size and resources, may
enjoy certain efficiencies and competitive advantages over Canaan Bank in the
pricing, delivery, and marketing of their products and services. It is possible
that such legislative authority will increase the number or the size of
financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to
banks set forth below do not purport to be a complete description of such
statutes and regulations and their effects on Canaan 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
Canaan is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the FRB 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 Canaan 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 Canaan can engage in such activities. The BHCA prohibits Canaan and
Canaan 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 Canaan Bank, although it is impossible to assess what impact this will
have on Canaan or Canaan Bank.
The Federal Reserve Act imposes certain restrictions on loans by Canaan
Bank to Canaan 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 FRB ("Regulation Y"), no
corporation may become a bank holding company as defined therein, without prior
approval of the Federal Reserve Board. Canaan received the approval and became a
bank holding company on May 26, 1988. Canaan will also have to secure prior
approval of the Federal Reserve Board if it wishes to acquire voting shares of
any other bank, if after such acquisition it would own or control more than five
percent (5%) of the voting share of such bank. The BHCA imposes limitations upon
Canaan as to the types of business in which it may engage.
38
Regulation Y requires bank holding companies to provide the Federal
Reserve Board with written notice before purchasing or redeeming equity
securities if the gross consideration for the purchase or redemption, when
aggregated with the net consideration paid by Canaan for all such purchases or
redemptions during the preceding twelve (12) months, is equal to ten percent
(10%) or more of Canaan's consolidated net worth. For purposes of Regulation Y,
"net consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:
(i) the bank holding company's capital ratios exceed the threshold established
for "well-capitalized" 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.
Office of the Comptroller of the Currency Regulation
As a national chartered bank and member of the FDIC, Canaan Bank is
subject to regulation both by the OCC and by the FDIC. Applicable laws and
regulations impose restrictions and requirements in many areas, including
capital requirements, maintenance of reserves, establishment of new branch
offices, mergers, making of loans and investments, consumer protection,
employment practices and other matters. Any new regulations or amendments to
existing regulations may materially affect the services offered, expenses
incurred and/or income generated by Canaan Bank.
The OCC regulates Canaan Bank's internal organization as well as its
deposit, lending and investment activities. The approval of the OCC is required
to, among other things, open branch offices and to consummate merger
transactions and other business combinations. The OCC conducts periodic
examinations of the Bank.
Subject to certain limited exceptions, loans made to any one obligor may
not exceed fifteen percent (15%) of Canaan Bank's capital, surplus, undivided
profits and loan reserves.
FDIC Regulation
The FDIC insures Canaan Bank's deposit accounts in an amount up to
$100,000 for each insured depositor. FDIC insurance of deposits may be
terminated by the FDIC, after notice and a hearing, upon a finding by the FDIC
that the insured institution has engaged in unsafe or unsound practices, or is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule or order of, or condition imposed by, the FDIC.
A bank's failure to meet the minimum capital and risk-based capital guidelines
discussed below would be considered to be unsafe and unsound banking practices.
Canaan Bank, as a national-chartered FDIC-insured bank, is regulated by the FDIC
in many of the areas also regulated by the OCC. The FDIC also conducts its own
periodic examinations of Canaan Bank, and Canaan 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 pay premiums to the FDIC for the insurance of deposits.
Other
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, Canaan Bank
received a rating of "Outstanding". Failure to receive at least a "Satisfactory"
rating may inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
39
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to
offer a wide range of financial services, large financial institutions would
appear to be the beneficiaries as a result of this Act because many community
banks are less able to devote the capital and management resources needed to
facilitate broad expansion of financial services. The Company qualified and
registered as a financial holding company in May 3, 2000.
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The purpose of the Sarbanes-Oxley Act is to protect investors by improving
the accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to
prohibit a registered public accounting firm from performing specified nonaudit
services contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also
vests the audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain
bonuses and profits under certain circumstances. Specifically, if an issuer is
required to prepare an accounting restatement due to the material noncompliance
of the issuer as a result of misconduct with any financial reporting
requirements under the securities laws, the chief executive officer and chief
financial officer of the issuer shall be required to reimburse the issuer for
(1) any bonus or other incentive-based or equity based compensation received by
that person from the issuer during the 12-month period following the first
public issuance or filing with the SEC of the financial document embodying such
financial reporting requirements; and (2) any profits realized from the sale of
securities of the issuer during that 12-month period.
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
o Disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o The presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the
Company's stock during a lock out period of Company's pension plans, and any
profits of such insider transactions are to be disgorged. In addition, there is
a prohibition of company loans to its executives, except in certain
circumstances. The Sarbanes-Oxley Act also provides for mandated internal
control report and assessment with the annual report and an attestation and a
report on such report by Company's auditor. The SEC also requires an issuer to
institute a code of ethics for senior financial officers of the company.
Furthermore, the Sarbanes-Oxley Act adds a criminal penalty of fines and
imprisonment of up to 10 years for securities fraud.
The terrorist attacks in September, 2001 have impacted the financial
services industry and led to federal legislation that attempts to address
certain issues involving financial institutions. On October 26, 2001, President
Bush signed into law the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"USA Patriot Act").
40
Part of the USA Patriot Act is the International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the
Secretary of the Treasury, in consultation with the heads of other government
agencies, to adopt special measures applicable to banks, bank holding companies,
and/or other financial institutions. These measures may include enhanced
recordkeeping and reporting requirements for certain financial transactions that
are of primary money laundering concern, due diligence requirements concerning
the beneficial ownership of certain types of accounts, and restrictions or
prohibitions on certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to:
(i) establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Employees
Canaan's workforce at December 31, 2003 was 36 employees, of whom 31 were
full-time and 5 were part-time. A collective bargaining unit does not represent
the employees.
Financial Information about Foreign and Domestic Operations and Export Sales
Canaan does not have any foreign business operations or export sales of
its own. However, it does provide financial services including wire transfers
and foreign currency exchange to other businesses involved in foreign trade.
Statistical Disclosure Required Pursuant to Industry Guide 3
Investment Portfolio
Canaan 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. Canaan 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)
2003 2002 2001
-------- -------- --------
Available-for-sale securities: (at fair value)
Corporate bonds $ 2,295 $ 2,080 $ 4,457
Equity securities 3,278 3,777 3,929
U.S. Treasury securities and other
U.S. government corporations and agencies 5,079 0 1,262
Obligations of states and political subdivisions 11,259 6,994 3,079
Mortgage-backed securities 17,504 15,573 11,524
Asset-backed securities 4,706 5,694 6,511
-------- -------- --------
$ 44,121 $ 34,118 $ 30,762
======== ======== ========
Held-to-maturity securities: (at amortized cost)
Obligations of states and political subdivisions $ 753 $ 753 $ 754
Mortgage-backed securities 4 514 658
-------- -------- --------
$ 757 $ 1,267 $ 1,412
======== ======== ========
Federal Reserve Bank Stock $ 56 $ 56 $ 56
Federal Home Loan Bank stock 1,250 1,250 1,250
-------- -------- --------
$ 1,306 $ 1,306 $ 1,306
======== ======== ========
41
The scheduled maturities of held-to-maturity securities and
available-for-sale securities (other than equity securities) were as follows as
of December 31, 2003 (yields are not calculated and presented on a fully
taxable-equivalent (FTE) basis):
(dollars in thousands)
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
-------- ----- -------- ----- -------- ----- -------- ----- --------
Held-to-maturity
securities (at amortized cost)
Obligations of state and
political subdivisions $ 0 $ 0 $ 650 6.71% $ 103 6.81% $ 753
Mortgage-backed
securities 4 7.65% 0 0 0 4
-------- -------- -------- -------- --------
$ 4 $ 0 $ 650 $ 103 $ 757
======== ======== ======== ======== ========
Available-for-sale
securities (at fair value)
Corporate Bonds $ 1,130 5.95% $ 1,165 3.38% $ 0 $ 0 $ 2,295
U.S. Treasury securities
and other U.S. government
corporations and agencies 0 2,958 3.48% 2,121 4.64% 0 5,079
Obligations of state and
political subdivisions 0 438 6.84% 2,456 5.74% 8,365 5.33% 11,259
Mortgage-backed
securities 8 5.79% 1,490 3.44% 5,040 3.77% 10,966 3.36% 17,504
Asset-backed securities 141 2.72% 980 2.85% 3,585 2.33% 4,706
-------- -------- -------- -------- --------
$ 1,138 $ 6,192 $ 10,597 $ 22,916 $ 40,843
======== ======== ======== ======== ========
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial, financial and
agricultural $ 6,494 $ 6,180 $ 5,952 $ 5,557 $ 5,689
Obligations of States and
political subdivisions 209 241 269 299 688
Real Estate-construction and
land development 1,984 3,084 2,323 1,831 1,446
Real Estate- residential 30,326 32,986 33,004 29,892 27,846
Real Estate-commercial 12,783 12,507 11,960 11,386 9,364
Consumer 5,266 5,840 7,009 7,183 5,855
Other 13 22 90 20 21
-------- -------- -------- -------- --------
57,075 60,860 60,607 56,168 50,909
Allowance for loan losses (698) (680) (643) (605) (624)
Unearned income (49) (69) (72) (83) (81)
-------- -------- -------- -------- --------
Net loans $ 56,328 $ 60,111 $ 59,892 $ 55,480 $ 50,204
======== ======== ======== ======== ========
There are no industry concentrations in Canaan Bank's loan portfolio.
42
The following table shows the maturity of commercial, financial and
agricultural loans, real estate commercial loans and real estate-construction
loans outstanding as of December 31, 2003. Also provided are the amounts due
after one (1) year, classified according to the sensitivity to changes in
interest rates.
(dollars in thousands) Due after
Due in one one year to Due after
year or less five years five years
------------ ----------- ----------
Commercial, financial, agricultural and real
estate commercial $ 3,490 $ 2,571 $ 13,216
Real estate-construction and land development 14 84 1,886
-------- ------- --------
$ 3,504 $ 2,655 $ 15,102
======== ======= ========
Maturities after One Year with:
Fixed interest rates $ 1,814 $ 4,478
Variable interest rates 841 10,624
------- --------
$ 2,655 $ 15,102
======= ========
Return on Equity and Assets
The following table summarizes various financial ratios of Canaan Bank for
each of the last three (3) years:
Year Ended December 31
----------------------
2003 2002 2001
----- ----- ----
Return on average total assets
(net income divided by average total assets) 0.68% 0.72% 0.76%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 8.68% 9.32% 9.80%
Dividend payout ratio
(total dividends divided by net income) 11.12% 10.30% 9.82%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 7.89% 7.76% 7.78%
Nonaccrual, Past Due and Restructured Loans
At December 31, 2003, there were three (3) nonaccrual loans in Canaan
Bank's portfolio, two (2) of which were secured by real estate and one (1)
secured by business assets. Canaan Bank's policy is to place a loan on
nonaccrual status when interest or principal has not been paid for 90 days.
Exceptions to this policy are those loans that are in the process of collection
and are well secured. Additionally, loans are placed on nonaccrual status at any
time when there is reasonable probability that 100 percent of future interest
will not be collected. Generally, the only loans that Canaan Bank classifies
nonaccrual are those that are secured by real estate or other collateral deemed
collectible. Otherwise loans are generally charged off if they become 90 days or
more delinquent. Exceptions are warranted with the $561,000 in loans that are
presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31 2003 2002 2001 2000 1999
------- ------- ------- -------- --------
Nonaccrual $ 15 $ 314 $ 472 $ 76 $ 14
90 days or more past due 561 142 248 113 155
Restructured loans 262 284 406 407 417
------- ------- ------- -------- --------
Total nonperforming loans $ 838 $ 740 $ 1,126 $ 596 $ 586
======= ======= ======= ======== ========
Total nonperforming loans as per-
centage of the total loan portfolio 1.47% 1.22% 1.86% 1.06% 1.15%
Allowance for loan losses as a per-
centage of nonperforming loans 83.29% 91.89% 57.10% 101.51% 106.48%
43
Information with respect to non-accrual and restructured loans
at December 31, 2003, 2002 and 2001 is as follows:
(dollars in thousands) Year Ended December 31
2003 2002 2001
---- ---- ----
Interest income that would have been
recorded under original terms $ 15 $ 44 $ 74
Gross interest recorded 14 48 70
---- ---- ----
Foregone interest $ 1 $ (4) $ 4
==== ==== ====
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance of the allowance for
loan losses at beginning of year $ 680 $ 643 $ 605 $ 624 $ 619
------ ------ ------ ------ ------
Charge-offs:
Commercial, financial and
agricultural 13 0 5 22 4
Real estate mortgage 0 14 0 0 0
Consumer 25 36 35 15 22
------ ------ ------ ------ ------
Total charge-offs 38 50 40 37 26
Recoveries:
Commercial, financial and
agricultural 0 15 1 0 1
Real estate mortgage 13 0 0 0 8
Consumer 7 2 3 4 1
------ ------ ------ ------ ------
Total recoveries 20 17 4 4 10
------ ------ ------ ------ ------
Net charge-offs 18 33 36 33 16
Provisions charged to operations 36 70 74 14 21
------ ------ ------ ------ ------
Balance at end of year $ 698 $ 680 $ 643 $ 605 $ 624
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding 0.03% 0.05% 0.06% 0.06% 0.03%
Ratio of allowance for loan losses
to year end loans 1.22% 1.12% 1.06% 1.08% 1.23%
Allocation of the Allowance for Loan Losses
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial, financial and
agricultural $ 128 11.74% $ 109 10.55% $ 90 10.26% $ 65 10.43% $ 95 12.53%
Real estate construction
and land development 5 3.48% 6 5.07% 4 3.83% 3 3.26% 2 2.84%
Real estate mortgage 463 75.53% 454 74.75% 422 74.19% 435 73.49% 439 73.09%
Consumer 98 9.23% 103 9.60% 116 11.56% 93 12.79% 65 11.50%
Other loans 4 0.02% 8 0.03% 11 0.16% 9 0.03% 23 0.04%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$ 698 100.00% $ 680 100.00% $ 643 100.00% $ 605 100.00% $ 624 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
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. Canaan Bank records provisions for loan losses, which are charged
against earnings, in the year that they are established.
44
Short Term Borrowings
(dollars in thousands) December 31
2003 2002 2001
------- ------- -------
Federal Home Loan Bank Advances
Average interest rate
At year end 1.32% 0 2.07%
For the year 1.63% 1.96% 5.66%
Average amount outstanding during the year $ 83 $ 598 $ 2,079
Maximum amount outstanding at any month $ 2,398 $ 1,889 $ 2,980
Amount outstanding at year end $ 2,398 $ 0 $ 2,980
Description of Properties
Canaan Bank serves its customers from its two (2) offices, which are
located in Canaan, Connecticut and Egremont, Massachusetts. Canaan Bank's
drive-up facility is located in a separate building behind the main office of
Canaan Bank.
The holding company is not the owner or lessee of any properties. Canaan
Bank owns one (1) property and currently leases two (2) properties. The
properties are described below.
The following table includes all property owned and leased by Canaan Bank,
but does not include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 100 Main Street Owned
Canaan, Connecticut
Branch Office 51 Main Street Leased
South Egremont, Massachusetts
Location for Potential Main Street Leased
Future Branch Office Sheffield, Massachusetts
Legal Proceedings
Other than routine litigation incidental to its business, there are no
material legal proceedings pending to which Canaan, Canaan Bank, or their
properties are subject.
Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders during the fourth
quarter of Canaan's 2003 fiscal year.
Market for Canaan Common Stock and Related Shareholder Matters
(a) Market Information
Canaan's common stock is not publicly traded. The following table presents
the high and low sales prices of Canaan's common stock, to the extent Canaan is
aware of the sales price.
2003 Quarters 2002 Quarters
------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- -------
Range of Stock prices:
High $ 48.00 $ 48.00 $ 48.00 $ 48.00 $ 47.50 $ 47.50 $ 47.50 $ 47.50
Low $ 48.00 $ 48.00 $ 48.00 $ 42.75 $ 42.75 $ 42.75 $ 42.75 $ 42.75
45
(b) Holders
There were 355 shareholders as of December 31, 2003. This number includes
brokerage firms and other financial institutions which hold stock in their name
but which is actually owned by third parties. Canaan is not provided with the
number or identities of these parties.
(c) Dividends
Dividends are currently paid two times a year. During the year 2003,
Canaan paid total cash dividends of $.46 per share, which compared to total
dividends of $.43 that were paid in the year 2002. Payment of all dividends is
dependent upon the condition and earnings of Canaan. The following table
presents cash dividends per share for the last two years:
2003 Quarters 2002 Quarters
--------------------------- ---------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--- ------ --- ------ --- ------ --- ------
Cash dividends $ 0 $ 0.18 $ 0 $ 0.28 $ 0 $ 0.17 $ 0 $ 0.26
The dividends paid to shareholders of Canaan are funded primarily from
dividends received by Canaan from Canaan Bank.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Canaan
Business
The following provides Management's comments on the financial condition
and results of operations of Canaan, which is the holding company for Canaan
Bank. Canaan's sole subsidiary is Canaan Bank, which has two (2) offices located
in the towns of North Canaan, Connecticut, and South Egremont, Massachusetts.
Canaan and Canaan Bank were formed in 1988 and 1907, respectively. This
discussion should be read in conjunction with Canaan's consolidated financial
statements and the notes to the consolidated financial statements that are
presented as part of this Prospectus/Proxy Statement.
Results of Operations
Comparison of the Years Ended December 2003 and 2002
Overview
The reported earnings for Canaan were $726,000 in 2003, a decrease of
$13,000 or 1.76% below year 2002 earnings of $739,000. Earnings in 2001 were
$722,000. As a result, earnings per share decreased $.07 or 1.66% to $4.13 in
2003. This compares to earnings per share of $4.20 in 2002 and $4.08 in 2001.
The lack of improvement in net income for 2003 reflects approximately $198,000
in merger related expenses during 2003 that were not tax deductible.
Canaan is "well capitalized". Canaan's risk-based capital ratios at
December 31, 2003, which includes the risk-weighted assets and capital of the
Canaan Bank, were 12.04% for Tier 1 capital and 13.07% for total capital.
Canaan's leverage ratio was 7.53% at December 31, 2003. This compares to a Tier
1 capital to risk weighted assets ratio at December 31, 2002 of 12.77%, a total
capital to risk weighted assets ratio of 13.86%, and leverage ratio of 7.67%.
The Board of Directors increased total dividends on Canaan's common stock
to $.46 per share in 2003. This compares to a $.43 per share dividend in 2002
and a $.40 per share dividend in 2001.
Net Interest and Dividend Income
Canaan earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities, and the second is by
charging fees for services provided. The first source involves functioning as a
financial intermediary. Canaan accepts funds from depositors or borrows funds
and either lends the funds to borrowers or invests those funds in various types
of securities. The second source is fee income, which is discussed in the
noninterest income section of this analysis.
46
Net interest income is the difference between the interest and fees earned
on loans, interest and dividends earned on securities (Canaan's earning assets)
and the interest expense paid on deposits and borrowed funds, primarily in the
form of advances from the Federal Home Loan Bank. The amount by which interest
income will exceed interest expense depends on two factors: (1) the volume or
balance of earning assets compared to the volume or balance of interest-bearing
deposits and borrowed funds and (2) the interest rate earned on those interest
earning assets compared with the interest rate paid on those interest-bearing
deposits and borrowed funds. For this discussion, net interest income is
presented on a fully taxable-equivalent ("FTE") basis. FTE interest income
restates reported interest income on tax exempt loans and securities as if such
interest were taxed at the applicable State and Federal income tax rates for all
periods presented.
(dollars in thousands) December 31
2003 2002 2001
-------- -------- --------
Interest and Dividend Income
(financial statements) $ 5,506 $ 6,127 $ 6,821
Tax Equivalent Adjustment 214 129 91
-------- -------- --------
Total Interest Income (on an FTE basis) 5,720 6,256 6,912
Interest Expense (2,201) (2,644) (3,331)
-------- -------- --------
Net Interest Income-FTE $ 3,519 $ 3,612 $ 3,581
======== ======== ========
Canaan's 2003 total interest and dividend income on an FTE basis of
$5,720,000 was $536,000 or 8.57% less than the total interest and dividend on an
FTE basis of $6,256,000 in 2002. Although there is an increase in earning
assets, this decrease in interest and dividend income is primarily the result of
an economic environment with lower interest rates. A change in the mix of
earning assets which reflects an increase in tax exempt securities has resulted
in a significant increase in the tax equivalent adjustment of $214,000 for 2003
as compared to $129,000 for 2002. This is an increase of approximately 66%.
Interest expense on deposits in 2003 decreased $364,000 or 24.38% and
totaled $1,129,000. This compares to $1,493,000 for the corresponding period in
2002. Although deposits increased, generally lower interest rates resulted in
the decrease in interest expense. Interest expense for Federal Home Loan Bank
advances decreased $79,000 to $1,071,000 in 2003. This compares to interest
expense of $1,150,000 in 2002 and, as with deposits, lower interest rates
resulted in lower interest expense in borrowings. Although interest margins
continue to be pressured by generally lower interest rates and by aggressive
competition, net interest income on an FTE basis only decreased $93,000 or 2.57%
and totaled $3,519,000 for the year ended December 31, 2003. This compared to
total net interest income on an FTE basis of $3,612,000 for the year ended
December 31, 2002.
Net interest margin is net interest and dividend income expressed as a
percentage of average earning assets. It is used to measure the difference
between the average rate of interest and dividends earned on assets and the
average rate of interest that must be paid to support those assets. To maintain
its net interest margin, Canaan must manage the relationship between interest
earned and paid. Canaan's 2003 net interest margin on an FTE basis was 3.43%.
This compares to a net interest margin of 3.66% for the corresponding period in
2002. The following table reflects average balances, interest earned or paid and
rates for the three years ended December 31, 2003, 2002 and 2001. The average
loan balances include both non-accrual and restructured loans. Interest earned
on loans also includes fees on loans such as late charges collected that are not
deemed to be material. Interest earned on tax exempt securities in the table is
presented on a fully taxable-equivalent basis. A federal tax rate of 34% was
used in performing these calculations. Actual tax exempt interest income earned
on securities in 2003 was $415,000 with a yield of 4.03%. Actual tax exempt
income in 2002 totaled $250,000 with a yield of 4.40%.
47
Yield Analysis
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
-------------------------------------------------------------------------------------------
2003 2002 2001
Interest Interest Interest
Average Earned/ Yield Average Earned/ Yield Average Earned/ Yield
(dollars in thousands) Balance Paid Rate Balance Paid Rate Balance Paid Rate
--------- --------- ----- --------- -------- ----- --------- -------- -----
ASSETS
Interest Earning Assets:
Loans $ 60,233 $ 4,048 6.72% $ 61,829 $ 4,540 7.34% $ 57,958 $ 4,930 8.51%
Taxable Securities 30,207 1,027 3.40% 29,829 1,319 4.42% 28,350 1,671 5.89%
Tax-Exempt Securities* 10,305 629 6.10% 5,681 379 6.67% 3,804 268 7.05%
Federal Funds 1,805 15 0.83% 1,194 17 1.42% 1,092 43 3.94%
Other Interest Income 106 1 0.94% 102 1 0.98% 59 0 0
--------- --------- --------- -------- --------- --------
Total Interest Earning Assets 102,656 $ 5,720 5.57% 98,635 $ 6,256 6.34% 91,263 $ 6,912 7.57%
--------- -------- --------
Allowance for Loan Losses (696) (661) (622)
Cash & due from banks 1,925 1,833 1,726
Premises, Equipment 1,232 1,343 1,210
Net Unrealized gain/loss on AFS
Securities (48) 135 171
Other Assets 934 906 969
--------- --------- ---------
Total Average Assets $ 106,003 $ 102,191 $ 94,717
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Now/Money Market Deposits $ 13,564 $ 54 0.40% $ 13,767 $ 144 1.05% $ 14,969 $ 342 2.28%
Savings Deposits 16,750 164 0.98% 14,448 264 1.83% 10,537 312 2.96%
Time Deposits 31,337 911 2.91% 31,152 1,085 3.48% 27,748 1,399 5.04%
Borrowed Funds 21,590 1,072 4.97% 22,453 1,151 5.13% 21,987 1,278 5.81%
--------- --------- --------- -------- --------- --------
Total Interest Bearing Liabilities 83,241 $ 2,201 2.64% 81,820 $ 2,644 3.23% 75,241 $ 3,331 4.43%
--------- -------- --------
Demand Deposits 14,048 11,973 11,573
Other Liabilities 354 472 535
Shareholders' Equity 8,360 7,926 7,368
--------- --------- ---------
Total Liabilities and Equity $ 106,003 $ 102,191 $ 94,717
========= ========= =========
Net Interest Income $ 3,519 $ 3,612 $ 3,581
========= ======== ========
Net Interest Spread 2.93% 3.11% 3.14%
Net Interest Margin 3.43% 3.66% 3.92%
Interest income and yields on securities are stated on fully taxable equivalent
(FTE) basis. The total amount of adjustments for 2003, 2002 and 2001 are
$214,000, $129,000 and $91,000, respectively. A federal tax rate of 34% was used
in performing this calculation.
48
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(Dollars in thousands) 2003 over 2002 2002 over 2001
--------------------------- ----------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- -------- -------
Increase (decrease) in:
Interest income on:
Loans $ (115) $ (377) $ (492) $ 372 $ (762) $ (390)
Taxable investment securities 17 (309) (292) 93 (445) (352)
Tax-exempt investment securities 279 (29) 250 124 (13) 111
Other interest income (11) 9 (2) 4 (29) (25)
------- ------- ------- ------- -------- -------
Total interest income $ 170 $ (706) $ (536) $ 593 $ (1,249) $ (656)
------- ------- ------- ------- -------- -------
Interest expense on:
NOW/Money Market deposits $ (2) $ (88) $ (90) $ (26) $ (172) $ (198)
Savings deposits 52 (152) (100) 1,519 (1,567) (48)
Time deposits 6 (180) (174) 207 (521) (314)
Borrowed funds (43) (36) (79) 28 (155) (127)
------- ------- ------- ------- -------- -------
Total interest expense $ 13 $ (456) $ (443) $ 1,728 $ (2,415) $ (687)
------- ------- ------- ------- -------- -------
Net interest margin $ 157 $ (250) $ (93) $ 1,135 $ 1,166 $ 31
======= ======= ======= ======= ======== =======
Noninterest Income
Noninterest income totaled $1,052,000 for the year ended December 31, 2003
as compared to $643,000 for the year ended December 31, 2002. Service charges
increased $26,000 for 2003 due to the increase in deposit volumes. Gains on
sales of available-for-sale securities totaled $0 in 2003. This represents a
decrease of $68,000 when comparing total gains on sales of available-for-sale
securities in 2002. Other income, including gain on sale of loans held-for-sale,
increased $451,000 or 170.19% to $716,000 in 2003. This compares to total other
income, including gain on sale of loans held-for-sale, of $265,000 in 2002. This
increase is primarily the result of increased fees generated from the
refinancing activities in the secondary market as well as an increase in
transaction fees generated from activity of deposit accounts. Canaan continues
to seek to increase noninterest income due to its importance as a potential
contributor to profitability.
Noninterest Expense
Noninterest expense increased 8.74% to $3,284,000 for the year ended
December 31, 2003 as compared to $3,020,000 for the corresponding period in
2002. Salaries and employee benefits totaled $1,696,000 for the twelve months
ended December 31, 2003 compared to $1,586,000 for the same period in 2002. This
is an increase of $110,000 or 6.94% and is primarily the result of the addition
of staff. Annual pay raises and the increasing costs of employee benefits have
also contributed to the increased expense. Occupancy expenses increased $19,000
or 10.50% to $200,000. This compares to total occupancy expense of $181,000 for
the same period in 2002. Data processing expenses increased $27,000 or 8.94% for
the year ended December 31, 2003 and totaled $329,000. Data processing expenses
for the same period in 2002 totaled $302,000. This increase is mainly due to the
online banking product that was implemented in 2003. Professional fees, which
includes legal fees, increased $194,000 or 204.21% and totaled $289,000 in
December 2003 as compared to $95,000 for same period in 2002. Legal and
consulting fees associated with the proposed merger with Salisbury Bancorp, Inc.
totaled $211,000. There was no write-down of impaired assets in 2003, as
compared to an $80,000 write-down in 2002. Other operating expenses totaled
$494,000 for the year ended December 31, 2003 compared to other operating
expenses totaling $508,000 for the corresponding period in 2002.
Income Taxes
In 2003, Canaan's income tax provision totaled $311,000, an effective tax
rate of 30.00%. This compares to an income tax provision of $297,000 in 2002,
reflecting an effective tax rate of 28.67%. This increase is the result of the
impact of the $198,000 in merger related expenses that were not tax deductible.
49
Net Income
Net income totaled $726,000 for the year 2003. This was a decrease of
$13,000 or 1.76% and reflects basic earnings per share of $4.13 per share for
the year. This compared to basic earnings per share of $4.20 for the same period
in 2002.
Financial Condition
Comparison of December 31, 2003 and 2002
Total assets at December 31, 2003 were $107,087,000 compared to
$103,435,000 at December 31, 2002, an increase of $3,652,000 or 3.53%
Securities Portfolio
Canaan 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 diversification of Canaan's assets.
Canaan continues to use arbitrage strategy by borrowing funds and investing them
at a rate of return higher than the borrowing cost in order to generate
additional interest income from the securities portfolio. The securities
portfolio also acts as collateral for deposits of public agencies. As of
December 31, 2003, the securities portfolio, including Federal Reserve Bank and
Federal Home Loan Bank of Boston stock, totaled $46,184,000. This represents an
increase of $9,493,000 or 25.87% when comparing the portfolio total of
$36,691,000 at year-end 2002. The increase has been the result of an economic
environment of low interest rates that has created refinancing opportunities to
longer term fixed rate products that are offered by the secondary mortgage
market. This has resulted in a decrease in total net loans, thus resulting in
available cash to invest in the securities portfolio.
The make up of the securities portfolio is diversified among U.S.
Government sponsored agencies, mortgage backed securities, corporate bonds,
preferred stock, and securities issued by states of the United States and
political subdivisions of the states. At December 31, 2003, securities totaling
$44,121,000 were classified as available-for-sale and securities totaling
$757,000 were classified as held-to-maturity.
Securities are classified in the portfolio as either
Securities-Available-for-Sale or Securities-Held-to-Maturity. The securities
reported as available-for-sale are stated at fair value in the financial
statements of Canaan. Unrealized holding gains and losses (accumulated other
comprehensive income/loss) are not included in earnings, but are reported as a
net amount (less expected tax) in a separate component of capital until
realized. At December 31, 2003, the unrealized loss net of tax was $530,000.
This compares to an unrealized gain net of tax of $103,000 at December 31, 2002.
The securities reported as securities-held-to-maturity are stated at amortized
cost.
Federal Funds Sold and FHLB Overnight Deposits
Federal Funds sold and FHLB Overnight Deposits totaled $0 at December 31,
2003, as compared to $675,000 at December 31, 2002.
Lending
Loans receivable, net of allowance for loan losses decreased $3,783,000 to
$56,328,000 at December 31, 2003 or 6.29% compared to $60,111,000 at December
31, 2002. Canaan offers a wide variety of loan types and terms along with
competitive pricing to customers. The largest dollar volumes of loan activity
continue to be in the residential mortgage area. A continuing economic
environment of generally lower interest rates that targets refinancing
opportunities to longer term fixed rate products primarily offered by the
secondary market has resulted in the decrease in total net loans.
Provisions and Allowance for Loan Losses
Total gross loans at December 31, 2003 were $57,075,000, which compares to
total loans of $60,860,000 at December 31, 2002. This is a decrease of
$3,785,000 or 6.22%. At December 31, 2003 approximately 79% of Canaan Bank's
loan portfolio was related to real estate products and although the portfolio
decreased during the year 2003, the concentration remained fairly consistent as
approximately 79.8% of the portfolio was related to real estate at December 31,
2002. There were no material changes in the composition of the loan portfolio
during this period.
50
Credit risk is inherent in the business of extending loans. Canaan Bank
monitors the quality of the portfolio to ensure that loan quality will not be
sacrificed for growth. Because of the risk associated with extending loans,
Canaan Bank maintains an allowance or reserve for credit losses through charges
to earnings. The loan loss provision for the year 2003 was $36,000 as compared
to $70,000 for the year ended December 31, 2002. This is the result of a
decrease in charged off loans during the year 2003 and an increase in recoveries
of loans previously charged off. While the overall level of nonperforming loans
remains low as a percentage of total loans, the increase of $98,000 in
nonperforming loans from December 31, 2003 to December 31, 2002 is being closely
monitored by management in order to determine whether such event is evidence of
any trend within the economy or loan portfolio.
Canaan Bank evaluates the adequacy of the allowance on a monthly basis. No
material changes have been made in the estimation methods or assumptions that
the Bank used in making this determination during the year ended December 31,
2003. Such evaluations are based on assessments of credit quality and "risk
rating" of loans by senior management, which is submitted to the Board of
Directors for approval. Loans are initially risk rated when originated. If there
is deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of
the measurement criteria of Statements of Financial Accounting Standards No.
114, Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired
loans receive individual evaluation of the allowance necessary on a monthly
basis and loans to be considered for impairment are defined in Canaan Bank's
Loan Policy. Loans are considered impaired when it is probable that Canaan Bank
will not be able to collect all principal and interest due according to the
terms of the note.
These loans will be measured on a loan-by-loan basis by either the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of collateral if the
loan is collateral dependent.
In addition, a risk of loss factor is applied in evaluating categories of
loans generally as part of the periodic analysis of the Allowance for Loan
Losses. This analysis reviews the allocations of the different categories of
loans within the portfolio and it considers historical loan losses and
delinquency figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and
given a special loan loss factor because management recognizes the higher risk
involved in such loans. Concentrations of credit and local economic factors are
also evaluated on a periodic basis. Historical average net losses by loan type
are examined as well as trends by type. Canaan Bank's loan mix over the same
period of time is also analyzed. A loan loss allocation is made for each type of
loan multiplied by the loan mix percentage for each loan type to produce a
weighted average factor. There have been no reallocations within the allowance
during the years ended December 31, 2003 and 2002.
At December 31, 2003 the allowance for loan losses totaled $698,000,
representing 83.29% of nonperforming loans, which totaled $838,000, and 1.22% of
total loans of $57,075,000. This compared to $680,000 representing 91.89% of
nonperforming loans, which totaled $740,000 and 1.12% of total loans of
$60,860,000 at December 31, 2002. A total of $38,000 in loans was charged off
during the year 2003, as compared to $50,000 during 2002. A total of $20,000 of
previously charged off loans was recovered during the year ended December 31,
2003. Recoveries for the year 2002 totaled $17,000. When comparing the two
years, net charge-offs were $18,000 for the year 2003 and $33,000 for the year
2002. Management believes that the allowance for loan losses is adequate. While
management estimates loan losses using the best available information, no
assurances can be given that additions to the allowance will not be necessary
based on changes in economic and real estate market conditions, further
information obtained regarding problem loans, identification of additional
problem loans or other factors. Additionally, with expectations of the Bank to
grow its existing portfolio, future additions to the allowance may be necessary
to maintain adequate coverage ratios.
51
Deposits
Canaan offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2003 totaled $74,983,000 compared to $72,935,000
at year-end 2002. This increase of $2,048,000 or 2.81% can be primarily
attributed to the ongoing efforts of Canaan to develop and maintain relationship
banking with its customers. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and the aggressive competition from nonbanking entities. During the year,
there was an increase in demand, NOW and savings accounts, which are lower cost,
core deposits.
The average daily amount of deposits by category and the average rates
paid on such deposits are summarized in the following table:
(dollars in thousands)
Year ended December 31
2003 2002 2001
--------------- --------------- ---------------
Average Average Average
Balance Rate Balance Rate Balance Rate
-------- ---- -------- ---- -------- ----
Demand $ 14,048 $ 11,973 $ 11,573
NOW 9,447 .29% 6,730 1.03% 5,272 1.42%
Money Market 4,117 .65% 7,037 1.07% 9,697 2.74%
Savings 16,750 .98% 14,448 1.83% 10,537 2.96%
Time 31,337 2.91% 31,152 3.48% 27,748 5.04%
-------- -------- --------
$ 75,699 1.49% $ 71,340 2.09% $ 64,827 3.17%
======== ======== ========
Maturities of time certificates of deposits of $100,000 or more
outstanding at December 31 are summarized as follows:
(dollars in thousands)
December 31
2003 2002 2001
------- ------- -------
Three months or less $ 1,253 $ 1,529 $ 1,447
Over three months through six months 1,180 1,625 902
Over six months through one year 1,897 1,384 1,789
Over one year 3,719 3,330 3,563
------- ------- -------
Total $ 8,049 $ 7,868 $ 7,701
======= ======= =======
Borrowings
As part of its operating strategy, Canaan 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, 2003, Canaan had $23,319,000 in outstanding
advances from the Federal Home Loan Bank compared to $21,774,000 at December 31,
2002. Management expects that it will continue this strategy of supplementing
deposit growth with advances from the Federal Home Loan Bank of Boston.
Interest Rate Risk
Interest rate risk is the most significant market risk affecting Canaan.
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.
52
In an attempt to manage its exposure to changes in interest rates, Canaan
Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. Canaan Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" Canaan's asset and liability balances to measure how much of
Canaan's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets. At
December 31, 2003, Canaan was asset sensitive (positive gap). This would suggest
that the during a period of rising interest rates Canaan would be in a better
position to invest in higher yielding assets resulting in growth in interest
income. To the contrary, during a period of falling interest rates, a positive
gap would result in a decrease in interest income. The overall exposure of
interest rate risk at December 31, 2003 was low.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable
cost in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. Canaan manages
liquidity primarily with readily marketable investment securities, deposits and
loan repayments. Canaan's subsidiary, Canaan Bank, is a member of the Federal
Home Loan Bank of Boston. This enhances the liquidity position by providing a
source of available borrowings.
Capital
At December 31, 2003, Canaan had $8,350,000 in shareholders' equity
compared to $8,274,000 at December 31, 2002. This represents an increase of
$76,000 or 0.92%. Several components contributed to the change since December
2002. Earnings for the year totaled $726,000. Market conditions have resulted in
a negative adjustment to unrealized comprehensive income of $633,000. Canaan
paid dividends in 2003 resulting in a decrease in capital of $81,000. Canaan
issued 1,917 net shares of common stock during 2003, which resulted in an
increase in capital of $65,000. Under current regulatory definitions, Canaan and
Canaan Bank are considered to be "well capitalized" for capital adequacy
purposes. As a result, Canaan Bank pays the lowest federal deposit insurance
deposit premiums possible. One primary measure of capital adequacy for
regulatory purposes is based on the ratio of capital to risk weighted assets.
This method of measuring capital adequacy helps to establish capital
requirements that are more sensitive to the differences in risk associated with
various assets. It takes into account off-balance sheet exposure in assessing
capital adequacy and it minimizes disincentives to holding liquid, low risk
assets. At year-end 2003, Canaan had a risk-based capital ratio of 13.07%
compared to 13.86% at December 31, 2002. Maintaining strong capital is essential
to bank safety and soundness. However, the effective management of capital
resources requires generating attractive returns on equity to build value for
shareholders while maintaining appropriate levels of capital to fund growth,
meet regulatory requirements and be consistent with prudent industry practices.
Management believes that the capital ratios of Canaan and Canaan Bank are
adequate to continue to meet the foreseeable capital needs of the institution.
Impact of Inflation and Changing Prices
Canaan'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 Canaan are monetary and, as a
result, interest rates tend to have a greater impact on Canaan's performance
than do the effects of general levels of inflation; although they do not
necessarily move in the same direction or with the same magnitude as the prices
of goods and services. Although not an influence in recent years, inflation
could impact earnings in future periods.
53
Impact of New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement (a) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (b) clarifies when a derivative contains a
financing component, (c) amends the definition of an underlying to conform to
language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain existing pronouncements. The
provisions of SFAS No. 149 are effective for contracts entered into or modified
after June 30, 2003. There was no substantial impact on Canaan's consolidated
financial statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on Canaan's consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
Canaan is required to apply FIN 46, as revised, to all entities subject to it by
the beginning of the first fiscal year or interim period beginning after
December 15, 2004. The adoption of this interpretation is not expected to have a
material effect on Canaan's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS no. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on Canaan's
consolidated financial statements.
54
Forward Looking Statements
This Prospectus/Proxy Statement, as well as other filings, reports and
press releases made or issued by Canaan and Canaan Bank, and oral statements
made by executive officers of Canaan and Canaan 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 Canaan and
Canaan Bank do business, and
(b) expectations for increased revenues and earnings for Canaan and Canaan
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.
Canaan notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may affect the operation, performance, development and
results of Canaan and Canaan 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 Canaan Bank operates;
(b) changes in the legislative and regulatory environment that negatively
impact Canaan and Canaan Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
and
(d) the impact of technological advances;
Such developments could have an adverse impact on Canaan's and Canaan
Bank's financial position and results of operations.
Statement of Management's Responsibility
Management is responsible for the integrity and objectivity of the
financial statements and other information appearing in this Prospectus/Proxy
Statement. The 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.
Quantitative and Qualitative Disclosures About Market Risk
The main components of market risk for Canaan are equity price risk,
credit risk, interest rate risk and liquidity risk.
With regard to equity price risk Canaan's stock is not publicly traded. As
a result, the value of its common stock is determined annually by a third party
and does not respond to price movements relating to the banking industry or
other indicia of investment. A discussion of credit risk, interest rate risk and
liquidity risk can be found in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Prospectus/Proxy
Statement.
55
CANAAN FINANCIAL STATEMENTS
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Canaan National Bancorp, Inc.
Canaan, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Canaan National
Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and the related
consolidated statement of income, changes in stockholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Canaan
National Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 23, 2004
56
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 1,766,144 $ 2,617,873
Interest bearing demand deposits with other banks 50,458 355,424
Federal Home Loan Bank overnight deposit 675,000
------------- -------------
Cash and cash equivalents 1,816,602 3,648,297
Investments in available-for-sale securities (at fair value) 44,121,023 34,118,645
Investments in held-to-maturity securities (fair values of $802,881 as of
December 31, 2003 and $1,323,349 as of December 31, 2002) 756,822 1,266,645
Federal Reserve Bank stock, at cost 56,300 56,300
Federal Home Loan Bank stock, at cost 1,250,300 1,250,300
Loans, net of allowance for loan losses of $698,222 as of December 31, 2003
and $680,414 as of December 31, 2002 56,328,023 60,110,720
Loans held-for-sale 180,000 858,500
Premises and equipment 1,212,854 1,354,724
Accrued interest receivable 583,673 518,932
Other assets 781,349 251,801
------------- -------------
Total assets $ 107,086,946 $ 103,434,864
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 14,134,911 $ 13,579,420
Interest-bearing 60,848,115 59,355,990
------------- -------------
Total deposits 74,983,026 72,935,410
Federal Home Loan Bank advances 23,319,449 21,773,649
Other borrowed funds 97,696 100,000
Other liabilities 336,313 352,221
------------- -------------
Total liabilities 98,736,484 95,161,280
------------- -------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 300,000 shares; issued
and outstanding, 177,418 shares as of December 31, 2003 and 175,501
shares as of December 31, 2002 1,774 1,755
Paid-in capital 1,070,898 1,005,806
Retained earnings 7,807,864 7,162,820
Accumulated other comprehensive (loss) income (530,074) 103,203
------------- -------------
Total stockholders' equity 8,350,462 8,273,584
------------- -------------
Total liabilities and stockholders' equity $ 107,086,946 $ 103,434,864
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
57
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003 and 2002
2003 2002
----------- -----------
Interest and dividend income:
Interest and fees on loans $ 4,047,550 $ 4,540,336
Interest on debt securities:
Taxable 874,875 1,104,502
Tax-exempt 414,915 249,755
Dividends 152,572 214,296
Other interest 15,665 18,030
----------- -----------
Total interest and dividend income 5,505,577 6,126,919
----------- -----------
Interest expense:
Interest on deposits 1,129,100 1,492,917
Interest on Federal Home Loan Bank advances 1,071,135 1,150,318
Interest on other borrowed funds 634 1,035
----------- -----------
Total interest expense 2,200,869 2,644,270
----------- -----------
Net interest and dividend income 3,304,708 3,482,649
Provision for loan losses 36,000 70,000
----------- -----------
Net interest and dividend income after provision for loan losses 3,268,708 3,412,649
----------- -----------
Other income:
Service charges on deposit accounts 335,958 309,491
Gain on sales of available-for-sale securities, net 68,003
Gain on sales of loans, net 627,198 184,775
Servicing income 35,513 11,327
Other income 53,207 69,178
----------- -----------
Total other income 1,051,876 642,774
----------- -----------
Other expense:
Salaries and employee benefits 1,695,752 1,586,076
Occupancy expense 199,725 180,526
Equipment expense 276,112 268,432
Data processing 328,906 301,928
Professional fees 289,009 94,967
Writedown of other asset 80,000
Net cost of operation of other real estate owned 10,664 1,224
Printing and stationery 44,722 43,206
Other expense 438,720 463,248
----------- -----------
Total other expense 3,283,610 3,019,607
----------- -----------
Income before income taxes 1,036,974 1,035,816
Income taxes 311,242 296,454
----------- -----------
Net income $ 725,732 $ 739,362
=========== ===========
Earnings per common share $ 4.13 $ 4.20
=========== ===========
Earnings per common share, assuming dilution $ 4.04 $ 4.13
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
58
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003 and 2002
Number of
Shares Accumulated
Issued Other
and Common Paid-in Retained Comprehensive
Outstanding Stock Capital Earnings Income Total
----------- ------- ----------- ----------- ------------- -----------
Balance, December 31, 2001 176,639 $ 1,766 $ 1,059,783 $ 6,499,624 $ 171,000 $ 7,732,173
Comprehensive income:
Net income 739,362
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect (67,797)
Comprehensive income 671,565
Retirement of shares of common stock (5,367) (53) (247,312) (247,365)
Issuance of shares of common stock 4,229 42 193,335 193,377
Dividends ($.43 per share) (76,166) (76,166)
------- ------- ----------- ----------- ---------- -----------
Balance, December 31, 2002 175,501 1,755 1,005,806 7,162,820 103,203 8,273,584
Comprehensive income:
Net income 725,732
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect (633,277)
Comprehensive income 92,455
Retirement of shares of common stock (1,090) (11) (52,309) (52,320)
Issuance of shares of common stock 52 2,480 2,480
Sale of common stock on exercise of
stock options 2,955 30 114,921 114,951
Dividends ($.46 per share) (80,688) (80,688)
------- ------- ----------- ----------- ---------- -----------
Balance, December 31, 2003 177,418 $ 1,774 $ 1,070,898 $ 7,807,864 $ (530,074) $ 8,350,462
======= ======= =========== =========== ========== ===========
Reclassification disclosure for the years ended December 31:
2003 2002
---------- ---------
Net unrealized (losses) gains on available-for-sale securities $ (718,492) $ 80,197
Reclassification adjustment for realized gains in net income (68,003)
---------- ---------
Other comprehensive (loss) income before income tax effect (718,492) 12,194
Income tax benefit (expense) 85,215 (79,991)
---------- ---------
Other comprehensive loss, net of tax $ (633,277) $ (67,797)
========== =========
Accumulated other comprehensive (loss) income as of December 31, 2003 and 2002F
consists of net unrealized holding (losses) gains on available-for-sale
securities, net of taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
59
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 725,732 $ 739,362
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 261,792 170,063
Gain on sales of available-for-sale securities, net (68,003)
Writedown of other asset 80,000
Provision for loan losses 36,000 70,000
Change in unearned income (20,539) (16,000)
Change in loans held-for-sale 678,500 (858,500)
Depreciation and amortization 226,874 226,405
(Increase) decrease in interest receivable (64,741) 132,952
Deferred tax expense (benefit) 135,542 (757)
Increase in prepaid expenses (14,979) (4,363)
Increase in income tax receivable (111,672) (23,803)
(Increase) decrease in other assets (2,023) 3,661
Increase in mortgage servicing rights (304,188)
Decrease in taxes payable (35,239)
(Decrease) increase in accrued expenses (59,432) 37,293
Decrease in interest payable (12,489) (19,883)
Increase (decrease) in other liabilities 5,686 (72,010)
------------- -------------
Net cash provided by operating activities 1,480,063 361,178
------------- -------------
Cash flows from investing activities:
Purchases of available-for-sale securities (21,234,858) (18,443,480)
Proceeds from sales of available-for-sale securities 5,329,508
Proceeds from maturities of available-for-sale securities 10,054,556 9,168,365
Proceeds from maturities of held-to-maturity securities 510,777 145,043
Loan originations and principal collections, net 3,747,215 (436,148)
Recoveries of loans previously charged off 20,021 16,913
Proceeds from sale of other real estate owned 146,101
Proceeds from sale of other stock investment 100,000
Capital expenditures (85,004) (129,603)
------------- -------------
Net cash used in investing activities (6,887,293) (4,203,301)
------------- -------------
60
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
(continued)
2003 2002
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 3,162,040 5,636,933
Net (decrease) increase in time deposits (1,114,424) 2,837,766
Net increase (decrease) in short term advances from Federal Home Loan Bank 2,398,000 (2,979,500)
Proceeds from long-term advances from Federal Home Loan Bank 750,000 4,561,386
Principal payments on long-term advances from Federal Home Loan Bank (1,602,200) (5,613,349)
Net decrease in other borrowed funds (2,304) (6,993)
Dividends paid (80,688) (76,166)
Retirement of shares of common stock (52,320) (247,365)
Issuance of shares of common stock 2,480 193,377
Proceeds from exercise of stock options 114,951
------------ ------------
Net cash provided by financing activities 3,575,535 4,306,089
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,831,695) 463,966
Cash and cash equivalents at beginning of year 3,648,297 3,184,331
------------ ------------
Cash and cash equivalents at end of year $ 1,816,602 $ 3,648,297
============ ============
Supplemental disclosures:
Interest paid $ 2,213,358 $ 2,664,153
Income taxes paid 287,372 356,253
Loans transferred to other real estate owned 146,101
The accompanying notes are an integral part of these consolidated financial
statements.
61
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003 and 2002
NOTE 1 - NATURE OF OPERATIONS
Canaan National Bancorp, Inc. (Company) is a Delaware corporation that was
organized in 1988 to become the holding company of The Canaan National Bank
(Bank). The Company's primary activity is to act as the holding company for the
Bank. The Bank is a federally chartered bank which was incorporated in 1907 and
is headquartered in Canaan, Connecticut. The Bank also has a branch office
located in South Egremont, Massachusetts. The Bank is engaged principally in the
business of attracting deposits from the general public and investing those
deposits in residential and commercial real estate loans, and in consumer and
small business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to accounting policies generally accepted in the United States of America and
predominant practices within the banking industry. The consolidated financial
statements were prepared using the accrual basis of accounting. The significant
accounting policies are summarized below to assist the reader in better
understanding the consolidated financial statements and other data contained
herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Canaan
National Bancorp, Inc. and its wholly-owned subsidiary, The Canaan
National Bank (Bank), and the Bank's wholly-owned subsidiary, CNB
Insurance Agency, Inc. CNB Insurance Agency, Inc. was formed to sell
insurance. 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 and Federal Home Loan Bank overnight deposit.
Cash and due from banks as of December 31, 2003 and 2002 includes $640,000
and $583,000, respectively, 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 computed so as to approximate the interest
method. Gains or losses on sales of investment securities are computed on
a specific identification basis.
62
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. These
security classifications may be modified after acquisition only under
certain specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
o Held-to-maturity securities are measured at amortized cost in
the consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings or in a separate component
of capital. They are merely disclosed in the notes to the
consolidated financial statements.
o 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.
o Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
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.
Loan origination, commitment fees and certain direct origination costs are
deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line 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 is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
63
LOANS HELD-FOR-SALE:
Loans held-for-sale are carried at the lower of cost or estimated market
value in the aggregate. Net unrealized losses are recognized through a
valuation allowance by charges to income.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 15 to 45 years for buildings and 2 to 10
years for furniture and equipment. Leasehold improvements are amortized
over the lesser of the life of the lease or the estimated life of the
improvements.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets and subsequent writedowns are included in
other expense.
64
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
SERVICING:
Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets. Capitalized
servicing rights are reported in other assets and are amortized into
noninterest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing
assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates
and terms. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash
flows using market-based assumptions. Impairment is recognized through a
valuation allowance for an individual stratum, to the extent that fair
value is less than the capitalized amount for the stratum.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
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 receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Loans held-for-sale: Fair values of loans held-for-sale are based on
commitments on hand from investors or prevailing market prices.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
65
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Other borrowed funds: Other borrowed funds consist of treasury tax and
loan deposits which generally are repaid within one to 120 days from the
transaction date. The carrying amount of other borrowed funds 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:
At December 31, 2003, the Company has three stock-based employee
compensation plans which are described more fully in Note 11. The Company
accounts for those plans under the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. No stock-based employee compensation is reflected
in net income, as all options granted under this plan has an exercise
price equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to
stock-based employee compensation for the years ended December 31:
2003 2002
--------- ---------
Net income, as reported $ 725,732 $ 739,362
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (17,750)
--------- ---------
Pro forma net income $ 725,732 $ 721,612
========= =========
Earnings per share:
Basic - as reported $ 4.13 $ 4.20
Basic - pro forma 4.13 4.10
Diluted - as reported 4.04 4.13
Diluted - pro forma 4.04 4.03
EARNINGS PER SHARE:
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method.
66
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 106"). This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. This
Statement did not have a material impact on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and
144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and FASB Interpretation
No. 9 "Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method" provided interpretive guidance on
the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions
from the scope of both Statement 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147
amends SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The provisions in
paragraph 6 related to accounting for the impairment or disposal of
certain long-term customer-relationship intangible assets are effective on
October 1, 2002. Transition provisions for previously recognized
unidentifiable intangible assets in paragraphs 8-14 are effective on
October 1, 2002, with earlier application permitted. There was no
substantial impact on its consolidated financial statements on adoption of
this Statement.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 clarifies that a
guarantor is required to disclose (a) the nature of the guarantee; (b) the
maximum potential amount of future payments under the guarantee; (c) the
carrying amount of the liability; (d) the nature and extent of any
recourse provisions or available collateral that would enable the
guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December
15, 2002. The Company adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and
adopted the disclosure requirements effective as of December 31, 2002. The
adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.
67
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS
Statement No. 123" ("SFAS No. 148"). SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The transition
provisions and disclosure provisions are required for financial statements
for fiscal years ending after December 15, 2002. The Company adopted the
disclosure provisions of SFAS No. 148 as of December 31, 2002 and
currently uses the intrinsic value method of accounting for stock options.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"),
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement (a) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (b)
clarifies when a derivative contains a financing component, (c) amends the
definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
and (d) amends certain other existing pronouncements. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after
June 30, 2003. There was no substantial impact on the Company's
consolidated financial statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that
certain financial instruments that were previously classified as equity
must be classified as a liability. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This Statement did not have any
material effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. In December 2003, the FASB revised
Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN
46(R)"). The objective of this interpretation is not to restrict the use
of variable interest entities but to improve financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company only if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
The Company is required to apply FIN 46, as revised, to all entities
subject to it by the beginning of the first fiscal year or interim period
beginning after December 15, 2004. The adoption of this interpretation is
not expected to have a material effect on the Company's consolidated
financial statements.
68
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132
(revised 2003)"). This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans required by SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which it replaces. It
requires additional disclosures to those in the original Statement 132
about assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal
years ending after December 15, 2003 and interim periods beginning after
December 15, 2003. Adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
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:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------ ------------- ------------- ------------
Available-for-sale securities:
December 31, 2003:
Debt securities issued by U.S. government
corporations and agencies $ 5,046,572 $ 45,907 $ 13,455 $ 5,079,024
Debt securities issued by states of the United
States and political subdivisions of the states 11,061,895 276,487 79,363 11,259,019
Corporate debt securities 2,271,168 28,047 3,830 2,295,385
Mortgage-backed securities 17,483,799 98,840 78,732 17,503,907
Asset-backed securities 4,664,887 41,909 595 4,706,201
Marketable equity securities 4,000,000 722,513 3,277,487
------------ --------- --------- ------------
$ 44,528,321 $ 491,190 $ 898,488 $ 44,121,023
============ ========= ========= ============
December 31, 2002:
Debt securities issued by states of the United
States and political subdivisions of the states $ 6,777,040 $ 226,816 $ 9,811 $ 6,994,045
Corporate debt securities 2,015,916 64,191 2,080,107
Mortgage-backed securities 15,380,651 208,161 15,246 15,573,566
Asset-backed securities 5,633,844 62,089 2,206 5,693,727
Marketable equity securities 4,000,000 222,800 3,777,200
------------ --------- --------- ------------
$ 33,807,451 $ 561,257 $ 250,063 $ 34,118,645
============ ========= ========= ============
Held-to-maturity securities:
December 31, 2003:
Debt securities issued by states of the United
States and political subdivisions of the states $ 752,754 $ 46,045 $ $ 798,799
Mortgage-backed securities 4,068 14 4,082
------------ --------- --------- ------------
$ 756,822 $ 46,059 $ $ 802,881
============ ========= ========= ============
69
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
----------- ------------- ------------- -----------
December 31, 2002:
Debt securities issued by states of the United
States and political subdivisions of the states $ 753,287 $ 46,513 $ $ 799,800
Mortgage-backed securities 513,358 10,191 523,549
----------- -------- ---------- -----------
$ 1,266,645 $ 56,704 $ $ 1,323,349
=========== ======== ========== ===========
The scheduled maturities of debt securities were as follows as of December 31,
2003:
Available-For-Sale Held-To-Maturity
------------------ ----------------------
Fair Amortized Fair
Value Cost Basis Value
------------ ---------- ---------
Due in one year $ 1,130,439 $ $
Due after one year through five years 4,561,476
Due after five years through ten years 4,576,421 650,000 687,600
Due after ten years 8,365,092 102,754 111,199
Mortgage-backed securities 17,503,907 4,068 4,082
Asset-backed securities 4,706,201
------------ --------- ---------
$ 40,843,536 $ 756,822 $ 802,881
============ ========= =========
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 not other than temporarily impaired, are as follows as
of December 31, 2003:
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 U.S.
government corporations
and agencies $ 953,307 $ 13,455 $ $ $ 953,307 $ 13,455
Debt securities issued by states of
the United States and political
subdivisions of the states 3,770,667 79,363 3,770,667 79,363
Corporate debt securities 896,170 3,830 896,170 3,830
Mortgage-backed securities 7,900,704 77,721 45,950 1,011 7,946,654 78,732
Asset-backed securities 237,844 595 237,844 595
Marketable equity securities 3,277,487 722,513 3,277,487 722,513
------------ --------- ----------- --------- ------------ ---------
Total temporarily impaired
securities $ 13,758,692 $ 174,964 $ 3,323,437 $ 723,524 $ 17,082,129 $ 898,488
============ ========= =========== ========= ============ =========
The Company reported a net unrealized loss on available for sale securities of
$361,239 at December 31, 2003 compared to a net unrealized gain of $367,898 at
December 31, 2002. Securities in a unrealized loss position for less that twelve
months are the result of the current interest rate environment and are not due
to unfavorable credit ratings. These securities are considered to be temporarily
impaired. Five securities were in an unrealized loss position for twelve months
or more. Of these five securities, four impaired with an unrealized loss at
approximately 22% of amortized cost. These four securities consist of FNMA and
FHLMC preferred stock. Due to the adjustable rate on these securities, the
impairments are a function of the current interest rate environment and their
values are expected to rise when interest rates rise. Company management does
not consider their securities to be other than temporarily impaired as of
December 31, 2003.
70
During 2003, there were no sales of available-for-sale securities. During 2002,
proceeds from sales of available-for-sale securities amounted to $5,329,508.
Gross realized gains and gross realized losses on those sales amounted to
$128,919 and $60,916, respectively. The tax expense applicable to these net
realized gains amounted to $26,487.
As of December 31, 2003 and 2002, securities with carrying amounts totaling
$6,346,099 and $1,353,997 were pledged to secure treasury, tax and loan, public
funds on deposit and borrowings at the Federal Reserve Discount Window and
Federal Home Loan Bank.
Securities of issuers which exceeded 10% of stockholders' equity as of December
31, 2003 are as follows:
Amortized
Issuer Cost Basis Fair Value
----------------------------------------------------- ------------ ------------
Federal National Mortgage Association preferred stock $ 3,000,000 $ 2,457,345
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
2003 2002
------------ ------------
Commercial, financial and agricultural $ 6,494,067 $ 6,180,104
Obligations of states and political subdivisions in the U.S. 208,748 241,087
Real estate - construction and land development 1,984,346 3,084,212
Real estate - residential 30,325,854 32,986,038
Real estate - commercial 12,783,228 12,506,914
Consumer 5,265,795 5,840,068
Other 13,039 22,082
------------ ------------
57,075,077 60,860,505
Allowance for loan losses (698,222) (680,414)
Unearned income (48,832) (69,371)
------------ ------------
Net loans $ 56,328,023 $ 60,110,720
============ ============
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2003.
Total loans to such persons and their companies amounted to $1,989,392 as of
December 31, 2003. During 2003 principal advances of $1,154,911 were made and
principal payments totaled $526,149.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2003 2002
--------- ---------
Balance at beginning of period $ 680,414 $ 643,021
Provision for loan losses 36,000 70,000
Recoveries of loans previously charged off 20,021 16,913
Loans charged off (38,213) (49,520)
--------- ---------
Balance at end of period $ 698,222 $ 680,414
========= =========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2003 2002
--------- ---------
Total nonaccrual loans $ 15,385 $ 313,584
========= =========
Accruing loans which are 90 days or more overdue $ 560,789 $ 142,147
========= =========
71
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of December
31:
2003 2002
------------------------ ------------------------
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 $ 4,317 $ 1,079 $ 228,584 $ 17,144
Loans for which there is no related allowance for credit losses 0 0
--------- ------- --------- --------
Totals $ 4,317 $ 1,079 $ 228,584 $ 17,144
========= ======= ========= ========
Average recorded investment in impaired loans during the
years ended December 31 $ 140,482 $ 229,230
========= =========
Related amount of interest income recognized during the time,
in the years ended December 31 that the loans were impaired
Total recognized $ 4,150 $ 21,700
========= =========
Amount recognized using a cash-basis method of
accounting $ 4,150 $ 21,700
========= =========
As of December 31, 2003 and 2002, there was one loan outstanding, with a balance
of $262,205 and $283,858, respectively, that was restructured in a troubled debt
restructuring before January 1, 1995, the effective date of SFAS No. 114. This
loan was not impaired based on the terms specified by the restructuring
agreement. Interest income recognized on this loan amounted to $13,341 in 2003
and $26,053 in 2002. Interest income that would have been recognized on this
loan during the year ended December 31, 2003 and 2002 had it been current under
its original terms amounted to $14,430 and $20,954, respectively.
Mortgage servicing rights of $357,318 were capitalized in 2003. Amortization of
mortgage servicing rights was $32,323 in 2003. The balance of capitalized
mortgage servicing rights included in other assets at December 31, 2003 was
$304,188.
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the year ended December 31, 2003:
Balance, beginning of year $
Additions 51,174
Reductions (30,367)
---------
Balance, end of year $ 20,807
=========
Management estimates that the carrying value of those rights at December 31,
2003 approximates fair value.
As of December 31, 2003 the Company serviced loans for others with unpaid
principal balances of $34,208,164.
72
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2003 2002
------------ ------------
Land $ 48,460 $ 48,460
Buildings 1,008,244 998,843
Leasehold improvements 463,004 463,004
Furniture and equipment 1,269,780 1,225,742
------------ ------------
2,789,488 2,736,049
Accumulated depreciation and amortization (1,576,634) (1,381,325)
------------ ------------
$ 1,212,854 $ 1,354,724
============ ============
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2003 and 2002 was $8,049,365 and $7,867,718,
respectively.
For time deposits as of December 31, 2003, the scheduled maturities for years
ended December 31 are:
2004 $ 16,717,782
2005 3,194,954
2006 3,226,292
2007 6,745,357
2008 546,748
------------
$ 30,431,133
============
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank. Total
deposits to such persons and their companies amounted to $1,985,614 and
$1,495,183 as of December 31, 2003 and 2002, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five years ending after December
31, 2003 and thereafter are summarized as follows:
AMOUNT
------------
2004 $ 6,302,837
2005 1,299,365
2006 1,595,508
2007 2,323,900
2008 1,676,704
Thereafter 10,121,135
------------
$ 23,319,449
============
73
As of December 31, 2003, the following advances from the FHLB were redeemable at
par at the option of the FHLB:
MATURITY DATE OPTIONAL REDEMPTION DATE AMOUNT
----------------- ------------------------------------------ -----------
November 15, 2004 February 17, 2004 and quarterly thereafter $ 400,000
March 28, 2007 March 29, 2004 and quarterly thereafter 750,000
April 27, 2009 January 26, 2004 and quarterly thereafter 500,000
April 27, 2009 April 26, 2004 and quarterly thereafter 500,000
February 8, 2010 February 9, 2004 and quarterly thereafter 600,000
March 8, 2010 March 8, 2004 and quarterly thereafter 1,000,000
March 15, 2010 March 15, 2004 and quarterly thereafter 500,000
December 15, 2010 March 15, 2004 and quarterly thereafter 800,000
December 20, 2010 March 22, 2004 and quarterly thereafter 500,000
December 27, 2010 March 26, 2004 and quarterly thereafter 1,000,000
January 24, 2011 January 22, 2004 and quarterly thereafter 1,000,000
February 28, 2011 February 26, 2004 and quarterly thereafter 850,000
March 1, 2011 March 1, 2006 and quarterly thereafter 500,000
March 7, 2011 March 5, 2004 and quarterly thereafter 1,000,000
As of December 31, 2003 a $400,000 advance maturing on April 9, 2007 is subject
to maturity on January 8, 2004 and each quarter thereafter if the strike rate of
7%, specified in the advance agreement, is lower than the one month LIBOR.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2003, the interest rates on FHLB advances ranged from 1.21
percent to 6.96 percent. At December 31, 2003, the weighted average interest
rate on FHLB advances was 4.56 percent.
NOTE 8 - OTHER BORROWED FUNDS
Other borrowed funds consist of treasury tax and loan deposits which generally
are repaid within one to 120 days from the transaction date.
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended
December 31:
2003 2002
--------- ---------
Current:
Federal $ 117,298 $ 213,809
State 58,402 83,402
--------- ---------
175,700 297,211
--------- ---------
Deferred:
Federal 107,303 (23,910)
State 28,239 (8,271)
Valuation allowance 31,424
--------- ---------
135,542 (757)
--------- ---------
Total income tax expense $ 311,242 $ 296,454
========= =========
74
The reasons for the difference between the tax at the statutory federal income
tax rate and the effective tax rate are summarized as follows for the years
ended December 31:
2003 2002
------ ------
% of % of
Income Income
------ ------
Federal income tax at statutory rate 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (13.9) (8.2)
Dividends received deduction (2.5) (3.8)
Unallowable deductions 1.5 1.1
Merger expenses 6.5
Other items (1.1) (2.5)
State tax, net of federal tax benefit 5.5 5.0
Valuation allowance 3.0
----- -----
Effective tax rate 30.0% 28.6%
===== =====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2003 2002
---------- ----------
Deferred tax assets:
Allowance for loan losses $ 201,781 $ 194,786
Interest on non-performing loans 101 7,119
Security writedown 31,424
Capital loss carryforward 31,424
Deferred expense 4,611 4,611
Net unrealized holding loss on available-for-sale equity securities 281,419 75,752
---------- ----------
Gross deferred tax assets 519,336 313,692
Valuation allowance (312,843) (107,176)
---------- ----------
206,493 206,516
---------- ----------
Deferred tax liabilities:
Depreciation (90,270) (74,236)
Net unrealized holding gain on available-for-sale debt securities (122,776) (207,991)
Mortgage servicing asset (119,485)
---------- ----------
Gross deferred tax liabilities (332,531) (282,227)
---------- ----------
Net deferred tax liabilities $ (126,038) $ (75,711)
========== ==========
As of December 31, 2003, the Company had no operating loss and tax credit
carryovers for tax purposes. The Company has capital loss carryovers of $80,000
which expire in 2008.
NOTE 10 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan (ESOP) which is a defined
contribution plan covering all employees of the Company who have been credited
with at least 1,000 hours of service for the plan year. Allocations of Company
contributions, plan earnings and forfeitures are based on the ratio which the
compensation of each participant bears to the compensation of all participants
in the ESOP. Vesting is based on years of service. After three years of service,
participants are twenty percent vested and after seven years of service,
participants are fully vested.
Upon termination of service, participants may elect to receive their benefits in
whole shares of Company stock, cash or a combination of both.
75
In 2002 the ESOP distributed 43 shares of Company stock to a terminated
participant. The Company subsequently purchased the 43 shares from the
terminated participant along with 2 other shares at a total cost of $2,138.
At December 31, 2003, 6,133 of the total allocated ESOP shares were subject to
repurchase obligations by the Plan for pending payouts and diversification
purposes.
The ESOP shares were as follows as of December 31:
2003 2002
------ ------
Shares allocated to participants 23,225 23,225
------ ------
Total ESOP shares 23,225 23,225
====== ======
The Company recognized contribution expense related to the ESOP in the amount of
$54,804 for the years ended December 31, 2003 and 2002.
NOTE 11 - STOCK OPTION PLANS
The Company sponsors the 1998 Stock Option and Incentive Plan (the "Incentive
Plan"), the 1998 Stock Option Plan for Directors (the "Directors' Plan") and the
2002 Stock Option and Incentive Plan (the "2002 Plan"). A summary of the Plans
is as follows.
Under the Incentive Plan and the 2002 Plan, full-time employees, including
officers, may be granted incentive or nonqualified stock options to purchase
shares of common stock. For the incentive stock options, the option exercise
price per share may not be less than one hundred percent of the fair market
value of common stock at grant date. For the nonqualified stock options, the
option exercise price per share may not be less than the greater of fifty
percent of the fair market value of common stock at grant date or the par value,
if any, of the shares. Under both plans, the period during which stock options
shall be exercisable may not exceed ten years from the date of grant. The
maximum aggregate number of shares issuable over the term of the plans may not
exceed 14,700 shares and 6,750 shares for the Incentive Plan and the 2002 Plan,
respectively.
Eligibility for participation in the Directors' Plan is limited to directors of
the Company. Directors who are newly elected to the Board receive an automatic
grant of an option to purchase 250 shares of common stock on the date they
become a director (or, if elected by the Board, on the date of the annual
meeting of the stockholders immediately following such date). The option
exercise price per share may not be less than one hundred percent of the fair
market value of common stock at grant date. No option may be exercised until six
months after it is granted, and options must be exercised within the period of
ten years following the grant date. The maximum number of shares issuable over
the term of the plan may not exceed 3,750 shares.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option - pricing model with the following weighted-average
assumptions used for the grants in the year ended December 31, 2002: Dividend
yield of 1.0 percent; expected volatility of 9.35 percent; risk-free interest
rate of 4.93 percent; and expected life of 10 years. No options were granted in
2003.
76
A summary of the status of the Plans is presented below as of and for the years
ended December 31:
2003 2002
------------------------- ---------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price
---------------------------------- ------ ---------------- -------- ----------------
Outstanding at beginning of year 18,245 $ 39.25 15,595 $ 38.04
Granted 0 0 2,650 46.36
Exercised (2,955) 38.48 0
Forfeited 0 0 0
------ --------
Outstanding at end of year 15,290 $ 39.40 18,245 $ 39.25
====== ========
Options exercisable at year-end 15,290 $ 39.40 16,845 $ 38.56
Weighted-average fair value of
options granted during the year N/A $ 14.00
The following table summarizes information about fixed stock options outstanding
as of December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
$ 37.00 7,390 4.2 years $ 37.00 7,390 $ 37.00
38.50 1,400 5.4 years 38.50 1,400 38.50
39.00 3,120 6.3 years 39.00 3,120 39.00
42.75 1,515 7.7 years 42.75 1,515 42.75
47.50 1,865 8.8 years 47.50 1,865 47.50
------ ------
15,290 5.6 years 39.40 15,290 39.40
====== ======
NOTE 12 - EMPLOYEE BENEFITS
The Company has a 401(k) plan covering substantially all employees. Under the
Plan, the Company contributes 50% of the first 7.5% of all eligible
participants' contributions. The Company may also contribute to the Plan a
discretionary profit sharing contribution in an amount determined by the
Company. Total contributions under this Plan amounted to $75,787 and $70,201 for
the years ended December 31, 2003 and 2002, respectively.
NOTE 13 - POST RETIREMENT BENEFIT OBLIGATION
The Company established a policy to pay the health insurance premiums of retired
employees and their spouses at age 65 if the employee and his/her spouse were
receiving this benefit as of January 1, 1999. The policy states that management
reserves the right to alter or discontinue this post-retirement benefit at any
time. The health insurance benefits that the Company pays are capped at the
September 1, 1999 premium rate. Future premium increases will require
contributions from the retirees and their spouses. The Company recognized
$36,774 in benefit expense under this post-retirement benefit obligation for the
years ended December 31, 2003 and 2002.
NOTE 14 - CHANGE IN CONTROL PLAN
On September 28, 1998 the Board of Directors approved a Change in Control Plan.
The Plan provides for each full-time employee to continue to be compensated if
terminated within three years of the occurrence of a Change in Control, as they
have been for an applicable period after a Change in Control. Applicable period
shall mean with respect to an officer of the Company holding a position of
vice-president or above for a twenty-four month period; an officer of the
Company holding a position below vice-president for a twelve month period; and
any individual eligible for severance benefits under the Plan but not described
above for a six month period.
77
NOTE 15 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is obligated under various lease agreements covering banking
premises and equipment. These agreements are considered to be operating leases.
The terms expire between June 2005 and September 2005. Options to renew for
additional terms are included under the banking premises lease agreements. The
total minimum rental due in future periods under these agreements is as follows
as of December 31, 2003:
Years Ending December 31,
-------------------------
2004 $ 25,140
2005 18,570
--------
Total minimum lease payments $ 43,710
========
Certain leases contain provisions for escalation of minimum lease payments
contingent upon increases in real estate taxes and percentage increases in the
consumer price index. The total rental expense amounted to $36,008 and $38,606
for the years ended December 31, 2003 and 2002, respectively.
The Company entered into an agreement with a third party in which the third
party is to provide the Company with data processing services and other related
services. Under the agreement, the Company is obligated to pay monthly minimum
processing fees equal to $8,089 through March 2006 and the Company may cancel
the agreement at any time, provided the Company pays a lump sum termination fee
equal to the average monthly billing, exclusive of pass through cost, for the
previous twelve months multiplied by the number of months remaining in the
contract term.
Related to the merger agreement with Salisbury Bancorp, Inc., see Note 20,
company management anticipates canceling this third party data processing
services agreement if the merger consummates and incurring a termination fee
based on the formula as described above. The termination fee will be expensed
when the termination occurs.
NOTE 16 - FINANCIAL INSTRUMENTS
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. These
financial instruments include commitments to originate loans, standby letters of
credit, commercial letters of credit and unadvanced funds on loans. The
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and commercial letters of credit is represented by the contractual
amounts of those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Company 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, 2003 and 2002, the
maximum potential amount of the Company's obligation was $12,800 and $0,
respectively, for financial and standby letters of credit. The Company's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Company may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Company may take possession of the collateral, if any, securing
the line of credit.
78
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
2003 2002
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 1,816,602 $ 1,816,602 $ 3,648,297 $ 3,648,297
Available-for-sale securities 44,121,023 44,121,023 34,118,645 34,118,645
Held-to-maturity securities 756,822 802,881 1,266,645 1,323,349
Other stock investment 100,000 100,000
Federal Reserve Bank stock 56,300 56,300 56,300 56,300
Federal Home Loan Bank stock 1,250,300 1,250,300 1,250,300 1,250,300
Loans, net 56,328,023 57,612,000 60,110,720 62,505,000
Loans held-for-sale 180,000 181,837 858,500 867,068
Accrued interest receivable 583,673 583,673 518,932 518,932
Financial liabilities:
Deposits 74,983,026 75,610,000 72,935,410 73,285,000
FHLB advances 23,319,449 24,350,000 21,773,649 23,276,000
Other borrowed funds 97,696 97,696 100,000 100,000
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions, except
for other stock investment which is included in other assets. Accounting
policies related to financial instruments are described in Note 2.
The amounts of financial instrument liabilities with off-balance sheets credit
risk are as follows as of December 31:
2003 2002
------------ ------------
Commitments to originate loans $ 536,000 $ 2,142,000
Standby letters of credit 12,800
Commercial letters of credit 150,000 157,100
Unadvanced portions of loans:
Home equity 8,603,334 7,097,096
Commercial lines of credit 2,738,544 2,587,230
Construction 888,381 282,556
Consumer (including credit card loans) 2,083,187 2,688,223
------------ ------------
$ 15,012,246 $ 14,954,205
============ ============
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 17 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company's business activity is with customers located within the
state. There are no concentrations of credit to borrowers that have similar
economic characteristics. The majority of the Company's loan portfolio is
comprised of loans collateralized by real estate located in the state of
Connecticut and Berkshire County of Massachusetts.
79
NOTE 18 - REGULATORY MATTERS
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2003, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Company and the Bank's actual capital amounts and ratios are also presented
in the table as of December 31.
For Capital
Actual Adequacy Purposes
--------------- --------------------------------------
Amount Ratio Amount Ratio
------- ----- ------- ----------------------------
(Dollar amounts in thousands)
December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $ 8,826 13.07% $ 5,402 GREATER THAN OR EQUAL TO 8.0%
The Canaan National Bank 8,664 12.83 5,402 GREATER THAN OR EQUAL TO 8.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 8,128 12.04 2,701 GREATER THAN OR EQUAL TO 4.0
The Canaan National Bank 7,966 11.80 2,701 GREATER THAN OR EQUAL TO 4.0
Tier 1 Capital (to Average Assets)
Consolidated 8,128 7.53 4,317 GREATER THAN OR EQUAL TO 4.0
The Canaan National Bank 7,966 7.38 4,317 GREATER THAN OR EQUAL TO 4.0
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
---------------------------------------
Amount Ratio
------- -----------------------------
(Dollar amounts in thousands)
December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated N/A N/A
The Canaan National Bank $ 6,752 GREATER THAN OR EQUAL TO 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated N/A N/A
The Canaan National Bank 4,051 GREATER THAN OR EQUAL TO 6.0
Tier 1 Capital (to Average Assets)
Consolidated N/A N/A
The Canaan National Bank 5,397 GREATER THAN OR EQUAL TO 5.0
80
For Capital
Actual Adequacy Purposes
--------------- --------------------------------------
Amount Ratio Amount Ratio
------- ----- ------- ----------------------------
(Dollar amounts in thousands)
December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated $ 8,628 13.86% $ 4,980 GREATER THAN OR EQUAL TO 8.0%
The Canaan National Bank 8,536 13.71 4,980 GREATER THAN OR EQUAL TO 8.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 7,948 12.77 2,490 GREATER THAN OR EQUAL TO 4.0
The Canaan National Bank 7,856 12.62 2,490 GREATER THAN OR EQUAL TO 4.0
Tier 1 Capital (to Average Assets)
Consolidated 7,948 7.67 4,145 GREATER THAN OR EQUAL TO 4.0
The Canaan National Bank 7,856 7.58 4,145 GREATER THAN OR EQUAL TO 4.0
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
---------------------------------------
Amount Ratio
------- -----------------------------
(Dollar amounts in thousands)
December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated N/A N/A
The Canaan National Bank $ 6,225 GREATER THAN OR EQUAL TO 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated N/A N/A
The Canaan National Bank 3,735 GREATER THAN OR EQUAL TO 6.0
Tier 1 Capital (to Average Assets)
Consolidated N/A N/A
The Canaan National Bank 5,181 GREATER THAN OR EQUAL TO 5.0
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
The Bank, as a National Bank is subject to the dividend restrictions set forth
by the Comptroller of the Currency. Under such restrictions, the Bank may not,
without the prior approval of the Comptroller of the Currency, declare dividends
in excess of the sum of the current year's earnings (as defined) plus, the
retained earnings (as defined) from the prior two years. As of December 31, 2003
the Bank could declare dividends up to $1,831,259, without the approval of the
Comptroller of the Currency.
NOTE 19 - EARNINGS PER SHARE (EPS)
Reconciliation of the numerators and the denominators of the basic and diluted
per share computations for net income are as follows as of December 31:
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year ended December 31, 2003
Basic EPS
Net income and income available to common stockholders $ 725,732 175,539 $ 4.13
Effect of dilutive securities, options 3,999
--------- -------
Diluted EPS
Income available to common stockholders and assumed
conversions $ 725,732 179,538 $ 4.04
========= =======
Year ended December 31, 2002
Basic EPS
Net income and income available to common stockholders $ 739,362 176,231 $ 4.20
Effect of dilutive securities, options 2,808
--------- -------
Diluted EPS
Income available to common stockholders and assumed
conversions $ 739,362 179,039 $ 4.13
========= =======
81
NOTE 20 - MERGER AGREEMENT
On November 17, 2003, Salisbury Bancorp, Inc. ("Salisbury"), parent company of
Salisbury Bank & Trust Company and the Company executed a definitive agreement
(the "Agreement") for Salisbury to acquire the Company, with Salisbury being the
surviving corporation.
Under the terms of the Agreement, which was unanimously approved by the Board of
Directors, the shareholders of the Company will be entitled to receive merger
consideration consisting of $31.20 in cash and 1.3371 shares of Salisbury common
stock for every share of Company stock, subject to possible adjustment.
The merger is subject to approval by state and federal bank supervisory agencies
and the Company's shareholders.
NOTE 21 - PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements are for Canaan National Bancorp,
Inc. (Parent Company Only) and should be read in conjunction with the
Consolidated Financial Statements of Canaan National Bancorp, Inc. and
Subsidiary.
82
CANAAN NATIONAL BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
----------- -----------
ASSETS
Checking account in The Canaan National Bank $ 160,240 $ 86,877
Investment in subsidiary 8,189,078 8,182,200
Due from subsidiary 1,144 4,507
----------- -----------
Total assets $ 8,350,462 $ 8,273,584
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share; authorized 300,000 shares; issued and
outstanding, 177,418 shares as of December 31, 2003 and
175,501 shares as of December 31, 2002 $ 1,774 $ 1,755
Paid in capital 1,070,898 1,005,806
Retained earnings 7,807,864 7,162,820
Accumulated other comprehensive (loss) income (530,074) 103,203
----------- -----------
Total stockholders' equity 8,350,462 8,273,584
----------- -----------
Total liabilities and stockholders' equity $ 8,350,462 $ 8,273,584
=========== ===========
83
CANAAN NATIONAL BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
Years Ended December 31, 2003 and 2002
2003 2002
--------- ---------
Dividend income from subsidiary $ 99,901 $ 93,658
--------- ---------
Filing fees 1,840 1,835
Printing and stationery 1,609 1,379
Other expense 12,019 540
--------- ---------
15,468 3,754
--------- ---------
Income before income tax benefit and equity in undistributed
net income of subsidiary 84,433 89,904
Income tax benefit (1,144) (4,507)
--------- ---------
Income before equity in undistributed net income of subsidiary 85,577 94,411
Equity in undistributed net income of subsidiary 640,155 644,951
--------- ---------
Net income $ 725,732 $ 739,362
========= =========
84
CANAAN NATIONAL BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003 and 2002
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 725,732 $ 739,362
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary (640,155) (644,951)
Decrease (increase) in due from subsidiary 3,363 (142)
---------- ----------
Net cash provided by operating activities 88,940 94,269
---------- ----------
Cash flows from financing activities:
Retirement of shares of common stock (52,320) (247,365)
Issuance of shares of common stock 2,480 193,377
Proceeds from exercise of stock options 114,951
Dividends paid (80,688) (76,166)
---------- ----------
Net cash used in financing activities (15,577) (130,154)
---------- ----------
Net increase (decrease) in cash and cash equivalents 73,363 (35,885)
Cash and cash equivalents at beginning of year 86,877 122,762
---------- ----------
Cash and cash equivalents at end of year $ 160,240 $ 86,877
========== ==========
85
CANAAN UNAUDITED QUARTERLY FINANCIAL INFORMATION
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and December 31, 2003
March 31, December 31,
2004 2003
------------- -------------
(unaudited)
ASSETS
Cash and due from banks $ 2,513,971 $ 1,766,144
Interest bearing demand deposits with other banks 64,745 50,458
------------- -------------
Cash and cash equivalents 2,578,716 1,816,602
Investments in available-for-sale securities (at fair value) 45,204,491 44,121,023
Investments in held-to-maturity securities (fair values of
$802,631 as of March 31, 2004 and $1,057,197 as of
March 31, 2003) 754,642 756,822
Federal Reserve Bank stock, at cost 56,300 56,300
Federal Home Loan Bank stock, at cost 1,291,200 1,250,300
Loans, net of allowance for loan losses of $693,708 as of
March 31, 2004 and $695,680 as of March 31, 2003 56,451,030 56,328,023
Loans held-for-sale 180,000
Premises and equipment 1,158,799 1,212,854
Accrued interest receivable 544,674 583,673
Other assets 620,379 781,349
------------- -------------
Total assets $ 108,660,231 $ 107,086,946
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 13,730,770 $ 14,134,911
Interest-bearing 59,947,529 60,848,115
------------- -------------
Total deposits 73,678,299 74,983,026
Federal Home Loan Bank advances 25,823,940 23,319,449
Other borrowed funds 102,850 97,696
Other liabilities 367,941 336,313
------------- -------------
Total liabilities 99,973,030 98,736,484
------------- -------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized
300,000 shares; issued and outstanding, 177,418 shares
as of March 31, 2004 and 175,300 shares as of
March 31, 2003 1,774 1,774
Paid-in capital 1,070,898 1,070,898
Retained earnings 7,949,777 7,807,864
Accumulated other comprehensive loss (335,248) (530,074)
------------- -------------
Total stockholders' equity 8,687,201 8,350,402
------------- -------------
Total liabilities and stockholders' equity $ 108,660,231 $ 107,086,946
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
86
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Interest and dividend income:
Interest and fees on loans $ 957,299 $ 1,131,978
Interest on debt securities:
Taxable 255,434 235,980
Tax-exempt 115,951 84,226
Dividends 32,248 40,640
Other interest 341 3,013
------------ ------------
Total interest and dividend income 1,361,273 1,495,837
------------ ------------
Interest expense:
Interest on deposits 232,503 312,856
Interest on Federal Home Loan Bank advances 264,278 265,672
Interest on other borrowed funds 153 178
------------ ------------
Total interest expense 496,934 578,706
------------ ------------
Net interest and dividend income 864,339 917,131
Provision for loan losses 3,000 5,000
------------ ------------
Net interest and dividend income after provision for
loan losses 861,339 912,131
------------ ------------
Other income:
Service charges on deposit accounts 75,360 79,643
Gain on sales of loans, net 20,635
Servicing income 24,496 13,426
Other income 9,857 8,772
------------ ------------
Total other income 130,348 101,841
------------ ------------
Other expense:
Salaries and employee benefits 400,759 407,237
Occupancy expense 53,573 53,314
Equipment expense 64,756 67,878
Data processing 81,833 77,716
Professional fees 20,443 59,353
Operation of other real estate owned (10,665)
Printing and stationery 3,326 9,397
Other expense 107,933 120,612
------------ ------------
Total other expense 721,958 795,507
------------ ------------
Income before income taxes 269,729 218,465
Income taxes 74,591 50,419
------------ ------------
Net income $ 195,138 $ 168,046
============ ============
Earnings per common share $ 1.10 $ 0.96
Earnings per common share, assuming dilution $ 1.06 $ 0.94
The accompanying notes are an integral part of these condensed
consolidated financial statements.
87
CANAAN NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2004 and 2003
(Unaudited)
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 195,138 $ 168,046
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 54,385 49,572
Provision for loan losses 3,000 5,000
Change in unearned income 10,633 8,539
Net decrease in loans held-for-sale 180,000 858,500
Depreciation and amortization 54,055 58,902
Decrease in interest receivable 38,999 737
Deferred tax expense 65
Decrease (increase) in prepaid expenses 7,684 (8,632)
Decrease in income tax receivable 47,691 23,804
Decrease in other assets 1,688 116,506
Increase in mortgage servicing rights (11,322)
Increase in taxes payable 21,139
Decrease in accrued expenses (6,742) (41,632)
Decrease in interest payable (1,567) (2,357)
Increase (decrease) in other liabilities 514 (7,042)
------------ ------------
Net cash provided by operating activities 574,156 1,251,147
------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities (1,907,660) (3,830,472)
Proceeds from maturities of available-for-sale securities 1,119,411 2,258,948
Proceeds from maturities of held-to-maturity securities 2,054 249,542
Purchases of Federal Home Loan Bank stock (40,900)
Loan originations and principal collections, net (137,266) 135,527
Recoveries of loans previously charged off 626 15,436
Capital expenditures (29,941)
------------ ------------
Net cash used in investing activities (963,735) (1,200,960)
------------ ------------
Cash flows from financing activities:
Net decrease in demand deposits, NOW and savings accounts (435,692) (1,378,384)
Net (decrease) increase in time deposits (869,035) 559,973
Net increase in short term advances from Federal Home Loan
Bank 3,402,000 6,000
Principal payments on long-term advances from Federal Home Loan
Bank (897,509) (396,117)
Net increase (decrease) in other borrowed funds 5,154 (7,532)
Dividends paid (53,225) (49,140)
Issuance of shares of common stock 1,472
Retirement of shares of common stock (11,136)
------------ ------------
Net cash provided by (used in) financing activities 1,151,693 (1,274,864)
------------ ------------
Net increase (decrease) in cash and cash equivalents 762,114 (1,224,677)
Cash and cash equivalents at beginning of period 1,816,602 3,648,297
------------ ------------
Cash and cash equivalents at end of period $ 2,578,716 $ 2,423,620
============ ============
Supplemental disclosures:
Interest paid $ 498,501 $ 581,066
Income taxes paid 26,900 29,215
The accompanying notes are an integral part of these condensed
consolidated financial statements.
88
CANAAN NATIONAL BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Canaan , those of Canaan Bank, its
wholly-owned subsidiary and Canaan Bank's subsidiary, CNB Insurance Agency. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
for interim financial information and with the instructions to SEC Form 10-Q.
Accordingly, they do not include all the information and footnotes required by
GAAP for complete financial statements. All significant intercompany accounts
and transactions have been eliminated in the consolidation. These financial
statements reflect, in the opinion of Management, all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of Canaan's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in this proxy statement/prospectus.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 -COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for disclosure of comprehensive income, which
includes net income and any changes in equity from non-owner sources that are
not recorded in the income statement (such as changes in the net unrealized
gains (losses) on securities). The purpose of reporting comprehensive income is
to report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. Canaan's one source of other
comprehensive income is the net unrealized gain (loss) on securities.
Three months ended
March 31
2004 2003
------ -----
Comprehensive Income
Net income $ 195 $ 168
Net unrealized gains (losses)
on securities during period 195 (97)
------ -----
Comprehensive income $ (390) $ 71
====== =====
89
Results of Operations
Comparison of the Quarters Ended March 2004 and 2003
Overview
The reported earnings for Canaan were $195,000 in the first quarter of
2004, an increase of $27,000 or 16.07% above the first quarter of 2003 earnings
of $168,000. As a result, earnings per share increased $.14 or 14.58% to $1.10
in 2004. This compares to earnings per share of $.96 in the first quarter of
2003. The majority of improvement in net income is due to the recording of gains
on sales of loans and increased loan servicing income.
Canaan is "well capitalized". Canaan's risk-based capital ratios at March
31, 2004, which include the risk-weighted assets and capital of the Canaan Bank,
were 13.45% for Tier 1 capital and 14.58% for total capital. Canaan's leverage
ratio was 7.72% at March 31, 2004. This compares to a Tier 1 capital to risk
weighted assets ratio at March 31, 2003 of 12.86%, a total capital to risk
weighted assets ratio of 13.97%, and a leverage ratio of 7.80%.
Net Interest and Dividend Income
Canaan earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and the second is by
charging fees for services provided. The first source involves functioning as a
financial intermediary. Canaan accepts funds from depositors or borrows funds
and either lends the funds to borrowers or invests those funds in various types
of securities. The second source is fee income, which is discussed in the
noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned
on loans, interest and dividends earned on securities (Canaan's earning assets)
and the interest expense paid on deposits and borrowed funds, primarily in the
form of advances from the Federal Home Loan Bank. The amount by which interest
income will exceed interest expense depends on two factors: (1) the volume or
balance of earning assets compared to the volume or balance of interest-bearing
deposits and borrowed funds and (2) the interest rate earned on those interest
earning assets compared with the interest rate paid on those interest-bearing
deposits and borrowed funds. For this discussion, net interest income is
presented on a fully taxable-equivalent ("FTE") basis. FTE interest income
restates reported interest income on tax exempt loans and securities as if such
interest were taxed at the applicable State and Federal income tax rates for all
periods presented.
Three Months
Ended
(dollars in thousands) March 31
2004 2003
-------- --------
Interest and Dividend Income
(financial statements) $ 1,361 $ 1,496
Tax Equivalent Adjustment 60 43
-------- --------
Total Interest Income (on an FTE basis) 1,421 1,539
Interest Expense (497) (579)
-------- --------
Net Interest Income-FTE $ 924 $ 960
======== ========
Canaan's first quarter 2004 total interest and dividend income on an FTE
basis of $1,421,000 was $118,000 or 7.67% less than the total interest and
dividend on an FTE basis of $1,539,000 in 2003. Although there was an increase
in earning assets, this decrease in interest and dividend income is primarily
the result of an economic environment with lower interest rates which produced a
large number of mortgages being refinanced into the secondary market. The
refinancings produced a change in the mix of earning assets, which increased
investment in securities and decreased loans outstanding. An increase in tax
exempt securities has resulted in an increase in the tax equivalent adjustment
to $60,000 for the first quarter of 2004 as compared to $43,000 for 2003.
90
Interest expense on deposits in the first quarter of 2004 decreased
$80,000 or 25.56% and totaled $233,000. This compares to $313,000 for the
corresponding period in 2003. Although deposits increased, generally lower
interest rates resulted in the decrease in interest expense. Interest expense
for Federal Home Loan Bank advances decreased slightly by $2,000 to $264,000 in
the first quarter of 2004 compared to interest expense of $266,000 in the first
quarter of 2003. As with deposits, lower interest rates resulted in lower
interest expense on borrowings. Because interest margins continue to be
pressured by generally lower interest rates and by aggressive competition, net
interest income on an FTE basis decreased $36,000 or 3.75% to $924,000 for the
quarter ended March 31, 2004, compared to $960,000 for the quarter ended March
31, 2003.
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, Canaan must manage the relationship between interest
earned and paid. Canaan's first quarter 2004 net interest margin on an FTE basis
was 3.54%, compared to 3.90% for the corresponding period in 2003.
Noninterest Income
Noninterest income totaled $130,000 for the quarter ended March 31, 2004
as compared to $102,000 for the quarter ended March 31, 2003, an increase of
$28,000 or 27.45%. This increase is primarily the result of increased fees
generated from the refinancing activities in the secondary market. Net gain on
sales of loans and loan servicing income totaled $21,000 and $24,000,
respectively for the first quarter 2004, as compared to $0 and $13,000 for the
same time frame in 2003. Canaan continues to seek to increase noninterest income
due to its importance as a potential contributor to profitability.
Noninterest Expense
Noninterest expense decreased 9.30% to $722,000 for the quarter ended
March 31, 2004 as compared to $796,000 for the corresponding period in 2003.
Professional fees, which includes legal fees, decreased $39,000 or 66.10% and
totaled $20,000 in the quarter ended March 2004 as compared to $59,000 for the
same period in 2003. Recoveries of expenses on a property that was heading to
foreclosure netted $11,000 in the first quarter of 2004 as compared to $0 in
2003. Other operating expenses totaled $108,000 for the quarter ended March 31,
2004 compared to $121,000 for the corresponding period in 2003.
Income Taxes
For the first quarter of 2004, Canaan's income tax provisions totaled
$75,000, an effective tax rate of 27.65%. This compares to an income tax
provision of $50,000 in the first quarter of 2003, reflecting an effective tax
rate of 23.08%.
Net Income
Net income totaled $195,000 for the first quarter of 2004. This was an
increase of $27,000 or 16.07% and reflects basic earnings per share of $1.10 per
share for the quarter. This compared to basic earnings per share of $.96 for the
same period in 2003.
Financial Condition
Comparison of March 31, 2004 and December 31, 2003
Total assets at March 31, 2004 were $108,660,000 compared to $107,087,000
at December 31, 2003, an increase of $1,573,000 or 1.47%.
Securities Portfolio
Canaan 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 diversification of Canaan's assets.
Canaan continues to use arbitrage strategy by borrowing funds and investing them
at a rate of return higher than the borrowing cost in order to generate
additional interest income from the securities portfolio. The securities
portfolio also acts as collateral for deposits of public agencies. As of March
31, 2004, the securities portfolio, including Federal Reserve Bank and Federal
Home Loan Bank of Boston stock, totaled $47,307,000. This represents an increase
of $1,123,000 or 2.43% when comparing the portfolio total of $46,184,000 at
year-end 2003. The increase has been the result of an economic environment of
low interest rates that has created refinancing opportunities to longer term
fixed rate products that are offered by the secondary mortgage market.
91
The make up of the securities portfolio is diversified among U.S.
Government sponsored agencies, mortgage backed securities, corporate bonds,
preferred stock, and securities issued by states of the United States and
political subdivisions of the states. At March 31, 2004, securities totaling
$45,204,000 were classified as available-for-sale and securities totaling
$755,000 were classified as held-to-maturity.
Securities are classified in the portfolio as either Available-for-Sale or
Held-to-Maturity. The securities reported as available-for-sale are stated at
fair value in the financial statements of Canaan. Unrealized holding gains and
losses (accumulated other comprehensive income/loss) are not included in
earnings, but are reported as a net amount (less expected tax) in a separate
component of capital until realized. At March 31, 2004, the unrealized loss net
of tax was $335,000. This compares to an unrealized loss of net of tax of
$530,000 at December 31, 2003. The securities reported as
securities-held-to-maturity are stated at amortized cost.
Lending
Loans receivable, net of allowance for loan losses, increased slightly to
$56,451,000 at March 31, 2004 compared to $56,328,000 at December 31, 2003.
Canaan offers a wide variety of loan types and terms along with competitive
pricing to customers. The largest dollar volumes of loan activity continue to be
in the residential mortgage area.
Provisions and Allowance for Loan Losses
Total gross loans at March 31, 2004 were $57,145,000, which compares to
total gross loans of $57,026,000 at December 31, 2003. At March 31, 2004,
approximately 80% of Canaan Bank's loan portfolio related to real estate
products, consistent with approximately 79% of the portfolio related to real
estate at December 31, 2003. There were no material changes in the composition
of the loan portfolio during this period.
Credit risk is inherent in the business of extending loans. Canaan Bank
monitors the quality of the portfolio to ensure that loan quality will not be
sacrificed for growth. Because of the risk associated with extending loans,
Canaan Bank maintains an allowance for credit losses through charges to
earnings. The loan loss provision for the first quarter 2004 was $3,000. The
overall level of nonperforming loans remains low as a percentage of total loans,
with a decrease of $466,000 in nonperforming loans from December 31, 2003 to
March 31, 2004.
Canaan Bank evaluates the adequacy of the allowance on a monthly basis. No
material changes have been made in the estimation methods or assumptions that
Canaan Bank used in making this determination during the quarter ended March 31,
2004. Such evaluations are based on assessments of credit quality and "risk
rating" of loans by senior management, which is submitted to the Board of
Directors for approval. Loans are initially risk rated when originated. If there
is deterioration in the credit, the risk rating is adjusted accordingly.
The allowance also includes a component resulting from the application of
the measurement criteria of Statement 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 and
loans to be considered for impairment are defined in Canaan Bank's Loan Policy.
Loans are considered impaired when it is probable that Canaan Bank will not be
able to collect all principal and interest due according to the terms of the
note. Any such commercial loans will be considered impaired under any of the
following circumstances:
1. Loans on non-accrual status;
2. Loans over 90 days delinquent; or
3. Troubled debt restructures consummated after January 1, 1994;
92
These loans will be measured on a loan-by-loan basis by either the present
value of expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of collateral if the
loan is collateral dependent.
In addition, a risk of loss factor is applied in evaluating categories of
loans generally as part of the periodic analysis of the Allowance for Loan
Losses. This analysis reviews the allocations of the different categories of
loans within the portfolio and it considers historical loan losses and
delinquency figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and
given a special loan loss factor because management recognizes the higher risk
involved in such loans. Concentrations of credit and local economic factors are
also evaluated on a periodic basis. Historical average net losses by loan type
are examined as well as trends by type. Canaan Bank's loan mix over the same
period of time is also analyzed. A loan loss allocation is made for each type of
loan multiplied by the loan mix percentage for each loan type to produce a
weighted average factor. There have been no reallocations within the allowance
during the quarters ended March 31, 2004 and 2003.
At March 31, 2004 the allowance for loan losses totaled $694,000,
representing 186.56% of nonperforming loans, which totaled $372,000, and 1.21%
of total loans of $57,145,000. This compared to $698,000 representing 100.58% of
nonperforming loans, which totaled $694,000 and 1.22% of total loans of
$57,026,000 at December 31, 2003. A total of $8,000 in loans was charged off
during the first quarter 2004, as compared to $38,000 during the year ended
December 31, 2003. A total of $1,000 of previously charged off loans was
recovered during the quarter ended March 31, 2004. Recoveries for fiscal year
2003 totaled $20,000. Management believes that the allowance for loan losses is
adequate. While management estimates loan losses using the best available
information, no assurances can be given that additions to the allowance will not
be necessary based on changes in economic and real estate market conditions,
further information obtained regarding problem loans, identification of
additional problem loans or other factors. Additionally, with expectations of
Canaan Bank to grow its existing portfolio, future additions to the allowance
may be necessary to maintain adequate coverage ratios.
Deposits
Canaan offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at March 31, 2004 totaled $73,678,000, compared to
$74,983,000 at December 31, 2003. This decrease of $1,305,000 or 1.74% can be
primarily attributed to the outflow of non-core deposits. The flow of deposits
is influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and the aggressive competition from
non-banking entities.
Borrowings
As part of its operating strategy, Canaan 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 March 31, 2004, Canaan had $25,824,000 in outstanding
advances from the Federal Home Loan Bank, compared to $23,319,000 at December
31, 2003. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
Interest Rate Risk
Interest rate risk is the most significant market risk affecting Canaan.
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 reprices on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, Canaan
Bank's assets and liabilities are managed in accordance with policies
established and reviewed by Canaan Bank's Board of Directors. Canaan 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.
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To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprices during specific time frames and model simulation which is
used to "rate shock" Canaan's asset and liability balances to measure how much
of Canaan's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the
amount of interest-earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities maturing or repricing
within that same period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets. At
March 31, 2004, Canaan was asset sensitive (positive gap). This would suggest
that the during a period of rising interest rates Canaan would be in a better
position to invest in higher yielding assets resulting in growth in interest
income. To the contrary, during a period of falling interest rates, a positive
gap would result in a decrease in interest income. The overall exposure of
interest rate risk at March 31, 2004 was low.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable
cost in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. Canaan manages
liquidity primarily with readily marketable investment securities, deposits and
loan repayments. Canaan Bank is a member of the Federal Home Loan Bank of
Boston. This enhances the liquidity position by providing a source of available
borrowings.
Capital
At March 31, 2004, Canaan had $8,687,000 in shareholders' equity compared
to $8,350,000 at December 31, 2003. This represents an increase of $337,000 or
4.04%. Under current regulatory definitions, Canaan and Canaan Bank are
considered to be "well capitalized" for capital adequacy purposes. As a result,
Canaan Bank pays the lowest federal deposit insurance premiums possible. One
primary measure of capital adequacy for regulatory purposes is based on the
ratio of capital to risk weighted assets. This method of measuring capital
adequacy helps to establish capital requirements that are more sensitive to the
differences in risk associated with various assets. It takes into account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low risk assets. At quarter-end 2004, Canaan
had a risk-based capital ratio of 14.58% compared to 13.86% at December 31,
2003. Maintaining strong capital is essential to bank safety and soundness.
However, the effective management of capital resources requires generating
attractive returns on equity to build value for shareholders while maintaining
appropriate levels of capital to fund growth, meet regulatory requirements and
be consistent with prudent industry practices. Management believes that the
capital ratios of Canaan and Canaan Bank are adequate to continue to meet the
foreseeable capital needs of the institution.
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DIRECTORS AND EXECUTIVE OFFICERS OF CANAAN
Management and Board of Directors
The following table sets forth the name and age of each Officer, his or
her principal occupation for the last five (5) years and the year in which
he/she was first appointed an Executive Officer of Canaan.
Executive Officer
Name Age Position of Canaan since:
----------------- --- ------------------- -----------------
Gerard J. Baldwin 59 President 1992(1)
Melanie Neely 47 Secretary/Treasurer 1995(2)
(1) Mr. Baldwin is also the President and Chief Executive Officer of Canaan
Bank and has been an Executive Officer of Canaan Bank since 1989.
(2) Ms. Neely is also Vice President and Cashier of Canaan Bank and has been
an Executive Officer of Canaan Bank since 1999.
Board of Directors
The Certificate of Incorporation and Bylaws of Canaan provide for a Board
of Directors of not less than seven (7) or more than twenty five (25) members,
as determined from time to time by resolution of the Board of Directors. The
Board of Directors has set the number of directorships at seven (7). The Board
of Directors of Canaan is divided into three (3) classes as nearly equal in
number as possible. Classes of directors serve for staggered three (3) year
terms. A successor class is to be elected at each annual meeting of shareholders
when the terms of office of the members of one class expire. Vacant
directorships may be filled, until the expiration of the term of the vacated
directorship, by the vote of a majority of the directors then in office.
The following table sets forth certain information, as of December 31,
2003, with respect to the directors of Canaan.
Positions Held Director Term
Name Age with Canaan Since Expiring
------------------- ---- ----------------------- -------- --------
Louis E. Allyn, II 56 Director 1991 2004
Gerard J. Baldwin 59 President, 1992 2005
Chief Executive Officer
and Director
Dana A. Bartholomew 64 Director 1991 2005
Ann S. Byrne 61 Director 1995 2004
Robert S. Drucker 61 Director 1995 2006
Linda M. Patz 41 Director 2002 2005
Jean R. Perotti 64 Chairperson 1989 2004
Presented below is additional information concerning the directors of Canaan.
Unless otherwise stated, all directors have held the position described for at
least five (5) years.
Louis E. Allyn, II is President of Allyndale Corporation. He has been a director
of Canaan Bank since 1991.
Gerard Baldwin is President and Chief Executive Office of Canaan and Canaan
Bank. Prior to that he served as Vice President and Senior Lending Officer of
Canaan Bank. He has been a director of Canaan Bank since 1992.
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Dana A. Bartholomew is President of Sheffield Water Company. He has been a
director of Canaan Bank since 1991.
Ann S. Byrne is owner of Ann's Nursery for Babies, Shrope Foundation and Pact,
Inc. She has been a director of Canaan Bank since 1995.
Robert S. Drucker is Proprietor of Bob Clothing and Barrington Outfitters. He
has been a director of Canaan Bank since 1995.
Linda M. Patz is a partner in the law firm Drury & Patz. She has been a director
of Canaan Bank since 2002.
Jean R. Perotti is Comptroller of Perotti Plumbing & Heating. She is Chairperson
of the Board. She has been a director since 1989.
Directors' Fees
During 2003, the Chairman received an annual retainer of $2,500 and the
remaining directors received an annual retainer of $1,060. In addition,
directors received $265 for each Board of Directors meeting attended and $160
for each committee meeting attended. Director Baldwin received no additional
compensation for his service as director or member of any board committee during
2003.
Executive Compensation
Summary Compensation Table
The following table provides certain information regarding the
compensation paid to certain executive officers of Canaan and Canaan Bank for
services rendered in all capacities during the fiscal years ended December 31,
2003, 2002, and 2001. No other current executive officer of Canaan or Canaan
Bank received cash compensation in excess of $100,000 during the year ended
December 31, 2003. Canaan Bank paid all compensation expense.
Annual
Compensation All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($)
---------------------------------- ---- ------------ -------- ---------------
Gerard J. Baldwin 2003 $ 107,230 $ 19,586 $ 4,647(4)
President and 2002 102,598 18,679 4,548(3)
Chief Executive Officer 2001 100,039 20,385 4,516(2)
of the Company and the Bank
Darrel S. Long 2003 $ 74,478 $ 9,225 $ 2,784(4)
Vice President, and 2002 71,148 8,552 2,310(3)
Sr. Operations Officer of the Bank 2001 70,425 9,645 1,470(2)
Melanie K. Neely 2003 $ 51,841 $ 7,183 $ 2,213(4)
Secretary & Treasurer of the 2002 48,460 6,541 2,063(3)
Company and Vice President/ 2001 45,578 6,956 1,970(2)
Cashier of the Bank
Randy Brintnell(5) 2003 $ 73,199 $ 9,146 $ 3,088(4)
Vice President and Loan 2002 68,464 8,155 2,873(3)
Origination Officer of the Bank 2001
----------
(1) Compensation above does not include accrual of benefits under Canaan
Bank's ESOP plan.
(2) Canaan Bank's matching contribution to the 401(k) plan for 2001.
(3) Canaan Bank's matching contribution to the 401(k) plan for 2002.
(4) Canaan Bank's matching contribution to the 401(k) plan for 2003.
(5) Randy Brintnell was hired on January 7, 2002.
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Insurance
In addition to the cash compensation paid to the executive officers of
Canaan and Canaan Bank, the executive officers receive group life, long term
disability and medical insurance coverage. However, these plans do not
discriminate in scope, term, or operation, in favor of officers or directors of
Canaan or Canaan Bank and are available generally to all full-time employees.
Stock Option and Incentive Plans
The Board of Directors and the Shareholders adopted the 1998 Stock Option
Plan for Directors which provides for the issuance of a maximum of Three
Thousand Seven Hundred and Fifty (3,750) shares to Directors. Each of the nine
(9) Directors serving during 1998 have been granted an option to purchase Two
Hundred and Fifty (250) shares of Common Stock at Thirty Seven Dollars ($37.00).
Directors appointed since 1998 were granted options to purchase Two Hundred and
Fifty (250) shares of Common Stock at Thirty Eight Dollars and Fifty Cents
($38.50) and Two Hundred and Fifty (250) shares of Common Stock at Forty Seven
Dollars and Fifty Cents ($47.50). All options were granted at the fair market
value at the time of the grant. Two Hundred and Fifty (250) of the
aforementioned options have been exercised. Options must be exercised within ten
(10) years. The Plan will remain in effect for a period of ten (10) years after
the Effective Date of the Plan, which is February 23, 1998.
The Board of Directors and the Shareholders adopted the 1998 Stock Option
and Incentive Plan which provides for the issuance of a maximum of Fourteen
Thousand Seven Hundred (14,700) shares to selected full-time employees. As of
December 31, 2003, the Stock Option Committee, which is composed of non-employee
Directors, has granted options to purchase Seven Thousand Two Hundred and Thirty
Five (7,235) Shares of Common Stock at Thirty Seven Dollars ($37.00), Two
Thousand One Hundred and Fifteen (2,115) Shares of Common Stock granted at
Thirty Eight Dollars and Fifty Cents ($38.50), Four Thousand (4,000) Shares of
Common Stock granted at Thirty Nine Dollars ($39.00) and One Thousand Seven
Hundred and Forty Five (1,745) Shares of Common Stock granted at Forty Two
Dollars and Seventy Five Cents ($42.75). All options were granted at the fair
market value at the time of the grant. Three Hundred and Ninety Five (395) of
the aforementioned Options expired due to termination and have been reissued as
permitted under the plan. Three Thousand Five Hundred and Twenty Five (3,525) of
the aforementioned Options have been exercised. Options must be exercised within
ten (10) years. The Plan will remain in effect for a period of ten (10) years
after the Effective Date of the Plan, which is February 23, 1998.
The Board of Directors and the Shareholders adopted the 2002 Stock Option
and Incentive Plan which provides for the issuance of a maximum of Six Thousand
Seven Hundred and Fifty (6,750) shares to selected full-time employees. As of
December 31, 2003, the Stock Option Committee, which is composed of non-employee
Directors, has granted options to purchase One Thousand Seven Hundred and Sixty
Five (1,765) Shares of Common Stock at Forty Seven Dollars and Fifty Cents
($47.50). All options were granted at the fair market value at the time of the
grant. One Hundred and Fifty (150) of the aforementioned options have been
exercised. Options must be exercised within ten (10) years. The Plan will remain
in effect for a period of ten (10) years after the effective date of the Plan,
which is March 18, 2002.
401(k) Plan
Canaan has a 401(k) plan covering substantially all employees. Under the
Plan, the company contributes 50% of the first 7.5% of all eligible
participants' contributions. Canaan may also contribute to the Plan a
discretionary profit sharing contribution in an amount determined by Canaan.
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Change in Control Plan
Canaan Bank's Change in Control Plan provides benefits to all regular
full-time employees of Canaan Bank. If an employee's employment is terminated by
the employer within three years of a "Change in Control" other than for "Cause"
or by the employee within three years of a Change in Control for "Good Reason,"
the employee is entitled to certain severance benefits. The severance benefits
include payment of salary, profit sharing, bonus (if any) and the employee's
matching contributions to the 401(k) plan, plus continuation of all benefits and
service credits under welfare and pension plans. The amount of salary, profit
sharing and bonus payments are determined at the greater of such amounts for the
twelve months prior to the Change in Control or the twelve months prior to the
termination. Such payments continue for 24 months for officers holding a
position of vice president or higher, twelve months for other officers and six
months for other employees. The provisions of the Change in Control Plan are
triggered by a Change in Control, such as the merger contemplated by the merger
agreement. The benefits are not payable if the employee is terminated for
"Cause," which is defined as (i) committing an intentional act of fraud,
embezzlement or theft in connection with the employee's duties or in the course
of the employee's employment; (ii) committing intentional wrongful damage to the
property of Canaan Bank; or (iii) intentionally and wrongfully disclosing
confidential information. If an employee terminates their employment, they are
not entitled to severance benefits, unless they terminate for "Good Reason,"
which includes (i) the employer's failure to elect, reelect or maintain the
employee in any office or position they had prior to the Change in Control; (ii)
a significant adverse change in the nature or scope of the employee's authority,
power, functions or duties; (iii) a reduction in pay or a failure in increase
pay on a percentage basis equal to the average percentage increase of all other
employees; (iv) a failure to continue in effect, without reduction in benefits
level and/or reward opportunities, any material compensation or employee benefit
plan, program or practice; and (v) requiring the employee to be based more than
25 miles from the employee's principal place of business before the Change in
Control.
Securities Ownership of Directors and Executive Officers
The following table sets forth certain information as of December 31, 2003
regarding the number of shares of Common Stock beneficially owned by each
director and executive officer of Canaan and by all directors and executive
officers of Canaan as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
Louis E. Allyn, II 518(3) .29%
Gerard J. Baldwin 5,311(4) 2.99%
Dana A. Bartholomew 1,500(5) .85%
R. Randy Brintnell 1,613(6) .91%
Ann S. Byrne 747(7) .42%
Robert S. Drucker 3,100(8) 1.75%
Darrel S. Long 445(9) .25%
Melanie K. Neely 1,579(10) .89%
Linda M. Patz 135(11) .08%
Jean R. Perotti 3,657(12) 2.06%
---------------------------- ------ -----
(All Directors and Executive
Officers of Canaan as a
group of (10) persons) 18,605 10.49%
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a directors spouse and/or children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 177,418 shares of Canaan's Common Stock
outstanding and entitled to vote on March 7, 2003. The definition of
beneficial owner includes any person who, directly or indirectly, through
any contract, agreement or understanding, relationship or otherwise has or
shares voting power or investment power with respect to such security.
(3) All 518 shares are owned individually by Mr. Allyn.
(4) Includes 1,550 shares owned individually by Mr. Baldwin; 3,252 shares in
ESOP; 309 shares in 401K; and 200 shares owned by his spouse.
(5) All 1,500 shares are owned jointly by Mr. Bartholomew with his spouse.
(6) Includes 1,600 shares owned jointly by Mr. Brintnell with his spouse, and
13 shares in ESOP.
(7) All 747 shares are owned jointly by Mrs. Byrne with her spouse.
(8) All 3,100 shares are owned individually by Mr. Drucker.
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(9) Includes 20 shares owned jointly by Mr. Long with his spouse; and 225
shares in ESOP; and 200 shares owned by his mother.
(10) Includes 163 shares owned individually by Ms. Neely, and 1,416 shares in
ESOP.
(11) All 135 shares are owned jointly by Mrs. Patz with her spouse.
(12) Includes 1,620 shares owned individually by Mrs. Perotti; 347 shares owned
by her spouse; and 1,228 shares are owned by the Perotti Profit Sharing
Plan, a plan of which Mrs. Perotti is the Trustee; and 462 shares owned by
her children.
Principal Shareholders of Canaan
The following table includes certain information as of December 31, 2003
regarding the principal shareholders of Canaan. With the exception of the
shareholder listed below, Canaan is not aware of any beneficial owner of five
percent (5%) or more of Canaan's Common Stock.
Number of Shares
Beneficially Owned Percent of Outstanding
Name and Address or Controlled Common Stock *
Canaan National Bank Employee 23,225 13.09%
Stock Ownership Trust, Trustee
for Canaan National Bank Employee
Stock Ownership Plan
100 Main Street, P.O. Box 757
Canaan, Connecticut 06018
(*) Percentages are based upon the 177,418 shares of Common Stock outstanding.
The definition of a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise has or shares voting power or
investment power with respect to such security.
Certain Relationships and Related Transactions
Canaan and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with directors, officers,
principle shareholders and their associates on substantially the same terms as
those available for comparable transactions with others.
Jean R. Perotti is Chairman of the Board of Directors and Controller of
Perotti Plumbing. Canaan has engaged Perotti Plumbing in past years and during
2003.
Linda M. Patz is a director of Canaan and a partner in the law firm of
Drury & Patz, LLP. Canaan has engaged Ms. Patz in past years but her services
were not used in 2003.
Robert S. Drucker is a director of Canaan and owner of Bob's Clothing.
Canaan has purchased merchandise from Bob's Clothing in past years and during
2003.
Some of the directors and executive officers of Canaan and Canaan Bank, as
well as firms and companies with which they are associated, are or have been
customers of Canaan Bank and as such have had banking transactions with Canaan
Bank. As a matter of policy, loans to directors and executive officers are made
in the ordinary course of business on substantially the same terms, including
interest rates, collateral and repayment terms, as those prevailing at the time
for comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features.
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Since January 1, 2003, the highest aggregate outstanding principal amount
of all loans extended by Canaan Bank to its directors, executive officers and
all associates of such persons as a group was $2,342,000 representing an
aggregate principal amount equal to 28.27% of the equity capital accounts of
Canaan Bank.
Controls and Procedures
Based upon an evaluation within the 90 days prior to the filing date of
this report, Canaan's Chief Executive Officer and Secretary/Treasurer concluded
that Canaan's disclosure controls and procedures are effective. There have been
no significant changes in Canaan's internal controls or in other factors that
could significantly affect Canaan's internal controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
DESCRIPTION OF CAPITAL STOCK AND
COMPARISON OF SHAREHOLDER RIGHTS
Set forth below is a description of Salisbury's capital stock, as well as
a summary of the material differences between the rights of holders of Canaan's
common stock and their prospective rights as holders of Salisbury's common
stock. If the merger agreement is approved and the merger takes place, the
holders of Canaan's common stock will become holders of Salisbury's common
stock. As a result, Salisbury's certificate of incorporation and bylaws, as
amended, and the applicable provisions of the Connecticut Business Corporation
Act, referred to in this section as the "Connecticut corporation law," will
govern the rights of current holders of Canaan's common stock. The rights of
those shareholders are governed at the present time by the certificate of
incorporation and the bylaws of Canaan and the applicable provisions of the
Delaware General Corporation Law (the "Delaware corporation law").
The following comparison is based on the current terms of the governing
documents of Salisbury and Canaan and on the provisions of the Connecticut
corporation law and the Delaware corporation law. The discussion is intended to
highlight important similarities and differences between the rights of holders
of Salisbury's common stock and Canaan's common stock.
Salisbury's Common Stock
Salisbury is authorized to issue 3,000,000 shares of common stock, par
value $.10 per share. As of May 28, 2004, 1,424,078 shares of Salisbury's common
stock were outstanding. Each share of Salisbury's common stock has the same
relative rights and is identical in all respects to each other share of
Salisbury's common stock. Salisbury's common stock is non-withdrawable capital,
is not of an insurable type and is not insured by the FDIC or any other
governmental entity.
Holders of Salisbury's common stock are entitled to one vote per share on
each matter properly submitted to shareholders for their vote, including the
election of directors. Salisbury's common stock is not subject to additional
calls or assessments by Salisbury, and all shares of Salisbury's common stock
currently outstanding are fully paid and nonassessable. For a discussion of the
voting rights of Salisbury's common stock, its lack of preemptive rights, the
classification of Salisbury's Board of Directors and provisions of Salisbury's
certificate of incorporation and bylaws that may prevent a change in control of
Salisbury or that would operate only in an extraordinary corporate transaction
involving Salisbury or its subsidiaries, see "--Certificate of Incorporation and
Bylaw Provisions."
Holders of Salisbury's common stock and any class or series of stock
entitled to participate with it are entitled to receive dividends declared by
the Board of Directors of Salisbury out of any assets legally available for
distribution. No dividends or other distributions may be declared or paid,
however, unless all accumulated dividends and any sinking fund, retirement fund
or other retirement payments have been paid, declared or set aside on any class
of stock having preference as to payments of dividends over Salisbury's common
stock.
In the unlikely event of any liquidation, dissolution or winding up of
Salisbury, the holders of Salisbury's common stock and any class or series of
stock entitled to participate with it would be entitled to receive all remaining
assets of Salisbury available for distribution, in cash or in kind, after
payment or provision for payment of all debts and liabilities of Salisbury and
after the liquidation preferences of all outstanding shares of any class of
stock having preference over Salisbury's common stock have been fully paid or
set aside.
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Canaan's Common Stock
The certificate of incorporation of Canaan authorizes 300,000 shares of
Canaan's common stock, par value $.01 per share, of which 177,418 shares were
outstanding as of June 1, 2004. In addition, as of June 1, 2004, there were
outstanding options to purchase Canaan's common stock granted to officers and
other employees of Canaan for 15,290 shares of Canaan's common stock.
Each share of Canaan's common stock has the same relative rights and is
identical in all respects with all other shares of Canaan's common stock. As
with Salisbury's common stock, Canaan's common stock is non-withdrawable
capital, is not of an insurable type and is not insured by the FDIC or any other
governmental entity.
Holders of Canaan's common stock are entitled to one vote per share on
each matter properly submitted to shareholders for their vote, including the
election of directors. Holders of Canaan's common stock have distribution and
liquidation rights similar to those of holders of Salisbury's common stock. All
shares of Canaan's common stock currently outstanding are fully paid and
nonassessable. For a discussion of the voting rights of Canaan's common stock,
its lack of preemptive rights and provisions in Canaan's certificate of
incorporation which may prevent a change in control of Canaan, see
"--Certificate of Incorporation and Bylaw Provisions."
Certificate of Incorporation and Bylaw Provisions
The following discussion is a general summary of provisions of Salisbury's
certificate of incorporation and bylaws, and a comparison of those provisions to
similar types of provisions in the certificate of incorporation and bylaws of
Canaan. The discussion is necessarily general and, for provisions contained in
Salisbury's certificate of incorporation and bylaws or in Canaan's certificate
of incorporation and bylaws, reference should be made to the documents in
question. Certain provisions in Salisbury's certificate of incorporation and
bylaws are intended to enhance the negotiating ability of the Board of Directors
in order to serve the best interests of the shareholders and may make it more
difficult for third parties to acquire or to exercise control of Salisbury, even
if some shareholders consider an acquisition to be in their own interest. The
Board of Directors is not aware at this time of any attempt by any person or
entity to gain control of Salisbury.
Directors. Certain provisions of Salisbury's certificate of incorporation
and bylaws impede change in majority control of Salisbury's Board of Directors.
Salisbury's certificate of incorporation provides that the Board of Directors
will consist of not less than seven (7) members and not more than twelve (12)
members and will be divided into three (3) classes, with directors in each class
elected for three (3) year terms. The Board of Directors may increase the number
of directors by no more than two (2) in each fiscal year, and may decrease the
number of directors at any time (but to not less than seven (7) directors). No
decrease in the number of directors will shorten the term of any incumbent
director. Salisbury's certificate of incorporation and bylaws also impose
restrictions on the ability of shareholders to nominate candidates for the Board
of Directors, requiring, in general, not less than thirty (30) nor more than
fifty (50) days prior written notice of such nominations which contains
specified information about the proposed nominee and about the person making the
nomination. The certificate of incorporation and the bylaws provide that
vacancies created by an increase in the number of directorships can be filled
for the unexpired term by the Board of Directors. Vacancies occurring for any
other reasons, such as death or resignation, would be filled by the remaining
directors. The effect of these provisions would prevent a new majority
shareholder from increasing the size of the Board of Directors and from then
filling the vacancies created by such increase. They would also prevent a new
majority shareholder from filling any vacancies on the Board of Directors
arising by resignation, death or other reason.
Salisbury's certificate of incorporation and bylaws provide that any
director of Salisbury may be removed from office at any time with cause by the
affirmative vote of at least two-thirds (2/3) of the Directors then in office.
Canaan's certificate of incorporation provides that the number of
directors shall be determined as set forth in the bylaws. Canaan's bylaws
provide that the Board of Directors shall consist of not less than five (5) nor
more than twenty-five (25) members, with the exact number of directors to be
fixed within the minimum and maximum limitations by resolution of a majority of
the entire Board of directors or by majority vote of the shareholders at the
annual meeting. The Board of Directors may increase the number of directorships
to a number which exceeds the number fixed by shareholders, but not to more than
twenty-five (25).
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Canaan's bylaws provide that any vacancy on the Board of Directors or a
newly created directorship resulting from an increase in the number of
directorships may be filled by a majority of the directors then in office,
although less than a quorum, and any director so chosen shall hold office for
the remainder of the full term of the class in which the new directorship was
creased or the vacancy occurred.
Canaan's certificate of incorporation provides that directors may be
removed only for cause by a two-thirds (2/3) vote of the total votes eligible to
be voted by shareholders at a meeting called for that purpose.
Call of Special Meetings. Salisbury's certificate of incorporation
provides that a special meeting of shareholders may be called at any time but
only by the Chairman, the President or by the Board of Directors. Shareholders
are not authorized to call a special meeting. Canaan's certificate of
incorporation provides that a special meeting of the shareholders may be called
only by the Chairman of the Board or the President or by the Board of Directors.
Shareholder Action without a Meeting. Salisbury's certificate of
incorporation provides that shareholders may act by written consent without a
meeting but only if the consent is unanimous. Canaan's certificate of
incorporation provides that shareholder action may not be taken except at a duly
called meeting of shareholders, except action may be taken by a consent in
writing which is unanimous.
Limitation on Liability of Directors and Indemnification. Salisbury's
certificate of incorporation provides that to the fullest extent permitted by
law, no director shall have any personal liability to the corporation or its
shareholders for monetary damages for breach of their fiduciary duty as a
director, provided that the provisions will not eliminate or limit the liability
of a director in certain circumstances. Specifically, liability will not be
eliminated or limited (i) for any breach of the director's duty of loyalty to
the corporation or its shareholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violations of law;
(iii) for any unlawful payment of dividends, unlawful stock purchase or unlawful
redemption; or (iv) for any transaction from which the director derived an
improper personal benefit.
Canaan's certificate of incorporation provides that no director shall be
personally liable to the corporation or its shareholders for monetary damages if
the director acted in good faith and in a manner reasonably believed to be in or
not opposed to the best interest of Canaan and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Salisbury's certificate of incorporation and bylaws provide that the
corporation shall indemnify its directors, officers, employees and agents to the
maximum extent permitted by the Connecticut Business Corporation Act. The
Connecticut Business Corporation Act provides for four (4) types of
indemnification: permissible; mandatory; obligatory; and court ordered.
Permissible indemnification for a director requires the director's conduct to
have been taken in good faith and in the reasonable belief that such conduct was
in the best interest of Salisbury. Mandatory indemnification is required under
the Connecticut Business Corporation Act regardless of the provisions of a
corporation's certificate of incorporation or bylaws only when the director has
been "wholly successful on the merits or otherwise, in the defense of an action
to which he was a party because he is or was a director." Obligatory
indemnification occurs by reason of specific provisions in a certificate of
incorporation, bylaw, board resolution or contract. Court ordered
indemnification arises when a court orders indemnification based upon its
finding that mandatory indemnification or obligatory indemnification exists or
because the court concludes that it would be fair and reasonable to indemnify
the director. The indemnification provisions of Salisbury provide
indemnification to directors, except with regard to the following five (5)
exceptions: (a) knowing and culpable violations of law; (b) receipt of improper
personal economic gain; (c) lack of good faith and conscious disregard for duty
under circumstances in which the director was aware that his or her conduct or
omission created an unjustifiable risk of serious injury to Salisbury; (d)
sustained and unexcused inattention that amounts to an abdication of duty; or
(e) unlawful distributions.
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Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the corporation pursuant to the foregoing provisions, or otherwise, Salisbury
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by Salisbury of expenses incurred or paid by a director, officer or
controlling person of Salisbury in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Salisbury will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Likewise, Canaan's bylaws provide for indemnification of directors,
officers, trustees, employees and agents of Canaan, and for those serving in
those roles with other business organizations or entities, in the event that the
person was or is a party to any threatened, pending or completed civil,
criminal, administrative, arbitrative or investigative action, suit or
proceeding, other than an action by or in the right of Canaan, by reason of the
fact that the person is or was serving in that kind of capacity for or on behalf
of Canaan. The bylaws provide that Canaan will indemnify any person of this kind
against expenses (including attorneys' fees), judgments, fines, penalties and
amounts paid in settlement if the person acted in good faith and in a manner the
person reasonably believed to be in or not opposed to the best interests of
Canaan, and, for any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Similarly, the bylaws provide that Canaan will
indemnify these persons for expenses reasonably incurred and settlements
reasonably paid in actions, suits, or proceedings brought by or in the right of
Canaan, if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of Canaan; provided,
however, that indemnification may be made against expenses for any claim, issue
or matter as to which the person is adjudged to be liable to Canaan or against
amounts paid in settlement only to the extent that there is a determination made
by the appropriate party set forth in Canaan's bylaws that the person to be
indemnified is, in view of all the circumstances of the case, fairly and
reasonably entitled to indemnity for such expenses or amounts paid in
settlement. Canaan's bylaws permit it to pay expenses incurred in connection
with any such a matter in advance of the final disposition if the person gives
an undertaking to repay such amount advanced if it is determined that they are
not entitled to be indemnified. In addition, Canaan's bylaws permit the
corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, trustee, employee, or agent of Canaan or is acting in
this kind of capacity for another business organization or entity at Canaan's
request, against any liability asserted against the person and incurred in that
capacity, or arising out of that status, whether or not Canaan would have the
power or obligation to indemnify him against that kind of liability under the
indemnification provisions of Canaan's bylaws.
Cumulative Voting. Neither Salisbury nor Canaan shareholders have
cumulative voting rights in the election of directors.
Preemptive Rights. Salisbury's certificate of incorporation provides that
shareholders do not have any preemptive rights regarding Salisbury's securities.
Similarly, Canaan shareholders do not have any preemptive rights regarding
Canaan securities.
Notice of Meetings. Salisbury's bylaws require that notice be given not
less than ten (10) nor more than sixty (60) days prior to each annual or special
meeting of shareholders. Canaan's bylaws require that notice of an annual or
special meeting be given not less than twenty (20) nor more than fifty (50) days
prior to a meeting.
Quorum. Salisbury's bylaws provide that the holders of one-third of the
capital stock issued and outstanding and entitled to vote at a meeting
constitutes a quorum. Canaan's bylaws provide that the presence of the holders
of one-third of the issued and outstanding shares of stock of the company
entitled to vote at a meeting constitutes a quorum.
General Vote. Salisbury's bylaws provide that any matter brought before a
meeting of shareholders will be decided by the affirmative vote of a majority of
the votes cast on the matter except as otherwise required by law or Salisbury's
certificate of incorporation or bylaws. Canaan's bylaws provide that any matter
brought before any meeting of shareholders will be decided by the vote of the
holders of a majority of the votes cast on the matter, except as otherwise
required by law or Canaan's certificate of incorporation or bylaws.
Record Date. Salisbury's bylaws provide that the record date for
determination of shareholders entitled to notice of or to vote at a meeting and
for other specified purposes may not be less than ten (10) nor more than sixty
(60) days before the date of the meeting or other action. Canaan's bylaws
provide that the Board of Directors may set a record date for determination of
shareholders entitled to notice of or to vote at a meeting and for other
specified purposes which shall not be more than fifty (50) nor less than twenty
(20) days before such meeting nor more than fifty (50) days prior to the
particular event requiring such determination is to occur.
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Salisbury - Fair Price Provision. Salisbury's certificate of incorporation
requires that, unless otherwise required by law, certain "business combinations"
with a holder (hereinafter referred to as an "Interested Shareholder") of ten
percent (10%) or more of the voting power of common stock (hereinafter referred
to as the "Voting Stock") must be approved by "super-majority" votes of
shareholders. The purpose of this provision is to discourage "front load" or
two-tier acquisitions. In this type of acquisition, one price is offered in a
tender offer for a controlling block of stock and then a much lower price and/or
less desirable form of consideration is offered for the remainder of the
outstanding stock.
Under the provisions of the Salisbury's certificate of incorporation,
three (3) votes are necessary before a business combination with an Interested
Shareholder can occur. First, the Board of Directors must approve the
transaction. Second, the holders of at least eighty percent (80%) of the voting
power of the outstanding Voting Stock must approve the transaction. Third, the
holders of at least two-thirds (2/3) of the voting power of the outstanding
Voting Stock other than that controlled by the Interested Shareholder must
approve the transaction.
The term "business combination" encompasses six categories of
transactions. The first includes any merger, consolidation or share exchange by
Salisbury or any subsidiary with any Interested Shareholder or related persons.
The second category includes any sale, lease, exchange, mortgage or other
disposition of assets to an Interested Shareholder within any twelve month
period which is not in the usual and regular course of business, if the assets
have a book value of ten percent (10%) or more of either the total market value
of the outstanding stock of Salisbury or Salisbury's net worth as of the end of
the most recent fiscal quarter. The third category is the issuance or transfer
to an Interested Shareholder, on a non-pro rata basis, of stock having a market
value equal to five percent (5%) or more of the total market value of all shares
of stock of Salisbury. The fourth category is a liquidation or dissolution
proposed by or on behalf of an Interested Shareholder or related person. The
fifth category is any reclassification of securities or recapitalization which
increases an Interested Shareholder's proportionate ownership of Salisbury's
equity or convertible securities. The sixth category is the receipt by an
Interested Shareholder of loans, advances, guarantees, pledges or other
financial assistance from Salisbury.
Salisbury's certificate of incorporation exempts from the super-majority
voting requirements described above any business combination with an Interested
Shareholder if the transaction is approved by Salisbury's Board of Directors
before the Interested Shareholder first becomes an Interested Shareholder.
Salisbury's certificate of incorporation also exempts from the foregoing,
super-majority voting requirements for business combinations described in the
first category set forth above (that is, mergers, consolidations and share
exchanges) which satisfy certain "fair price" and procedural provisions. Five
(5) basic conditions must be met in order for this exemption to apply. The first
condition requires that shareholders whose stock is acquired in the second or
later stage of an acquisition must receive at least as much as the highest price
the Interested Shareholder paid for shares within the prior two years, and in
some cases a higher price, as determined by various formulas specified in the
exemptive provision. These prices may bear no relation to the then-current
market value of Salisbury's stock. The second condition is that the
consideration in the business combination must be cash or the same form of
consideration as the Interested Shareholder previously paid. The requirement
prevents the use of cash in the "first tier" of an acquisition and less valuable
securities in the "second tier". The third condition provides that prior to the
business consolidation, there was no reduction in the annual rate of dividends
paid on Salisbury's stock and/or increase in the annual rate of dividends paid
should there be a reverse stock split or any similar transaction unless the
Interested Shareholder voted as a director of the corporation against such
action. In addition, the third condition provides that the Interested
Shareholder shall not have become the beneficial owner of any additional shares
of stock. The fourth condition is designed to ensure that an Interested
Shareholder has not, through the exercise of influence over Salisbury, enhanced
his position or brought about actions detrimental to the other shareholders.
Thus, any receipt by the Interested Shareholder of specified financial or tax
benefits (such as loan, advances, pledges or guarantees provided by Salisbury),
will prevent the use of the "fair price" exemption. The fifth condition requires
that a proxy or information statement complying with the provisions of the
Exchange Act be mailed to Salisbury's shareholders at least thirty (30) days
prior to the consummation of the business combination, whether or not such proxy
or information statement is required under the Exchange Act.
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In the event that the requisite approval of the Board of Directors was
given or the "fair price" and procedural requirements were met with respect to a
particular business combination, the normal voting requirements of law would
apply. Under Connecticut law, a merger, consolidation, sale of all or
substantially all of the assets of Salisbury or the adoption of a plan of
dissolution of Salisbury would require the approval of the holders of a majority
of the outstanding shares of Salisbury's common stock. A reclassification of
Salisbury's securities involving an amendment to its certificate of
incorporation would require the approval of the holders of a majority of
Salisbury's capital stock entitled to vote thereon. A sale of less than
substantially all of the assets of Salisbury, a merger of Salisbury with a
company in which it owns ninety percent (90%) of the outstanding capital stock,
or a reclassification of Salisbury's securities not involving an amendment to
its certificate of incorporation would not require shareholder approval.
Salisbury - Board of Director Approval of a Business Combination or Stock
Purchase. Salisbury's certificate of incorporation prevents an Interested
Shareholder from engaging in any "business combination" with Salisbury for a
period of five (5) years following the date on which it first became an
Interested Shareholder (i.e., the date on which it first acquired ten percent
(10%) or more of the Voting Stock). A "business combination" is defined in the
same way as for the purposes of the fair price provision discussed above.
Nevertheless, a business combination with an Interested Shareholder may occur
before the termination of the five (5) year period if the Board of Directors of
Salisbury gives its approval, before the date on which the Interested
Shareholder becomes an Interested Shareholder, to either the proposed business
combination or the proposed acquisition of the Voting Stock. Moreover, the
majority of the non-employee members of the Board of Directors (of which there
must be at least two) must also give their prior approval. The purpose of this
provision is to effectively require any potential acquiror of Salisbury to seek
the approval of the Board of Directors of Salisbury before launching a takeover
attempt.
In the event that the requisite prior Board of Director approval is
obtained with respect to a particular business combination, the normal voting
requirements of Connecticut law would apply. Under such law, a merger,
consolidation, or sale of all or substantially all of the assets of Salisbury or
the adoption of the plan of dissolution of Salisbury would require the approval
of a majority of the outstanding shares of Salisbury's capital stock. A
reclassification of Salisbury's securities involving an amendment to its
certificate of incorporation would require the approval of the holders of a
majority of Salisbury's capital stock entitled to vote thereon.
Salisbury - Anti-Greenmail. Salisbury's certificate of incorporation
requires approval by the holders of a majority of the outstanding shares of
voting stock before Salisbury may directly or indirectly purchase or otherwise
acquire any voting stock beneficially owned by a holder of 3% or more of
Salisbury's voting stock, if the holder has owned the shares for less than two
years. Any shares beneficially held by the person are required to be excluded in
calculating majority shareholder approval. This provision would not apply to a
pro rata offer made by Salisbury to all of its shareholders in compliance with
the Securities Exchange Act of 1934 and the rules and regulations under that
statute.
Canaan - Shareholder Approval for Acquisitions of Control. Canaan's
certificate of incorporation provides that no individual, firm, corporation or
other entity, including any such persons or entities acting in concert for a
common purpose, may acquire control of Canaan unless such acquisition of control
has been approved in advance by the vote of the holders of at least two-thirds
(2/3) of the outstanding shares of common stock at a meeting of shareholders
called for such purpose. However, if at least two-thirds (2/3) of the directors
then in office approve the acquisition of control, the vote of the holders of a
majority of the outstanding shares of common stock may approve the acquisition.
Control, for purposes of this provision, means the power to vote or dispose of
more than fifteen percent (15%) of the common stock. In addition, no person or
entity may acquire control unless they have first obtained all required
regulatory approvals.
Canaan - Higher Vote Required for Certain Business Combinations. Canaan's
certificate of incorporation requires that the affirmative vote of the holders
of at least eighty percent (80%) of the outstanding shares of common stock
approve certain business combinations with Interested Shareholders. An
"Interested Shareholder" is a shareholder that beneficially owns ten percent
(10%) or more of the outstanding common stock. A business combination is any
merger, consolidation or share exchange; any sale, lease, exchange, mortgage,
pledge, transfer or other disposition of assets having a book value in excess of
five percent (5%) of the market value of all of Canaan's common stock or its net
worth; any purchase, exchange, lease or other acquisition by Canaan of more than
five percent (5%) of the assets or business of the Interested Shareholder; or
the issuance or transfer to an Interested Shareholder by Canaan of its common
stock having a market value of more than five percent (5%) of the total market
value of Canaan's common stock. The eighty percent (80%) vote is not required if
the business combination is approved by a majority of the directors then in
office who are not affiliated with the Interested Shareholder and if the
aggregate value of the consideration received by shareholders is equal in amount
to the highest price paid by the Interested Shareholder in acquiring Canaan's
common stock and is in the same form as paid by the Interested Shareholder in
acquiring the common stock. If these conditions are met, the normal voting
requirements of Delaware law would apply, which require approval by the holders
a majority of the outstanding shares of Canaan's common stock, except as
described under "--Canaan - Shareholder Approval of Acquisitions of Control."
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Criteria for Evaluating Offers. Salisbury's certificate of incorporation
provides that the Board of Directors, when evaluating any acquisition offer,
shall give due consideration to all relevant factors, including, without
limitation, the economic effects of acceptance of the offer on depositors,
borrowers and employees of its insured institution subsidiaries and on the
communities in which its subsidiaries operate or are located, as well as on the
ability of its subsidiaries to fulfill the objectives of insured institutions
under applicable federal statutes and regulations.
Canaan's certificate of incorporation provides that the Board of
Directors, when evaluating any offer to make a tender offer or exchange offer
for Canaan stock, merge or consolidate Canaan with another entity or purchase or
otherwise acquire the properties and assets of Canaan, may, in connection with
the exercise of its judgment in determining what is in the best interests of
Canaan and its shareholders, give due consideration to all relevant factors,
including, without limitation, the economic effects of acceptance of the offer
on depositors and borrowers of its insured institution subsidiaries and on the
communities in which its subsidiaries operate or are located, as well as on the
ability of its subsidiaries to fulfill the objectives of insured institutions
under applicable federal and state statutes and regulations.
Amendment to Certificate of Incorporation and Bylaws. Approval of an
amendment to Salisbury's certificate of incorporation requires the approval of
the holders of only a majority of the outstanding shares of Salisbury's capital
stock entitled to vote thereon. However, Article Eighteenth of the certificate
of incorporation requires that any amendment by the provisions of Salisbury's
certificate of incorporation relating to various Board of Director provisions,
provisions relating to restrictions on the acquisition of ten percent (10%) or
more of Salisbury's common stock, business combinations with interested
shareholders, meetings of shareholders, the removal of directors with cause, and
the procedure for the amendment of the foregoing provisions be approved by
eighty percent (80%) of the outstanding shares of Salisbury's capital stock
entitled to vote thereon. If there is an Interested Shareholder, the amendment
must also be approved by sixty percent (60%) of voting power of Salisbury's
issued and outstanding shares of capital stock entitled to vote thereon held by
shareholders other than the Interested Shareholder.
Salisbury's bylaws provide that, except as otherwise provided by law or
the bylaws, Salisbury's bylaws may be amended or repealed by (i) the Board by
the affirmative vote of a majority of the directors then in office, or (ii) by
the shareholders of Salisbury, at any annual meeting of shareholders or special
meeting of shareholders called for such purpose, by the affirmative vote of at
least a majority of the shares present in person or represented by proxy at such
meeting and entitled to vote on such amendment or repeal, voting together as
class; provided, however, that in order to amend or repeal or to adopt any
provision inconsistent with certain provisions of the bylaws regarding
shareholder meetings, directors and bylaw amendments the affirmative vote of
sixty percent (60%) of the voting power of all the issued and outstanding shares
is required to effectuate such amendments.
Canaan's certificate of incorporation requires that any proposed amendment
to the certificate of incorporation be first approved by two-thirds (2/3) of the
directors then in office and approved by the affirmative vote of the holders of
at least a majority of the shares entitled to vote thereon. However, Article 15
of the certificate of incorporation requires that any amendment to the
provisions of Canaan's certificate of incorporation relating to directors,
amendment of the bylaws, special meetings, approval of acquisitions of control,
criteria for evaluating certain officers, business combinations with interested
shareholders, or this portion of Article 15, must be approved by the affirmative
vote of the holders of at least two-thirds (2/3) of the shares entitled to vote
thereon. In addition, Article 15 of the certificate of incorporation requires
that any amendment to provisions relating to certain business combinations or
this portion of Article 15 must be approved by the affirmative vote of the
holders of at least eighty percent (80%) of the shares entitled to vote thereon.
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Canaan's certificate of incorporation and bylaws provide that the bylaws
may be adopted, altered, amended or repealed by the vote of at least two-thirds
(2/3) of the directors then in office or by the affirmative vote of the holders
of at least two-thirds (2/3) of the shares eligible to be voted thereon at a
meeting duly called for such purpose.
Applicable Law
The following discussion is a general summary of particular federal and
state statutory and regulatory provisions that may be deemed to have an
anti-takeover effect.
Connecticut Takeover Statute and Regulatory Restrictions on Acquisitions
of Stock. Section 33-844 of the Connecticut Business Corporation Act applies to
Connecticut corporations, such as Salisbury, with a class of voting stock
registered on a national securities exchange and restricts transactions which
may be entered into by the corporation and some of its shareholders. Section 844
provides, in general, that a shareholder acquiring more than 10% of the
outstanding voting stock of a corporation subject to the statute and that
person's affiliates and associates, referred to in this section as an interested
shareholder, may not engage in specified business combinations, as discussed
below, with the corporation for a period of five years after the date on which
the shareholder became an interested shareholder unless the business combination
is approved by the corporation's board of directors and a majority of the
non-employee directors of the Company. Section 843 defines the term business
combination to include a wide variety of transactions with or caused by an
interested shareholder or its affiliates in which the interested shareholder
receives or could receive a benefit on other than a pro rata basis with other
shareholders, including mergers, consolidations, specified types of asset sales,
specified issuances of additional shares to the interested stockholder,
transactions with the corporation which increase the proportionate interest of
the interested shareholder or transactions in which the interested shareholder
receives specified other benefits.
Connecticut banking statutes prohibit any person from directly or
indirectly offering to acquire or acquiring voting stock of a
Connecticut-chartered bank, like Salisbury Bank, or a holding company of that
kind of entity, like Salisbury, that would result in the person becoming,
directly or indirectly, the beneficial owner of more than ten percent (10)% of
any class of voting stock of that entity unless the person had previously filed
an acquisition statement with the Connecticut Commissioner of Banking and the
offer or acquisition has not been disapproved by the Connecticut Commissioner.
Delaware Business Combinations Statute. Section 203 of the Delaware
corporation law restricts certain business combinations which may be entered
into by Delaware corporations, such as Canaan, and certain of its shareholders.
Canaan's certificate of incorporation provide that Canaan expressly elects to be
governed by Section 203. Section 203 provides, in essence, that a shareholder
acquiring more than fifteen percent (15%) of the outstanding voting stock of a
corporation subject to the statute and that person's affiliates and associates,
referred to as an interested stockholder, but less than eighty-five percent
(85%) of its shares, may not engage in specified business combinations with the
corporation for a period of three years after the date on which the shareholder
became an interested stockholder unless before that date the corporation's board
of directors approved either the business combination or the transaction in
which the shareholder became an interested stockholder or at or after that time
the business combination is approved by the corporation's board of directors and
authorized at an annual or special meeting of shareholders by the affirmative
vote of the holders of at least two-thirds (2/3) of the outstanding voting stock
of the corporation not owned by the interested stockholder. Section 203 defines
the term business combination to include a wide variety of transactions with or
caused by an interested stockholder in which the interested stockholder receives
or could receive a benefit on other than a pro rata basis with other
shareholders, including mergers, consolidations, specified types of asset sales,
specified issuances of additional shares to the interested stockholder,
transactions with the corporation which increase the proportionate interest of
the interested stockholder or transactions in which the interested stockholder
receives specified other benefits.
Federal Law. Federal law provides that, subject to some exemptions, no
person acting directly or indirectly or through or in concert with one or more
other persons may acquire control of an insured institution or holding company
of an insured institution, without giving at least sixty (60) days prior written
notice providing specified information to the appropriate federal banking
agency. In the case of Salisbury and Salisbury Bank, the appropriate federal
banking agency is the FRB and the FDIC, respectively, and in the case of Canaan
and Canaan Bank, the appropriate federal banking agencies are the OCC and the
FDIC, respectively. Control is defined for this purpose as the power, directly
or indirectly, to direct the management or policies of an insured institution or
to vote twenty-five percent (25%) or more of any class of voting securities of
an insured institution. Control is presumed to exist where the acquiring party
has voting control of at least ten percent (10%) of any class of the
institution's voting securities and other conditions are present. The FRB, OCC
or the FDIC may prohibit the acquisition of control if the agency finds, among
other things, that:
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o the acquisition would result in a monopoly or substantially lessen
competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of any acquiring person or
any of the proposed management personnel indicates that it would not
be in the interest of the depositors or the public to permit the
acquisition of control by that person.
Federal law also provides that, subject to some exceptions, a bank holding
company may not acquire more than 5 percent of the voting stock of a bank, and a
new holding company may not be formed to acquire control of a bank, without the
prior approval of the FRB. Control is defined for this purpose in a similar
manner as discussed in the preceding paragraph. The FRB may not approve the
acquisition of control if it finds that the acquisition of control would result
in a monopoly or would further an attempt to monopolize the business of banking
in any part of the United States or if the acquisition of control would
substantially lessen competition or tend to create a monopoly and the
anticompetitive effects are not clearly outweighed by the public benefits of the
proposed transaction. The FRB also may not approve the acquisition of control if
the company fails to provide the FRB with adequate assurances regarding the
availability of information concerning the operations or activities of the
company and any affiliate of the company that the FRB determines to be
appropriate. The FRB also must take into consideration:
o the financial resources and future prospects of the companies and
banks concerned, and the convenience and needs of the community to
be served;
o the managerial resources of a company or bank, including the
competence, experience, and integrity of officers, directors, and
principal shareholders;
o the company's record of meeting the credit needs of its entire
community, including low-and moderate-income neighborhoods; and
o the effectiveness of the company in combating money laundering
activities.
INFORMATION REGARDING SALISBURY
Information regarding Salisbury's business, current directors and
executive officers, the principal holders of its voting securities, executive
compensation, certain relationships and related transactions and financial
statements is set forth in Salisbury's Annual Report on Form 10-K for the year
ended December 31, 2003 and Form 10-Q for the fiscal quarter ended March 31,
2004, which are incorporated in this document by reference and included as
Appendix E and Appendix F, respectively.
WHERE YOU CAN FIND MORE INFORMATION
Salisbury files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that Salisbury files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements and other
information about issuers that file electronically with the SEC. The address of
the SEC's Internet site is http://www.sec.gov. Salisbury can be found on the
Internet at http://www.salisbury-bank.com. Salisbury's common stock is traded on
the American Stock Exchange under the trading symbol SAL.
108
Salisbury has filed with the SEC a registration statement on Form S-4
under the Securities Act relating to Salisbury's common stock to be issued to
Canaan's shareholders in the merger. As permitted by the rules and regulations
of the SEC, this proxy statement/prospectus does not contain all the information
set forth in the registration statement. You can obtain that additional
information from the SEC's principal office in Washington, D.C. or the SEC's
Internet site as described above. Statements contained in this proxy
statement/prospectus or in any document incorporated by reference into this
proxy statement/prospectus about the contents of any contract or other document
are not necessarily complete and, in each instance where the contract or
document is filed as an exhibit to the registration statement, reference is made
to the copy of that contract or document filed as an exhibit to the registration
statement, with each statement of that kind in this proxy statement/prospectus
being qualified in all respects by reference to the document.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows Salisbury to incorporate by reference information into this
proxy statement/prospectus, which means that Salisbury can disclose important
information to you by referring you to another document filed separately with
the SEC. The information that Salisbury incorporates by reference is considered
a part of this proxy statement/prospectus, except for any information superseded
by information presented in this proxy statement/prospectus. This proxy
statement/prospectus incorporates important business and financial information
about Salisbury that is not included in or delivered with this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that Salisbury has filed with the SEC:
Filings Period of Report or Date Filed
---------------------------------------------------------- ------------------------------
o Annual Report on Form 10-K (included as Appendix D) Year ended December 31, 2003,
filed on March 30, 2004
o Current Report on Form 8-K Filed on April 30, 2004
o Quarterly Report on Form 10-Q (included as Appendix E) Quarter ended March 31, 2004,
filed on May 14, 2004
Salisbury also incorporates by reference additional documents that the
company may file with the SEC between the date of this document and the date of
the Canaan special meeting. These documents may include periodic reports, such
as annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K, as well as proxy statements.
These documents are available without charge to you if you call or write
to: John F. Perotti, President and Chief Executive Officer of Salisbury Bancorp,
Inc., 5 Bissell Street, P.O. Box 1868, Lakeville, Connecticut 06039, telephone
(860) 435-9801.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this document, and in documents
that we incorporate by reference. These kinds of statements are subject to risks
and uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of our operations. When we use words like
believes, expects, anticipates or similar expressions, we are making
forward-looking statements.
You should note that many factors, some of which are discussed elsewhere
in this document and in the documents that we incorporate by reference, could
affect our future financial results and could cause those results to differ
materially from those expressed in our forward-looking statements. These factors
include the following:
o the effect of economic conditions;
o inability to realize expected cost savings in connection with
business combinations and other acquisitions;
o higher than expected costs related to integration of combined or
merged businesses;
109
o deposit attrition;
o adverse changes in interest rates;
o change in any applicable law, rule, regulation or practice with
respect to tax or accounting issues or otherwise; and
o adverse changes or conditions in capital or financial markets.
The forward-looking statements are made as of the date of this document,
and we assume no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
No person is authorized to give any information or to make any
representation not contained in this document, and, if given or made, that
information or representation should not be relied upon as having been
authorized. This document does not constitute an offer to sell, or a
solicitation of an offer to purchase, any of Salisbury's common stock offered by
this document, or the solicitation of a proxy, in any jurisdiction in which it
is unlawful to make that kind of offer or solicitation. Neither the delivery of
this document nor any distribution of Salisbury's common stock offered pursuant
to this proxy statement/prospectus shall, under any circumstances, create an
implication that there has been no change in the affairs of Canaan or Salisbury
or the information in this document or the documents or reports incorporated by
reference into this document since the date of this document.
OTHER MATTERS
We do not expect that any matters other than those described in this
document will be brought before the special meeting. If any other matters are
presented, however, it is the intention of the persons named in the Canaan proxy
card, to vote proxies in accordance with the determination of a majority of
Canaan's Board of Directors, including, without limitation, a motion to adjourn
or postpone the special meeting to another time and/or place for the purpose of
soliciting additional proxies in order to approve the merger agreement or
otherwise.
EXPERTS
The consolidated financial statements of Salisbury at December 31, 2003,
2002 and 2001 and for each of the years in the three-year period ended December
31, 2003 have been incorporated by reference into this document and in the
registration statement in reliance on the report of Shatswell, MacLeod &
Company, P.C., independent certified public accountants, which is incorporated
by reference into this document and into the registration statement by reference
to Salisbury's Annual Report on Form 10-K for the year ended December 31, 2003
and upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Canaan at December 31, 2003 and
2002 and for each of the years in the two-year period ended December 31, 2003
have been included in this document in reliance on the report of Shatswell,
MacLeod & Company, P.C., independent certified public accountants, and have been
so included in reliance upon the report of that firm given upon their authority
as experts in accounting and auditing.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of Shatswell, MacLeod & Company, P.C., will be present at
the Canaan special meeting. The representative will have the opportunity to make
a statement if he/she desires to do so and is expected to be available to
respond to appropriate questions.
LEGAL MATTERS
The validity of Salisbury's common stock to be issued in the merger has
been passed upon by Cranmore, FitzGerald & Meaney, Hartford, CT. Day, Berry &
Howard, Hartford, CT will be passing upon certain tax matters for Salisbury and
Canaan in connection with the merger.
110
Appendix A
AGREEMENT AND PLAN OF MERGER BY AND BETWEEN
SALISBURY BANCORP, INC. AND CANAAN NATIONAL BANCORP, INC.
DATED AS OF NOVEMBER 17, 2003
TABLE OF CONTENTS
Page Section
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ARTICLE I THE MERGER A-4
The Merger A-4 1.1
Effective Time A-4 1.2
Effects of the Merger A-4 1.3
Conversion of Canaan Common Stock A-4 1.4
Exchange of Canaan Common Stock and Dissenters' Rights A-6 1.5
Options A-6 1.6
Certificate of Incorporation A-6 1.7
Bylaws A-6 1.8
Directors and Officers A-6 1.9
Tax Consequences A-6 1.10
Accounting Treatment A-6 1.11
ARTICLE II EXCHANGE OF SHARES A-6
Salisbury to Make Merger Consideration Available A-6 2.1
Exchange A-6 2.2
Disclosure Schedule A-7 2.3
Standards A-8 2.4
ARTICLE III REPRESENTATIONS AND WARRANTIES OF CANAAN A-8
Corporate Organization A-8 3.1
Capitalization A-8 3.2
Authority; No Violation A-9 3.3
Consents and Approvals A-10 3.4
Loan Portfolio; Reports A-10 3.5
Financial Statements; Exchange Act Filings; Books and Records A-11 3.6
Broker's Fees A-11 3.7
Absence of Certain Changes or Events A-11 3.8
Legal Proceedings A-12 3.9
Taxes and Tax Returns A-12 3.10
Employee Plans A-13 3.11
Certain Contracts A-14 3.12
Agreements with Governmental Agencies A-14 3.13
State Takeover Laws; Certificate of Incorporation A-14 3.14
Environmental Matters A-15 3.15
Reserves for Losses A-15 3.16
Properties and Assets A-16 3.17
Insurance A-16 3.18
CNB Insurance Agency, Inc. A-16 3.19
Compliance with Applicable Laws A-17 3.20
Loans A-17 3.21
Affiliates A-18 3.22
Ownership of Salisbury Common Stock A-18 3.23
Change in Control Benefits A-18 3.24
Intellectual Property A-18 3.25
A-1
Canaan Information A-18 3.26
Fairness Opinion A-18 3.27
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SALISBURY A-18
Corporate Organization A-18 4.1
Capitalization A-19 4.2
Authority; No Violation A-19 4.3
Regulatory Approvals A-20 4.4
Financial Statements; Exchange Act Filings; Books and Records A-20 4.5
Agreements with Governmental Agencies A-21 4.6
Legal Proceedings A-21 4.7
Salisbury Information A-21 4.8
Absence of Certain Changes or Events A-22 4.9
Compliance with Applicable Laws A-22 4.10
Tax Treatment of Merger A-22 4.11
Fairness Opinion A-22 4.12
Consents and Approvals A-22 4.13
Broker's Fees A-23 4.14
Taxes and Tax Returns A-23 4.15
Employee Plans A-24 4.16
Environmental Matters A-25 4.17
Reserves for Losses A-25 4.18
Properties and Assets A-26 4.19
Insurance A-26 4.20
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS A-26
Covenants of Canaan A-26 5.1
Covenants of Salisbury A-29 5.2
Merger Covenants A-29 5.3
Compliance with Antitrust Laws A-29 5.4
ARTICLE VI ADDITIONAL AGREEMENTS A-29
Regulatory Matters A-29 6.1
Access to Information A-30 6.2
Shareholder Meetings A-31 6.3
Legal Conditions to Merger A-31 6.4
Stock Exchange Listing A-32 6.5
Employees A-32 6.6
Indemnification A-33 6.7
Subsequent Interim and Annual Financial Statements A-33 6.8
Additional Agreements A-34 6.9
Advice of Changes A-34 6.10
Current Information A-34 6.11
Execution and Authorization of Subsidiary Bank Merger Agreement A-34 6.12
Change in Structure A-34 6.13
Transaction Expenses of Canaan A-34 6.14
Further Action of Canaan A-35 6.15
ARTICLE VII CONDITIONS PRECEDENT A-35
Conditions to Each Party's Obligation To Effect the Merger A-35 7.1
Conditions to Obligations of Salisbury A-36 7.2
Conditions to Obligations of Canaan A-37 7.3
ARTICLE VIII TERMINATION AND AMENDMENT A-37
Termination A-37 8.1
A-2
Effect of Termination A-39 8.2
Amendment A-39 8.3
Extension; Waiver A-39 8.4
ARTICLE IX GENERAL PROVISIONS A-40
Closing A-40 9.1
Nonsurvival of Representations, Warranties and Agreements A-40 9.2
Expenses; Breakup Fee A-40 9.3
Notices A-40 9.4
Interpretation A-41 9.5
Counterparts A-41 9.6
Entire Agreement A-41 9.7
Governing Law A-41 9.8
Enforcement of Agreement A-41 9.9
Severability A-41 9.10
Publicity A-41 9.11
Assignment; Limitation of Benefits A-41 9.12
Additional Definitions A-42 9.13
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of November 17, 2003 (this
"Agreement"), is entered into by and between Salisbury Bancorp, Inc., a
Connecticut corporation ("Salisbury") and Canaan National Bancorp, Inc., a
Delaware corporation ("Canaan").
WHEREAS, the Boards of Directors of Salisbury and Canaan have determined that it
is advisable and in the best interests of their respective companies and
shareholders to consummate the business combination transaction provided for
herein in which Canaan will, subject to the terms and conditions set forth
herein, merge with and into Salisbury, with Salisbury being the Surviving
Corporation (as hereinafter defined) (the "Merger");
WHEREAS, prior to the consummation of the Merger, Salisbury and Canaan will
respectively cause Salisbury Bank and Trust Company ("Salisbury Bank"), a
Connecticut chartered bank and trust company and wholly-owned subsidiary of
Salisbury, and The Canaan National Bank, a national bank and wholly-owned
subsidiary of Canaan ("Canaan National Bank"), to enter into a merger agreement,
in the form attached hereto as Exhibit A (the "Subsidiary Bank Merger
Agreement"), providing for the merger (the "Bank Merger") of Canaan National
Bank with and into Salisbury Bank, with Salisbury Bank being the "Surviving
Bank" of the Bank Merger, and the Bank Merger to be consummated immediately
after consummation of the Merger;
WHEREAS, as an inducement to Salisbury to enter into this Agreement, Canaan will
enter into an option agreement, in the form attached hereto as Exhibit B (the
"Option Agreement"), with Salisbury immediately following the execution of this
Agreement pursuant to which Canaan will grant Salisbury an option to purchase,
under certain circumstances, an aggregate of 48,000 newly issued shares of
common stock, par value $.01 per share, of Canaan ("Canaan Common Stock") upon
the terms and conditions therein contained; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this Agreement, in
accordance with the State of Connecticut Business Corporation Act, as amended
(the "Connecticut Corporation Law"), at the Effective Time (as defined in
Section 1.2 hereof), Canaan shall merge into Salisbury, with Salisbury being the
surviving corporation (hereinafter sometimes called the "Surviving Corporation")
in the Merger. Upon consummation of the Merger, the corporate existence of
Canaan shall cease, and the Surviving Corporation shall continue to exist as a
Connecticut corporation.
1.2 EFFECTIVE TIME. The Merger shall become effective on the date and at the
time set forth in the certificate of merger (the "Certificate of Merger"),
substantially in the form attached as Exhibit D hereto, which shall be filed
with the Secretaries of State of the States of Connecticut and Delaware on or
before the Closing Date. The term "Effective Time" shall be the date and time
when the Merger becomes effective, as set forth in the Certificate of Merger.
1.3 EFFECTS OF THE MERGER. At and after the Effective Time, the Merger shall
have the effects set forth in Sections 33-820 and 33-821 of the Connecticut
Corporation Law.
1.4 CONVERSION OF CANAAN COMMON STOCK.
(a) At the Effective Time, subject to Sections 1.4(b) and 1.4(c) hereof, each
share of Canaan Common Stock issued and outstanding prior to the Effective Time
(excluding shares held by stockholders who perfect their dissenters' rights of
appraisal as provided in Section 1.5(h) hereof) shall, by virtue of this
Agreement and without any action on the part of the holder thereof, be converted
into the right to receive a combination of (i) 1.3371 shares (the "Exchange
Ratio") of Salisbury common stock, par value $.01 per share ("Salisbury Common
Stock") (the "Stock Consideration"), plus (ii) $31.20 in cash (without interest)
(the "Cash Consideration"), subject to possible adjustment as provided in
Section 1.5 hereof. The Cash Consideration and the Stock Consideration are
sometimes referred to herein collectively as the "Merger Consideration."
A-4
(b) Notwithstanding any other provision of this Agreement, no fraction of a
share of Salisbury Common Stock will be issued. Instead, Salisbury shall pay to
each holder of Canaan Common Stock who would otherwise be entitled to a fraction
of a share of Salisbury Common Stock an amount in cash equal to (i) the fraction
of a share of Salisbury Common Stock to which such holder would otherwise be
entitled, multiplied by (ii) the actual market value of Salisbury Common Stock,
which shall be deemed to be the average of the daily closing prices per share
for Salisbury Common Stock for the fifteen consecutive trading days on which
shares of Salisbury Common Stock are actually traded (as reported on the
American Stock Exchange) ending on the third trading day preceding the Closing
Date. Following consummation of the Merger, no holder of Canaan Common Stock
shall be entitled to dividends or any other rights in respect of any such
fraction.
(c) All shares of Canaan Common Stock that are held by Salisbury, if any, other
than shares held in a fiduciary capacity or in satisfaction of a debt previously
contracted, shall be canceled. In addition, no Dissenters' Shares as hereinafter
defined shall be converted into the Merger Consideration pursuant to this
Section 1.4 but instead shall be treated in accordance with the provisions set
forth in Section 1.5(h) of this Agreement.
1.5 EXCHANGE OF CANAAN COMMON STOCK AND DISSENTERS' RIGHTS.
(a) (RESERVED)
(b) (RESERVED)
(c) (RESERVED)
(d) (RESERVED)
(e) (RESERVED)
(f) All of the shares of Canaan Common Stock exchanged for the Merger
Consideration pursuant to this Article I shall no longer be outstanding and
shall automatically be canceled and shall cease to exist, and each Certificate
previously representing any such shares of Canaan Common Stock shall thereafter
represent the right to receive the Merger Consideration for each share of Common
Stock represented by such Certificate. If prior to the Effective Time Salisbury
should split or combine its common stock, or pay a dividend or other
distribution in such common stock, then the Merger Consideration shall be
appropriately adjusted to reflect such split, combination, dividend or
distribution.
(g) At the Effective Time, all shares of Canaan Common Stock that are owned by
Canaan as treasury stock and all shares of Canaan Common Stock that are owned
directly or indirectly by Salisbury or Canaan or any of their respective
Subsidiaries and other than any shares of Canaan Common Stock held by Salisbury
or Canaan or any of their respective Subsidiaries in respect of a debt
previously contracted shall be canceled and shall cease to exist and no cash or
other consideration shall be delivered in exchange therefor. All shares of
Salisbury Common Stock that are owned by Canaan or any of its Subsidiaries shall
become treasury stock of Salisbury.
(h) Notwithstanding anything in this Agreement to the contrary and unless
otherwise provided by applicable law, shares of Canaan Common Stock that are
issued and outstanding immediately prior to the Effective Time and that are
owned by shareholders who have properly objected within the meaning of Section
262(d) of the Delaware General Corporation Law (the "DGCL") (the "Dissenters'
Shares"), shall not be converted into the right to receive shares of Salisbury
Common Stock, unless and until such shareholders shall have failed to perfect or
shall have effectively withdrawn or lost their right of payment under applicable
law, in which event such Dissenters' Shares shall thereupon be deemed to have
been converted into and to have become exchangeable, as of the Effective Time,
for the right to receive, without any interest thereon, the Merger Consideration
upon surrender in the manner provided in Section 1.4(a) of the Agreement.
A-5
(i) Canaan shall give Salisbury (i) prompt notice of any objections filed
pursuant to Section 262(d) of the DGCL that are received by Canaan, withdrawals
of such objections and any other instruments served in connection with such
objections pursuant to the DGCL and received by Canaan and (ii) the opportunity
to direct all negotiations and proceedings with respect to objections under the
DGCL consistent with the obligations of Canaan thereunder. Canaan shall not,
except with the prior written consent of Salisbury, (x) make any payment with
respect to any such objection, (y) offer to settle or settle any such objections
or (z) waive any failure to timely deliver a written objection in accordance
with the DGCL, subject to Canaan's legal duties and obligations thereunder.
1.6 OPTIONS.
Unless exercised prior to the Effective Time, each option granted by Canaan to
purchase shares of Canaan Common Stock which has not been properly exercised
shall terminate and expire and thereafter shall be of no effect or value.
Options for Canaan Common Stock, as reflected on Schedule 1.6 of the Canaan
Disclosure Schedule, which are properly exercised prior to the Effective Time
shall be included in the Canaan Common Stock and shall be converted into Merger
Consideration at the Effective Time.
1.7 CERTIFICATE OF INCORPORATION. At the Effective Time, the Certificate of
Incorporation of Salisbury, as in effect at the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation.
1.8 BYLAWS. At the Effective Time, the Bylaws of Salisbury, as in effect
immediately prior to the Effective Time, shall be the Bylaws of the Surviving
Corporation.
1.9 DIRECTORS AND OFFICERS. At the Effective Time, the directors and officers of
Salisbury immediately prior to the Effective Time shall be the directors and
officers of the Surviving Corporation. As of the Effective Time, Salisbury shall
increase the size of its Board of Directors by two (2) members, and thereupon
Salisbury shall invite two (2) of the current independent Directors of Canaan to
serve as directors of Salisbury and Salisbury Bank until the Annual Meeting of
Shareholders to be held in 2005, at which time they shall be nominated to serve
as members of the Board of Directors of Salisbury and Salisbury Bank for a
period to terminate no earlier than the annual meeting of Salisbury stockholders
next following the second anniversary of the Effective Time; provided, however,
that Salisbury shall have no obligation to invite any person to serve on
Salisbury or Salisbury Bank's Boards of Directors if they are not members in
good standing of Canaan's Board of Directors immediately prior to the Effective
Time.
1.10 TAX CONSEQUENCES. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code, and that this
Agreement shall constitute a "plan of reorganization" for the purposes of the
Code.
1.11 ACCOUNTING TREATMENT. It is intended that the Merger shall be accounted for
as a "purchase transaction" under generally accepted accounting principles
("GAAP").
ARTICLE II
EXCHANGE OF SHARES
2.1 SALISBURY TO MAKE MERGER CONSIDERATION AVAILABLE. At or prior to the
Effective Time, Salisbury shall deposit, or shall cause to be deposited, with
the Exchange Agent for the benefit of the holders of Certificates, for exchange
in accordance with this Article II, certificates representing the shares of
Salisbury Common Stock and the cash sufficient in the aggregate for the Exchange
Agent to make full payment of the Merger Consideration (such cash and
certificates for shares of Salisbury Common Stock, being hereinafter referred to
as the "Exchange Fund") to be issued pursuant to Section 1.4 and paid pursuant
to Section 2.2(a). There shall be a written agreement between Salisbury and the
Exchange Agent in which the Exchange Agent expressly undertakes the obligations
to pay the Merger Consideration as provided herein. Canaan shall have the right
to review the agreement with the Exchange Agent prior to its execution.
A-6
2.2 EXCHANGE.
(a) As soon as practicable after the Effective Time, the Exchange Agent shall
mail to each holder of record of a Certificate or Certificates a form letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration and the
cash in lieu of fractional shares into which the shares of Canaan Common Stock
represented by such Certificate or Certificates shall have been converted
pursuant to this Agreement. Canaan shall have the right to review both the
letter of transmittal and the instructions prior to such documents being
finalized. Upon surrender of a Certificate for exchange and cancellation to the
Exchange Agent, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive promptly in exchange
therefor (x) a certificate representing that number of whole shares of Salisbury
Common Stock and cash to which such holder of Canaan Common Stock shall have
become entitled pursuant to the provisions of Article I hereof and (y) a check
representing the Cash Consideration and the amount of cash in lieu of fractional
shares, if any, which such holder has the right to receive in respect of the
Certificate surrendered pursuant to the provisions of Article I, and the
Certificate so surrendered shall forthwith be canceled. No interest will be paid
or accrued on the cash and unpaid dividends and distributions, if any, payable
to holders of Certificates.
(b) No dividends or other distributions declared after the Effective Time with
respect to Salisbury Common Stock and payable to the holders of record thereof
shall be paid to the holder of any unsurrendered Certificate until the holder
thereof shall surrender such Certificate in accordance with this Article II.
After the surrender of a Certificate in accordance with this Article II, the
record holder thereof shall be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Salisbury Common Stock represented by such
Certificate. No holder of an unsurrendered Certificate shall be entitled, until
the surrender of such Certificate, to vote the shares of Salisbury Common Stock
into which the Canaan Common Stock shall have been converted.
(c) If any certificate representing shares of Salisbury Common Stock is to be
issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Salisbury Common Stock in any name other
than that of the registered holder of the Certificate surrendered, or shall
establish to the satisfaction of the Exchange Agent that such tax has been paid
or is not payable.
(d) As of the close of business on the day immediately prior to the Effective
Time, there shall be no transfers on the stock transfer books of Canaan of the
shares of Canaan Common Stock which were issued and outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates
representing such shares are presented for transfer to the Exchange Agent, they
shall be canceled and exchanged for certificates representing shares of
Salisbury Common Stock as provided in this Article II.
(e) Any portion of the Exchange Fund that remains unclaimed by the shareholders
of Canaan for six months after the Effective Time shall be returned to
Salisbury. After such funds have been returned to Salisbury, any shareholders of
Canaan who have not theretofore complied with this Article II shall thereafter
look only to Salisbury for payment of the Merger Consideration, cash in lieu of
fractional shares and unpaid dividends and distributions on Salisbury Common
Stock deliverable in respect of each share of Canaan Common Stock such
shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of Salisbury,
Canaan, the Exchange Agent or any other person shall be liable to any former
holder of shares of Canaan Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(f) In the event any Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Certificate
to be lost, stolen or destroyed and, if required by Salisbury, the posting by
such person of a bond in such amount as Salisbury may reasonably direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Salisbury Common Stock and cash in lieu of
fractional shares deliverable in respect thereof pursuant to this Agreement.
A-7
2.3 DISCLOSURE SCHEDULE. Prior to the execution and delivery hereof, Canaan has
delivered to Salisbury a schedule (the "Canaan Disclosure Schedule"), and
Salisbury has delivered to Canaan a schedule (the "Salisbury Disclosure
Schedule"), in each case setting forth, among other things, items of which
disclosure is necessary or appropriate either in response to an express
disclosure requirement contained in a provision hereof or as an exception to one
or more of such party's representations or warranties contained in Articles III
or IV, as applicable, or to one or more of its covenants contained in Article V;
provided, however, that the mere inclusion of an item in a Disclosure Schedule
as an exception to a representation or warranty shall not be deemed an admission
by a party that such item represents a material exception or fact, event or
circumstance or that such item has had or would have a Material Adverse Effect
(as defined in Section 9.13) with respect to such party.
2.4 STANDARDS. No representation or warranty of Canaan contained in Article III
or of Salisbury contained in Article IV shall be deemed untrue or incorrect for
any purpose under this Agreement, and no party hereto shall be deemed to have
breached a representation or warranty for any purpose under this Agreement, as a
consequence of the existence or absence of any fact, circumstance or event
unless such fact, circumstance or event, individually or when taken together
with all other facts, circumstances or events inconsistent with any
representations or warranties contained in Article III, in the case of Canaan,
or Article IV, in the case of Salisbury, has had or would be reasonably certain
to have a Material Adverse Effect with respect to Canaan or Salisbury,
respectively.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CANAAN
Canaan hereby makes the following representations and warranties to Salisbury as
set forth in this Article III, each of which is being relied upon by Salisbury
as a material inducement to enter into and perform this Agreement. All of the
disclosure schedules of Canaan referenced below and thereby required of Canaan
pursuant to this Agreement, which disclosure schedules shall be cross-referenced
to the specific sections and subsections of this Agreement and delivered
herewith, are referred to herein as the "Canaan Disclosure Schedule."
3.1 CORPORATE ORGANIZATION.
(a) Canaan is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Canaan has the corporate power
and authority to own or lease all of its properties and assets and to carry on
its business as it is now being conducted, and is duly licensed or qualified to
do business in each jurisdiction in which the nature of its business conducted
by it or the character or location of any properties or assets owned or leased
by it makes such licensing or qualification necessary. Canaan is duly registered
as a bank holding company with the Board of Governors of the Federal Reserve
System ("FRB") under the Banking Holding Company Act of 1956, as amended
("BHCA"). The Articles of Incorporation and Bylaws of Canaan, copies of which
are included in Section 3.1(a) of the Canaan Disclosure Schedule, are true,
correct and complete copies of such documents as in effect as of the date of
this Agreement.
(b) Canaan National Bank is a national bank duly organized and validly existing
and in good standing under the laws of the United States of America. The deposit
accounts of Canaan National Bank are insured by the Federal Deposit Insurance
Corporation (the "FDIC") through the Bank Insurance Fund (the "BIF") to the
fullest extent permitted by law, and all premiums and assessments required in
connection therewith have been paid by Canaan National Bank. CNB Insurance
Agency, Inc., is the only Subsidiary of Canaan National Bank, and other than
Canaan National Bank, Canaan has no subsidiaries. Canaan National Bank has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted and is duly licensed
or qualified to do business in each jurisdiction in which the nature of its
business conducted by it or the character or the location of any properties or
assets owned or leased by it makes such licensing or qualification necessary.
The Certificate of Incorporation and Bylaws of each of Canaan National Bank, and
CNB Insurance Agency, Inc., copies of which have previously been delivered to
Salisbury, are true, correct and complete copies of such documents as in effect
as of the date of this Agreement.
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3.2 CAPITALIZATION.
(a) The authorized capital stock of Canaan consists of 3,000,000 shares of
Canaan Common Stock. As of the date hereof, there are: (x) 177,418 shares of
Canaan Common Stock issued and outstanding and no shares of Canaan Common Stock
are held in Canaan's treasury; (y) 15,290 shares of Canaan Common Stock reserved
for issuance upon exercise of outstanding stock options under the Canaan Stock
Plans; and (z) 48,000 shares of Canaan Common Stock reserved for issuance upon
exercise of the option to be issued to Salisbury pursuant to the Option
Agreement. As of the date hereof, no shares of Canaan Preferred Stock are
outstanding. All of the issued and outstanding shares of Canaan Common Stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of preemptive rights, with no personal liability attaching to the
ownership thereof. Except for the Option Agreement and outstanding options under
the Canaan Stock Plans, Canaan does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character calling for the purchase or issuance of any shares of Canaan Common
Stock or Canaan Preferred Stock or any other equity security of Canaan or any
securities representing the right to purchase or otherwise receive any shares of
Canaan Common Stock or any other equity security of Canaan. The names of the
optionees, the date of each option to purchase Canaan Common Stock granted, the
number of shares subject to each such option, the expiration date of each such
option, and the price at which each such option may be exercised under the
Canaan Stock Plans are set forth in Section 3.2(a) of the Canaan Disclosure
Schedule. Except as set forth at Section 3.2(a) of the Canaan Disclosure
Schedule, since December 31, 2002 Canaan has not issued any shares of its
capital stock or any securities convertible into or exercisable for any shares
of its capital stock, other than pursuant to the exercise of director or
employee stock options granted under the Canaan Stock Plans.
(b) Section 3.2(b) of the Canaan Disclosure Schedule sets forth a true, correct
and complete list of all direct or indirect Subsidiaries of Canaan as of the
date of this Agreement. Except as set forth at Section 3.2(b) of the Canaan
Disclosure Schedule, Canaan owns, directly or indirectly, all of the issued and
outstanding shares of capital stock of each of its Subsidiaries, free and clear
of all liens, charges, encumbrances and security interests whatsoever, and all
of such shares are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No Canaan Subsidiary has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
3.3 AUTHORITY; NO VIOLATION.
(a) Canaan has full corporate power and authority to execute and deliver this
Agreement and the Option Agreement and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Option Agreement and the consummation of the transactions contemplated
hereby and thereby have been duly and validly approved by the Board of Directors
of Canaan. The Board of Directors of Canaan has directed that this Agreement and
the transactions contemplated hereby be submitted to Canaan's shareholders for
approval at a meeting of such shareholders and, except for the adoption of this
Agreement by the requisite vote of Canaan's shareholders, no other corporate
proceedings on the part of Canaan (except for matters related to setting the
date, time, place and record date for the meeting) are necessary to approve this
Agreement or the Option Agreement or to consummate the transactions contemplated
hereby or thereby. This Agreement has been, and the Option Agreement will be,
duly and validly executed and delivered by Canaan and (assuming due
authorization, execution and delivery by Salisbury of this Agreement and by
Salisbury of the Option Agreement) will constitute valid and binding obligations
of Canaan, enforceable against Canaan in accordance with their terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
(b) Canaan National Bank has full corporate power and authority to execute and
deliver the Subsidiary Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Subsidiary Bank Merger
Agreement and the consummation of the transactions contemplated thereby have
been duly and validly approved by the Board of Directors of Canaan National Bank
and by Canaan as the sole shareholder of Canaan National Bank. All corporate
proceedings on the part of Canaan National Bank necessary to consummate the
transactions contemplated thereby will have been taken prior to the Effective
Time. The Subsidiary Bank Merger Agreement, upon execution and delivery by
Canaan National Bank, will be duly and validly executed and delivered by Canaan
National Bank and will (assuming due authorization, execution and delivery by
Salisbury Bank) constitute a valid and binding obligation of Canaan National
Bank, enforceable against Canaan National Bank in accordance with its terms,
except as enforcement may be limited by general principles of equity, whether
applied in a court of law or a court of equity, and by bankruptcy, insolvency
and similar laws affecting creditors' rights and remedies generally.
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(c) Neither the execution and delivery of this Agreement and the Option
Agreement by Canaan or the Subsidiary Bank Merger Agreement by Canaan National
Bank, nor the consummation by Canaan or Canaan National Bank, as the case may
be, of the transactions contemplated hereby or thereby, nor compliance by Canaan
or Canaan National Bank with any of the terms or provisions hereof or thereof,
will (i) violate any provision of the Certificate of Incorporation or Bylaws of
Canaan or the Certificate of Incorporation or Bylaws of Canaan National Bank, or
(ii) assuming that the consents and approvals referred to in Section 3.4 hereof
are duly obtained, (x) violate any Laws (as defined in Section 9.13) applicable
to Canaan or Canaan National Bank, or any of their respective properties or
assets, or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, or result in the creation of any lien, pledge,
security interest, charge or other encumbrance upon any of the respective
properties or assets of Canaan or Canaan National Bank under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other instrument or obligation to which Canaan or
Canaan National Bank is a party, or by which they or any of their respective
properties or assets may be bound or affected, except in the case of clause (ii)
for such matters as would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on Canaan or Canaan National Bank or
any Subsidiaries of either, or materially impair their ability to consummate the
transactions contemplated by the Agreement.
3.4 CONSENTS AND APPROVALS.
(a) Except for (i) the filing of applications and notices, as applicable, as to
the Merger with the FRB under the BHCA and with the Office of the Comptroller of
the Currency (the "OCC") or the FDIC with respect to the Bank Merger Act, as to
the Bank Merger with Salisbury Bank, (ii) the filing of applications and notices
with the Banking Commissioner of the State of Connecticut (the "Connecticut
Commissioner"), as well as any other applications and notices to state officials
related to the Merger and the Bank Merger (the "State Banking Approvals"), (iii)
the filing with the Connecticut Commissioner of an acquisition statement
pursuant to Section 36a-184 of the Banking Law of the State of Connecticut prior
to the acquisition of more than 10% of Canaan Common Stock pursuant to the
Option Agreement, if not exempt, (iv) the filing of any required applications or
notices with the FDIC and OCC as to any subsidiary activities of Canaan National
Bank which becomes a service corporation or operating subsidiary of Salisbury
Bank and approval of such applications and notices, (v) the filing with the
United States Securities and Exchange Commission (the "SEC") of a registration
statement on Form S-4 by Salisbury to register the shares of Salisbury Common
Stock to be issued in connection with the Merger (including the shares of
Salisbury Common Stock that may be issued upon the exercise of the options
referred to in Section 1.5 hereof), which will include the Proxy
Statement/Prospectus to be used in soliciting the approval of shareholders of
Canaan at a meeting to be held in connection with this Agreement and the
transactions contemplated hereby (the "Proxy Statement/Prospectus"), (vi) the
filing of the Certificate of Merger with the Secretary of the State of
Connecticut pursuant to the Connecticut Corporation Law; (vii) the filing of the
Certificate of Merger with the Secretary of the State of Delaware pursuant to
the DGCL, (viii) the filing of the Subsidiary Bank Merger Agreement with the
FDIC, Connecticut Commissioner and the Secretary of the State of Connecticut,
(ix) such filings and approval as may be required to be made or obtained under
the securities or "Blue Sky" laws of various states or with Nasdaq (or such
other exchange as may be applicable), (x) the filing of the required application
and notices to American Stock Exchange ("AMEX"), and (xi) such filings,
authorizations or approvals as may be set forth in Section 3.4(a) of the Canaan
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity"), or with any third
party are necessary in connection with (1) the execution and delivery by Canaan
of this Agreement and the Option Agreement, (2) the consummation by Canaan of
the Merger and the other transactions contemplated hereby, (3) the execution and
delivery by Canaan National Bank of the Subsidiary Bank Merger Agreement, (4)
the consummation by Canaan of the Option Agreement; and (5) the consummation by
Canaan National Bank of the Bank Merger and the transactions contemplated
thereby, except, in each case, for such consents, approvals or filings, the
failure of which to obtain will not have a material adverse effect on the
ability of Canaan to consummate the transactions contemplated hereby.
(b) Canaan hereby represents to Salisbury that it has no knowledge of any reason
why approval or effectiveness of any of the applications, notices or filings
referred to in Section 3.4(a) cannot be obtained or granted on a timely basis.
3.5 LOAN PORTFOLIO; REPORTS.
(a) Except as set forth at Section 3.5(a) of the Canaan Disclosure Schedule, as
of December 31, 2002 and thereafter through and including the date of this
Agreement, neither Canaan, Canaan National Bank nor any of their Subsidiaries is
a party to any written or oral loan agreement, note or borrowing arrangement
(including, without limitation, leases, credit enhancements, commitments,
guarantees and interest-bearing assets) (collectively, "Loans"), with any
director, officer or five percent or greater shareholder of Canaan or Canaan
National Bank, or any Affiliated Person (as defined in Section 9.13) of the
foregoing.
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(b) Canaan, Canaan National Bank and each of their Subsidiaries have timely
filed all reports, registrations and statements, together with any amendments
required to be made with respect thereto, that they were required to file with
(i) the FRB, (ii) the FDIC, (iii) the Connecticut Commissioner and any other
state banking commissioners or any other state regulatory authority (each a
"State Regulator"), (iv) the SEC, (v) any other self-regulatory organization
("SRO"), and (vi) the OCC. Except for normal examinations conducted by a
regulatory agency in the regular course of the business of Canaan and any
Subsidiary, no Governmental Entity is conducting, or has conducted at any time
subsequent to December 31, 2000, any proceeding or investigation into the
business or operations of Canaan or its Subsidiaries.
3.6 FINANCIAL STATEMENTS; EXCHANGE ACT FILINGS; BOOKS AND RECORDS. Canaan has
previously delivered to Salisbury true, correct and complete copies of the
consolidated statements of financial position of Canaan and its Subsidiaries as
of December 31 for the fiscal year 2002 and the related consolidated statements
of earnings, shareholders' equity and cash flows for the fiscal years 2001 and
2002, inclusive, as reported in Canaan's Annual Report for the fiscal year ended
2002, within forty-five (45) days of execution of this Agreement, the financial
statements for the year 2002 shall be accompanied by the audit report of
Canaan's independent public accountants. The financial statements referred to in
this Section 3.6 (including the related notes, where applicable) fairly present,
and the financial statements referred to in Section 6.8 hereof will fairly
present (subject, in the case of the unaudited statements, to recurring audit
adjustments normal in nature and amount), the results of the consolidated
operations and consolidated financial condition of Canaan and its Subsidiaries
for the respective fiscal periods or as of the respective dates therein set
forth. Each of such statements (including the related notes, where applicable)
comply, and the financial statements referred to in Section 6.8 hereof will
comply, with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, and each of such statements
(including the related notes, where applicable) has been, and the financial
statements referred to in Section 6.8 hereof will be prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied during
the periods involved, except in each case as indicated in such statements or in
the notes thereto or, in the case of unaudited statements, as permitted by
Regulation S-X. The financial statements reflecting Canaan's Annual Report for
the fiscal year ended December 31, 2002 when accompanied by the audit report of
Canaan's independent public accountants will comply in all material respects
with the appropriate applicable requirements for such reports under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The books and
records of Canaan and each of its Subsidiaries have been and are being,
maintained in all material respects in accordance with GAAP and any other
applicable legal and accounting requirements.
3.7 BROKER'S FEES. Neither Canaan, Canaan National Bank, any of their
Subsidiaries nor any of their respective officers or directors has employed any
broker or finder or incurred any liability for any broker's fees, commissions or
finder's fees in connection with any of the transactions contemplated by this
Agreement, the Subsidiary Bank Merger Agreement or the Option Agreement, except
that Canaan has engaged, and will pay a financial advisor's fee to HAS
Associates, Inc. ("HAS") in accordance with the terms of a letter agreement
between HAS and Canaan, a true, complete and correct copy of which is attached
at Section 3.7 of the Canaan Disclosure Schedule. Such fee to HAS is the only
fee, commission or other expense to be incurred by or on behalf of Canaan,
Canaan National Bank or any Subsidiary with respect to any financial advisor,
broker or finder in connection with the Merger and the transactions contemplated
thereby.
3.8 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth at Section 3.8(a) of the Canaan Disclosure Schedule, or
as disclosed in Canaan's Annual Report for the fiscal year ended December 31,
2002, since December 31, 2002 (i) neither Canaan nor any Subsidiary has incurred
any material liability, except as contemplated by the Agreement or in the
ordinary course of their business consistent with their past practices, and (ii)
no event has occurred which has had, or is likely to have, individually or in
the aggregate, a Material Adverse Effect (as defined in Section 9.13) on Canaan
or its Subsidiaries.
(b) Since December 31, 2002 Canaan and each of its Subsidiaries have carried on
their respective businesses in the ordinary and usual course consistent with
their past practices.
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3.9 LEGAL PROCEEDINGS.
(a) Except as set forth at Section 3.9(a) of the Canaan Disclosure Schedule,
neither Canaan, Canaan National Bank nor any of their Subsidiaries is a party to
any, and there are no pending or to the knowledge of Canaan, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Canaan, Canaan
National Bank or any Subsidiary in which, to the knowledge of Canaan or any
Subsidiary, there is a reasonable probability of any material recovery against
or other material effect upon Canaan or any Subsidiary, or which challenge the
validity or propriety of the transactions contemplated by this Agreement, the
Subsidiary Bank Merger Agreement or the Option Agreement and as to which there
is a reasonable probability of success.
(b) There is no injunction, order, judgment, decree, or regulatory restriction
imposed upon Canaan, Canaan National Bank or any of their Subsidiaries, or the
assets of Canaan, Canaan National Bank or any of their Subsidiaries.
3.10 TAXES AND TAX RETURNS.
(a) Each of Canaan, Canaan National Bank and their Subsidiaries have duly filed
all Tax Returns, as hereinafter defined, required to be filed by it on or prior
to the date hereof (all such returns being accurate and complete in all material
respects) and has duly paid or made provision (or will make provision) on the
financial statements referred to in Sections 3.6 and 6.8 hereof in accordance
with GAAP for the payment of all material Taxes, as hereinafter defined, which
have been incurred or are due or claimed to be due from them by Taxing
Authorities, as hereinafter defined, on or prior to the date hereof other than
Taxes (a) which (x) are not yet delinquent or (y) are being contested in good
faith and set forth in Section 3.10(a) of the Canaan Disclosure Schedule and (b)
which have not been finally determined. All liability with respect to the Tax
Returns of Canaan and any Subsidiary has been satisfied for all years to and
including 2002. The Internal Revenue Service ("IRS") has not notified Canaan of,
or otherwise asserted, that there are any material deficiencies with respect to
the federal income Tax Returns of Canaan or any Subsidiaries. There are no
material disputes pending, or claims asserted for, Taxes or assessments upon
Canaan or any Subsidiaries, nor has Canaan or any Subsidiary been requested to
give any currently effective waivers extending the statutory period of
limitation applicable to any federal or state income Tax Return for any period.
In addition, Tax Returns which are accurate and complete in all material
respects have been filed by Canaan and each Subsidiary for all periods for which
returns were due with respect to income tax withholding, Social Security and
unemployment taxes and the amounts shown on such Tax Returns to be due and
payable have been paid in full or adequate provision therefor in accordance with
GAAP has been (or will be) included by Canaan in the financial statements
referred to in Sections 3.6 and 6.8 hereto. All Canaan Tax Returns which have
been examined by the relevant Taxing Authorities, or closed without audit by
applicable statutes of limitations, and all deficiencies proposed as a result of
such examinations have been paid or settled, for all periods. Neither Canaan nor
any Subsidiary has consented to any waiver or extension of any statute of
limitations with respect to any Tax. Neither Canaan nor any Subsidiary has made
an election under Section 341(f) of the IRC. Canaan has provided or made
available to Salisbury complete and correct copies of its and its Subsidiaries'
Tax Returns and all material correspondence and documents, if any, relating
directly or indirectly to taxes for each taxable year or other relevant period
as to which the applicable statute of limitations has not run on the date
hereof. For this purpose, "correspondence and documents" include, without
limitation, amended Tax Returns, claims for refunds, notices from Taxing
Authorities of proposed changes or adjustments to Taxes or Tax Returns, consents
to assessment or collection of Taxes, acceptances of proposed adjustments,
closing agreements, rulings and determination letters and requests therefor, and
all other written communications to or from Taxing Authorities relating to any
material Tax liability of Canaan or any Subsidiaries. Neither Canaan nor any
Subsidiaries will be a "foreign person" as that term is used in section 1.1445-2
of the Treasury Regulations promulgated under the IRC. Canaan National Bank is
not a "United States real property holding corporation" within the meaning of
section 897 of the IRC and was not a "United States real property holding
corporation" on any "determination date" (as defined in section 1.897-2(c) of
such Regulations) that occurred during any relevant period.
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(b) For purposes of this Agreement: "Tax" means any tax (including any income
tax, capital gains tax, value-added tax, sales tax, property tax, gift tax, or
estate tax), levy, assessment, tariff, duty (including any customs duty),
deficiency, or other fee, and any related charge or amount (including any fine,
penalty, interest, or addition to tax), imposed, assessed, or collected by or
under the authority of any Taxing Authority or payable pursuant to any
tax-sharing agreement or any other contract relating to the sharing or payment
of any such tax, levy, assessment, tariff, duty, deficiency, or fee. "Tax
Return" means any return (including any information return), report, statement,
schedule, notice, form, or other document or information filed with or submitted
to, or required to be filed with or submitted to, any Taxing Authority in
connection with the determination, assessment, collection, or payment of any Tax
or in connection with the administration, implementation, or enforcement of or
compliance with any law, regulation or other legal requirement relating to any
Tax. "Taxing Authority" means any: (i) nation, state, county, city, town,
village, district, or other jurisdiction of any nature; (ii) federal, state,
local, municipal, foreign, or other government; (iii) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official, or entity and any court or other tribunal); (iv)
multi-national organization or body; or (v) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police,
regulatory, or taxing authority or power of any nature.
3.11 EMPLOYEE PLANS.
(a) Section 3.11(a) of the Canaan Disclosure Schedule sets forth a true and
complete list of each employee benefit plan (within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
arrangement or agreement that is maintained or contributed to as of the date of
this Agreement, or that has within the last six years been maintained or
contributed to, by Canaan or any Subsidiary or any other entity which together
with Canaan would be deemed a "single employer" within the meaning of Section
4001 of ERISA or Code Sections 414(b), (c) or (m) or under which Canaan or any
Subsidiary has any liability (collectively, the "Plans").
(b) Canaan has heretofore delivered or made available to Salisbury true, correct
and complete copies of each of the Plans and all related documents, including
but not limited to (i) the actuarial report for such Plan (if applicable) for
each of the last five years, (ii) the most recent determination letter from the
IRS (if applicable) for such Plan, (iii) the current summary plan description
and any summaries of material modification, (iv) all annual reports (Form 5500
series) for each Plan filed for the preceding five plan years, (v) all
agreements with fiduciaries and service providers relating to the Plan, and (vi)
all substantive correspondence relating to any such Plan addressed to or
received from the Internal Revenue Service, the Department of Labor, the Pension
Benefit Guaranty Corporation or any other governmental agency.
(c) Except as set forth at Section 3.11 (c) of the Canaan Disclosure Schedule,
(i) each of the Plans has been operated and administered in all material
respects in compliance with applicable Laws, including but not limited to ERISA
and the Code; (ii) each of the Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified; (iii) no such Plan is
subject to Title IV of ERISA; (iv) no Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured), with respect to
current or former employees of Canaan or any Subsidiary beyond their retirement
or other termination of service, other than (w) coverage mandated by applicable
Law, (x) benefits under a Plan that is a "qualified plan," for purposes of
Section 401(a) of the Code, (y) deferred compensation benefits under a Plan that
are accrued as liabilities on the books of Canaan or any Subsidiary, or (z)
benefits the full cost of which is borne by the current or former employee (or
his beneficiary); (v) no liability under Title IV of ERISA has been incurred by
Canaan or any Subsidiary that has not been satisfied in full, and no condition
exists that presents a material risk of Canaan or any Subsidiary incurring a
material liability thereunder; (vi) no Plan is a "multiemployer pension plan,"
as such term is defined in Section 3(37) of ERISA; (vii) all contributions or
other amounts payable by Canaan or any Subsidiary as of the Effective Time with
respect to each Plan and all other liabilities of each such entity with respect
to each Plan, in respect of current or prior plan years have been paid or
accrued in accordance with generally accepted accounting practices and Section
412 of the Code; (viii) neither Canaan nor any Subsidiary has engaged in a
transaction in connection with which Canaan or any Subsidiary could be subject
to either a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or
a tax imposed penalty pursuant to Section 4975 or 4976 of the Code; (ix) to the
knowledge of Canaan, there are no pending, threatened or anticipated claims
(other than routine claims for benefits) by, on behalf of or against any of the
Plans or any trusts related thereto; (x) all Plans could be terminated as of the
Effective Time without any liability materially in excess of the amounts accrued
with respect to such Plans on the financial statements referenced in Section 3.6
hereof and, for the purposes of Section 7.2(a) hereof, on the financial
statements referred to in Section 6.8 hereof; (xi) no Plan, program, agreement
or other arrangement, either individually or collectively, provides for any
payment by Canaan or any Subsidiary that would not be deductible under Code
Sections 162(a)(1), 162(m) or 404 or that would constitute a "parachute payment"
within the meaning of Code Section 280G; and (xii) no Plan is subject to the
minimum funding requirements of Section 302 of ERISA or Section 412 of the Code.
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3.12 CERTAIN CONTRACTS.
(a) Except as set forth at Section 3.12(a) of the Canaan Disclosure Schedule,
neither Canaan nor any Subsidiary is a party to or bound by any contract,
arrangement or commitment (i) with respect to the employment of any directors,
officers, employees or consultants, (ii) which, upon the consummation of the
transactions contemplated by this Agreement or the Subsidiary Bank Merger
Agreement, will (either alone or upon the occurrence of any additional acts or
events) result in any payment (whether of severance pay or otherwise) becoming
due from Salisbury, Canaan, Canaan National Bank, Salisbury Bank or any of their
respective Subsidiaries to any director, officer or employee of Canaan or any
Subsidiary, (iii) which materially restricts the conduct of any line of business
by Canaan or any Subsidiary, (iv) with or to a labor union or guild (including
any collective bargaining agreement) or (v) any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated by the
occurrence of any of the transactions contemplated by this Agreement or the
Subsidiary Bank Merger Agreement, or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by this
Agreement or the Subsidiary Bank Merger Agreement (including as to this clause
(v), any stock option plan, stock appreciation rights plan, restricted stock
plan or stock purchase plan). Except as set forth at Section 3.12(a) of the
Canaan Disclosure Schedule, there are no employment, consulting and deferred
compensation agreements to which Canaan or any of its Subsidiaries is a party.
Section 3.12(a) of the Canaan Disclosure Schedule sets forth a list of all
material contracts (as defined in Item 601(b)(10) of Regulation S-K) of Canaan
and each of its Subsidiaries. Each contract, arrangement or commitment of the
type described in this Section 3.12(a), whether or not set forth in Section 3.12
of the Canaan Disclosure Schedule, is referred to herein as a "Canaan Contract,"
and neither Canaan nor any Subsidiary has received notice of, any violation of
any Canaan Contract by Canaan.
(b) (i) Each Canaan Contract is valid and binding and in full force and effect,
(ii) Canaan and its Subsidiaries has in all material respects performed all
obligations required to be performed by it to date under each Canaan Contract,
and (iii) no event or condition exists which constitutes or, after notice or
lapse of time or both, would constitute, a material default on the part of
Canaan or any Subsidiary under any such Canaan Contract.
(c) Each of the Executive Officers of Canaan, listed on Schedule 3.12(c) of the
Canaan Disclosure Schedule has executed a valid waiver of his or her rights
pursuant to the Canaan Change in Control Plan and Canaan has provided such
waivers to Salisbury as Section 3.12(c) of the Canaan Disclosure Schedule.
(d) The Schedule of Potential Benefits payable to officers and employees of
Canaan provided by Canaan at Section 3.12(d) of the Canaan Disclosure Schedules
is accurate and complete in all material respects.
3.13 AGREEMENTS WITH GOVERNMENTAL AGENCIES. Neither Canaan nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or has adopted any board resolutions at the request of any
Governmental Entity that restricts the conduct of its business or that in any
manner relates to its capital adequacy, its credit policies, its management or
its business, nor has Canaan or any Subsidiary been advised by any Governmental
Entity that it is considering issuing or requesting any Regulatory Agreement. To
the best of its knowledge, Canaan is in compliance, in the conduct of its
business, with all applicable federal, state, local and foreign statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable thereto
or applicable to the employees conducting such businesses, including the
Sarbanes-Oxley Act of 2002, the Equal Credit Opportunity Act, the Fair Housing
Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, all other
applicable fair lending laws or other laws relating to discrimination and the
Bank Secrecy Act, and, Canaan National Bank has a Community Reinvestment Act
rating of "satisfactory" or better.
3.14 STATE TAKEOVER LAWS; CERTIFICATE OF INCORPORATION. The Board of Directors
of Canaan has approved the offer of Salisbury to enter into this Agreement, the
Subsidiary Bank Merger Agreement and the Option Agreement, and has approved
Canaan entering into this Agreement, the Subsidiary Bank Merger Agreement and
the Option Agreement, and the transactions contemplated thereby, such that under
applicable law and Canaan's Certificate of Incorporation the only vote of Canaan
shareholders necessary to consummate the transactions contemplated hereby
(including the Bank Merger and issuance of Canaan Common Stock under the Option
Agreement) is the approval of a majority of all votes entitled to be cast by the
holders of the outstanding shares of Canaan Common Stock.
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3.15 ENVIRONMENTAL MATTERS.
(a) Each of Canaan and its Subsidiaries is in compliance in all respects with
all applicable federal and state laws and regulations relating to pollution or
protection of the environment (including without limitation, laws and
regulations relating to emissions, discharges, releases and threatened releases
of Hazardous Material (as hereinafter defined), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, except for such matters as would
not individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect on Canaan or any of its Subsidiaries or materially impair their
ability to consummate the transactions contemplated by this Agreement.
(b) There is no suit, claim, action, proceeding, investigation or notice
pending, or to the knowledge of Canaan or any of its Subsidiaries, threatened,
in which Canaan or any of its Subsidiaries has been or, with respect to
threatened suits, claims, actions, proceedings, investigations or notices, is
threatened to be, named as a defendant or, to the knowledge of Canaan or any of
its Subsidiaries, threatened with respect to past or present actions or events
that could form the basis of any such suit, claim, action, proceeding,
investigation or notice (x) for alleged noncompliance (including by any
predecessor), with any environmental law, rule or regulation or (y) relating to
any release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a site owned, leased or operated by
Canaan or any Subsidiary, except for such matters as would not individually or
in the aggregate, be reasonably expected to have a Material Adverse Effect on
Canaan or any Subsidiary or materially impair their ability to consummate the
transactions contemplated by this Agreement;
(c) To the knowledge of Canaan or any Subsidiary, during the period of Canaan's
or any Subsidiary's ownership or operation of any of its properties, there has
not been any release of Hazardous Material in, on, under or affecting any such
property.
(d) Except as set forth at Section 3.15(d) of the Canaan Disclosure Schedule, to
the knowledge of Canaan and any of its Subsidiaries, neither Canaan nor any of
its Subsidiaries has made or participated in any loan to any person who is
subject to any suit, claim, action, proceeding, investigation or notice, pending
or threatened, with respect to (i) any alleged noncompliance as to any property
securing such loan with any environmental law, rule or regulation, or (ii) the
release or the threatened release into the environment of any Hazardous Material
at a site owned, leased or operated by such person on any property securing such
loan.
(e) For purposes of this Section 3.15, the term "Hazardous Material" means any
hazardous waste, petroleum product, polychlorinated biphenyl, chemical,
pollutant, contaminant, pesticide, radioactive substance, or other toxic
material, or other material or substance (in each such case, other than small
quantities of such substances in retail containers) regulated under any
applicable environmental or public health statute, law, ordinance, rule or
regulation.
(f) Except as set forth at Section 3.15(f) of the Canaan Disclosure Schedule, no
real property owned or leased by Canaan or any of its Subsidiaries as other real
estate owned ("OREO") or otherwise, or owned or controlled by Canaan or any
Subsidiary as a trustee or fiduciary meets the statutory criteria of an
"Establishment" as that term is defined pursuant to Section 22a-134(3) of the
General Statutes of Connecticut.
3.16 RESERVES FOR LOSSES. All reserves or other allowances for possible losses
reflected in Canaan's financial statements referred to in Section 3.6 and all
subsequent quarterly periods complied with all Laws and are adequate under GAAP.
Neither Canaan nor Canaan National Bank has been notified by the FRB, the FDIC,
the OCC, the Connecticut Commissioner or Canaan's independent auditor, or anyone
engaged by Canaan or Canaan National Bank to perform loan review services at
Canaan National Bank in writing or otherwise, that such reserves are inadequate
or that the practices and policies of Canaan or Canaan National Bank in
establishing such reserves and in accounting for delinquent and classified
assets generally fail to comply with applicable accounting or regulatory
requirements, or that the FRB, the FDIC, the OCC, the Connecticut Commissioner
or Canaan's independent auditor believes such reserves to be inadequate or
inconsistent with the historical loss experience of Canaan or Canaan National
Bank. Canaan has previously furnished Salisbury with a complete list of all
extensions of credit and OREO that have been classified by any bank or trust
examiner (regulatory or internal) as other loans specially mentioned, special
mention, substandard, doubtful, loss, classified or criticized, credit risk
assets, concerned loans or words of similar import. Canaan agrees to update such
list no less frequently than monthly after the date of this Agreement until the
earlier of the Closing Date or the date that this Agreement is terminated in
accordance with Section 8.1. All OREO held by Canaan or Canaan National Bank is
being carried net of reserves at the lower of cost or net realizable value.
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3.17 PROPERTIES AND ASSETS. Section 3.17 of the Canaan Disclosure Schedule lists
as of the date of this Agreement (i) all real property owned by Canaan and any
Subsidiary; (ii) each real property lease, sublease or installment purchase
arrangement to which Canaan or any Subsidiary is a party; (iii) a description of
each contract for the purchase, sale, or development of real estate to which
Canaan or any Subsidiary is a party; and (iv) all items of Canaan's or any
Subsidiary's tangible personal property and equipment with a book value of
$5,000 or more or having any annual lease payment of $2,500 or more. Except for
(a) items reflected in Canaan's consolidated financial statements as of December
31, 2002 referred to in Section 3.6 hereof, (b) exceptions to title that do not
interfere materially with Canaan's or any Subsidiary's use and enjoyment of
owned or leased real property (other than OREO), (c) liens for current real
estate taxes not yet delinquent, or being contested in good faith, properly
reserved against (and reflected on the financial statements referred to in
Section 3.6 above), (d) properties and assets sold or transferred in the
ordinary course of business consistent with past practices since December 31,
2002, and (e) items listed in Section 3.17 of the Canaan Disclosure Schedule,
Canaan and its Subsidiaries have good and, as to owned real property, marketable
and insurable, title to all their properties and assets, free and clear of all
liens, claims, charges and other encumbrances. Canaan and its Subsidiaries, as
lessees, have the right under valid and subsisting leases to occupy, use and
possess all property leased by them, and neither Canaan nor any Subsidiary has
experienced any material uninsured damage or destruction with respect to such
properties since December 31, 2002. All properties and assets used by Canaan and
any of its Subsidiaries are in good operating condition and repair suitable for
the purposes for which they are currently utilized and comply in all material
respects with all Laws relating thereto now in effect or scheduled to come into
effect. Canaan and its Subsidiaries enjoy peaceful and undisturbed possession
under all leases for the use of all property under which they are the lessees,
and all leases to which Canaan or its Subsidiaries are a party are valid and
binding obligations in accordance with the terms thereof. Neither Canaan nor any
Subsidiary is in default with respect to any such lease, and there has occurred
no default by Canaan or any Subsidiary or event which with the lapse of time or
the giving of notice, or both, would constitute a material default under any
such lease. There are no Laws, conditions of record, or other impediments which
interfere with the intended use by Canaan or any Subsidiary of any of the
property owned, leased, or occupied by them.
3.18 INSURANCE. Section 3.18 of the Canaan Disclosure Schedule contains a true,
correct and complete list of all insurance policies and bonds maintained by
Canaan and its Subsidiaries, including the name of the insurer, the policy
number, the type of policy and any applicable deductibles, and all such
insurance policies and bonds (or other insurance policies and bonds that have,
from time to time, in respect of the nature of the risks insured against and
amount of coverage provided, been substantially similar in kind and amount to
that customarily carried by parties similarly situated who own properties and
engage in businesses substantially similar to that of Canaan and its
Subsidiaries, as the case may be) are in full force and effect and have been in
full force and effect. As of the date hereof, neither Canaan nor any Subsidiary
has received any notice of cancellation or amendment of any such policy or bond
or is in default under any such policy or bond, no coverage thereunder is being
disputed and all material claims thereunder have been filed in a timely fashion.
The existing insurance carried by Canaan and its Subsidiaries is and will
continue to be, in respect of the nature of the risks insured against and the
amount of coverage provided, substantially similar in kind and amount to that
customarily carried by parties similarly situated who own properties and engage
in businesses substantially similar to that of Canaan and its Subsidiaries, as
the case may be, and is sufficient for compliance by Canaan and its Subsidiaries
with all requirements of Law and agreements to which Canaan or its Subsidiaries
is subject or is party. True, correct and complete copies of all such policies
and bonds reflected at Section 3.18 of the Canaan Disclosure Schedule, as in
effect on the date hereof, have been delivered to Salisbury.
3.19 CNB INSURANCE AGENCY, INC (the "Agency"). The Agency is a wholly owned
subsidiary of Canaan National Bank, and is a corporation duly organized and
validly existing under the laws of the State of Connecticut. The Agency has the
full corporate power and authority to own and operate its properties and assets,
and to carry on its business as currently conducted and is duly licensed or
qualified to do business in each jurisdiction in which the nature of its
business conducted by it or the character or location of any properties or
assets owned or leased by it makes such licensing or qualification necessary.
The Agency is licensed in all states where the nature of its operations requires
it to be so licensed. The Agency has complied in all material respects with all
applicable federal, state, local, self-regulatory and foreign laws, statutes,
ordinances, rules and regulations, and is not in violation in any material
respect of, and has not received any notices of violation with respect to, its
respective certificate or articles of incorporation or bylaws or other charter
or organizational documents, or any federal, state, local, self-regulatory or
foreign statute, law, ordinance, rule or regulation applicable to the conduct of
its business or the ownership or operation of its business.
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3.20 COMPLIANCE WITH APPLICABLE LAWS. Each of Canaan, Canaan National Bank and
their Subsidiaries has complied in all material respects with all Laws
applicable to it or to the operation of its business. Neither Canaan nor any
Subsidiary has received any notice of any material alleged or threatened claim,
violation of, or liability or potential responsibility under any such Laws that
has not heretofore been cured and for which there is no remaining liability.
3.21 LOANS. As of the date hereof:
(a) All loans owned by Canaan, Canaan National Bank or any of their
Subsidiaries, or in which Canaan, Canaan National Bank or any of their
Subsidiaries has an interest, comply in all material respects with all Laws,
including, but not limited to, applicable usury statutes, underwriting and
recordkeeping requirements and the Truth in Lending Act, the Equal Credit
Opportunity Act, and the Real Estate Procedures Act, and other applicable
consumer protection statutes and the regulations thereunder.
(b) All loans owned by Canaan, Canaan National Bank or any of their
Subsidiaries, or in which Canaan, Canaan National Bank or any of their
Subsidiaries has an interest, have been made or acquired in accordance with
board of director-approved loan policies and all of such loans are collectible,
except to the extent reserves have been made against such loans in Canaan's
consolidated financial statements at December 31, 2002, March 31, 2003 and June
30, 2003 referred to in Section 3.6 hereof. Each of Canaan, Canaan National Bank
and any of their Subsidiaries holds mortgages contained in its loan portfolio
for its own benefit to the extent of its interest shown therein; such mortgages
evidence liens having the priority indicated by their terms, subject, as of the
date of recordation or filing of applicable security instruments, only to such
exceptions as are discussed in attorneys' opinions regarding title or in title
insurance policies in the mortgage files relating to the loans secured by real
property or are not material as to the collectability of such loans; and all
loans owned by Canaan, Canaan National Bank and any of their Subsidiaries are
with full recourse to the borrowers (except as set forth at Section 3.21(b) of
the Canaan Disclosure Schedule), and each of Canaan, Canaan National Bank and
any of their Subsidiaries has taken no action which would result in a waiver or
negation of any rights or remedies available against the borrower or guarantor,
if any, on any loan. All applicable remedies against all borrowers and
guarantors are enforceable except as may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting creditors' rights and except as may
be limited by the exercise of judicial discretion in applying principles of
equity. Except as set forth at Section 3.21(b) of the Canaan Disclosure
Schedule, all loans purchased or originated by Canaan, Canaan National Bank or
any of their Subsidiaries and subsequently sold by Canaan, Canaan National Bank
or any of their Subsidiaries have been sold without recourse to Canaan, Canaan
National Bank or any of their Subsidiaries and without any liability under any
yield maintenance or similar obligation. True, correct and complete copies of
loan delinquency reports as of December 31, 2002, March 31, 2003, June 30, 2003
and August 31, 2003 prepared by Canaan, Canaan National Bank and any of their
Subsidiaries which reports include all loans delinquent or otherwise in default,
have been furnished to Salisbury. True, correct and complete copies of the
currently effective lending policies and practices of Canaan, Canaan National
Bank and any of their Subsidiaries also have been furnished to Salisbury.
(c) Except as set forth at Section 3.21(c) of the Canaan Disclosure Schedule,
each outstanding loan participation sold by Canaan, Canaan National Bank or any
of their Subsidiaries was sold with the risk of non-payment of all or any
portion of that underlying loan to be shared by each participant (including
Canaan, Canaan National Bank or any of their Subsidiaries) proportionately to
the share of such loan represented by such participation without any recourse of
such other lender or participant to Canaan, Canaan National Bank or any of their
Subsidiaries for payment or repurchase of the amount of such loan represented by
the participation or liability under any yield maintenance or similar
obligation. Canaan, Canaan National Bank and any of their Subsidiaries have
properly fulfilled in all material respects its contractual responsibilities and
duties in any loan in which it acts as the lead lender or servicer and has
complied in all material respects with its duties as required under applicable
regulatory requirements.
(d) Canaan, Canaan National Bank and their subsidiaries have in all material
respects properly perfected or caused to be properly perfected all security
interests, liens, or other interests in any collateral securing any loans made
by it.
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(e) Section 3.21(e) of the Canaan Disclosure Schedule sets forth a list of all
loans or other extensions of credit to all directors, officers and employees, or
any other person covered by Regulation O of the FRB.
3.22 AFFILIATES. Each director, executive officer and other person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act of 1933, as
amended (the "Securities Act") of Canaan is listed at Section 3.22 of the Canaan
Disclosure Schedule, and each director of Canaan has delivered to Salisbury,
concurrently with the execution of this Agreement, a stockholder agreement in
the form of Exhibit C hereto (the "Canaan Stockholder Agreement"). The Canaan
Stockholder Agreement has been duly and validly executed and delivered by each
person that is a party thereto and, assuming due authorization, execution and
delivery by Salisbury, constitutes the valid and binding obligation of such
person, enforceable against such person in accordance with their terms, except
as enforcement may be limited by general principles of equity whether applied in
a court of law or a court of equity and by bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally.
3.23 OWNERSHIP OF SALISBURY COMMON STOCK. Except as set forth at Section 3.23 of
the Canaan Disclosure Schedule, neither Canaan nor any of its directors,
officers, 5% or greater shareholders or affiliates (as used above in Section
3.22) (i) beneficially own, directly or indirectly, or (ii) is a party to any
agreement, arrangement or understanding for the purpose of acquiring, holding,
voting or disposing of, in each case, any shares of outstanding capital stock of
Salisbury (other than those agreements, arrangements or understandings
specifically contemplated hereby).
3.24 CHANGE IN CONTROL BENEFITS. The information provided by Canaan with respect
to the benefits to be paid, vested or accrued to any of the current or former
employees of Canaan or its subsidiaries in the event of a change in control are
set forth at Section 3.24 of the Canaan Disclosure Schedule.
3.25 INTELLECTUAL PROPERTY. Neither Canaan nor any Subsidiary has any material
undisclosed liability with respect to (i) patents, trademarks, trade names,
service marks, copyrights and any applications therefor, net lists, schematics,
technology, know-how, trade secrets, inventory, ideas, algorithms, processes,
computer software programs and applications (in both source code and object code
form), and tangible or intangible proprietary information or material that are
used in the business of Canaan or any Subsidiary or (ii) licenses, sublicenses
and other agreements as to which Canaan or any Subsidiary is a party and
pursuant to which Canaan or any Subsidiary is authorized to use any third party
patents, trademarks or copyrights, including software which are incorporated in,
or form a part of any Canaan or any Subsidiary product.
3.26 CANAAN INFORMATION. The information relating to Canaan and its Subsidiaries
to be provided by Canaan to be contained in the Proxy Statement/Prospectus
(defined below) and the Registration Statement (defined below) will not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances in which
they are made, not misleading. The Proxy Statement/Prospectus (except for the
portions thereof relating solely to Salisbury or any of its Subsidiaries, as to
which Canaan makes no representation or warranty) will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder.
3.27 FAIRNESS OPINION. Canaan has received a written fairness opinion from HAS
to the effect that, in its opinion, the consideration to be paid by Salisbury to
shareholders of Canaan pursuant to this Agreement is fair to such holders of
Canaan Common Stock from a financial point of view ("Fairness Opinion") and HAS
has consented to the inclusion of the written Fairness Opinion in the
Registration Statement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SALISBURY
Salisbury hereby makes the following representations and warranties to Canaan as
set forth in this Article IV, each of which is being relied upon by Canaan as a
material inducement to enter into and perform this Agreement.
4.1 CORPORATE ORGANIZATION.
(a) Salisbury is a corporation duly organized, validly existing and in good
standing under the laws of the State of Connecticut. Salisbury has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties or
assets owned or leased by it makes such licensing or qualification necessary.
Salisbury is duly registered as a holding company with the FRB under the BHCA.
The Certificate of Incorporation and Bylaws of Salisbury, copies of which are
included in Section 4.1(a) of the Salisbury Disclosure Schedule, are true,
correct and complete copies of such documents as in effect as of the date of
this Agreement.
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(b) Salisbury Bank is a state bank and trust company chartered by the State of
Connecticut under the laws of the United States with its main office in the
State of Connecticut. Salisbury Bank has the corporate power and authority to
own or lease all of its properties and assets and to carry on its business as it
is now being conducted, and is duly licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties or assets owned or leased by it makes
such licensing or qualification necessary. The Charter and Bylaws of Salisbury
Bank, copies of which have previously been made available to Canaan, are true,
correct and complete copies of such documents as in effect as of the date of
this Agreement.
4.2 CAPITALIZATION.
(a) The authorized capital stock of Salisbury consists of 3,000,000 shares of
Salisbury Common Stock (par value $.10 per share), of which 1,424,078 shares
were issued and outstanding at June 30, 2003. At such date, there were no
options outstanding to purchase any shares of Salisbury Common Stock, and 13,280
shares were reserved for issuance pursuant to the Salisbury Directors Stock
Retainer Plan. All of the issued and outstanding shares of Salisbury Common
Stock have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof, and upon issuance in accordance with the
terms hereof, the Shares will be duly authorized and validly issued, and fully
paid, nonassessable and free of preemptive rights. As of the date of this
Agreement, except as set forth above, Salisbury does not have and is not bound
by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any character calling for the purchase or issuance of any shares
of Salisbury Common Stock or Salisbury Preferred Stock or any other equity of
Salisbury or any securities representing the right to purchase or otherwise
receive any shares of Salisbury Common Stock or Salisbury Preferred Stock, other
than pursuant to the Salisbury Directors Stock Retainer Plan.
(b) All of the outstanding shares of Salisbury Bank Common Stock are owned by
Salisbury free and clear of all liens, charges, encumbrances and security
interests whatsoever, and all of such shares are duly authorized and validly
issued and fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to ownership thereof.
4.3 AUTHORITY; NO VIOLATION.
(a) Salisbury has full corporate power and corporate authority to execute and
deliver this Agreement and the Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Option Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of Salisbury and no other corporate proceedings on the part of
Salisbury are necessary to approve this Agreement or to consummate the
transaction contemplated hereby or thereby. This Agreement has been, and the
Option Agreement will be, duly and validly executed and delivered by Salisbury
and (assuming due authorization, execution and delivery by Canaan) will
constitute valid and binding obligations of Salisbury enforceable against
Salisbury in accordance with their terms, except as enforcement may be limited
by general principles of equity, whether applied in a court of law or a court of
equity, and by bankruptcy, insolvency and similar law affecting creditors'
rights and remedies generally.
(b) Salisbury Bank has full corporate power and corporate authority to execute
and deliver the Subsidiary Bank Merger Agreement and to consummate the
transactions contemplated thereby. The execution and delivery of the Subsidiary
Bank Merger Agreement and the consummation of the transactions contemplated
thereby have been duly and validly approved by the Board of Directors of
Salisbury Bank and by Salisbury as the sole shareholder of Salisbury Bank. All
corporate proceedings on the part of Salisbury Bank necessary to consummate the
transactions contemplated thereby will have been taken prior to the Effective
Time. The Subsidiary Bank Merger Agreement, upon execution and delivery by
Salisbury Bank, will be duly and validly executed and delivered by Salisbury
Bank and (assuming due authorization, execution and delivery by Canaan National
Bank) will constitute a valid and binding obligation of Salisbury Bank,
enforceable against Salisbury Bank in accordance with its terms, except as
enforcement may be limited by general principles of equity, whether applied in a
court of law or a court of equity, and by bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally.
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(c) Neither the execution and delivery of this Agreement or the Option Agreement
by Salisbury or the Subsidiary Bank Merger Agreement by Salisbury Bank, nor the
consummation by Salisbury or Salisbury Bank, as the case may be, of the
transactions contemplated hereby or thereby, nor compliance by Salisbury or
Salisbury Bank with any of the terms or provisions hereof or thereof, will (i)
violate any provision of the Certificate of Incorporation or Bylaws of Salisbury
or the Charter or Bylaws of Salisbury Bank, as the case may be, or (ii) assuming
that the consents and approvals referred to in Section 4.4(a) hereof are duly
obtained, (x) violate any Laws (as defined in Section 9.13) applicable to
Salisbury, Salisbury Bank or any of their respective properties or assets, or
(y) violate, conflict with, result in a breach of any provision of or the loss
of any benefit under, constitute a default (or an event which, with notice or
lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any lien, pledge, security
interest, charge or other encumbrance upon any of the respective properties or
assets of Salisbury or Salisbury Bank under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease, agreement or other instrument or obligation to which Salisbury or
Salisbury Bank is a party, or by which they or any of their respective
properties or assets may be bound or affected, except in the case of clause (ii)
for such matters as would not, individually or in the aggregate, be reasonably
expected to have a Material Adverse Effect on Salisbury or Salisbury Bank or
materially impair their ability to consummate the transactions contemplated by
the Agreement.
4.4 REGULATORY APPROVALS.
(a) Except for (i) the filing of applications and notices, as applicable, as to
the Merger and the Bank Merger with the FRB and the FDIC and approval of such
applications and notices, (ii) the filing of any required applications or
notices with the FDIC and the OCC as to any subsidiary activities of Canaan
National Bank which become a service corporation or operating subsidiary of
Salisbury Bank and approval of such applications and notices, (iii) the State
Banking Approvals, (iv) the filing with the Connecticut Commissioner of an
acquisition statement pursuant to Section 36a-184 of the Connecticut Banking Law
prior to the acquisition of more than 10% of the Canaan Common Stock pursuant to
the Option Agreement, if not exempt, (v) the filing with the SEC of a
registration statement on Form S-4 to register the shares of Salisbury Common
Stock to be issued in connection with the Merger (including the shares of
Salisbury Common Stock that may be issued upon the exercise of the options
referred to in Section 1.5 hereof), which will include the Proxy
Statement/Prospectus, (vi) the filing of the Certificate of Merger with the
Secretary of State of Connecticut pursuant to the Connecticut Corporation Law,
(vii) the filing of the Certificate of Merger with the Secretary of the State of
Delaware pursuant to the DGCL, (viii) the filing of the Subsidiary Bank Merger
Agreement with the FDIC, OCC, Connecticut Commissioner and the Secretary of
State of Connecticut, and (ix) the filings of the required notices regarding the
change of control of CNB, (x) such filings and approvals as are required to be
made or obtained under the securities or "Blue Sky" laws of various states or
with AMEX in connection with the issuance of the shares of Salisbury Common
Stock pursuant to this Agreement, or (xi) such filing, authorization, approvals
or consents of third parties as may be set forth in Section 4.4(a) of the
Salisbury Disclosure Schedule, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
in connection with (1) the execution and delivery by Salisbury of this Agreement
and the Option Agreement, (2) the consummation by Salisbury of the Merger and
the other transactions contemplated hereby, (3) the execution and delivery by
Salisbury Bank of the Subsidiary Bank Merger Agreement, and (4) the consummation
by Salisbury Bank of the transactions contemplated by the Subsidiary Bank Merger
Agreement except for such consents, approvals or filings the failure of which to
obtain will not have a material adverse effect on the ability of Canaan to
consummate the transactions contemplated thereby.
(b) Salisbury hereby represents to Canaan that it has no knowledge of any reason
why approval or effectiveness of any of the applications, notices or filings
referred to in Section 4.4(a) cannot be obtained or granted on a timely basis.
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4.5 FINANCIAL STATEMENTS; EXCHANGE ACT FILINGS; BOOKS AND RECORDS. Salisbury has
previously delivered to Canaan true, correct and complete copies of the
consolidated balance sheets of Salisbury and its Subsidiaries as of December 31
for the fiscal years 2000, 2001 and 2002 and the related consolidated statements
of income, changes in shareholders' equity and cash flows for the fiscal years
2000 through 2002, inclusive, as reported in Salisbury's Annual Report on Form
10-K for the fiscal year ended December 31, 2002 filed with the SEC under the
Exchange Act, in each case accompanied by the audit report of Shatswell, MacLeod
& Company, P.C., independent public accountants with respect to Salisbury, and
the interim financial statements of Salisbury as of and for the six (6) months
ended June 30, 2003 as included in Salisbury's quarterly report on Form 10-Q for
the period ended June 30, 2003, as filed with the SEC. The financial statements
referred to in this Section 4.5 (including the related notes, where applicable)
fairly present, and the financial statements referred to in Section 6.8 hereof
will fairly present (subject, in the case of the unaudited statements, to
recurring audit adjustments normal in nature and amount), the results of the
consolidated operations and consolidated financial condition of Salisbury and
its Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) comply, and the financial statements referred to in Section 6.8
hereof will comply, in all material respects, with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto; and each of such statements (including the related notes, where
applicable) has been, and the financial statements referred to in Section 6.8
hereof will be, prepared in accordance with GAAP consistently applied during the
periods involved, except as indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q. Salisbury's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 and all subsequently filed
reports under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act comply in
all material respects with the appropriate requirements for such reports under
the Exchange Act, and Salisbury has previously delivered or made available to
Canaan true, correct and complete copies of such reports. The books and records
of Salisbury and Salisbury Bank have been, and are being, maintained in all
material respects in accordance with GAAP and any other applicable legal and
accounting requirements and reflect only actual transactions.
4.6 AGREEMENTS WITH GOVERNMENTAL AGENCIES AND REGULATORY MATTERS. Neither
Salisbury nor any of its affiliates is subject to any cease-and-desist or other
order issued by, or is a party to any written agreement, consent agreement or
memorandum of understanding with, or has adopted any board resolutions at the
request of any Governmental Entity that restricts the conduct of its business or
that in any manner relates to its capital adequacy, its credit policies, its
management or its business, nor has Salisbury, nor Salisbury Bank been advised
by any Governmental Entity that it is considering issuing or requesting any
Regulatory Agreement. To the best of its knowledge, Salisbury is in compliance,
in the conduct of its business, with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or applicable to the employees conducting such
businesses, including the Sarbanes-Oxley Act of 2002, the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act, the Home
Mortgage Disclosure Act, the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT)
Act of 2001, all other applicable fair lending laws or other laws relating to
discrimination and the Bank Secrecy Act, and, Salisbury Bank has a Community
Reinvestment Act rating of "satisfactory" or better.
4.7 LEGAL PROCEEDINGS.
(a) Neither Salisbury nor any of its Subsidiaries is a party to any, and there
are no pending or, to Salisbury's knowledge, threatened, legal, administrative,
arbitration or other proceedings, claims, actions or governmental or regulatory
investigations of any nature against Salisbury or any of its Subsidiaries in
which, to Salisbury's knowledge, there is a reasonable probability of any
material recovery against or other material effect upon Salisbury or any of its
Subsidiaries or which challenge the validity or propriety of the transactions
contemplated by this Agreement, the Subsidiary Bank Merger Agreement or the
Option Agreement as to which there is a reasonable probability of success.
(b) There is no injunction, order, judgment, decree, or regulatory restriction
imposed upon Salisbury, any of its Subsidiaries or the assets of Salisbury or
any of its Subsidiaries.
4.8 SALISBURY INFORMATION. The information relating to Salisbury and its
Subsidiaries to be provided by Salisbury to be contained in the Proxy
Statement/Prospectus and the Registration Statement will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in light of the circumstances in which they are made,
not misleading. The Proxy Statement/Prospectus (except for the portions thereof
relating solely to Canaan or any Subsidiary of Canaan, as to which Salisbury
makes no representation or warranty) will comply in all material respects with
the provisions of the Securities Act, Exchange Act and the rules and regulations
thereunder.
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4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as disclosed in Salisbury's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002 and all reports subsequently filed by Salisbury
under Sections 13(a), 13(e), 14 or 15(d) of the Exchange Act, true, correct and
complete copies of which have previously been delivered or made available to
Canaan, since December 31, 2002, no event has occurred which has had,
individually or in the aggregate, a Material Adverse Effect on Salisbury.
(b) Since December 31, 2002, Salisbury and its Subsidiaries have carried on
their respective businesses in the ordinary and usual course consistent with
their past practices.
4.10 COMPLIANCE WITH APPLICABLE LAWS. Salisbury and each Salisbury Subsidiary
has complied in all material respects with all Laws applicable to it or to the
operation of its business. Neither Salisbury nor any Salisbury Subsidiary has
received any notice of any alleged or threatened claim, violation of or
liability or potential responsibility under any such Laws that has not
heretofore been cured and for which there is no remaining liability.
4.11 TAX TREATMENT OF MERGER. As of the date of this Agreement, Salisbury is not
aware of any fact or state of affairs that could cause the Merger not to be
treated as a "reorganization" under Section 368(a) of the Code.
4.12 FAIRNESS OPINION. Salisbury has received a written fairness opinion from
Northeast Capital & Advisory, Inc. ("Northeast Capital") to the effect that, in
its opinion, the consideration to be paid by Salisbury to shareholders of Canaan
pursuant to this Agreement is fair to such holders of Salisbury Common Stock
from a financial point of view ("Salisbury Fairness Opinion") and Northeast
Capital has consented to the inclusion of the written Fairness Opinion in the
Registration Statement.
4.13 CONSENTS AND APPROVALS.
(a) Except for (i) the filing of applications and notices, as applicable, as to
the Merger with the FRB under the BHCA and with the Office of the Comptroller of
the Currency (the "OCC") or the Federal Deposit Insurance Corporation ("FDIC")
with respect to the Bank Merger Act, as to the Bank Merger with Canaan National
Bank, (ii) the filing of applications and notices with the Banking Commissioner
of the State of Connecticut (the "Connecticut Commissioner"), as well as any
other applications and notices to state officials related to the Merger and the
Bank Merger (the "State Banking Approvals"), (iii) the filing with the
Connecticut Commissioner of an acquisition statement pursuant to Section 36a-184
of the Banking Law of the State of Connecticut prior to the acquisition of more
than 10% of Canaan Common Stock pursuant to the Option Agreement, if not exempt,
(iv) the filing of any required applications or notices with the FDIC and OCC as
to any subsidiary activities of Canaan National Bank which becomes a service
corporation or operating subsidiary of Salisbury Bank and approval of such
applications and notices, (v) the filing with the SEC of a registration
statement on Form S-4 by Salisbury to register the shares of Salisbury Common
Stock to be issued in connection with the Merger (including the shares of
Salisbury Common Stock that may be issued upon the exercise of the options
referred to in Section 1.5 hereof), which will include the Proxy
Statement/Prospectus to be used in soliciting the approval of shareholders of
Canaan at a meeting to be held in connection with this Agreement and the
transactions contemplated hereby, (vi) the filing of the Certificate of Merger
with the Secretary of State of Connecticut pursuant to the Connecticut
Corporation Law; (vii) the filing of the Certificate of Merger with the
Secretary of the State of Delaware pursuant to the DGCL, (viii) the filing of
the Subsidiary Bank Merger Agreement with the FDIC, Connecticut Commissioner and
the Secretary of State of Connecticut, (ix) such filings and approval as may be
required to be made or obtained under the securities or "Blue Sky" laws of
various states or with Nasdaq (or such other exchange as may be applicable), (x)
the filing of the required application and notices to American Stock Exchange
("AMEX"), and (xi) such filings, authorizations or approvals as may be set forth
in Section 4.13(a) of the Salisbury Disclosure Schedule, no consents or
approvals of or filings or registrations with any court, administrative agency
or commission or other governmental authority or instrumentality (each a
"Governmental Entity"), or with any third party are necessary in connection with
(1) the execution and delivery by Salisbury of this Agreement and the Option
Agreement, (2) the consummation by Salisbury of the Merger and the other
transactions contemplated hereby, (3) the execution and delivery by Salisbury
Bank of the Subsidiary Bank Merger Agreement, (4) the consummation by Salisbury
of the Option Agreement; and (5) the consummation by Salisbury Bank of the Bank
Merger and the transactions contemplated thereby, except, in each case, for such
consents, approvals or filings, the failure of which to obtain will not have a
material adverse effect on the ability of Salisbury to consummate the
transactions contemplated hereby.
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(b) Salisbury hereby represents to Canaan that it has no knowledge of any reason
why approval or effectiveness of any of the applications, notices or filings
referred to in Section 4.13(a) cannot be obtained or granted on a timely basis.
4.14 BROKER'S FEES. Neither Salisbury, Salisbury Bank, any of their Subsidiaries
nor any of their respective officers or directors has employed any broker or
finder or incurred any liability for any broker's fees, commissions or finder's
fees in connection with any of the transactions contemplated by this Agreement,
the Subsidiary Bank Merger Agreement or the Option Agreement, except that
Salisbury has engaged, and will pay a financial advisor's fee to Northeast
Capital & Advisory, Inc. ("NEC") in accordance with the terms of a letter
agreement between NEC and Salisbury, a true, complete and correct copy of which
is attached at Section 4.14 of the Salisbury Disclosure Schedule. Such fee to
NEC is the only fee, commission or other expense to be incurred by or on behalf
of Salisbury, Salisbury Bank or any Subsidiary with respect to any financial
advisor, broker or finder in connection with the Merger and the transactions
contemplated thereby.
4.15 TAXES AND TAX RETURNS.
(a) Each of Salisbury, Salisbury Bank and their Subsidiaries have duly filed all
Tax Returns, as hereinafter defined, required to be filed by it on or prior to
the date hereof (all such returns being accurate and complete in all material
respects) and has duly paid or made provision (or will make provision) on the
financial statements referred to in Sections 4.5 and 6.8 hereof in accordance
with GAAP for the payment of all material Taxes, as hereinafter defined, which
have been incurred or are due or claimed to be due from them by Taxing
Authorities, as hereinafter defined, on or prior to the date hereof other than
Taxes (a) which (x) are not yet delinquent or (y) are being contested in good
faith and set forth in Section 4.15(a) of the Salisbury Disclosure Schedule and
(b) which have not been finally determined. All liability with respect to the
Tax Returns of Salisbury and any Subsidiary has been satisfied for all years to
and including 2002. The Internal Revenue Service ("IRS") has not notified
Salisbury of, or otherwise asserted, that there are any material deficiencies
with respect to the federal income Tax Returns of Salisbury. There are no
material disputes pending, or claims asserted for, Taxes or assessments upon
Salisbury or any Subsidiary, nor has Salisbury or any Subsidiary been requested
to give any currently effective waivers extending the statutory period of
limitation applicable to any federal or state income Tax Return for any period.
In addition, Tax Returns which are accurate and complete in all material
respects have been filed by Salisbury and each Subsidiary for all periods for
which returns were due with respect to income tax withholding, Social Security
and unemployment taxes and the amounts shown on such Tax Returns to be due and
payable have been paid in full or adequate provision therefor in accordance with
GAAP has been (or will be) included by Salisbury in the financial statements
referred to in Sections 4.15 and 6.8 hereto. All Salisbury Tax Returns which
have been examined by the relevant Taxing Authorities, or closed without audit
by applicable statutes of limitations, and all deficiencies proposed as a result
of such examinations have been paid or settled, for all periods. Neither
Salisbury nor any Subsidiary has consented to any waiver or extension of any
statute of limitations with respect to any Tax. Neither Salisbury nor any
Subsidiary has made an election under Section 341(f) of the IRC. Salisbury has
provided or made available to Canaan complete and correct copies of its and its
Subsidiaries' Tax Returns and all material correspondence and documents, if any,
relating directly or indirectly to taxes for each taxable year or other relevant
period as to which the applicable statute of limitations has not run on the date
hereof. For this purpose, "correspondence and documents" include, without
limitation, amended Tax Returns, claims for refunds, notices from Taxing
Authorities of proposed changes or adjustments to Taxes or Tax Returns, consents
to assessment or collection of Taxes, acceptances of proposed adjustments,
closing agreements, rulings and determination letters and requests therefor, and
all other written communications to or from Taxing Authorities relating to any
material Tax liability of Salisbury or Salisbury Bank. Neither Salisbury nor any
Subsidiaries will be a "foreign person" as that term is used in section 1.1445-2
of the Treasury Regulations promulgated under the IRC. Salisbury Bank is not a
"United States real property holding corporation" within the meaning of section
897 of the IRC and was not a "United States real property holding corporation"
on any "determination date" (as defined in section 1.897-2(c) of such
Regulations) that occurred during any relevant period.
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(b) For purposes of this Agreement: "Tax" means any tax (including any income
tax, capital gains tax, value-added tax, sales tax, property tax, gift tax, or
estate tax), levy, assessment, tariff, duty (including any customs duty),
deficiency, or other fee, and any related charge or amount (including any fine,
penalty, interest, or addition to tax), imposed, assessed, or collected by or
under the authority of any Taxing Authority or payable pursuant to any
tax-sharing agreement or any other contract relating to the sharing or payment
of any such tax, levy, assessment, tariff, duty, deficiency, or fee. "Tax
Return" means any return (including any information return), report, statement,
schedule, notice, form, or other document or information filed with or submitted
to, or required to be filed with or submitted to, any Taxing Authority in
connection with the determination, assessment, collection, or payment of any Tax
or in connection with the administration, implementation, or enforcement of or
compliance with any law, regulation or other legal requirement relating to any
Tax. "Taxing Authority" means any: (i) nation, state, county, city, town,
village, district, or other jurisdiction of any nature; (ii) federal, state,
local, municipal, foreign, or other government; (iii) governmental or
quasi-governmental authority of any nature (including any governmental agency,
branch, department, official, or entity and any court or other tribunal); (iv)
multi-national organization or body; or (v) body exercising, or entitled to
exercise, any administrative, executive, judicial, legislative, police,
regulatory, or taxing authority or power of any nature.
4.16 EMPLOYEE PLANS.
(a) Section 4.16(a) of the Salisbury Disclosure Schedule sets forth a true and
complete list of each employee benefit plan (within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
arrangement or agreement that is maintained or contributed to as of the date of
this Agreement, or that has within the last six years been maintained or
contributed to, by Salisbury or any Subsidiary or any other entity which
together with Salisbury would be deemed a "single employer" within the meaning
of Section 4001 of ERISA or Code Sections 414(b), (c) or (m) or under which
Salisbury or any Subsidiary has any liability (collectively, the "Plans").
(b) Salisbury has heretofore delivered or made available to Canaan true, correct
and complete copies of each of the Plans and all related documents, including
but not limited to (i) the actuarial report for such Plan (if applicable) for
each of the last five years, (ii) the most recent determination letter from the
IRS (if applicable) for such Plan, (iii) the current summary plan description
and any summaries of material modification, (iv) all annual reports (Form 5500
series) for each Plan filed for the preceding five plan years, (v) all
agreements with fiduciaries and service providers relating to the Plan, and (vi)
all substantive correspondence relating to any such Plan addressed to or
received from the Internal Revenue Service, the Department of Labor, the Pension
Benefit Guaranty Corporation or any other governmental agency.
(c) Except as set forth at Section 4.16(c) of the Salisbury Disclosure Schedule,
(i) each of the Plans has been operated and administered in all material
respects in compliance with applicable Laws, including but not limited to ERISA
and the Code; (ii) each of the Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code is so qualified; (iii) no such Plan is
subject to Title IV of ERISA; (iv) no Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured), with respect to
current or former employees of Salisbury or any Subsidiary beyond their
retirement or other termination of service, other than (w) coverage mandated by
applicable Law, (x) benefits under a Plan that is a "qualified plan," for
purposes of Section 401(a) of the Code, (y) deferred compensation benefits under
a Plan that are accrued as liabilities on the books of Salisbury or any
Subsidiary, or (z) benefits the full cost of which is borne by the current or
former employee (or his beneficiary); (v) no liability under Title IV of ERISA
has been incurred by Salisbury or any Subsidiary that has not been satisfied in
full, and no condition exists that presents a material risk of Salisbury or any
Subsidiary incurring a material liability thereunder; (vi) no Plan is a
"multiemployer pension plan," as such term is defined in Section 3(37) of ERISA;
(vii) all contributions or other amounts payable by Salisbury or any Subsidiary
as of the Effective Time with respect to each Plan and all other liabilities of
each such entity with respect to each Plan, in respect of current or prior plan
years have been paid or accrued in accordance with generally accepted accounting
practices and Section 412 of the Code; (viii) neither Salisbury nor any
Subsidiary has engaged in a transaction in connection with which Salisbury or
any Subsidiary could be subject to either a civil penalty assessed pursuant to
Section 409 or 502(i) of ERISA or a tax imposed penalty pursuant to Section 4975
or 4976 of the Code; (ix) to the knowledge of Salisbury, there are no pending,
threatened or anticipated claims (other than routine claims for benefits) by, on
behalf of or against any of the Plans or any trusts related thereto; (x) all
Plans could be terminated as of the Effective Time without any liability
materially in excess of the amounts accrued with respect to such Plans on the
financial statements referenced in Section 4.5 hereof and, for the purposes of
Section 7.3(a) hereof, on the financial statements referred to in Section 6.8
hereof; (xi) no Plan, program, agreement or other arrangement, either
individually or collectively, provides for any payment by Salisbury or any
Subsidiary that would not be deductible under Code Sections 162(a)(1), 162(m) or
404 or that would constitute a "parachute payment" within the meaning of Code
Section 280G; and (xii) no Plan is subject to the minimum funding requirements
of Section 302 of ERISA or Section 412 of the Code.
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4.17 ENVIRONMENTAL MATTERS.
(a) Each of Salisbury and each of its Subsidiaries is in compliance in all
respects with all applicable federal and state laws and regulations relating to
pollution or protection of the environment (including without limitation, laws
and regulations relating to emissions, discharges, releases and threatened
releases of Hazardous Material (as hereinafter defined), or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, except for such matters as would
not individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect on Salisbury or any of its Subsidiaries or materially impair
their ability to consummate the transactions contemplated by this Agreement.
(b) There is no suit, claim, action, proceeding, investigation or notice
pending, or to the knowledge of Salisbury or any of its Subsidiaries,
threatened, in which Salisbury or any of its Subsidiaries has been or, with
respect to threatened suits, claims, actions, proceedings, investigations or
notices, is threatened to be, named as a defendant or, to the knowledge of
Salisbury or any of its Subsidiaries, threatened with respect to past or present
actions or events that could form the basis of any such suit, claim, action,
proceeding, investigation or notice (x) for alleged noncompliance (including by
any predecessor), with any environmental law, rule or regulation or (y) relating
to any release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a site owned, leased or operated by
Salisbury or any Subsidiary, except for such matters as would not individually
or in the aggregate, be reasonably expected to have a Material Adverse Effect on
Salisbury or any Subsidiary or materially impair their ability to consummate the
transactions contemplated by this Agreement;
(c) To the knowledge of Salisbury or any Subsidiary, during the period of
Salisbury's or any Subsidiary's ownership or operation of any of its properties,
there has not been any release of Hazardous Material in, on, under or affecting
any such property.
(d) Except as set forth at Section 4.17(d) of the Salisbury Disclosure
Schedule,to the knowledge of Salisbury and any of its Subsidiaries, neither
Salisbury nor any of its Subsidiaries has made or participated in any loan to
any person who is subject to any suit, claim, action, proceeding, investigation
or notice, pending or threatened, with respect to (i) any alleged noncompliance
as to any property securing such loan with any environmental law, rule or
regulation, or (ii) the release or the threatened release into the environment
of any Hazardous Material at a site owned, leased or operated by such person on
any property securing such loan.
(e) For purposes of this Section 4.17, the term "Hazardous Material" means any
hazardous waste, petroleum product, polychlorinated biphenyl, chemical,
pollutant, contaminant, pesticide, radioactive substance, or other toxic
material, or other material or substance (in each such case, other than small
quantities of such substances in retail containers) regulated under any
applicable environmental or public health statute, law, ordinance, rule or
regulation.
(f) Except as set forth at Section 4.17(f) of the Salisbury Disclosure
Schedule, no real property owned or leased by Salisbury or any of its
Subsidiaries as other real estate owned ("OREO") or otherwise, or owned or
controlled by Salisbury or any Subsidiary as a trustee or fiduciary meets the
statutory criteria of an "Establishment" as that term is defined pursuant to
Section 22a-134(3) of the General Statutes of Connecticut.
4.18 RESERVES FOR LOSSES. All reserves or other allowances for possible losses
reflected in Salisbury's financial statements referred to in Section 4.5 and all
subsequent quarterly periods complied with all Laws and are adequate under GAAP.
Neither Salisbury nor Salisbury Bank has been notified by the FRB, the FDIC, the
OCC, the Connecticut Commissioner or Salisbury's independent auditor, or anyone
engaged by Salisbury or Salisbury Bank to perform loan review services at
Salisbury Bank in writing or otherwise, that such reserves are inadequate or
that the practices and policies of Salisbury or Salisbury Bank in establishing
such reserves and in accounting for delinquent and classified assets generally
fail to comply with applicable accounting or regulatory requirements, or that
the FRB, the FDIC, the OCC, the Connecticut Commissioner or Salisbury's
independent auditor believes such reserves to be inadequate or inconsistent with
the historical loss experience of Salisbury or Salisbury Bank. Salisbury has
previously furnished Canaan with a complete list of all extensions of credit and
OREO that have been classified by any bank or trust examiner (regulatory or
internal) as other loans specially mentioned, special mention, substandard,
doubtful, loss, classified or criticized, credit risk assets, concerned loans or
words of similar import. Salisbury agrees to update such list no less frequently
than monthly after the date of this Agreement until the earlier of the Closing
Date or the date that this Agreement is terminated in accordance with Section
8.1. All OREO held by Salisbury or Salisbury Bank is being carried net of
reserves at the lower of cost or net realizable value.
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4.19 PROPERTIES AND ASSETS. Section 4.19 of the Salisbury Disclosure Schedule
lists as of the date of this Agreement (i) all real property owned by Salisbury
and any Subsidiary; (ii) each real property lease, sublease or installment
purchase arrangement to which Salisbury or any Subsidiary is a party; (iii) a
description of each contract for the purchase, sale, or development of real
estate to which Salisbury or any Subsidiary is a party; and (iv) all items of
Salisbury's or any Subsidiary's tangible personal property and equipment with a
book value of $50,000 or more or having any annual lease payment of $25,000 or
more. Except for (a) items reflected in Salisbury's consolidated financial
statements as of December 31, 2002 referred to in Section 4.5 hereof, (b)
exceptions to title that do not interfere materially with Salisbury's or any
Subsidiary's use and enjoyment of owned or leased real property (other than
OREO), (c) liens for current real estate taxes not yet delinquent, or being
contested in good faith, properly reserved against (and reflected on the
financial statements referred to in Section 4.5 above), (d) properties and
assets sold or transferred in the ordinary course of business consistent with
past practices since December 31, 2002, and (e) items listed in Section 4.19 of
the Salisbury Disclosure Schedule, Salisbury and its Subsidiaries have good and,
as to owned real property, marketable and insurable title to all their
properties and assets, free and clear of all liens, claims, charges and other
encumbrances. Salisbury and its Subsidiaries, as lessees, have the right under
valid and subsisting leases to occupy, use and possess all property leased by
them, and neither Salisbury nor any Subsidiary has experienced any material
uninsured damage or destruction with respect to such properties since December
31, 2002. All properties and assets used by Salisbury and any of its
Subsidiaries are in good operating condition and repair suitable for the
purposes for which they are currently utilized and comply in all material
respects with all Laws relating thereto now in effect or scheduled to come into
effect. Salisbury and its Subsidiaries enjoy peaceful and undisturbed possession
under all leases for the use of all property under which they are the lessees,
and all leases to which Salisbury or its Subsidiaries are a party are valid and
binding obligations in accordance with the terms thereof. Neither Salisbury nor
any Subsidiary is in default with respect to any such lease, and there has
occurred no default by Salisbury or any Subsidiary or event which with the lapse
of time or the giving of notice, or both, would constitute a material default
under any such lease. There are no Laws, conditions of record, or other
impediments which interfere with the intended use by Salisbury or any Subsidiary
of any of the property owned, leased, or occupied by them.
4.20 INSURANCE. Section 4.20 of the Salisbury Disclosure Schedule contains a
true, correct and complete list of all insurance policies and bonds maintained
by Salisbury and its Subsidiaries, including the name of the insurer, the policy
number, the type of policy and any applicable deductibles, and all such
insurance policies and bonds (or other insurance policies and bonds that have,
from time to time, in respect of the nature of the risks insured against and
amount of coverage provided, been substantially similar in kind and amount to
that customarily carried by parties similarly situated who own properties and
engage in businesses substantially similar to that of Salisbury and its
Subsidiaries, as the case may be) are in full force and effect and have been in
full force and effect. As of the date hereof, neither Salisbury nor any
Subsidiary has received any notice of cancellation or amendment of any such
policy or bond or is in default under any such policy or bond, no coverage
thereunder is being disputed and all material claims thereunder have been filed
in a timely fashion. The existing insurance carried by Salisbury and its
Subsidiaries is and will continue to be, in respect of the nature of the risks
insured against and the amount of coverage provided, substantially similar in
kind and amount to that customarily carried by parties similarly situated who
own properties and engage in businesses substantially similar to that of
Salisbury and its Subsidiaries, as the case may be, and is sufficient for
compliance by Salisbury and its Subsidiaries with all requirements of Law and
agreements to which Salisbury or its Subsidiaries is subject or is party. True,
correct and complete copies of all such policies and bonds reflected at Section
4.20 of the Salisbury Disclosure Schedule, as in effect on the date hereof, have
been delivered to Canaan.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 COVENANTS OF CANAAN. During the period from the date of this Agreement and
continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement, the Subsidiary Bank Merger Agreement or the Option
Agreement, or with the prior written consent of Salisbury, Canaan and Canaan
National Bank, shall carry on their respective businesses in the ordinary course
consistent with past practices and consistent with prudent banking practices.
Canaan will use its reasonable efforts to (x) preserve its business organization
and that of its Subsidiaries intact, (y) keep available to itself and Salisbury
the present services of the employees of Canaan and its Subsidiaries and (z)
preserve for itself and Salisbury the goodwill of the customers of Canaan and
its Subsidiaries and others with whom business relationships exist. Without
limiting the generality of the foregoing, and except as set forth in the Canaan
Disclosure Schedule or as otherwise contemplated by this Agreement or consented
to by Salisbury in writing, Canaan shall not, and shall not permit its
Subsidiaries to:
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(a) declare or pay any dividends on, or make other distributions in respect of,
any of its capital stock (except that its Subsidiary may declare and pay
dividends and distributions to Canaan as may be legal, necessary for the
operation of Canaan and consistent with its past practices) and Canaan may, on a
one-time only basis, declare and pay in the first calendar quarter of 2004, a
regular dividend not to exceed $0.18 per share and a special dividend not to
exceed $0.12 per share, provided that such dividends are otherwise legal and
prudent;
(b) (i) split, combine or reclassify any shares of its capital stock or issue,
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock except upon the exercise
or fulfillment of rights or options issued or existing pursuant to the Canaan
Stock Plans in accordance with their present terms, all to the extent
outstanding and in existence on the date of this Agreement, and except pursuant
to the Option Agreement, or (ii) repurchase, redeem or otherwise acquire (except
for the acquisition of Trust Account Shares and DPC Shares, as such terms are
defined in Section 1.4(c) hereof), any shares of the capital stock of Canaan or
its Subsidiary, or any securities convertible into or exercisable for any shares
of the capital stock of Canaan or its Subsidiary;
(c) issue, deliver or sell, or authorize or propose the issuance, delivery or
sale of, any shares of its capital stock or any securities convertible into or
exercisable for, or any rights, warrants or options to acquire, any such shares,
or enter into any agreement with respect to any of the foregoing, other than (i)
the issuance of Canaan Common Stock pursuant to stock options or similar rights
to acquire Canaan Common Stock granted pursuant to the Canaan Stock Plans and
outstanding prior to the date of this Agreement, in each case in accordance with
their present terms and (ii) pursuant to the Option Agreement;
(d) amend its Certificate of Incorporation, Bylaws or other similar governing
documents;
(e) authorize or permit any of its officers, directors, employees or agents to,
directly or indirectly, (i) solicit, initiate or encourage any inquiries
relating to, or the making of any proposal from, (ii) engage in substantive
discussions or negotiations with or (iii) provide any information to, any
person, entity or group (other than Salisbury) concerning any Acquisition
Transaction (as defined below). Notwithstanding the foregoing, Canaan may
provide information in connection with a possible Acquisition Transaction if the
Board of Directors of Canaan, following receipt of advice of counsel, determined
that not to provide such information or participate in such negotiations and
discussions could cause the members of such Board to breach their fiduciary
duties under applicable laws. Canaan shall promptly communicate to Salisbury the
material terms of any proposal, whether written or oral, which it may receive in
respect of any such Acquisition Transaction and whether it is providing
information in connection with, or which may lead to, an Acquisition Transaction
with a third party. Canaan will promptly cease and cause to be terminated any
existing activities, discussions or negotiations previously conducted with any
parties other than Salisbury with respect to any of the foregoing. As used in
this Agreement, Acquisition Transaction shall mean any offer, proposal or
expression of interest relating to (I) any tender or exchange offer, (II)
merger, consolidation or other business combination involving Canaan or any
Subsidiary, or (III) the acquisition in any manner of a substantial equity
interest in, or a substantial portion of the assets and/or liabilities, out of
the ordinary course of business, of, Canaan or Canaan National Bank other than
the transactions contemplated or permitted by this Agreement, the Subsidiary
Bank Merger Agreement and the Option Agreement;
(f) other than as reflected in Section 5.1(f) of the Canaan Disclosure Schedule,
make capital expenditures aggregating in excess of $5,000;
(g) enter into any new line of business;
(h) acquire or agree to acquire, by merging or consolidating with, or by
purchasing an equity interest in or the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings, or in the ordinary course of business consistent
with prudent banking practices;
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(i) take any action that is intended or may reasonably be expected to result in
any of its representations and warranties set forth in this Agreement being or
becoming untrue or in any of the conditions to the Merger set forth in Article
VII not being satisfied, or in a violation of any provision of this Agreement,
the Subsidiary Bank Merger Agreement or the Option Agreement, except, in every
case, as may be required by applicable law;
(j) change its methods of accounting in effect at December 31, 2002 except as
required by this Agreement, the Regulations of the SEC or by changes in GAAP or
regulatory accounting principles as concurred to by Salisbury's independent
auditors;
(k) (i) except as required by applicable law or this Agreement or to maintain
qualification pursuant to the Code, adopt, amend, renew or terminate any Plan or
any other agreement, arrangement, plan or policy between Canaan or its
Subsidiaries and one or more of its current or former directors, officers,
employees or independent contractors; (ii) increase in any manner the
compensation of any employee or director or pay any benefit not required by any
plan or agreement as in effect as of the date hereof (including, without
limitation, the granting of stock options, stock appreciation rights, restricted
stock, restricted stock units or performance units or shares), (iii) enter into,
modify or renew any contract, agreement, commitment or arrangement providing for
the payment to any director, officer or employee of compensation or benefits,
(iv) hire any new employee, (v) pay expenses of any employees or directors for
attending conventions or similar meetings which conventions or meetings are held
after the date hereof, (vi) promote to a rank of assistant vice president or
more senior any employee, or (vii) pay any retention payments to any employees;
or (viii) make any nondeductible contribution to any Plan;
(l) incur any indebtedness for borrowed money, assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other individual, corporation or other entity, except for Federal Home Loan Bank
borrowings in the ordinary course consistent with past practices;
(m) sell, purchase, enter into a lease, relocate, open or close any banking or
other office, or file an application pertaining to such action with any
Governmental Entity;
(n) make any equity investment or commitment to make such an investment in real
estate or in any real estate development project, other than in connection with
foreclosure, settlements in lieu of foreclosure, or troubled loan or debt
restructuring, in the ordinary course of business consistent with past banking
practices;
(o) except consistent with past practices, make any new loans to, modify the
terms of any existing loan to, or engage in any other transactions (other than
routine banking transactions) with, any Affiliated Person of Canaan or its
Subsidiary;
(p) make any investment, or incur deposit liabilities, other than in the
ordinary course of business consistent with past practices, including deposit
pricing, and which would not change the risk profile of Canaan National Bank
based on its existing deposit and lending policies or make any equity
investments;
(q) purchase any loans, except in the ordinary course in accordance with past
practices, or sell, purchase or lease any real property, except for the sale of
real estate that is the subject of a casualty loss or condemnation or the sale
of OREO on a basis consistent with past practices;
(r) originate (i) any loans except in accordance with existing lending policies
of Canaan National Bank, (ii) unsecured consumer loans in excess of $15,000,
(iii) commercial business loans in excess of $800,000 as to any loan or
$1,000,000 in the aggregate as to related loans, or loans to related persons,
(iv) commercial real estate first mortgage loans in excess of $800,000 as to any
loan or $1,000,000 in the aggregate as to related loans, or loans to related
persons, or (v) land acquisition loans to borrowers who intend to construct a
residence on such land in excess of the lesser of 60% of the appraised value of
such land or $150,000, except in each case for loans for which written
applications have been received by Canaan National Bank as of the date hereof,
as set forth at Section 5.1(r) of the Canaan Disclosure Schedule;
(s) except consistent with past practices, make any investments in any equity or
derivative securities, or any debt securities issued or guaranteed by any
municipality or otherwise exempt to any extent from federal, state or local
taxation, or engage in any forward commitment, futures transaction, financial
options transaction, hedging or arbitrage transaction or covered asset trading
activities or make any investments in any investment security with a maturity of
greater than one year;
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(t) sell or purchase any mortgage loan servicing rights; or
(u) agree or commit to do any of the actions set forth in (a) - (t) above. The
consent of Salisbury to any action by Canaan or its Subsidiary that is not
permitted by any of the preceding paragraphs shall be evidenced by a writing
signed by the President or any Executive Vice President of Salisbury.
5.2 COVENANTS OF SALISBURY. During the period from the date of this Agreement
and continuing until the Effective Time, except as expressly contemplated or
permitted by this Agreement or with Canaan's prior written consent, Salisbury
shall not, and shall not permit Salisbury Bank to: (a) take any action that will
result in any of Salisbury's representations and warranties set forth in this
Agreement being or becoming untrue or any of the conditions to the Merger set
forth in Article VII not being satisfied or in violation of any provision of
this Agreement, except, in every case, as may be required by applicable Law; or
(b) take any other action that would materially adversely affect or materially
delay the ability of Salisbury to obtain the Requisite Regulatory Approvals or
otherwise materially adversely affect Salisbury's and Salisbury Bank's ability
to consummate the transactions contemplated by this Agreement.
5.3 MERGER COVENANTS. Notwithstanding that Canaan believes that it has
established all reserves and taken all provisions for possible loan losses
required by GAAP and applicable laws, rules and regulations, Canaan recognizes
that Salisbury may have adopted different loan, accrual and reserve policies
(including loan classifications and levels of reserves for possible loan
losses). In that regard, and in general, from and after the date of this
Agreement to the Effective Time, Canaan and Salisbury shall consult and
cooperate with each other in order to formulate the plan of integration for the
Merger, including, among other things, with respect to conforming, based upon
such consultation, Canaan's loan, accrual and reserve policies to those policies
of Salisbury to the extent appropriate and consistent with the fiduciary duties
of Canaan's Board of Directors.
5.4 COMPLIANCE WITH ANTITRUST LAWS. Each of Salisbury and Canaan shall use
commercially reasonable efforts to resolve objections, if any, which may be
asserted with respect to the Merger under antitrust laws. In the event a suit is
threatened or instituted challenging the Merger as violative of antitrust laws,
each of Salisbury and Canaan shall use commercially reasonable best efforts to
avoid the filing of, or resist or resolve such suit. Salisbury and Canaan shall
use commercially reasonable efforts to take such action as may be required:
(a) by the FDIC, OCC, FRB, the Connecticut Commissioner, and the Antitrust
Division of the Department of Justice or the Federal Trade Commission in order
to resolve such objections as any of them may have to the Merger under antitrust
laws, or
(b) by any federal or state court of the United States, in any suit brought by a
private party or Governmental Entity challenging the Merger as violative of
antitrust laws, in order to avoid the entry of, or to effect the dissolution of,
any injunction, temporary restraining order, or other order which has the effect
of preventing the consummation of the Merger. Commercially reasonable efforts
shall not include, among other things and only to the extent Salisbury so
desires, the willingness of Salisbury to accept an order agreeing to the
divestiture, or the holding separate, of any assets of Salisbury or Canaan.
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ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 REGULATORY MATTERS.
(a) Upon the execution and delivery of this Agreement and availability of Canaan
financial statements in the form required for use on Form S-4, Salisbury and
Canaan (as to information to be included therein pertaining to Canaan) shall
promptly cause to be prepared and filed with the SEC a registration statement of
Salisbury on Form S-4, including the Proxy Statement/Prospectus (the
"Registration Statement") for the purpose of registering the Salisbury Common
Stock to be issued in the Merger, and for soliciting the approval of this
Agreement and the Merger by the shareholders of Canaan. Salisbury and Canaan
shall use their reasonable best efforts to have the Registration Statement
declared effective by the SEC as soon as possible after the filing. The parties
shall cooperate in responding to and considering any questions or comments from
the SEC staff regarding the information contained in the Registration Statement.
If at any time after the Registration Statement is filed with the SEC, and prior
to the Closing Date, any event relating to Canaan is discovered by Canaan which
should be set forth in an amendment of, or a supplement to, the Registration
Statement, including the Proxy Statement/Prospectus, Canaan shall promptly
inform Salisbury, and shall furnish Salisbury with all necessary information
relating to such event whereupon Salisbury shall promptly cause an appropriate
amendment to the Registration Statement to be filed with the SEC. Upon the
effectiveness of such amendment, each of Salisbury and Canaan (if prior to the
meeting of shareholders pursuant to Section 6.3 hereof) will take all necessary
action as promptly as practicable to permit an appropriate amendment or
supplement to be transmitted to the shareholders of Canaan entitled to vote at
such meeting. If at any time after the Registration Statement is filed with the
SEC, and prior to the Closing Date, any event relating to Salisbury is
discovered by Salisbury which should be set forth in an amendment of, or a
supplement to, the Registration Statement, including the Proxy
Statement/Prospectus, Salisbury shall promptly inform Canaan, and Salisbury
shall promptly cause an appropriate amendment to the Registration Statement to
be filed with the SEC. Upon the effectiveness of such amendment, each of
Salisbury and Canaan (if prior to the meeting of shareholders pursuant to
Section 6.3 hereof) will take all necessary action as promptly as practicable to
permit an appropriate amendment or supplement to be transmitted to the
shareholders of Canaan entitled to vote at such meeting. Salisbury shall also
use reasonable efforts to obtain all necessary state securities law or "Blue
Sky" permits and approvals required to carry out the transactions contemplated
by this Agreement, the Subsidiary Bank Merger Agreement, and the Option
Agreement and Canaan shall furnish all information concerning Canaan and the
holders of Canaan Common Stock as may be reasonably requested in connection with
any such action.
(b) The parties hereto shall cooperate with each other and use their best
efforts to promptly prepare and file all necessary documentation to effect all
applications, notices, petitions and filings, and to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including without limitation
the Merger and the Bank Merger). Canaan and Salisbury shall have the right to
review in advance, and to the extent practicable each will consult the other on,
in each case subject to applicable laws relating to the exchange of information,
all the information relating to Canaan and Canaan National Bank or Salisbury or
Salisbury Bank, as the case may be, which appears in any filing made with, or
written materials submitted to, any third party or any Governmental Entity in
connection with the transactions contemplated by this Agreement; provided,
however, that nothing contained herein shall be deemed to provide either party
with a right to review any information provided to any Governmental Entity on a
confidential basis in connection with the transactions contemplated hereby. In
exercising the foregoing right, each of the parties hereto shall act reasonably
and as promptly as practicable. The parties hereto agree that they will consult
with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other apprised of the status of matters
relating to contemplation of the transactions contemplated herein.
(c) Canaan shall, upon request, furnish Salisbury with all information
concerning Canaan, Canaan National Bank and their directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with the Registration Statement or any other statement, filing,
notice or application made by or on behalf of Salisbury to any Governmental
Entity in connection with the Merger, the Bank Merger or the other transactions
contemplated by this Agreement.
(d) Salisbury and Canaan shall promptly advise each other upon receiving any
communication from any Governmental Entity whose consent or approval is required
for consummation of the transactions contemplated by this Agreement the
Subsidiary Bank Merger Agreement and the Option Agreement which causes such
party to believe that there is a reasonable likelihood that any Requisite
Regulatory Approval (defined in Section 7.1(c) hereof) will not be obtained or
that the receipt of any such approval will be materially delayed.
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6.2 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to applicable Laws relating to the
exchange of information, Canaan shall accord to the officers, employees,
accountants, counsel and other representatives of Salisbury, access, during
normal business hours during the period prior to the Effective Time, to all its,
and Canaan National Bank's properties, books, contracts, commitments and records
and, during such period, Canaan shall make available to Salisbury (i) a copy of
each report, schedule, registration statement and other document filed or
received by it (including Canaan National Bank) during such period pursuant to
the requirements of federal securities laws or federal or state banking laws and
(ii) all other information concerning its (including Canaan National Bank)
business, properties and personnel as Salisbury may reasonably request.
Salisbury shall receive notice of the meetings of the Canaan and Canaan National
Bank Board of Directors and any committees thereof, and of any management
committees (in all cases, at least as timely as Canaan and Canaan National Bank,
as the case may be, representatives to such meetings are required to be provided
notice). A representative of Salisbury shall be invited to attend all meetings
of the Board of Directors (except for any portion of such meetings which relate
to an alternative Acquisition Transaction or such other matters deemed by the
legal counsel of Canaan to be necessary to protect any attorney-client privilege
of Canaan or Canaan National Bank, as the case may be). Salisbury will hold all
such information in confidence to the extent required by, and in accordance
with, the provisions of the confidentiality agreements which Salisbury entered
into with Canaan (the "Confidentiality Agreement").
(b) Upon reasonable notice and subject to applicable Laws relating to the
exchange of information, Salisbury shall afford to the officers, employees,
accountants, counsel and other representatives of Canaan, access, during normal
business hours during the period prior to the Effective Time, to such
information regarding Salisbury as shall be reasonably necessary for Canaan to
fulfill its obligations pursuant to this Agreement or which may be reasonably
necessary for Canaan to confirm that the representations and warranties of
Salisbury contained herein are true and correct and that the covenants of
Salisbury contained herein have been performed in all material respects. Canaan
will hold all such information in confidence to the extent required by, and in
accordance with, the provisions of the Confidentiality Agreement.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations and warranties of the other set
forth herein.
(d) Canaan shall provide Salisbury with true, correct and complete copies of all
financial and other information provided to directors of Canaan and Canaan
National Bank in connection with meetings of their Boards of Directors or
committees thereof.
(e) Canaan acknowledges that Salisbury is in or may be in the process of
acquiring other businesses, banks and financial institutions and that in
connection with such acquisitions, information concerning Canaan may be required
to be included in the registration statements, if any, for the sale of
securities of Salisbury or in SEC reports in connection with such acquisitions.
Canaan agrees to provide Salisbury with any information, certificates, documents
or other materials about Canaan as are reasonably necessary to be included in
such other SEC reports or registration statements, including registration
statements which may be filed by Salisbury prior to the Effective Time. Canaan
shall use its reasonable best efforts to cause its attorneys and accountants to
provide Salisbury with any consents, comfort letters, opinion letters, reports
or information which are necessary to complete the registration statements and
applications for any such acquisition or issuance of securities. Salisbury shall
reimburse Canaan for reasonable expenses thus incurred by Canaan should the
transactions contemplated by this Agreement be terminated for any reason.
6.3 SHAREHOLDER MEETING.
(a) Canaan shall take all steps necessary to duly call, give notice of, convene
and hold meetings of its shareholders within forty (40) days after the
Registration Statement becomes effective for the purpose of voting upon the
approval of this Agreement and the Merger (the "Meeting"). Management and the
Board of Directors of Canaan shall recommend to the Canaan shareholders approval
of this Agreement, including the Merger, and the transactions contemplated
hereby, together with any matters incident thereto, and the Board of Directors
of Canaan shall oppose any third party proposal or other action that is
inconsistent with this Agreement or the consummation of the transactions
contemplated hereby, unless the Board of Directors of Canaan reasonably
determines, based upon the written advice of Canaan's legal counsel, that such
recommendation or opposition, as the case may be, would constitute a breach of
the exercise of its fiduciary duty. Canaan and Salisbury shall coordinate and
cooperate with respect to the foregoing matters.
6.4 LEGAL CONDITIONS TO MERGER. Each of Salisbury and Canaan shall use their
reasonable best efforts (a) to take, or cause to be taken, all actions
necessary, proper or advisable to comply promptly with all legal requirements
which may be imposed on such party with respect to the Merger and, subject to
the conditions set forth in Article VII hereof, to consummate the transactions
contemplated by this Agreement and (b) to obtain (and to cooperate with the
other party to obtain) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity and any other third party which is
required to be obtained by Canaan or Salisbury in connection with the Merger and
the other transactions contemplated by this Agreement.
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6.5 STOCK EXCHANGE LISTING. Salisbury shall cause the shares of Salisbury Common
Stock to be issued in the Merger to be approved for quotation on AMEX prior to
or at the Effective Time.
6.6 EMPLOYEES.
(a) To the extent permissible under the applicable provisions of the Code and
ERISA, for purposes of crediting periods of service for eligibility to
participate and vesting under the benefit plans maintained by Salisbury or
Salisbury Bank, as applicable and for purposes of eligibility to participate
(but not for purposes of benefit accrual) under the defined benefit pension plan
maintained by Salisbury or Salisbury Bank, as applicable, individuals who are
employees of Canaan or Canaan National Bank and who execute waivers of their
benefits under the Change in Control Plan and become employees of Salisbury or
Salisbury Bank, as applicable, at the Effective Time will be credited with
periods of service with Canaan or Canaan National Bank before the Effective Time
as if such service had been with Salisbury or Salisbury Bank, as applicable;
provided, however, that if, after the Effective Time, Salisbury or Salisbury
Bank continues in effect the plans previously maintained by Canaan or Canaan
National Bank, Salisbury and Salisbury Bank shall not be required to cause
employees who are covered by such plans to accrue benefits under such defined
benefit pension plan with respect to any period for which Salisbury or Salisbury
Bank makes contributions to such money purchase pension plan, and nothing in
this Section 6.6 shall be construed to require any duplication of benefits.
Similar service credit shall also be given by Salisbury or Salisbury Bank in
determining eligibility to participate in vacation and welfare plans provided to
such employees of Canaan or Canaan National Bank after the Merger. Employees of
Canaan or Canaan National Bank, who execute waivers of their benefits under the
Change in Control Plan and become employees of Salisbury or Salisbury Bank as of
the Effective Time will be immediately eligible to participate in the
comprehensive health and welfare plans maintained by Salisbury or Salisbury Bank
on the same basis that they were eligible to participate in the corresponding
plans at Canaan or Canaan National Bank immediately before the Effective Time
and restrictions under such plans relating to preexisting conditions will be
waived for such employees and their covered dependents.
(b) Following the Effective Time and until such time as Salisbury, in accordance
with applicable law determines that employees of Canaan or Canaan National Bank
as of the Effective Time (the "Canaan Employees") are eligible to participate in
the employee benefits plans and programs provided to similarly situated
employees of Salisbury Bank, the benefits to be provided to the Canaan Employees
shall be the same as or reasonably equivalent to the benefit plans and programs
that were provided by Canaan or Canaan National Bank to such employees
immediately before the Effective Time.
(c) Following the Merger, in the absence of a waiver by the employee, Salisbury
agrees that it shall honor those existing Change in Control Plans with employees
of Canaan that are specifically listed at Section 6.6(c) of the Canaan
Disclosure Schedule pursuant to the Canaan Change in Control Plan unless waived;
provided, however, that in making the foregoing agreement, except as otherwise
required by law, Salisbury will honor such contracts only to the extent that
none of such contracts, nor any other Plan, program, agreement or other
arrangement, either individually or collectively, provides for any payment by
Canaan or its Subsidiary that would not be deductible under Code Sections
162(a)(1), 162(m) or 404 or that would constitute a "parachute payment" within
the meaning of Code Section 280G that is not disclosed in response to Section
3.11 hereof. Salisbury will cause Salisbury Bank to retain, with reasonably
comparable positions and compensation, a majority of the personnel of Canaan
National Bank who have executed a form waiving any rights pursuant to the Canaan
Change in Control Plan. Salisbury will post at Canaan National Bank job openings
at Salisbury or Salisbury Bank immediately following the execution of this
Agreement. Salisbury recognizes that Canaan National Bank's officers have
valuable knowledge, experience and familiarity with Canaan National Bank's
operations. In recognition thereof, Salisbury will attempt in good faith to
enter into change in control agreements in the form entered into with other
officers of Salisbury (which may provide for a period of noncompetition
following the Effective Time) with those three (3) officers of Canaan designated
on Section 6.6(c) of the Salisbury Disclosure Schedule who have executed a valid
waiver of any rights pursuant to Canaan Change in Control Plan and/or any
existing change of control agreements.
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6.7 INDEMNIFICATION.
(a) In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, in which any person
who is now, or has been at any time prior to the date of this Agreement, or who
becomes prior to the Effective Time, a director or officer or employee of
Canaan, Canaan National Bank or any of their Subsidiaries (the "Indemnified
Parties") is, or is threatened to be, made a party based in whole or in part on,
or arising in whole or in part out of, or pertaining to (i) the fact that he is
or was a director, officer or employee of Canaan, Canaan National Bank or any of
their Subsidiaries or any of their respective predecessors or (ii) this
Agreement or any of the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Time, the parties hereto agree
to cooperate and defend against and respond thereto to the extent permitted by
applicable law and the Certificate of Incorporation and Bylaws of Canaan. It is
understood and agreed that after the Effective Time, Salisbury shall indemnify
and hold harmless, as and to the fullest extent permitted by applicable law and
the Certificate of Incorporation and Bylaws of Salisbury as in effect on the
date hereof (subject to change as required by law), each such Indemnified Party
against any losses, claims, damages, liabilities, costs, expenses (including
reasonable attorney's fees and expenses in advance of the final disposition of
any claim, suit, proceeding or investigation to each Indemnified Party to the
fullest extent permitted by law upon receipt of any undertaking required by
applicable law), judgments, fines and amounts paid in settlement ("Damages") in
connection with any such threatened or actual claim, action, suit, proceeding or
investigation, and in the event of any such threatened or actual claim, action,
suit, proceeding or investigation (whether asserted or arising before or after
the Effective Time), the Indemnified Parties may retain counsel reasonably
satisfactory to Salisbury; provided, however, that (1) Salisbury shall have the
right to assume the defense thereof and upon such assumption Salisbury shall not
be liable to any Indemnified Party for any legal expenses of other counsel or
any other expenses subsequently incurred by any Indemnified Party in connection
with the defense thereof, except that if Salisbury elects not to assume such
defense or counsel for the Indemnified Parties reasonably advises the
Indemnified Parties that there are issues which raise conflicts of interest
between Salisbury and the Indemnified Parties, the Indemnified Parties may
retain counsel reasonably satisfactory to Salisbury, and Salisbury shall pay the
reasonable fees and expenses of such counsel for the Indemnified Parties, (2)
Salisbury shall be obligated pursuant to this paragraph to pay for only one firm
of counsel for each Indemnified Party, (3) Salisbury shall not be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld or delayed), and (4) Salisbury shall not be obligated
pursuant to this paragraph to the extent that a final judgment determines that
any Damages are as a result of the gross negligence or willful misconduct or
result from a decision made by the Indemnified Party when the Indemnified Party
had no good faith belief that he or she was acting in the best interests of
Canaan. Salisbury shall have no obligation to advance expenses incurred in
connection with a threatened or pending action, suit or preceding in advance of
final disposition of such action, suit or proceeding, unless (i) Salisbury would
be permitted to advance such expenses pursuant to applicable law and Salisbury's
Certificate of Incorporation or Bylaws, and (ii) Salisbury receives an
undertaking by the Indemnified Party to repay such amount if it is determined
that such party is not entitled to be indemnified by Salisbury pursuant to
applicable law and Salisbury's Certificate of Incorporation or Bylaws. Any
Indemnified Party wishing to claim indemnification under this Section 6.7, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify Salisbury thereof; provided, however, that the failure to so notify shall
not affect the obligations of Salisbury under this Section 6.7 except to the
extent such failure to notify materially prejudices Salisbury.
(b) Salisbury shall use its best efforts to purchase for the benefit of the
persons serving as executive officers and directors of Canaan and its
subsidiaries immediately prior to the Effective Time, directors' and officers'
liability insurance coverage for three (3) years after the Effective Time, under
either Canaan's policy in existence on the date hereof, or under a policy of
similar coverage and amounts containing terms and conditions which are generally
not less advantageous than Salisbury's current policy, and in either case, with
respect to acts or omissions occurring prior to the Effective Time which were
committed by such executive officers and directors in their capacity as such
("Tail Insurance"), provided, however, that Salisbury shall not be required to
expend more than 150% of the current amount expended by Canaan to maintain or
procure insurance coverage pursuant hereto.
6.8 SUBSEQUENT INTERIM AND ANNUAL FINANCIAL STATEMENTS. As soon as reasonably
available, but in no event more than thirty (30) days after the end of each
fiscal quarter, Salisbury Bank will deliver to Canaan and Canaan will deliver to
Salisbury their respective Quarterly Reports of Condition and Income and shall
promptly provide the other party with copies of any forms required to be filed
with any state or federal agency.
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6.9 ADDITIONAL AGREEMENTS. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, or to vest the Surviving Corporation or the Surviving Bank with full
title to all properties, assets, rights, approvals, immunities and franchises of
any of the parties to the Merger, or the constituent banks to the Bank Merger,
as the case may be, the proper officers and directors of each party to this
Agreement and Salisbury's and Canaan's Subsidiaries shall take all such
necessary action as may be reasonably requested by Salisbury.
6.10 ADVICE OF CHANGES. Salisbury and Canaan shall promptly advise the other
party of any change or event that, individually or in the aggregate, has or
would be reasonably likely to have a Material Adverse Effect on it or to cause
or constitute a material breach of any of its representations, warranties or
covenants contained herein. From time to time prior to the Effective Time, each
party will promptly supplement or amend its disclosure schedule delivered in
connection with the execution of this Agreement to reflect any matter which, if
existing, occurring or known at the date of this Agreement, would have been
required to be set forth or described in such disclosure schedule or which is
necessary to correct any information in such disclosure schedule which has been
rendered inaccurate thereby. No supplement or amendment to such disclosure
schedule shall have any effect for the purpose of determining satisfaction of
the conditions set forth in Sections 7.2(a) or 7.3(a) hereof, as the case may
be, or the compliance by Canaan with the covenants set forth in Section 5.1
hereof.
6.11 CURRENT INFORMATION. During the period from the date of this Agreement to
the Effective Time, Canaan will cause one or more of its designated
representatives to confer on a regular and frequent basis (not less than
monthly) with representatives of Salisbury and to report the general status of
the ongoing operations of Canaan. Canaan will promptly notify Salisbury of any
material change in the normal course of business or in the operation of the
properties of Canaan and of any governmental complaints, investigations or
hearings (or communications indicating that the same may be contemplated), or
the institution or the threat of litigation involving Canaan, and will keep
Salisbury fully informed of such events.
6.12 EXECUTION AND AUTHORIZATION OF SUBSIDIARY BANK MERGER AGREEMENT AND STOCK
OPTION AGREEMENT. Prior to the Effective Time, (a) Salisbury and Canaan each
shall execute and deliver the Certificate of Merger substantially in the form at
Exhibit D, and (b) Salisbury and Canaan each shall cause Salisbury Bank and
Canaan National Bank, respectively, to execute and deliver the Subsidiary Bank
Merger Agreement, in substantially the form at Exhibit A. Immediately following
execution of this Agreement by Canaan, Canaan will enter into an option
agreement, in the form attached hereto as Exhibit B (the "Option Agreement"),
with Salisbury pursuant to which Canaan will grant Salisbury an option to
purchase, under certain circumstances, an aggregate of 48,000 newly issued
shares of common stock, par value $.01 per share, of Canaan ("Canaan Common
Stock") upon the terms and conditions therein contained.
6.13 CHANGE IN STRUCTURE. Salisbury may elect to modify the structure of the
transactions contemplated by this Agreement as noted herein so long as (i) there
are no material adverse federal income tax consequences to the Canaan
shareholders as a result of such modification, (ii) the consideration to be paid
to the Canaan shareholders under this Agreement is not thereby changed or
reduced in kind or amount, and (iii) such modification will not be reasonably
likely to delay materially or jeopardize receipt of any required regulatory
approvals. In the event that Salisbury elects to change the structure of the
Merger, the Bank Merger or any other transactions contemplated hereby, the
parties agree to modify this Agreement and the various exhibits hereto, or enter
into any other agreements, to reflect such revised structure. In such event,
Salisbury shall prepare appropriate amendments to this Agreement and the
exhibits hereto, or other documents, for execution by the parties hereto.
Salisbury and Canaan agree to cooperate fully with each other to effect such
amendments or other documents.
6.14 TRANSACTION EXPENSES OF CANAAN.
(a) For planning purposes, Canaan has provided Salisbury with its estimated
budget of transaction-related expenses reasonably anticipated to be payable by
Canaan in connection with this transaction, including the fees and expenses of
counsel, accountants, investment bankers and other professionals. Canaan shall
promptly notify Salisbury if or when it determines that it will expect to exceed
its budget.
(b) Promptly after the execution of this Agreement, Canaan shall ask all of its
attorneys and other professionals to render current and correct invoices for all
unbilled time and disbursements. Canaan shall accrue and/or pay all of such
amounts which are actually due and owing as soon as possible.
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(c) Canaan shall advise Salisbury monthly of all out-of-pocket expenses which
Canaan has incurred in connection with this transaction.
(d) Salisbury, in reasonable consultation with Canaan, shall make all
arrangements with respect to the printing and mailing of the Proxy
Statement/Prospectus. Canaan shall, if Salisbury reasonably deems necessary,
also engage a proxy solicitation firm to assist in the solicitation of proxies
for the meeting. Canaan agrees to cooperate as to such matters.
6.15 FURTHER ACTIONS OF CANAAN. Upon the written request of Salisbury, Canaan
shall, within five (5) business days of the date of such written request, demand
payment of, or cause Canaan National Bank to demand payment of, any and all
loans (to the extent identified by Salisbury) of Canaan or Canaan National Bank,
as the case may be, which loans are (or should have been) set forth at Sections
3.5(a) or 3.21(e) of the Canaan Disclosure Schedule, and which loans are secured
or collateralized in any way by Canaan Common Stock.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The respective
obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) SHAREHOLDER APPROVAL. (i) This Agreement, including the transactions
contemplated herein shall have been approved and adopted by the legally required
affirmative votes of the holders of at least a majority of the outstanding
shares of Canaan Common Stock, entitled to vote thereon.
(b) STOCK EXCHANGE LISTING. The shares of Salisbury Common Stock which shall be
issued in the Merger (including the Salisbury Common Stock that may be issued
upon exercise of the options referred to in Section 1.5 hereof) upon
consummation of the Merger shall have been authorized for trading on the AMEX.
(c) OTHER APPROVALS. All regulatory approvals from Governmental Entities
required to consummate the transactions contemplated hereby shall have been
obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired (all such approvals and the
expiration of all such waiting periods being referred to herein as the
"Requisite Regulatory Approvals"). No Requisite Regulatory Approval shall
contain a non-customary condition that materially alters the benefits for which
Salisbury bargained in this Agreement.
(d) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act, and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(e) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or decree
issued by any court or agency of competent jurisdiction or other legal restraint
or prohibition preventing the consummation of the Merger or any of the other
transactions (an "Injunction") contemplated by this Agreement or the Certificate
of Merger shall be in effect. No statute, rule, regulation, order, injunction or
decree shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restricts or makes illegal consummation of
the Merger.
(f) FEDERAL TAX OPINION. Salisbury and Canaan shall have received from such
legal counsel as Salisbury may designate after consultation with Canaan, an
opinion in form and substance reasonably satisfactory to Salisbury and Canaan,
substantially to the effect that on the basis of facts, representations, and
assumptions set forth in such opinion which are consistent with the state of
facts existing at the time of such opinion, the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and that the exchange of Canaan Stock to the extent exchanged
for Salisbury Stock will not give rise to the recognition of gain or loss for
federal income tax purposes to such shareholders of Canaan. In rendering such
opinion, such counsel may require and, to the extent such counsel deems
necessary or appropriate, may rely upon representations made in certificates of
officers of Canaan, Salisbury, their respective affiliates and others. The
parties hereby agree that this condition shall not be subject to waiver
following receipt of Canaan shareholder approval of this Agreement.
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(g) PURCHASE ACCOUNTING. Salisbury shall have received (i) advice of Shatswell,
MacLeod & Company, P.C., independent accountants, within two weeks of the date
hereof, to the effect that the Merger will be accounted for as a purchase
transaction, and (ii) as of the Effective Time, a written opinion of Shatswell,
MacLeod & Company, P.C. to the effect that the Merger will be accounted for as a
purchase transaction. Salisbury will inform Canaan in writing within three weeks
hereof if Shatswell, MacLeod & Company, P.C. has not provided the advice or
indicated such advice is not favorable for the availability of a purchase
transaction in connection with the Merger.
7.2 CONDITIONS TO OBLIGATIONS OF SALISBURY. The obligation of Salisbury to
effect the Merger is also subject to the satisfaction or waiver by Salisbury at
or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Canaan
set forth in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and (except to the extent such representations
and warranties speak as of an earlier date) as of the Closing Date as though
made on and as of the Closing Date. Salisbury shall have received a certificate
signed on behalf of Canaan by each of the President and Chief Executive Officer
and the Chief Financial Officer of Canaan to the foregoing effect.
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS OF CANAAN. Canaan shall have
performed in all material respects all covenants and agreements required to be
performed by it under this Agreement at or prior to the Closing Date. Salisbury
shall have received a certificate signed on behalf of Canaan by each of the
President and Chief Executive Officer and the Chief Financial Officer of Canaan
to such effect.
(c) CONSENTS UNDER AGREEMENTS. (i) The consent, approval or waiver of each
person (other than the Governmental Entities referred to in Section 7.1(c)
hereof) whose consent or approval shall be required in order to permit the
succession by the Surviving Corporation pursuant to the Merger to any
obligation, right or interest of Canaan under any loan or credit agreement,
note, mortgage, indenture, lease, license or other agreement or instrument shall
have been obtained, except for those, the failure of which to obtain, will not
result in a Material Adverse Effect on the Surviving Corporation. (ii) The
consent, approval or waiver of each person (other than the Governmental Entities
referred to in Section 7.1(c) hereof) whose consent or approval shall be
required in order to permit the succession by the Surviving Bank pursuant to the
Bank Merger to any obligation, right or interest of Canaan National Bank under
any loan or credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument shall have been obtained except for those, the failure
of which to obtain, will not result in a Material Adverse Effect on the
Surviving Bank.
(d) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any Governmental
Entity seeking an Injunction shall be pending.
(e) NO MATERIAL ADVERSE CHANGE. There shall have been no changes, other than
changes contemplated by this Agreement, in the business, operations, condition
(financial or otherwise), assets or liabilities of Canaan or its Subsidiary
(regardless of whether or not such events or changes are inconsistent with the
representations and warranties given herein) that individually or in the
aggregate has had or would have a Material Adverse Effect on Canaan.
(f) LEGAL OPINION. Salisbury shall have received the opinion of Day, Berry &
Howard, counsel to Canaan, dated the Closing Date, as to customary matters. As
to any matter in such opinion which involves matters of fact, such counsel may
rely upon the certificates of officers and directors of Canaan and of public
officials, reasonably acceptable to Salisbury.
(g) TERMINATION OF OBLIGATIONS. Canaan shall provide Salisbury with appropriate
assurance that Canaan's obligations pursuant to the Canaan ESOP are fully
satisfied, that all actions have been taken so that promptly following the
Effective Time, the ESOP will be properly terminated and that neither Canaan nor
Salisbury will have any unfunded obligations with respect to the ESOP, or with
respect to any other benefit plans offered by Canaan except with respect to
rights which may exist pursuant to COBRA.
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(h) WAIVERS OF BENEFITS PURSUANT TO THE CANAAN CHANGE IN CONTROL PLAN. Canaan
has provided Salisbury with validly executed waivers, signed by eight (8) of the
officers of Canaan whose identities are designated on Schedule 3.12(c) of the
Canaan Disclosure Schedules.
7.3 CONDITIONS TO OBLIGATIONS OF CANAAN. The obligation of Canaan to effect the
Merger is also subject to the satisfaction or waiver by Canaan at or prior to
the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Salisbury set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date. Canaan shall have received a
certificate signed on behalf of Salisbury by each of the President and the Chief
Financial Officer of Salisbury to the foregoing effect.
(b) PERFORMANCE OF COVENANTS AND AGREEMENTS OF SALISBURY. Salisbury shall have
performed in all material respects all covenants and agreements required to be
performed by it under this Agreement at or prior to the Closing Date. Canaan
shall have received a certificate signed on behalf of Salisbury by each of the
President and the Chief Financial Officer of Salisbury to such effect.
(c) CONSENTS UNDER AGREEMENTS. The consent or approval or waiver of each person
(other than the Governmental Entities referred to in Section 7.1(c)) whose
consent or approval shall be required in connection with the transactions
contemplated hereby under any loan or credit agreement, note, mortgage,
indenture, lease, license or other agreement or instrument to which Salisbury is
a party or is otherwise bound shall have been obtained.
(d) NO PENDING GOVERNMENTAL ACTIONS. No proceeding initiated by any Governmental
Entity seeking an Injunction shall be pending.
(e) NO MATERIAL ADVERSE CHANGE. There shall have been no Material Adverse Change
with respect to Salisbury.
(f) LEGAL OPINION. Canaan shall have received the opinion of Cranmore,
FitzGerald & Meaney, special counsel to Salisbury, dated the Closing Date, as to
customary matters, including the authorization, validity and non-assessibility
of the Salisbury Common Stock to be issued pursuant to this Agreement.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 TERMINATION. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the shareholders of Canaan, if applicable:
(a) by mutual consent of Salisbury and Canaan in a written instrument, if the
Board of Directors of each so determines by a vote of a majority of the members
of its entire Board;
(b) by either Salisbury or Canaan upon written notice to the other party (i) 60
days after the date on which any request or application for a Regulatory
Approval shall have been denied or withdrawn at the request or recommendation of
the Governmental Entity which must grant such Regulatory Approval, unless within
the 60-day period following such denial or withdrawal the parties agree to file,
and have filed with the applicable Governmental Entity, a petition for rehearing
or an amended application, provided, however, that no party shall have the right
to terminate this Agreement pursuant to this Section 8.1(b), if such denial or
request or recommendation for withdrawal shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe the covenants
and agreements of such party set forth herein;
(c) by either Salisbury or Canaan if the Merger shall not have been consummated
on or before November 17, 2004, unless the failure of the Closing to occur by
such date shall be due to the failure of the party seeking to terminate this
Agreement to perform or observe the covenants and agreements of such party set
forth herein;
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(d) by either Salisbury or Canaan (provided that the terminating party is not in
breach of its obligations under Section 6.3 hereof) if the approval of the
shareholders of Canaan or Salisbury hereto required for the consummation of the
Merger shall not have been obtained by reason of the failure to obtain the
required vote at a duly held meeting of shareholders or at any adjournment or
postponement thereof;
(e) by either Salisbury or Canaan (provided that the terminating party is not
then in breach of any representation, warranty, covenant or other agreement
contained herein that, individually or in the aggregate, would give the other
party the right to terminate this Agreement) if there shall have been a breach
of any of the representations or warranties set forth in this Agreement on the
part of the other party, if such breach, individually or in the aggregate, has
had or is likely to have a Material Adverse Effect on the breaching party, and
such breach shall not have been cured within 60 days following receipt by the
breaching party of written notice of such breach from the other party hereto or
such breach, by its nature, cannot be cured prior to the Closing;
(f) by either Salisbury or Canaan (provided that the terminating party is not
then in breach of any representation, warranty, covenant or other agreement
contained herein that, individually or in the aggregate, would give the other
party the right to terminate this Agreement) if there shall have been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the other party, and such breach shall not have been cured within 60
days following receipt by the breaching party of written notice of such breach
from the other party hereto or such breach, by its nature, cannot be cured prior
to the Closing;
(g) by Salisbury, if the management or the Board of Directors of Canaan, for any
reason, fails to call and hold within forty (40) days of the effectiveness of
the Registration Statement a meeting of Canaan's shareholders to consider and
approve this Agreement and the transactions contemplated hereby;
(h) by Salisbury ,if Canaan fails to recommend to shareholders the approval of
this Agreement and the transactions contemplated hereby;
(i) by Salisbury if Canaan fails to oppose any third party proposal that is
inconsistent with the transactions contemplated by this Agreement;
(j) by Salisbury if Canaan violates Section 5.1(e) of this Agreement;
(k) by Salisbury or Canaan if Canaan has complied with Section 5.1(e) above, and
has given written notice to Salisbury that Canaan has agreed to enter into an
Acquisition Transaction with an entity other than Salisbury and other than as
contemplated hereby; provided, however, that such termination under this Section
8.1(k) by Canaan shall not be effective unless and until Canaan shall have
complied with the expense and breakup fee provisions of Section 9.3 below, and
shall have acknowledged in the written notice to be provided in accordance
herewith that the Option granted pursuant to the Option Agreement shall then be
exercisable in accordance with terms thereof;
(l) by the Board of Directors of Canaan, upon written notice to Salisbury at any
time during the five-day period commencing two days after the Determination Date
(as defined below), if both of the following conditions are satisfied: (i) the
Average Closing Price shall be greater than 20 percent below the Starting Price;
and (ii) (A) the quotient obtained by dividing the Average Closing Price by the
Starting Price ( the "Salisbury Ratio") shall be less than (B) the quotient
obtained by dividing the Average Index Price by the Index Price on the Starting
Date (the "Index Ratio"), minus 0.20. Notwithstanding the foregoing, if Canaan
elects to exercise its termination right pursuant to the immediately preceding
sentence, it shall give written notice to Salisbury no later than seven days
after the Determination Date; provided, however, that such notice of election to
terminate may be withdrawn at any time within the aforementioned seven-day
period. During the five-day period commencing with its receipt of such notice,
Salisbury shall have the option to elect to increase the Stock Consideration
paid to the number of shares of Salisbury Common Stock such that the "Fair
Market Value" (as defined below) of the Salisbury Common Stock issued in
exchange for each share of Canaan Common Stock in the Merger will be the lowest
possible amount (rounded to the nearest cent) that such Shares of Canaan Common
Stock would have otherwise received if Canaan could not have sought to terminate
this Agreement pursuant to this Section 8.1(l)(i). If Salisbury makes such an
election within such five-day period, it shall give prompt written notice to
Canaan of such election and of the revised Merger Consideration, whereupon no
termination shall have occurred pursuant to this Section 8.1(l) and this
Agreement shall remain in effect in accordance with its terms (except as the
Merger Consideration shall have been so modified), and any references in this
Agreement to Merger Consideration or the Stock Consideration or the Cash
Consideration, as applicable, shall thereafter be deemed to refer to such
amounts as adjusted pursuant to this Section 8.1(l).
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For purposes of this Section 8.1(l), the following terms shall have the meanings
indicated:
"Average Closing Price" means the average of the daily last sale prices of
Salisbury Common Stock as reported on the American Stock Exchange for the ten
(10) consecutive full trading days in which such shares are traded on the
American Stock Exchange ending at the close of trading on the Determination
Date.
"Average Index Price" means the weighted average market capitalization of the
Index Group's closing prices within the ten (10) consecutive full trading days
ending at the close of trading on the Determination Date.
"Determination Date" means the date on which the final approval of the FDIC or
FRB, as applicable, required for consummation of the Merger shall be received.
"Fair Market Value" means the average of the closing sale price per share of
Salisbury Common Stock as reported by the American Stock Exchange for the ten
(10) consecutive full trading days ending on the trading day prior to the
Determination Date.
"Index Group" means NewMil Bancorp, Inc., Bar Harbor Bancshares, Berkshire
Bancorp, Inc., Central Bancorp, Inc., First National Lincoln Corporation, First
of Long Island Corporation, Hingham Institution for Savings, First Litchfield
Financial Corporation, Long Island Financial Corporation, New Hampshire Thrift
Bancshares, Inc., Wainwright Bank & Trust Company, Westbank Corporation, and
Woronoco Bancorp, Inc.
"Starting Date" means the last full day on which the American Stock Exchange was
open for trading prior to the execution of this Agreement.
"Starting Price" means the closing sale price per share of Salisbury Common
Stock as reported by the American Stock Exchange on the Starting Date.
8.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by
either Salisbury or Canaan as provided in Section 8.1 hereof, this Agreement
shall forthwith become void and have no effect except (i) the last sentences of
Sections 6.2(a) and 6.2(b) and Sections 8.2, 9.2 and 9.3 and the Option
Agreement hereof shall survive any termination of this Agreement, and (ii)
notwithstanding anything to the contrary contained in this Agreement, no party
shall be relieved or released from any liabilities or damages arising out of its
willful or intentional breach of any provision of this Agreement.
8.3 AMENDMENT. Subject to compliance with applicable law, this Agreement may be
amended by the parties hereto, by action taken or authorized by their respective
Board of Directors, at any time before or after approval of the matters
presented in connection with the Merger by the shareholders of Canaan; provided,
however, that after any approval of the transactions contemplated by this
Agreement by Canaan's shareholders, there may not be, without further approval
of such shareholders, any amendment of this Agreement which reduces the amount
or changes the form of the consideration to be delivered to Canaan shareholders
hereunder other than as contemplated by this Agreement. This Agreement may not
be amended except by an instrument in writing signed on behalf of each of the
parties hereto.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Boards of Directors,
may, to the extent legally allowed, (a) extend the time for the performance of
any of the obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
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ARTICLE IX
GENERAL PROVISIONS
9.1 CLOSING. Subject to the terms and conditions of this Agreement, the closing
of the Merger (the "Closing") will take place at 10:00 a.m. at the main offices
of Salisbury on (i) the fifth day after the last Requisite Regulatory Approval
and shareholder approval is received and all applicable waiting periods have
expired, or (ii) such other date, place and time as the parties may agree (the
"Closing Date").
9.2 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. None of the
representations, warranties, covenants and agreements in this Agreement or in
any instrument delivered pursuant to this Agreement (other than pursuant to the
Option Agreement, which shall terminate in accordance with its terms) shall
survive the Effective Time, except for those covenants and agreements contained
herein and therein which by their terms apply in whole or in part after the
Effective Time.
9.3 EXPENSES; BREAKUP FEE. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expense, except that all filing and other fees paid to the
SEC and the Connecticut Commissioner in connection with this Agreement shall be
borne by Salisbury. Except as set forth in the next sentence, in the event that
this Agreement is terminated by either Salisbury or Canaan by reason of a
material breach pursuant to Sections 8.1(e) or (f) hereof or by Salisbury
pursuant to Section 8.1(g) hereof, the other party shall pay all documented,
reasonable costs and expenses up to $400,000 incurred by the terminating party
in connection with this Agreement and the transactions contemplated hereby. In
the event that this Agreement is terminated by Salisbury under Section 8.1(d) by
reason of Canaan shareholders not having given any required approval and there
shall have been prior to the meeting of Canaan stockholders a "Third Party
Public Event" (as defined below), Canaan shall pay all documented, reasonable
costs and expenses up to $400,000 incurred by Salisbury in connection with this
Agreement and the transactions contemplated hereby, plus a breakup fee of
$500,000. For purposes of this Section 9.3, a "Third Party Public Event" shall
refer to any of the following events: (i) any director, officer, 5% or greater
stockholder or affiliate of Canaan shall have, by any means which becomes the
subject of public disclosure, communicated opposition to this Agreement, the
Merger or other transactions contemplated hereby, or otherwise takes action to
influence the vote of Canaan stockholders against this Agreement, the Merger and
the transactions contemplated hereby. In the event this Agreement is terminated
by either party by reason of a willful material breach pursuant to Sections
8.1(e) or (f) hereof, the breaching party shall pay all documented, reasonable
costs and expenses up to $400,000 incurred by the other non-breaching party in
connection with this Agreement and the transactions contemplated hereby, plus a
breakup fee of $500,000. In the event that this Agreement is terminated by
Salisbury under Section 8.1(i) by reason of Canaan having agreed to enter into
an Acquisition Transaction other than as contemplated hereby, Canaan shall pay
all documented, reasonable costs and expenses up to $400,000 incurred by
Salisbury in connection with this Agreement and the transactions contemplated
hereby, plus a breakup fee of $500,000.
9.4 NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed given if delivered personally, mailed by registered or
certified mail (return receipt requested) or delivered by an express courier
(with confirmation) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Salisbury, to: Salisbury Bancorp, Inc.
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039
Attn.: John F. Perotti
President and Chief Executive Officer
with copies (which shall not constitute notice) to:
Cranmore, FitzGerald & Meaney
49 Wethersfield Avenue
Hartford, CT 06114
Attn: J. J. Cranmore
A-40
and (b) if to Canaan, to: Canaan National Bancorp, Inc.
100 Main Street
Canaan, CT 06018
Attn.: Gerard J. Baldwin
President and Chief Executive Officer
with a copy (which shall not constitute notice) to:
Day, Berry & Howard
CityPlace I
Hartford, CT 06103
Attn: Robert M. Taylor, III
9.5 INTERPRETATION. When a reference is made in this Agreement to Sections,
Exhibits or Schedules, such reference shall be to a Section of or an Exhibit or
Schedule to this Agreement unless otherwise indicated. The table of contents and
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. Whenever
the words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation".
9.6 COUNTERPARTS. This Agreement may be executed in counterparts, all of which
shall be considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
9.7 ENTIRE AGREEMENT. This Agreement (including the disclosure schedules,
documents and the instruments referred to herein) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, other
than the Confidentiality Agreement, the Certificate of Merger, the Subsidiary
Bank Merger Agreement, the Option Agreement and the Stockholder's Agreements
dated as of even date herewith between Salisbury and those shareholders named
therein (the "Canaan Stockholder Agreement").
9.8 GOVERNING LAW. This Agreement shall be governed and construed in accordance
with the laws of the State of Connecticut, without regard to any applicable
conflicts of law rules.
9.9 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable damage
would occur in the event that the provisions of this Agreement were not
performed in accordance with its specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions thereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.10 SEVERABILITY. Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms or provisions of
this Agreement in any other jurisdiction. If any provision of this Agreement is
so broad as to be unenforceable, the provision shall be interpreted to be only
so broad as is enforceable.
9.11 PUBLICITY. Except as otherwise required by law or the rules of the AMEX so
long as this Agreement is in effect, neither Salisbury nor Canaan shall, or
shall permit any of Salisbury's or Canaan's Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement, the Certificate of Merger, the Option Agreement or the Canaan
Stockholder Agreement without the consent of the other party, which consent
shall not be unreasonably withheld.
A-41
9.12 ASSIGNMENT; LIMITATION OF BENEFITS. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns. Except as otherwise
specifically provided in Section 6.7 hereof, this Agreement (including the
documents and instruments referred to herein) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder, and the
covenants, undertakings and agreements set out herein shall be solely for the
benefit of, and shall be enforceable only by, the parties hereto and their
permitted assigns.
9.13 ADDITIONAL DEFINITIONS. In addition to any other definitions contained in
this Agreement, the following words, terms and phrases shall have the following
meanings when used in this Agreement.
"Affiliated Person": any director, officer or 5% or greater shareholder, spouse
or other person living in the same household of such director, officer or
shareholder, or any company, partnership or trust in which any of the foregoing
persons is an officer, 5% or greater shareholder, general partner or 5% or
greater trust beneficiary.
"Knowledge" or "knowledge": with respect to any entity, refers to the knowledge
of such entity's directors and officers in the ordinary course of their duties
in such positions.
"Laws": any and all statutes, laws, ordinances, rules, regulations, orders,
permits, judgments, injunctions, decrees, case law and other rules of law
enacted, promulgated or issued by any Governmental Entity.
"Material Adverse Effect":
(a) with respect to Canaan, means a condition, event, change or occurrence that
is reasonably likely in the opinion of Shatswell, MacLeod & Company, P.C. (an
independent public accounting firm which serves as independent auditors for each
of Salisbury and Canaan) to have a material adverse effect upon (A) the
financial condition, results of operations, business or properties of Canaan
(other than as a result of (i) changes in laws or regulations or accounting
rules of general applicability or interpretations thereof, or (ii) decreases in
capital under Financial Accounting Standards No. 115 attributable to general
changes in interest rates), or (B) the ability of Canaan to perform its
obligations under, and to consummate the transactions contemplated by, this
Agreement, the Certificate of Merger and the Option Agreement.
(b) with respect to Salisbury, means an event which would give Canaan the right
to terminate the Agreement pursuant to Section 8.1(l).
"Subsidiary" or "Subsidiaries," as applicable: with respect to any party means
any corporation, partnership or other organization, whether incorporated or
unincorporated, which is either directly or indirectly majority owned by such
party, or consolidated with such party for financial reporting purposes.
[SIGNATURE PAGES TO FOLLOW]
A-42
IN WITNESS WHEREOF, Salisbury and Canaan have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
SALISBURY BANCORP, INC.
ATTEST:
By: By:
--------------------------- ---------------------------
Name: Name:
Title: Title:
CANAAN NATIONAL BANCORP, INC.
By: By:
--------------------------- ---------------------------
Name: Name:
Title: Title:
A-43
Appendix B
Fairness Opinion of HAS Associates, Inc.
November 17, 2003
Board of Directors
Canaan National Bancorp, Inc.
100 Main Street
Canaan, CT 06018
Members of the Board:
You have requested our opinion as to the fairness to the stockholders of
Canaan National Bancorp, Inc., Canaan, Connecticut ("Canaan"), from a financial
point of view, of the terms of the Agreement and Plan of Reorganization dated
November 17, 2003 ("the Agreement") which will ultimately provide for the merger
(the "Reorganization") of Canaan into Salisbury Bancorp, Inc. ("Salisbury"), a
Connecticut corporation. Shareholders of Canaan who do not exercise their right
to dissent will receive the per share merger consideration which will be payable
in common stock of Salisbury and cash. The exchange ratio will be 1.3371 shares
of Salisbury common stock, plus $31.20.
In connection with its opinion, HAS Associates, Inc. ("HAS") reviewed,
analyzed and relied upon material relating to the financial and operating
conditions of Canaan including, among other things, the following: (i) the
Agreement; (ii) Annual Reports to Stockholders for the three years ended
December 31, 2000, 2001 and 2002, of Canaan; (iii) certain interim reports to
stockholders and Quarterly Reports of Canaan and certain other communications
from Canaan to its stockholders; (iv) other financial information concerning the
business and operations of Canaan furnished to HAS by Canaan for purposes of its
analysis, including certain internal financial analyses and forecasts for Canaan
prepared by the senior management of Canaan; (v) certain publicly available
information concerning the trading of, and the trading market for, the Common
Stock of Canaan; (vi) audit reports of Canaan for three years; (vii) regulatory
filings of Canaan for three years; (viii) Canaan policies and procedures,
certain loan files, its investment portfolio; and (ix) certain publicly
available information with respect to banking companies and the nature and terms
of certain other transactions that HAS considered relevant to its inquiry. In
addition, HAS reviewed certain market information concerning Canaan, analyzed
data concerning private and publicly owned banks in New England, reviewed stock
market data of other banks generally deemed comparable whose securities are
publicly traded, publicly available information concerning certain recent
business combinations, and such additional financial and other information as
HAS deemed necessary. Furthermore, HAS reviewed the same type of financial
information available concerning Salisbury. In addition, HAS reviewed certain
internal reports and documents including loan lists grouped by risk rating, past
due and non-accrual loan reports, internal loan watch list loan relationship
reports, restructured loan reports, OREO and ISF reports, loan loss reserve
analysis reports, audited financial statements (most recent three years),
regulatory reports (most recent three years), 2002 operating results, securities
portfolio-book value and market value reports, and schedule of threatened or
pending litigations. HAS also held discussions with senior management concerning
their past and current operations, financial condition and prospects, as well as
the results of regulatory examinations.
In conducting its review and arriving at its opinion, HAS relied upon and
assumed the accuracy and completeness of all of the financial and other
information provided to it or publicly available, and HAS did not attempt to
verify such information independently or undertake an independent appraisal of
the assets and liabilities of Canaan. HAS relied upon the accuracy and opinion
of the audit reports prepared by the Bank's independent accountants. HAS assumes
no responsibility for the accuracy and completeness of the financial and other
information relied upon.
B-1
We have acted as financial advisor to the Board of Canaan in connection
with the Reorganization and will receive a fee for this service.
In reliance upon and subject to the foregoing, it is our opinion that, as
of November 17, 2003, the per share merger consideration to be received by the
shareholders of Canaan and the financial terms of the Agreement were, and as of
the date hereof, such terms are, fair, from a financial point of view, to the
current shareholders of Canaan.
This letter is furnished to you in connection with the Reorganization and
we consent to its inclusion in the Registration Statement and proxy solicitation
material.
Sincerely,
HAS Associates, Inc.
B-2
Appendix C
Section 262 of the Delaware General Corporation Law
Section 262. Appraisal Rights
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to Section 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's
shares of stock under the circumstances described in subsections (b) and
(c) of this section. As used in this section, the word "stockholder" means
a holder of record of stock in a stock corporation and also a member of
record of a nonstock corporation; the words "stock" and "share" mean and
include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with
the depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257,
Section 258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof,
at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of
this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement
of merger or consolidation pursuant to Sections 251,
252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository
receipts at the effective date of the merger or
consolidation will be either listed on a national
securities exchange or designated as a national market
system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc. or
held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or
fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under Section 253 of
this title is not owned by the parent corporation immediately
prior to the merger, appraisal rights shall be available for
the shares of the subsidiary Delaware corporation.
C-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section,
shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not
less than 20 days prior to the meeting, shall notify each of
its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand
the appraisal of such stockholder's shares shall deliver to
the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's shares. A proxy or vote
against the merger or consolidation shall not constitute such
a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10
days after the effective date of such merger or consolidation,
the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or Section 253 of this title, then either a
constituent corporation before the effective date of the
merger or consolidation or the surviving or resulting
corporation within 10 days thereafter shall notify each of the
holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal
rights are available for any or all shares of such class or
series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice
may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation
shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that
are entitled to appraisal rights of the effective date of the
merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such
holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of
such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give
either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is
given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on
which the notice is given.
C-2
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any stockholder
who has complied with the requirements of subsections (a) and (d) hereof,
upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register
in Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction,
the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors.
In determining the fair rate of interest, the Court may consider all
relevant factors, including the rate of interest which the surviving or
resulting corporation would have had to pay to borrow money during the
pendency of the proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the appraisal
proceeding, the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
resulting corporation pursuant to subsection (f) of this section and who
has submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that such stockholder is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
C-3
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose
or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record
at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an
appraisal and an acceptance of the merger or consolidation, either within
60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented
to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-4
Appendix D
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
|_| 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
SALISBURY BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Connecticut 06-1514263
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 860-435-9801
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act: Common stock par
value $.10 per
share
Name of exchange on which registered: American Stock Exchange
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 an accelerated filer.
Yes |_| No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter: June 30, 2003: $38,753,796
Note. If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The Company had 1,424,078 shares outstanding as of March 5, 2004.
Documents Incorporated by Reference: None
D-1
TABLE OF CONTENTS
Page
----
Part I
Item 1 - Business D-3
(a) General Development of the Business D-3
(b) Financial Information about Industry Segments D-3
(c) Narrative Description of Business D-4
(d) Financial Information about Foreign and Domestic
Operations and Export Sales D-8
Item 2 - Properties D-13
Item 3 - Legal Proceedings D-13
Item 4 - Submission of Matters to a Vote of Security Holders D-13
Part II
Item 5 - Market for Registrant's Common Equity and
Related Stockholder Matters D-13
(a) Market Information D-13
(b) Holders D-13
(c) Dividends D-14
(d) Securities Authorized for Issuance Under Equity Compensation Plans D-14
Item 6 - Selected Financial Data D-14
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations D-16
Item 7A- Quantitative and Qualitative Disclosures about Market Risk D-30
Item 8 - Financial Statements and Supplementary Data D-31
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure D-61
Item 9A- Controls and Procedures D-61
Part III
Item 10 -Directors and Executive Officers of the Registrant D-61
Item 11 -Executive Compensation D-63
Item 12 -Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters D-66
Item 13- Certain Relationships and Related Transactions D-67
Item 14- Principal Accounting Fees and Services D-67
Part IV
Item 15- Exhibits, Financial Statements and Reports on Form 8-K D-68
Signatures D-70
D-2
PART I
ITEM 1. BUSINESS
(a) General Development of the Business
Salisbury Bancorp, Inc. (AMEX:SAL) (the "Company") is a Connecticut corporation
that was formed in 1998. Its primary activity is to act as the holding company
for its sole subsidiary, the Salisbury Bank and Trust Company (the "Bank") which
accounts for most of the Company's net income. The Bank assumed its present name
in 1925 following the acquisition by the Robbins Burrall Trust Company of the
Salisbury Savings Society. The Robbins Burrall Trust Company was incorporated in
1909 as the successor to a private banking firm established in 1874. The
Salisbury Savings Society was incorporated in 1848. The Bank is chartered as a
state bank and trust company by the State of Connecticut and its deposits are
insured by the Federal Deposit Insurance Corporation in accordance with the
Federal Deposit Insurance Act. The Bank's main office is at 5 Bissell Street,
Lakeville, Connecticut 06039. Its telephone number is (860) 435-9801.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. Substantially all of the
Bank's customers reside in or maintain their principal offices in Litchfield
County, Connecticut or in Dutchess County or Columbia County, New York or in
Berkshire County, Massachusetts.
(b) Financial Information about Industry Segments
The Company's products and services are all of a nature of commercial bank and
trust company.
Lending
Lending is a principal business of the Bank, and loans represent a large portion
of the Bank's assets. The portfolio consists of many types of loans. These
include residential mortgages, home equity lines of credit, monthly installment
loans for consumers, as well as commercial loans, which include lines of credit,
short term loans, Small Business Administration ("SBA") loans and real estate
loans for business customers.
The primary lending activity has been the origination of first mortgage loans
for the purchase, refinance or construction of residential properties in the
Bank's market area. Loans secured by mortgages on a borrower's principal
residence are generally viewed as the least vulnerable to major economic changes
and at the same time provide a significant yet relatively stable source of
interest income. Presently, loans are maintained in the Bank's portfolio as well
as sold to investors on the secondary mortgage market. This provides customers
the opportunity to choose from a wide array of competitive mortgage products and
rate structures.
The Bank also originates a variety of other loans for consumer and business
purposes. Although these loans represent a smaller percentage of the total loan
portfolio, the Bank is in the position of being a full service retail lender to
its consumers and a full service commercial lender to its business customers.
Investments
The Company's investment portfolio is also an important component of the Balance
Sheet. It provides a source of earnings in the form of interest and dividends.
It also plays a role in the interest rate risk management of the Company and it
provides a source of liquidity.
The portfolio is comprised primarily of U.S. Government sponsored agencies, U.S.
Treasury and mortgage-backed securities and securities of political subdivisions
of the states. At December 31, 2003, it totaled $147,021,000 which represents
approximately 47.26% of total assets and it produced interest and dividend
income of $6,423,000 for the year 2003 as compared with $6,480,000 for 2002 and
$5,746,000 for 2001 respectively.
D-3
Deposits and Borrowings
The Bank's primary sources of funds are deposits, borrowings and principal
payments on loans. Although competition for funds from non-banking institutions
remains aggressive, the Bank continues its efforts to build multiple account
relationships with its customers. As a result, average daily deposits increased
4.03% to $213,392,000 during 2003.
The Bank is a member of the Federal Home Loan Bank of Boston ("FHLBB").
Borrowings from FHLBB totaled $60,897,000 at December 31, 2003 as compared with
$51,891,000 at December 31, 2002.
For additional information relating to the asset, deposit and borrowing
components of the Company, see Item 7, Management's Discussion and Analysis and
the accompanying Consolidated Financial Statements.
Fiduciary
The Bank provides trust, investment and financial planning services to its
customers.
The Bank has a full service Trust Department. Among the services offered are:
custody and agency accounts and estate planning and estate settlement. Another
service is that of serving as Guardian or Conservator of estates and managing
the financial position of Guardianships or Conservatorships. Self directed IRAs
and Pension plans are also offered.
All Others
The Company also offers safe deposit rentals, foreign exchange, a full menu of
electronic fund transfer services and other ancillary services to businesses and
individuals.
(c) Narrative Description of Business
Salisbury Bancorp, Inc. is a bank holding company, which as described above, has
one subsidiary, Salisbury Bank and Trust Company (the "Bank").
The Bank is a full-service commercial bank and its activities encompass a broad
range of services which includes a complete menu of deposit services, multiple
mortgage products and various other types of loans for both business and
personal needs. Full trust services are also available. The Bank owns and
operates one subsidiary, SBT Realty, Inc. which is incorporated under the laws
of the State of New York. SBT Realty, Inc. holds and manages bank owned real
estate situated in New York State.
Competition
The Company and the Bank encounter competition in all phases of their business.
There are numerous financial institutions that have offices in the areas in
which the Company and Bank compete in Northwestern Connecticut, Western
Massachusetts and proximate areas of New York State.
All of the offices of the Bank are located in the northwest corner of Litchfield
County, designated by the Federal Reserve Banks of Boston and New York to be
within the "Metro Banking Market". The Bank maintains four (4) banking offices
within the Metro Banking Market, which is served by 277 commercial banks and
savings banks. The Bank has less than a 1% market share of deposits in such
Market.
Banks compete on the basis of price, including rates paid on deposits and
charged on borrowings, convenience and quality of service. Savings and loan
associations are able to compete aggressively with commercial banks in the
important area of consumer lending. Credit unions and small loan companies are
each significant factors in the consumer market. Insurance companies, investment
firms, credit and mortgage companies, brokerage firms cash management accounts,
money-market funds and retailers are all significant competitors for various
types of business. Insurance companies, investment counseling firms and other
businesses and individuals actively compete with the Bank for personal and
corporate trust services and investment counseling services. Many non-bank
competitors are not subject to the extensive regulation described below under
"LEGISLATION, REGULATION AND SUPERVISION" and in certain respects may have a
competitive advantage over banks in providing certain services.
D-4
In marketing its services, the Bank emphasizes its position as a hometown bank
with personal service, flexibility and prompt responsiveness to the needs of its
customers. Moreover, the Bank competes for both deposits and loans by offering
competitive rates and convenient business hours. In addition to providing
banking services to customers in its primary service areas, the Bank is a member
of the automatic teller machine networks and offers internet banking services,
which allow the Bank to deliver certain financial services to customers
regardless of their proximity to the primary service area of the Bank.
Connecticut has enacted legislation which liberalized banking powers for thrift
institutions thereby improving their competitive position with other banks. In
addition, the Connecticut Interstate Banking Act permits acquisitions and
mergers of Connecticut banks and bank holding companies of or with banks and
bank holding companies in other states. Accordingly, it is possible for large
super-regional organizations to enter many new markets including the market
served by the Bank. Certain of these competitors, by virtue of their size and
resources, may enjoy certain efficiencies and competitive advantages over the
Bank in the pricing, delivery, and marketing of their products and services. It
is possible that such legislative authority will increase the number or the size
of financial institutions competing with the Bank for deposits and loans in its
market place, although it is impossible to predict the effect upon competition
of such legislation.
Legislation, Regulation and Supervision
General
Virtually every aspect of the business of banking is subject to regulation
including such matters as the amount of reserves that must be established
against various deposits, the establishment of branches, mergers, non-banking
activities and other operations. Numerous laws and regulations also set forth
special restrictions and procedural requirements with respect to the extension
of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions.
The descriptions of the statutory provisions and regulations applicable to banks
set forth below do not purport to be a complete description of such statutes and
regulations and their effects on the Bank. Proposals to change the laws and
regulations governing the banking industry are frequently introduced in
Congress, in the state legislatures and before the various bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Bank's future business and earnings are difficult to
determine.
Federal Reserve Board Regulation
The Company is a registered bank holding company under the Bank Holding Company
Act of 1956, as amended (the "BHCA"). It is subject to the supervision and
examination of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and files with the Federal Reserve Board the reports as
required under the BHCA.
The BHCA generally requires prior approval by the Federal Reserve Board of the
acquisition by the Company of substantially all of the assets or more than five
percent (5%) of the voting stock of any bank. The BHCA also allows the Federal
Reserve Board to determine (by order or by regulation) what activities are so
closely related to banking as to be a proper incident of banking, and thus,
whether the Company can engage in such activities. The BHCA prohibits the
Company and the Bank from engaging in certain tie-in arrangements in connection
with any extension of credit, sale of property or furnishing of services.
Federal legislation permits adequately capitalized bank holding companies to
venture across state lines to offer banking services through bank subsidiaries
to a wide geographic market. It is possible for large super-regional
organizations to enter many new markets including the market served by the Bank,
although it is impossible to assess what impact this will have on the Company or
the Bank.
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.
D-5
Under the BHCA and the regulations of the Federal Reserve System promulgated
thereunder ("Regulation Y"), no corporation may become a bank holding company as
defined therein, without prior approval of the Federal Reserve Board. The
Company received the approval to become a bank holding company on June 18, 1998.
The Company will also have to secure prior approval of the Federal Reserve Board
if it wishes to acquire voting shares of any other bank, if after such
acquisition it would own or control more than five percent (5%) of the voting
share of such bank. The BHCA imposes limitations upon the Company as to the
types of business in which it may engage.
Regulation Y requires bank holding companies to provide the Federal Reserve
Board with written notice before purchasing or redeeming equity securities if
the gross consideration for the purchase or redemption, when aggregated with the
net consideration paid by the Company for all such purchases or redemptions
during the preceding twelve (12) months, is equal to ten percent (10%) or more
of the Company's consolidated net worth. For purposes of Regulation Y, "net
consideration" is the gross consideration paid by a company for all of its
equity securities purchased or redeemed during the period, minus the gross
consideration received for all of its equity securities sold during the period
other than as part of a new issue. However, a bank holding company need not
obtain Federal Reserve Board approval of any equity security redemption when:
(i) the bank holding company's capital ratios exceed the threshold established
for "well-capitalized" state member banks before and immediately after the
redemption; (ii) the bank holding company is well-managed; and (iii) the bank
holding company is not the subject of any unresolved supervisory issues.
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (S.900) (the
"GLBA"), provides bank holding companies, banks, securities firms, insurance
companies, and investment management firms the option of engaging in a broad
range of financial and related activities by opting to become a "financial
holding company." These holding companies will be subject to oversight by the
Federal Reserve Board, in addition to other regulatory agencies. Under the
financial holding company structure, bank holding companies have greater ability
to purchase or establish nonbank subsidiaries which are financial in nature or
which engage in activities which are incidental or complementary to a financial
activity. Additionally, for the first time, securities and insurance firms are
permitted to purchase full-service banks.
While the GLBA Act facilitates the ability of financial institutions to offer a
wide range of financial services, large financial institutions would appear to
be the beneficiaries as a result of this Act because many community banks are
less able to devote the capital and management resources needed to facilitate
broad expansion of financial services. The Company qualified and registered as a
financial holding company in May 3, 2000.
In July, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.
The purpose of the Sarbanes-Oxley Act is to protect investors by improving the
accuracy and reliability of corporate disclosures made pursuant to the
securities laws, and for other purposes.
The Sarbanes-Oxley Act amends the Securities Exchange Act of 1934 to prohibit a
registered public accounting firm from performing specified nonaudit services
contemporaneously with a mandatory audit. The Sarbanes-Oxley Act also vests the
audit committee of an issuer with responsibility for the appointment,
compensation, and oversight of any registered public accounting firm employed to
perform audit services. It requires each committee member to be a member of the
board of directors of the issuer, and to be otherwise independent. The
Sarbanes-Oxley Act further requires the chief executive officer and chief
financial officer of an issuer to make certain certifications as to each annual
or quarterly report.
In addition, the Sarbanes-Oxley Act requires officers to forfeit certain bonuses
and profits under certain circumstances. Specifically, if an issuer is required
to prepare an accounting restatement due to the material noncompliance of the
issuer as a result of misconduct with any financial reporting requirements under
the securities laws, the chief executive officer and chief financial officer of
the issuer shall be required to reimburse the issuer for (1) any bonus or other
incentive-based or equity based compensation received by that person from the
issuer during the 12-month period following the first public issuance or filing
with the SEC of the financial document embodying such financial reporting
requirements; and (2) any profits realized from the sale of securities of the
issuer during that 12-month period.
D-6
The Sarbanes-Oxley Act also instructs the SEC to require by rule:
o Disclosure of all material off-balance sheet transactions and
relationship that may have a material effect upon the financial
status of an issuer; and
o The presentation of pro forma financial information in a manner that
is not misleading, and which is reconcilable with the financial
condition of the issuer under generally accepted accounting
principles.
The Sarbanes-Oxley Act also prohibits insider transactions in the Company's
stock during a lock out period of Company's pension plans, and any profits of
such insider transactions are to be disgorged. In addition, there is a
prohibition of company loans to its executives, except in certain circumstances.
The Sarbanes-Oxley Act also provides for mandated internal control report and
assessment with the annual report and an attestation and a report on such report
by Company's auditor. The SEC also requires an issuer to institute a code of
ethics for senior financial officers of the company. Furthermore, the
Sarbanes-Oxley Act adds a criminal penalty of fines and imprisonment of up to 10
years for securities fraud.
The terrorist attacks in September, 2001 have impacted the financial services
industry and led to federal legislation that attempts to address certain issues
involving financial institutions. On October 26, 2001, President Bush signed
into law the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001.
Part of the USA Patriot Act is the International Money Laundering Abatement and
Financial Anti-Terrorism Act of 2001 ("IMLA"). IMLA authorizes the Secretary of
the Treasury, in consultation with the heads of other government agencies, to
adopt special measures applicable to banks, bank holding companies, and/or other
financial institutions. These measures may include enhanced recordkeeping and
reporting requirements for certain financial transactions that are of primary
money laundering concern, due diligence requirements concerning the beneficial
ownership of certain types of accounts, and restrictions or prohibitions on
certain types of accounts with foreign financial institutions.
Among its other provisions, IMLA requires each financial institution to: (i)
establish an anti-money laundering program; (ii) establish due diligence
policies, procedures and controls with respect to its private banking accounts
and correspondent banking accounts involving foreign individuals and certain
foreign banks; and (iii) avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a
foreign bank that does not have a physical presence in any country. In addition,
IMLA contains a provision encouraging cooperation among financial institutions,
regulatory authorities and law enforcement authorities with respect to
individuals, entities and organizations engaged in, or reasonably suspected of
engaging in, terrorist acts or money laundering activities. IMLA expands the
circumstances under which funds in a bank account may be forfeited and requires
covered financial institutions to respond under certain circumstances to
requests for information from federal banking agencies within 120 hours. IMLA
also amends the BHCA and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.
Connecticut Regulation
The Company is incorporated in the State of Connecticut and is subject to the
Connecticut Business Corporation Act and the Connecticut Bank Holding Company
Statutes.
As a state-chartered bank and member of the Federal Deposit Insurance
Corporation ("FDIC"), the Bank is subject to regulation both by the Connecticut
Banking Commissioner and by the FDIC. Applicable laws and regulations impose
restrictions and requirements in many areas, including capital requirements,
maintenance of reserves, establishment of new branch offices, mergers, making of
loans and investments, consumer protection, employment practices and other
matters. Any new regulations or amendments to existing regulations may
materially affect the services offered, expenses incurred and/or income
generated by the Bank.
D-7
The Connecticut Banking Commissioner regulates the Bank's internal organization
as well as its deposit, lending and investment activities. The approval of the
Connecticut Banking Commissioner is required to, among other things, open branch
offices and consummate merger transactions and other business combinations. The
Connecticut Banking Commissioner conducts periodic examinations of the Bank. The
Connecticut banking statutes also restrict the ability of the Bank to declare
cash dividends to its shareholders.
Subject to certain limited exceptions, loans made to any one obligor may not
exceed fifteen percent (15%) of the Bank's capital, surplus, undivided profits
and loan reserves. In addition, under Connecticut law, the beneficial ownership
of more than ten percent (10%) of any class of voting securities of a bank may
not be acquired by any person or groups of persons acting in concert without the
approval of the Connecticut Banking Commissioner.
FDIC Regulation
The FDIC insures the Bank's deposit accounts in an amount up to $100,000 for
each insured depositor. FDIC insurance of deposits may be terminated by the
FDIC, after notice and a hearing, upon a finding by the FDIC that the insured
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule or order of, or condition imposed by, the FDIC. A bank's
failure to meet the minimum capital and risk-based capital guidelines discussed
below, would be considered to be unsafe and unsound banking practices. The Bank,
as a Connecticut-chartered FDIC-insured bank, is regulated by the FDIC in many
of the areas also regulated by the Connecticut Banking Commissioner. The FDIC
also conducts its own periodic examinations of the Bank, and the Bank is
required to submit financial and other reports to the FDIC on a quarterly and
annual basis, or as otherwise required by the FDIC.
FDIC insured banks, such as the Bank, pay premiums to the FDIC for the insurance
of deposits.
Under FDIC regulations, FDIC-insured, state-chartered banks which are not
members of the Federal Reserve System, must meet certain minimum capital
requirements, including a leverage capital ratio and a risk-based capital ratio.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION".
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of its last CRA examination, the Bank received a
rating of "Outstanding". Failure to receive at least a "Satisfactory" rating may
inhibit an institution from undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. Similarly, failure of a bank
to maintain a CRA rating of "Satisfactory" or better would preclude it or its
holding company from engaging in any new financial activities pursuant to the
Gramm-Leach-Bliley Act.
Employees
The Company's current workforce at February 13, 2004 was 92 employees of whom 83
were full time and 9 were part time. The employees are not represented by a
collective bargaining unit.
(d) Financial Information about Foreign and Domestic Operations and Export Sales
The Company does not have any foreign business operations or export sales of its
own. However, it does provide financial services including wire transfers and
foreign currency exchange to other businesses involved in foreign trade.
D-8
STATISTICAL DISCLOSURE REQUIRED PURSUANT TO SECURITIES EXCHANGE ACT, INDUSTRY
GUIDE 3
The statistical disclosures required pursuant to Industry Guide 3, not contained
in Management's Discussion and Analysis of Financial Condition and Results of
Operations-contained herein, 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 9
III. Loan Portfolio 10
IV. Summary of Loan Loss Experience 11
V. Deposits 23
VI. Return on Equity and Assets 10
VII. Short-Term Borrowings 12
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 sets forth the carrying amounts of the
investment securities as of December 31:
(dollars in thousands) 2003 2002 2001
---------------------------------
Available-for-sale securities:
(at fair value)
Equity securities $ 136 $ 90 $ 135
U.S. government agencies preferred stock 7,610 4,179 0
U.S. Treasury securities and other
U.S. government corporations and agencies 51,979 41,635 38,701
Obligations of states and political subdivisions 45,988 42,792 30,273
Mortgage-backed securities 37,307 46,473 33,139
---------------------------------
$ 143,020 $ 135,169 $ 102,248
=================================
Held-to-maturity securities
(at amortized cost)
U.S. Treasury securities and other
U.S. government corporations and agencies $ $ $
Obligations of states and political subdivisions 0 0 0
Mortgage-backed securities 229 321 400
---------------------------------
$ 229 $ 321 $ 400
=================================
Federal Home Loan Bank stock $ 3,771 $ 2,945 $ 2,945
=================================
For the following table, yields are not calculated and presented on a fully
taxable-equivalent ("FTE") basis.
D-9
The scheduled maturities of held-to-maturity securities and available-for-sale
securities (other than equity securities) were as follows as of December 31,
2003:
(dollars in thousands)
Under 1-5 5-10 Over 10
1 Year Yield Years Yield Years Yield Years Yield Total
------- ----- ----- ----- -------- ----- --------- ----- ---------
Held-to-maturity
securities
(at amortized cost)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 0 $ 0 $ 0
Obligations of state and
political subdivisions 0 0 0 0 0
Mortgage-backed
securities 0 0 0 229 4.38% 229
------- ----- -------- --------- ---------
$ 0 $ 0 0 $ 229 $ 229
======= ===== ======== ========= =========
Available-for-sale
securities
(at fair value)
U.S. Treasury securities
and other U.S. government
corporations and agencies $ 0 $ 0 $ 7,099 6.01% $ 44,880 4.05% $ 51,979
Obligations of state and
political subdivisions $ 0 $ 241 4.70% $ 206 3.60% $ 45,541 4.81% $ 45,988
Mortgage-backed
securities $ 42 7.50% $ 18 7.00% $ 0 $ 37,247 4.68% $ 37,307
------- ----- -------- --------- ---------
$ 42 $ 259 $ 7,305 $ 127,668 $ 135,274
======= ===== ======== ========= =========
Loan Portfolio Analysis by Category
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
---------------------------------------------------------
Commercial, financial and
agricultural $ 9,149 $ 10,127 $ 10,797 $ 8,592 $ 9,025
Real Estate-construction and 15,307 6,027 3,935 6,275 3,382
land development
Real Estate - residential 90,807 93,636 102,201 98,312 86,680
Real Estate-commercial 19,199 18,002 17,423 15,463 15,324
Consumer 6,692 9,007 10,030 10,673 10,698
Other 73 291 125 247 364
---------------------------------------------------------
141,227 137,090 144,511 139,562 125,473
Allowance for loan losses (1,664) (1,458) (1,445) (1,292) (1,160)
Unearned income 0 (0) (0) (0) (0)
---------------------------------------------------------
Net loans $ 139,563 $ 135,632 $ 143,066 $ 138,270 $ 124,313
=========================================================
There are no industry concentrations in the Bank's loan portfolio.
The following table shows the maturity of commercial, financial and agricultural
loans, real estate commercial loans and real estate-construction loans
outstanding as of December 31, 2002. Also provided are the amounts due after one
(1) year classified according to the sensitivity to changes in interest rates.
Due after
Due in one one year to Due after
year or less five years five years
---------------------------------------
Commercial, financial,
agricultural and real estate commercial $ 6,070 $ 3,224 $ 19,053
Real estate-construction and land development 15,307 0 0
-------------------------------------
$ 21,377 $ 3,224 $ 19,053
=====================================
Maturities after
One Year with:
Fixed interest rates $ 2,004 $ 12,423
Variable interest rates 1,220 6,630
----------------------
$ 3,224 $ 19,053
======================
D-10
Return on Equity and Assets
The following table summarizes various financial ratios of the Company for each
of the last three (3) years:
Year Ended December 31,
-----------------------
2003 2002 2001
------ ----- ------
Return on average total assets
(net income divided by average total assets) 1.24% 1.13% 1.14%
Return on average shareholders' equity
(net income divided by average shareholders' equity) 13.47% 12.63% 12.25%
Dividend payout ratio
(total declared dividends divided by net income) 34.07% 39.11% 41.34%
Equity to assets ratio
(average shareholders' equity as a percentage of
average total assets) 9.21% 8.92% 9.27%
Nonaccrual, Past Due and Restructured Loans
At December 31, 2003, there were two (2) nonaccrual loans in the Bank's
portfolio both of which were secured by real estate. When a mortgage loan
becomes 90 days past due, and there is not sufficient collateral to cover the
principal and accrued interest, the Bank generally stops accruing interest
unless there are unusual circumstances which warrant an exception. Generally the
only loan types that the Bank reclassifies to nonaccrual are those secured by
real estate. Other types of loans are generally charged off if they become 90
days or more delinquent. However, exception is warranted with the $535,000 in
loans that are presently 90 days past due and still accruing.
Nonaccrual, Past Due and Restructured Loans
(dollars in thousands)
December 31
2003 2002 2001 2000 1999
------------------------------------------------
Nonaccrual $ 75 $ 855 $ 372 $ 186 $ 473
90 days or more past due 535 124 215 323 10
Restructured loans 0 271 0 12 12
-----------------------------------------------
Total nonperforming loans $ 610 $ 1,250 $ 587 $ 521 $ 495
===============================================
Total nonperforming loans as per-
centage of the total loan
portfolio 0.43% 0.92% 0.41% 0.37% 0.39%
Allowance for loan losses as a per-
centage of nonperforming loans 272.79% 116.64% 246.17% 247.99% 234.34%
Information with respect to non-accrual and restructured loans
at December 31, 2003, 2002 and 2001 is as follows:
(dollars in thousands) Year Ended December 31
2002 2002 2001
----------------------
Interest income that would have been recorded under original terms $ 4 $ 68 $ 38
Gross interest recorded 0 49 28
-------------------
Foregone interest $ 4 $ 19 $ 10
===================
D-11
Summary of Loan Loss Experience
(dollars in thousands) Year Ended December 31
2003 2002 2001 2000 1999
-----------------------------------------------
Balance of the allowance for
loan losses at beginning of year $ 1,458 $ 1,445 $ 1,292 $ 1,160 $ 1,260
-----------------------------------------------
Charge-offs:
Commercial, financial and
agricultural 71 60 0 0 1
Real estate mortgage 0 46 13 21 243
Consumer 84 146 88 50 25
-----------------------------------------------
Total charge-offs 155 252 101 71 269
-----------------------------------------------
Recoveries:
Commercial, financial and
agricultural 24 2 0 0 0
Real estate mortgage 0 1 87 6 19
Consumer 24 26 17 17 30
-----------------------------------------------
Total recoveries 48 29 104 23 49
-----------------------------------------------
Net charge-offs 107 223 (3) 48 220
Provisions charged to operations 313 300 150 180 120
Transfer of allowance for loan
losses to other liabilities 0 (64) 0 0 0
-----------------------------------------------
Balance at end of year $ 1,664 $ 1,458 $ 1,445 $ 1,292 $ 1,160
===============================================
Ratio of net charge-offs to
average loans outstanding .01% .02% (.002)% .04% .18%
Ratio of allowance for loan losses
to year end loans 1.18% 1.07% 1.01% .93% .93%
Allocation of the Allowance for Loan Losses
(dollars in thousands)
Years Ended December 31
2003 2002 2001 2000 1999
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Commercial, financial and
agricultural $ 441 6.47% $ 316 7.39% $ 120 7.47% $ 160 6.16% $ 160 7.19%
Real estate construction
and land development 112 10.82% 50 4.40% 24 2.72% 0 4.50% 0 2.70%
Real estate mortgage 749 77.94% 840 81.43% 1,200 82.78% 1,066 81.51% 941 81.30%
Consumer 357 4.72% 244 6.57% 100 6.94% 65 7.65% 58 8.52%
Other loans 5 .05% 8 .21% 1 .09% 1 .18% 1 .29%
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 1,664 100.00% $ 1,458 100.00% $ 1,445 100.00% $ 1,292 100.00% $ 1,160 100.00%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Provisions to the allowance for possible loan losses are charged to operating
expenses and are based on past experience, current economic conditions and
management's 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
2003 2002 2001
------------------------------
Federal Home Loan Bank Advances
Average interest rate
At year end 4.06% 5.35% 5.95%
For the year 4.21% 5.45% 5.62%
Average amount outstanding during the year $ 65,282 $ 52,438 $ 53,407
Maximum amount outstanding at any month $ 74,705 $ 59,125 $ 56,766
Amount outstanding at year end $ 60,897 $ 51,891 $ 53,004
D-12
ITEM 2. DESCRIPTION OF PROPERTIES
The holding company is not the owner or lessee of any properties. The Bank does
not lease any properties. The properties described below are owned by the Bank.
The Bank serves its customers from its four (4) offices which are located in
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Bank's trust
department is located in a separate building adjacent to the main office of the
Bank.
The following table includes all property owned by the Bank, but does not
include Other Real Estate Owned.
OFFICES LOCATION STATUS
Main Office 5 Bissell Street Owned
Lakeville, Connecticut
Trust Department 19 Bissell Street Owned
Lakeville, Connecticut
Salisbury Office 18 Main Street Owned
Salisbury, Connecticut
Sharon Office 29 Low Road Owned
Sharon, Connecticut
Canaan Office 94 Main Street Owned
Canaan, Connecticut
ITEM 3. LEGAL PROCEEDINGS
Other than routine litigation incidental to its business, there are no material
legal proceedings pending to which the Company, Bank, or their properties are
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the Company's 2003 fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is traded on The American Stock Exchange under the
symbol "SAL". The following table presents the high and low sales prices of the
Company's common stock.
2003 Quarters 2002 Quarters
------------------------------------- -------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-----------------------------------------------------------------------------
Range of Stock prices:
High $ 38.95 $ 32.25 $ 29.50 $ 30.00 $ 28.01 $ 25.25 $ 26.75 $ 25.25
Low $ 29.50 $ 29.00 $ 26.00 $ 26.00 $ 25.00 $ 22.51 $ 24.10 $ 21.25
(c) Holders
There were approximately 473 holders of record of the common stock of the
Company as of March 5, 2004. This number includes brokerage firms and other
financial institutions which hold stock in their name but which is actually
owned by third parties.
D-13
(c) Dividends
Dividends are currently declared four times a year, and the Company expects to
follow such practices in the future. During the year 2003, the Company declared
a cash dividend each quarter of $.23 per share. Dividends for the year 2003
totaled $.92 per share which compared to total dividends of $.88 that were
declared in the year 2002. At their February 27, 2004 meeting, the Directors of
the Company declared a cash dividend of $.24 per share for the first quarter of
2004. The dividend will be paid on April 28, 2004 to shareholders of record as
of March 31, 2004. Payment of all dividends are dependent upon the condition and
earnings of the Company. The Company's ability to pay dividends is limited by
the prudent banking principles applicable to all bank holding companies and by
the provisions of Connecticut Corporate law, which provide that no distribution
may be made by a company if, after giving it effect: (1) the company would not
be able to pay its debts as they become due in the usual course of business or
(2) the company's total assets would be less than the sum of its total
liabilities plus amounts needed to satisfy any preferred stock rights. The
following table presents cash dividends declared per share for the last two
years:
2003 Quarters 2002 Quarters
--------------------------------- ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--------------------------------- ---------------------------------
Cash dividends
declared $ 0.23 $ 0.23 $ 0.23 $ 0.23 $ 0.22 $ 0.22 $ 0.22 $ 0.22
The dividends paid to shareholders of the Company are funded primarily from
dividends received by the Company from the Bank. Reference should be made to
Note 12 of the Consolidated Financial Statements for a description of
restrictions on the ability of the Bank to pay dividends to the Company.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Equity Compensation Plan information is provided in Item 11 of this Form 10-K.
D-14
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE COMPANY
At or For the Years Ended December 31
2003 2002 2001 2000 1999
(dollars in thousands except per share data)
Statement of Condition Data:
Loans, Net $ 139,563 $ 135,632 $ 143,066 $ 138,270 $ 124,313
Allowance For Loan Losses 1,664 1,458 1,445 1,292 1,160
Investments 147,021 138,435 105,593 91,922 77,745
Total Assets 311,100 293,107 283,602 249,054 215,385
Deposits 218,457 211,037 201,351 166,436 154,358
Borrowings 60,897 51,891 53,004 47,357 39,712
Shareholders' Equity 28,850 27,345 23,363 22,460 19,895
Nonperforming Assets 685 1,400 587 521 495
Statement of Income Data:
Interest and Fees on Loans $ 9,226 $ 9,677 $ 11,344 $ 10,494 $ 9,621
Interest and Dividends on Securities
and Other Interest Income 6,423 6,481 5,746 6,015 4,903
Interest Expense 5,613 6,898 8,301 8,284 6,683
Net Interest Income 10,036 9,260 8,789 8,225 7,841
Provision for Loan Losses 313 300 150 180 120
Trust Department Income 1,252 1,100 1,070 1,108 1,121
Other Income 1,674 1,388 1,187 914 860
Net Gain (Loss) on Sales of Securities 1,058 634 130 (64) (2)
Other Expenses 8,599 7,775 6,755 5,797 5,523
Pre Tax Income 5,108 4,307 4,271 4,206 4,177
Income Taxes 1,268 1,108 1,370 1,357 1,484
Net Income $ 3,840 $ 3,199 $ 2,901 $ 2,849 $ 2,693
Per Share Data:
Earnings per common share $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Earnings per common share, assuming dilution $ 2.70 $ 2.25 $ 2.03 $ 1.92 $ 1.78
Cash Dividends Declared per share $ 0.92 $ 0.88 $ 0.84 $ 0.77 $ 0.70
Book Value (at year end) $ 20.26 $ 19.21 $ 16.43 $ 15.40 $ 13.23
Selected Statistical Data:
Return on Average Assets 1.24% 1.13% 1.14% 1.23% 1.25%
Return on Average Shareholders' Equity 13.47% 12.63% 12.25% 13.64% 12.96%
Dividend Payout Ratio 34.07% 39.11% 41.38% 39.72% 39.16%
Average Shareholders' Equity to Average Assets 9.21% 8.92% 9.27% 8.98% 9.67%
Net Interest Spread 3.23% 3.13% 2.91% 2.83% 3.07%
Net Interest Margin 3.65% 3.72% 3.71% 3.79% 3.93%
D-15
Salisbury Bancorp, Inc.
and Subsidiary
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS BUSINESS
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company,
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and the Bank
were formed in 1998 and 1848, respectively. This discussion should be read in
conjunction with the Company's consolidated financial statements and the notes
to the consolidated financial statements that are presented as part of this
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2003 and 2002
OVERVIEW
The reported earnings for the Company were $3,840,000 in 2003, an increase of
$641,000 or 20.04% over year 2002 earnings of $3,199,000. As a result, earnings
per share increased $.45 or 20.00% to $2.70 in 2003. This compares to earnings
per share of $2.25 in 2002 and $2.03 in 2001. The improvement in net income is
primarily the result of growth in earning assets that has produced an increase
in total net interest income, a reduction in interest expense and an increase in
other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2003, which includes the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 15.35% for Tier 1 capital and 16.44% for
total capital. The Company's leverage ratio was 8.05% at December 31, 2003. This
compares to a Tier 1 capital ratio at December 31, 2002 of 16.05%, a total
capital ratio of 17.21%, and a Company leverage ratio of 7.80%.
As a result of the Company's financial performance, the Board of Directors
increased total dividends declared on the Company's common stock to $.92 per
share in 2003. This compares to an $.88 per share dividend paid in 2002 and a
$.84 per share dividend that was paid in 2001.
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".
D-16
NET INTEREST AND DIVIDEND INCOME
The Company earns income from two basic sources. The primary source is through
the management of its financial assets and liabilities and involves functioning
as a financial intermediary. The Company accepts funds from depositors or
borrows funds and either lends the funds to borrowers or invests those funds in
various types of securities. The second source is fee income, which is discussed
in the noninterest income section of this analysis.
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2003 2002 2001
------------------------------
Interest and Dividend Income
(financial statements) $ 15,650 $ 16,157 $ 17,089
Tax Equivalent Adjustment 1,075 1,028 504
-------- -------- --------
Total Interest Income (on an FTE basis) 16,725 17,185 17,593
Interest Expense (5,613) (6,898) (8,301)
-------- -------- --------
Net Interest Income-FTE $ 11,112 $ 10,287 $ 9,292
======== ======== ========
The Company's 2003 total interest and dividend income on an FTE basis of
$16,725,000 was $460,000 or 2.68% less than the total interest and dividend on
an FTE basis of $17,185,000 in 2002. Although there was an increase in earning
assets, this decrease in interest and dividend income is primarily the result of
an economic environment with lower interest rates. A change in the mix of
earning assets during 2002 and continuing into 2003 has increased tax exempt
securities in the securities portfolio which has resulted in an increase in the
tax equivalent adjustment of $1,075,000 in 2003 and $1,028,000 in 2002 when
compared to the tax equivalent adjustment of $504,000 in 2001.
Interest expense on deposits in 2003 decreased $1,173,000 or 29.05% to
$2,866,000 compared to $4,039,000 for the corresponding period in 2002 and
$5,302,000 in 2001. Although deposits increased, generally lower interest rates
resulted in the decrease. Interest expense for Federal Home Loan Bank advances
decreased $111,000 to $2,747,000 in 2003 compared to $2,858,000 in 2002 and
$2,999,000 in 2001. Lower interest rates resulted in the decrease in interest
expense. Although interest margins continue to be pressured by generally lower
interest rates and by aggressive competition, net interest income on an FTE
basis increased $825,000 or 8.02% over 2002 and totaled $11,112,000 at December
31, 2003 compared to total net interest income on an FTE basis of $10,287,000 at
December 31, 2002 and $9,292,000 in 2001.
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 2003 net interest margin on an FTE basis
was 3.65%. This compares to a net interest margin of 3.72% for 2002. The
following table reflects average balances, interest earned or paid and rates for
the three years ended December 31, 2003, 2002 and 2001. The average loan
balances include both non-accrual and restructured loans. Interest earned on
loans also includes fees on loans such as late charges that are not deemed to be
material. Interest earned on tax exempt securities in the table is presented on
a fully taxable-equivalent basis ("FTE"). A federal tax rate of 34% was used in
performing these calculations. Actual tax exempt income earned in 2003 was
$2,086,000 with a yield of 4.83%. Actual tax exempt income in 2002 totaled
$1,995,000 with a yield of 4.88% and in 2001 actual tax exempt income was
$977,000 with a yield of 4.95%.
D-17
YIELD ANALYSIS
Average Balances, Interest Earned and Rates Paid
Year Ended December 31
(dollars in thousands) 2003 2002 2001
Interest Interest Interest
Average Earned/ Yield Average Earned/ Yield Average Earned/ Yield
Balance Paid Rate Balance Paid Rate Balance Paid Rate
ASSETS
Interest Earning Assets:
Loans $ 142,752 $ 9,226 6.46% $ 139,582 $ 9,677 6.93% $ 145,502 $ 11,344 7.80%
Taxable Securities $ 101,931 $ 3,875 3.80% $ 81,715 $ 4,144 5.07% $ 68,921 $ 4,204 6.10%
Tax-Exempt Securities * $ 43,603 $ 3,161 7.25% $ 41,347 $ 3,023 7.31% $ 20,030 $ 1,481 7.39%
Federal Funds $ 3,125 $ 28 0.90% $ 7,214 $ 111 1.54% $ 9,986 $ 324 3.24%
Other Interest Income $ 1,359 $ 10 0.74% $ 549 $ 11 2.00% $ 809 $ 36 4.45%
Total Interest Earning Assets $ 292,770 $ 16,300 5.57% $ 270,407 $ 16,966 6.27% $ 245,248 $ 17,389 7.09%
Allowance for Loan Losses $ (1,468) $ (1,403) $ (1,412)
Cash & due from Banks $ 6,425 $ 5,923 $ 5,138
Premises, Equipment $ 3,000 $ 2,810 $ 2,676
Net unrealized gain/loss on AFS
Securities $ 2,316 $ 1,083 $ 500
Other Assets $ 6,403 $ 5,263 $ 3,312
Total Average Assets $ 309,446 $ 284,083 $ 255,462
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Now/Money Market Deposits $ 59,521 $ 363 0.61% $ 62,756 $ 807 1.29% $ 67,516 $ 1,902 2.82%
Savings Deposits $ 45,975 $ 450 0.98% $ 37,629 $ 743 1.97% $ 16,674 $ 396 2.37%
Time Deposits $ 68,898 $ 2,053 2.98% $ 67,157 $ 2,490 3.71% $ 60,854 $ 3,004 4.94%
Borrowed Funds $ 65,282 $ 2,747 4.21% $ 51,966 $ 2,858 5.50% $ 53,407 $ 2,999 5.62%
Total Interest Bearing
Liabilities $ 239,676 $ 5,613 2.34% $ 219,508 $ 6,898 3.14% $ 198,451 $ 8,301 4.18%
Demand Deposits $ 38,998 $ 37,578 $ 31,497
Other Liabilities $ 2,130 $ 1,660 $ 1,829
Shareholders' Equity $ 28,642 $ 25,337 $ 23,685
Total Liabilities and Equity $ 309,446 $ 284,083 $ 255,462
Net Interest Income $ 10,687 $ 10,068 $ 9,088
Net Interest Spread 3.23% 3.13% 2.91%
Net Interest Margin 3.65% 3.72% 3.71%
* Presented on a fully taxable equivalent ("FTE") basis
D-18
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2003 over 2002 2002 over 2001
---------------------------- ----------------------------
Volume Rate Total Volume Rate Total
---------------------------- ----------------------------
Increase (decrease) in:
Interest income on:
Loans $ 220 $ (671) $ (451) $ (462) $ (1,205) $ (1,667)
Taxable investment securities 1,025 (1,294) (269) 780 (840) (60)
Tax-exempt investment securities 165 (27) 138 1,575 (33) 1,542
Other interest income (51) (33) (84) (100) (138) (238)
------- -------- ------- ------- -------- --------
Total interest income $ 1,359 $ (2,025) $ (666) $ 1,793 $ (2,216) $ (423)
------- -------- ------- ------- -------- --------
Interest expense on:
NOW/Money Market deposits $ (42) $ (402) $ (444) $ (134) $ (961) $ (1,095)
Savings deposits (164) (129) (293) 496 (149) 347
Time deposits 65 (502) (437) 311 (825) (514)
Borrowed funds 732 (843) (111) (81) (60) (141)
------- -------- ------- ------- -------- --------
Total interest expense $ 591 $ (1,876) $(1,285) $ 592 $ (1,995) $ (1,403)
------- -------- ------- ------- -------- --------
Net interest margin $ 768 $ (149) $ 619 $ 1,201 $ (221) $ 980
======= ======== ======= ======= ======== ========
NONINTEREST INCOME
Noninterest income increased $862,000 or 27.61% and totaled $3,984,000 for the
year ended December 31, 2003 as compared to $3,122,000 for the year ended
December 31, 2002. Trust Department income increased $152,000 to $1,252,000
primarily as a result of the efforts of new business development. Service
charges on deposit accounts totaled $560,000 for 2003. This is an increase of
$88,000 or 18.64% when comparing total service charges of $472,000 in 2002. The
increase can be attributed to an increase in deposit account transactions. Gains
on sales of available-for-sale securities totaled $1,058,000 in 2003
representing an increase of $424,000 or 66.88% compared to $634,000 in 2002.
This increase is primarily attributable movements in the markets which resulted
in opportunities for the Company to enhance the return from the securities
portfolio and at the same time realize gains on sales of available-for-sale
securities. Mortgage refinancing remained very active during 2003 as rates
remained at all time lows. Competition in the secondary mortgage market
continues to be very aggressive. Gains on sale of loans held-for-sale increased
$35,000 or 15.42% to $262,000 in 2003 compared to $227,000 in 2002. Other income
however, increased 16.13% to $799,000 in 2003 compared to other income of
$688,000 in 2002. This increase is primarily attributable to the increase in
fees earned from activity in the secondary mortgage market due to the change of
investors. Historically the Company has had few instances in which it foreclosed
on properties and therefore has a low volume of OREO properties. The Company
acquired one OREO property during the 2002, sold it in 2003 and realized a gain
on the sale of $52,000.
NONINTEREST EXPENSE
Noninterest expense increased 10.61% to $8,600,000 for the year ended December
31, 2003 as compared to $7,775,000 for the corresponding period in 2002.
Salaries and employee benefits totaled $4,834,000 for the twelve months ended
December 31, 2003 compared to $4,235,000 for the same period in 2002. This is an
increase of $599,000 or 14.14% over 2002 and is primarily the result of an
increase in staff along with salary increases and the increase in the costs of
employee benefits. Occupancy and equipment expenses increased $64,000 or 7.31%
to $939,000 compared to $875,000 for 2002. The increase is primarily the result
of expenses associated with routine maintenance and repairs of the Company's
facilities and equipment. Data processing expenses increased $42,000 or 7.88%
for the year ended December 31, 2003 over 2002 and totaled $575,000. This
increase is attributable to normal increasing costs related to enhancing the
delivery channels of products to our customers. Legal expenses totaled $128,000
for 2003. This is an increase of $67,000 or 110% when comparing total legal
expense in 2002 of $61,000. The increase is primarily the result of additional
services required due to compliance requirements of the Sarbanes-Oxley Act.
Amortization expense of the "Core Deposit Intangible" assets associated with the
2001 Branch acquisition totaled $68,000 and did not change from 2002.
D-19
INCOME TAXES
In 2003, the Company's income tax provision totaled $1,268,000, which reflects
an effective tax rate of 24.82% compared to an income tax provision of
$1,108,000 and an effective tax rate of 25.72% in 2002. Although there was a
decrease in the effective tax rate, the provision increased $160,000 as the
result of an increase in taxable income.
NET INCOME
Overall, net income totaled $3,840,000 for the year ended December 31, 2003
compared to net income of $3,199,000 for the year 2002 representing an increase
of $641,000 or 20.04%. On a per share basis, net income amounted to $2.70 per
share for 2003 as compared to $2.25 for 2002.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 2002 and 2001
Net income for the Company was $3,199,000 in 2002, an increase of $298,000 or
10.27% over year 2001 earnings of $2,901,000. As a result, earnings per share
increased $.22 or 10.83% to $2.25 in 2002. This compared to earnings per share
of $2.03 in 2001. The improvement in net income was primarily the result of
growth in earning assets that produced an increase in total net interest income
coupled with an increase in other noninterest income.
The Company is "well capitalized". The Company's risk-based capital ratios at
December 31, 2002, which included the risk-weighted assets and capital of the
Salisbury Bank and Trust Company, were 16.05% for Tier 1 capital and 17.21% for
total capital. The Company's leverage ratio was 7.80% at December 31, 2002. This
compared to a Tier 1 capital ratio at December 31, 2001 of 15.09%, a total
capital ratio of 16.21% The Company's leverage ratio was 7.61%.
As a result of the Company's financial performance, the Board of Directors
increased total dividends declared on the Company's common stock to $.88 per
share in 2002 as compared to $.84 per share in 2001.
NET INTEREST AND DIVIDEND INCOME
Net interest income is the difference between the interest and fees earned on
loans, interest and dividends earned on securities (the Company's earning
assets) and the interest expense paid on deposits and borrowed funds, primarily
in the form of advances from the Federal Home Loan Bank. The amount by which
interest income will exceed interest expense depends on two factors: (1) the
volume or balance of earning assets compared to the volume or balance of
interest-bearing deposits and borrowed funds and (2) the interest rate earned on
those interest earning assets compared with the interest rate paid on those
interest-bearing deposits and borrowed funds. For this discussion, net interest
income is presented on a fully taxable-equivalent ("FTE") basis. FTE interest
income restates reported interest income on tax exempt loans and securities as
if such interest were taxed at the applicable State and Federal income tax rates
for all periods presented.
(dollars in thousands) December 31,
2002 2001 2000
------------------------------
Interest and Dividend Income
(financial statements) $ 16,157 $ 17,089 $ 16,510
Tax Equivalent Adjustment 1,028 504 335
-------- -------- --------
Total Interest Income (on an FTE basis) 17,185 17,593 16,845
Interest Expense (6,898) (8,301) (8,284)
-------- -------- --------
Net Interest Income-FTE $ 10,287 $ 9,292 $ 8,561
======== ======== ========
D-20
The Company's 2002 total interest and dividend income on an FTE basis of
$17,185,000 was $408,000 or 2.32% less than the total interest and dividend on
an FTE basis of $17,593,000 in 2001. Although there was an increase in earning
assets, this decrease in interest and dividend income was primarily the result
of an economic environment with lower interest rates. A change in the mix of
earning assets which reflects an increase in tax exempt securities resulted in a
significant increase in the tax equivalent adjustment of $1,028,000 for 2002 as
compared to $504,000 for 2001. This was an increase of approximately 104%.
Interest expense on deposits in 2002 decreased $1,262,000 or 23.80% and totaled
$4,040,000. This compared to $5,302,000 for the corresponding period in 2001.
Although deposits increased, primarily as the result of a branch acquisition
which was completed in September 2001, generally lower interest rates resulted
in the decrease in interest expense. Interest expense for Federal Home Loan Bank
advances decreased $141,000 to $2,858,000 in 2002. This compared to interest
expense of $2,999,000 in 2001 and is primarily the result of a decrease in
borrowings. Although interest margins continue to be pressured by generally
lower interest rates and by aggressive competition, net interest income on an
FTE basis increased $995,000 or 10.71% and totaled $10,287,000 at December 31,
2002. This compared to total net interest income on an FTE basis of $9,292,000
at December 31, 2001.
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 2002 net interest margin on an FTE basis
was 3.72%. This compares to a net interest margin of 3.71% for the corresponding
period in 2001. The following table reflects average balances, interest earned
or paid and rates for the three years ended December 31, 2002, 2001 and 2000.
The average loan balances include both non-accrual and restructured loans.
Interest earned on loans also includes fees on loans such as late charges
collected that are not deemed to be material. Interest earned on tax exempt
securities in the table is presented on a fully taxable-equivalent basis
("FTE"). A federal tax rate of 34% was used in performing these calculations.
Actual tax exempt income earned in 2002 was $1,995,000 with a yield of 4.83%.
Actual tax exempt income in 2001 totaled $977,000 with a yield of 4.88%.
Volume and Rate Variance Analysis of Net Interest Income
(Taxable equivalent basis)
(dollars in thousands) 2002 over 2001 2001 over 2000
----------------------------- ---------------------------
Volume Rate Total Volume Rate Total
----------------------------- ---------------------------
Increase (decrease) in:
Interest income on:
Loans $ (462) $ (1,205) $ (1,667) $ 1,253 $ (403) $ 850
Taxable investment securities 780 (840) (60) (327) (61) (388)
Tax-exempt investment securities 1,575 (33) 1,542 515 (21) 494
Other interest income (100) (138) (238) 132 (340) (208)
------- -------- -------- ------- ------- -------
Total interest income $ 1,793 $ (2,216) $ (423) $ 1,573 $ (825) $ 748
------- -------- -------- ------- ------- -------
Interest expense on:
NOW/Money Market deposits $ (134) $ (961) $ (1,095) $ 272 $ (616) $ (344)
Savings deposits 496 (149) 347 24 (10) 14
Time deposits 311 (825) (514) 368 (158) 210
Borrowed funds (81) (60) (141) 239 (103) 136
------- -------- -------- ------- ------- -------
Total interest expense $ 592 $ (1,995) $ (1,403) $ 903 $ (887) $ 16
------- -------- -------- ------- ------- -------
Net interest margin $ 1,201 $ (221) $ 980 $ 670 $ 62 $ 732
======= ======== ======== ======= ======= =======
NONINTEREST INCOME
Noninterest income totaled $3,122,000 for the year ended December 31, 2002
compared to $2,387,000 for the year ended December 31, 2001. Trust Department
income increased slightly to $1,100,000 from $1,070,000. This was primarily the
result of the efforts of new business development. Service charges remained
consistent at $472,000 for 2002 and 2001, respectively. Gains on sales of
available-for-sale securities totaled $634,000 in 2002. This represented an
increase of $504,000 or 388% when comparing total gains on sales of
available-for-sale securities of $130,000 in 2001. Movement in the markets
presented opportunities for the Company to enhance the return from the
securities portfolio which resulted in this increase. Other income, including
gain on sale of loans held-for sale, increased $200,000 or 27.97% to $915,000 in
2002. This compares to total other income, including gain on sale of loans
held-for-sale, of $715,000 in 2001. This increase was primarily the result of
increased fees generated from the refinancing activities in the secondary market
as well as an increase in transaction fees generated from activity of deposit
accounts.
D-21
NONINTEREST EXPENSE
Noninterest expense increased 15.10% to $7,775,000 for the year ended December
31, 2002 as compared to $6,755,000 for the corresponding period in 2001.
Salaries and employee benefits totaled $4,235,000 for the twelve months ended
December 31, 2002 compared to $3,834,000 for the same period in 2001. This was
an increase of $401,000 or 10.46% and was primarily the result of the addition
of staff for the branch that was acquired in September 2001 coupled with the
additional staff that was also hired to service the increase in new business at
the Bank's other facilities. Annual pay raises and the increasing costs of
employee benefits also contributed to the increased expense. Occupancy and
equipment expenses increased $142,000 or 19.37% to $875,000. This compared to
total occupancy and equipment expense of $733,000 for the same period in 2001.
The increase was primarily the result of expenses associated with having an
additional office to maintain. The Company incurred some equipment costs
relating to system upgrades. Data processing expenses increased $39,000 or 7.79%
for the year ended December 31, 2002 and totaled $533,000. Data processing
expenses for the same period in 2001 totaled $495,000. Insurance expenses for
the year 2002, which do not include insurance benefits associated with
employees, increased $22,000 or 23.69% and totaled $114,000 as compared to
$92,000 for 2001. Printing and stationery costs and legal expenses remained very
consistent when comparing 2002 to 2001. Amortization expense of the "Core
Deposit Intangible" assets associated with the 2001 branch acquisition totaled
$68,000 for the year ended December 31, 2002. This expense for 2002 represented
a full year of amortization while the total expense of $48,000 represented only
three and one half months of the year 2001 because the acquisition was completed
in September 2001. Other operating expenses totaled $1,701,000 for the year
ended December 31, 2002 compared to other operating expenses totaling $1,318,000
for the corresponding period in 2001. This increase of $383,000 or 29.06% was
primarily the result of additional expenses relating to the operation of the
newly acquired branch coupled with increased expenses relating to Trust
operations as well as normal increases in expenses associated with the operation
of the Company.
INCOME TAXES
In 2002, the Company's income tax provision totaled $1,108,000, an effective tax
rate of 25.72%. This compared to an income tax provision of $1,370,000 in 2001,
reflecting an effective tax rate of 32.08%. This decrease was primarily the
result of the impact of an increase in tax exempt interest earned from the
securities portfolio.
NET INCOME
Overall, net income totaled $3,199,000 for the year ended December 31, 2002,
compared to net income of $2,901,000 for 2001. This was an increase of $298,000
or 10.27% and reflected earnings of $2.25 per share compared to earnings per
share of $2.03 for 2001.
FINANCIAL CONDITION
Comparison of December 31, 2003 and 2002
Total assets at December 31, 2003 were $311,100,000 compared to $293,107,000 at
December 31, 2002. This is an increase of $17,993,000 or 6.14%. The increase is
primarily due to additional advances taken from the Federal Home Loan Bank as
part of a strategy to increase interest income.
SECURITIES PORTFOLIO
The Company manages the securities portfolio in accordance with the investment
policy adopted by the Board of Directors. The primary objectives are to earn
interest and dividend income, provide liquidity to meet cash flow needs and to
manage interest rate risk and asset-quality diversifications to the Company's
assets. The securities portfolio also acts as collateral for deposits of public
agencies. As of December 31, 2003, the securities portfolio, including Federal
Home Loan Bank of Boston stock, totaled $147,021,000. This represents an
increase of $8,586,000 or 6.20% over year-end 2002. The increase is a reflection
of the strategy to increase interest income as a portion of the advances from
the Federal Home Loan Bank were used to purchase securities at a rate of return
higher than the borrowing cost in order to generate additional interest income
from the securities portfolio.
D-22
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either
Securities-Available-for-Sale and Securities-Held-to-Maturity. The securities
reported as available-for-sale are stated at fair value in the financial
statements of the Company. Unrealized holding gains and losses (accumulated
other comprehensive income/loss) are not included in earnings, but are reported
as a net amount (less expected tax) in a separate component of capital until
realized. At December 31, 2003, the unrealized gain net of tax was $686,000.
This compares to an unrealized gain net of tax of $1,734,000 at December 31,
2002. The securities reported as securities-held-to-maturity are stated at
amortized cost.
FEDERAL FUNDS SOLD
The balance of federal funds sold totaled $2,272,000 at December 31, 2003. This
compares to $1,750,000 at December 31, 2002. This represents a normal operating
range of funds for daily cash needs and is considered to be adequate by
Management.
LENDING
New business development during the year coupled with a small increase in loan
demand resulted in an increase in loans receivable, net of allowance for loan
losses of $3,931,000 or 2.90% to $139,563,000 at December 31, 2003, as compared
to $135,632,000 at December 31, 2002. Competition for loans remains very
aggressive in the market area of the Company. Although the largest dollar
volumes of loan activity continues to be in the residential mortgage area, the
Company offers a wide variety of loan types and terms along with competitive
pricing to customers. The Company's credit function is designed to ensure
adherence to prudent credit standards despite competition for loans in the
Company's market area.
PROVISIONS AND ALLOWANCE FOR LOAN LOSSES
Total gross loans at December 31, 2003 were $141,228,000, as compared to
$137,090,000 at December 31, 2002. This is an increase of $4,138,000 or 3.02%.
At December 31, 2003 approximately 89% of the Bank's loan portfolio was related
to real estate products and although the portfolio increased during the year
2003, the concentration remained consistent as approximately 86% of the
portfolio was related to real estate at December 31, 2002. The increase in total
gross loans was primarily the result of an increase in construction mortgages.
Otherwise there were no material changes in the composition of the loan
portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Company's objectives. Because of the risk
associated with extending loans the Company maintains an allowance or reserve
for credit losses through charges to earnings. The loan loss provision for the
year 2003 was $313,000 as compared to $300,000 for the year ended December 31,
2002. The level of nonperfoming loans remains low as a percentage of total
loans. Nonperforming loans totaled $610,000 or .43 % of total loans at December
31, 2003 as compared to $1,250,000 or .91% of total assets at December 31, 2002.
Nonperforming loans are closely monitored by management.
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
used in making this determination during the year ended December 31, 2003. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which is submitted to the Board of Directors for
approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
D-23
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Loans to be considered for impairment are defined in the Bank's Loan Policy as
residential real estate mortgages with balances of $300,000 or more and
commercial loans of $100,000 or more. Such loans are considered impaired when it
is probable that the Bank will not be able to collect all principal and interest
due according to the terms of the note. Any such commercial loans and
residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly
questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
years ended December 31, 2003 and 2002.
At December 31, 2003 the allowance for loan losses totaled $1,664,000,
representing 272.79% of nonperforming loans, which totaled $610,000, and 1.18%
of total loans of $141,228,000. This compares to $1,458,000, representing
116.64% of nonperforming loans, which totaled $1,250,000 and .91% of total loans
of $137,090,000 at December 31, 2002. A total of $155,000 in loans were charged
off during the year 2003, as compared to $251,000 during 2002. A total of
$48,000 of previously charged off loans was recovered during the year ended
December 31, 2003. Recoveries for the year 2002 totaled $29,000. When comparing
the two years, net charge-offs were $107,000 for the year 2003 and during the
year 2002 net charge-offs totaled $222,000. Management believes that the
allowance for loan losses is adequate. While management estimates loan losses
using the best available information, no assurances can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans or other factors.
Additionally, despite the overall good quality of the loan portfolio generally,
with expectations of the Company to continue to grow its existing portfolio,
future additions to the allowance may be necessary to maintain adequate reserve
coverage.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Deposits at year-end 2003 totaled $218,457,000 compared to
$211,037,000 at year-end 2002. This increase of $7,420,000 or 3.52% can be
primarily attributed to the ongoing efforts of the Company to competitively
price products and develop and maintain relationship banking with its customers.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and the aggressive
competition from nonbanking entities. During the year, there was an increase in
demand, NOW and savings accounts which are lower cost core deposits.
D-24
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
2003 2002 2001
------------------------------------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------------------------------------------------------
Demand $ 38,998 $ 37,578 $ 31,497
NOW 20,030 .31% 19,833 .82% 17,185 1.07%
Money Market 39,491 .76% 42,923 1.50% 50,331 3.41%
Savings 45,975 .98% 37,629 1.98% 16,674 2.37%
Time 68,898 2.98% 67,157 3.71% 60,854 4.94%
--------- --------- ---------
$ 213,392 1.34% $ 205,120 1.97% $ 176,541 3.00%
========= ========= =========
Maturities of time certificates of deposits of $100,000 or more outstanding for
the years ended December 31 are summarized as follows:
(dollars in thousands)
Year Ended December 31
2003 2002 2001
------------------------------
Three months or less $ 5,575 $ 3,454 $ 3,895
Over three months through six months 1,343 3,630 4,161
Over six months through one year 5,591 7,913 4,398
Over one year 11,080 8,050 5,708
-------- -------- --------
Total $ 23,589 $ 23,047 $ 18,162
======== ======== ========
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, 2003, the Company had $60,897,000 in
outstanding advances from the Federal Home Loan Bank compared to $51,891,000 at
December 31, 2002. Management expects that it will continue this strategy of
supplementing deposit growth with advances from Federal Home Loan Bank of
Boston.
INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
The Bank's assets and liabilities are managed in accordance with policies
established and reviewed by the Bank's Board of Directors. The Bank's
Asset/Liability Management Committee monitors asset and deposit levels,
developments and trends in interest rates, liquidity and capital. One of the
primary financial objectives is to manage interest rate risk and control the
sensitivity of earnings to changes in interest rates in order to prudently
improve net interest income and manage the maturities and interest rate
sensitivities of assets and liabilities.
D-25
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At December
31, 2003, the Company was slightly asset sensitive (positive gap). This would
suggest that the during a period of rising interest rates the Company would be
in a better position to invest in higher yielding assets resulting in growth in
interest income. To the contrary, during a period of falling interest rates, a
positive gap would result in a decrease in interest income. The level of
interest rate risk at December 31, 2003 is within the limits approved by the
Board of Directors.
LIQUIDITY
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, Salisbury Bank and Trust
Company is a member of the Federal Home Loan Bank of Boston which provides a
source of available borrowings for liquidity.
At December 31, 2003, the Company had approximately $29,003,000 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, 2003, the Company had $28,850,000 in shareholder equity compared
to $27,345,000 at December 31, 2002. This represents an increase of $1,505,000
or 5.50%. Several components contributed to the change since December 2002.
Earnings for the year totaled $3,840,000. Market conditions have reduced
unrealized securities gains and resulted in a negative adjustment to
comprehensive income of $1,049,000. The Company declared dividends in 2003
resulting in a decrease in capital of $1,310,000. The Company issued 840 new
shares of common stock under the terms of the Director Stock Retainer Plan
during the second quarter of 2002 which resulted in an increase in capital of
$24,000. Under current regulatory definitions, the Company and the Bank are
considered to be "well capitalized" for capital adequacy purposes. As a result,
the Bank pays the lowest federal deposit insurance deposit premiums possible.
One primary measure of capital adequacy for regulatory purposes is based on the
ratio of risk-based capital to risk weighted assets. This method of measuring
capital adequacy helps to establish capital requirements that are sensitive to
the differences in risk associated with various assets. It takes in account
off-balance sheet exposure in assessing capital adequacy and it minimizes
disincentives to holding liquid, low risk assets. At year-end 2003, the Company
had a risk-based capital ratio of 16.44% compared to 17.21% at December 31,
2002. The primary difference results from the negative effect of market
movements on unrealized gains and therefore a decrease in comprehensive income.
Maintaining strong capital is essential to bank safety and soundness. However,
the effective management of capital resources requires generating attractive
returns on equity to build value for shareholders while maintaining appropriate
levels of capital to fund growth, meet regulatory requirements and be consistent
with prudent industry practices. Management believes that the capital ratios of
the Company and Bank are adequate to continue to meet the foreseeable capital
needs of the institution.
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.
D-26
IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. Paragraph 5 of SFAS No. 147, which relates to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition was on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in paragraphs 8-14 were effective on October 1, 2002, with
earlier application permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 it's recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of December
31, 2003. The Company determined that its reclassified goodwill as of those
dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
D-27
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003. There was
no substantial impact on the Company's consolidated financial statements on
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on the Company's consolidated
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity.
In December 2003, the FASB revised Interpretation No. 46, also referred to as
Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not
to restrict the use of variable interest entities but to improve financial
reporting by companies involved with variable interest entities. Until now, one
company generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company only if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. The Company is
required to apply FIN 46, as revised, to all entities subject to it no later
than the end of the first reporting period ending after March 15, 2004. However,
prior to the required application of FIN 46, as revised, the Company shall apply
FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose
entities as of the end of the first fiscal year or interim period ending after
December 15, 2003. The adoption of this interpretation has not and is not
expected to have a material effect on the Company's consolidated financial
statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.
D-28
RECENT DEVELOPMENTS
On November 18, 2003, the Company announced the execution of a definitive
agreement (the "Agreement") to acquire Canaan National Bancorp, Inc. ("Canaan"),
parent of The Canaan National Bank. Canaan is headquartered in Canaan,
Connecticut and has a branch in Berkshire County, Massachusetts. On that date,
it had assets of approximately $108 million.
Under the terms of the Agreement, which was unanimously approved by the board of
directors, the shareholders of Canaan will be entitled to receive merger
considerations consisting of $31.20 in cash and 1.3371 shares of Salisbury
common stock for every share of Canaan Stock. The purchase price represented
174.5% of Canaan's fully diluted tangible book value and 21.4 times Canaan's
last twelve months earnings.
The merger is subject to approval by state and federal bank supervisory agencies
and the shareholders of Canaan. Salisbury anticipates that the transaction will
close in the third quarter of 2004.
OFF-BALANCE SHEET ARRANGEMENTS
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. In the
opinion of management, these off-balance sheet arrangements are not likely to
have a material effect on the Company's financial condition, results of
operations, or liquidity. (See Note 11 to the Financial Statements).
FORWARD LOOKING STATEMENTS
This Annual Report and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Bank, and oral statements made by
executive officers of the Company and the Bank, may include forward-looking
statements relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business, and
(b) expectations for increased revenues and earnings for the Company and Bank
through growth resulting from acquisitions, attraction of new deposit and
loan customers and the introduction of new products and services.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of the Company's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(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.
D-29
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
Management is responsible for the integrity and objectivity of the consolidated
financial statements and other information appearing in this Form 10-K. The
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States of America applying estimates
and management's best judgment as required. To fulfill their responsibilities,
management establishes and maintains accounting systems and practices adequately
supported by internal accounting controls. These controls include the selection
and training of management and supervisory personnel; an organization structure
providing for delegation of authority and establishment or responsibilities;
communication of requirements for compliance with approved accounting, control
and business practices throughout the organization; business planning and
review; and a program of internal audit. Management believes the internal
accounting controls in use provide reasonable assurance that assets are
safeguarded, that transactions are executed in accordance with management's
authorization and that financial records are reliable for the purpose of
preparing financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The main components of market risk for the Company are equity price risk, credit
risk, interest rate risk and liquidity risk. The Company's stock is traded on
the American Stock Exchange under the symbol "SAL". As a result, the value of
its common stock may fluctuate or respond to price movements relating to the
banking industry or other indicia of investment. The Company manages interest
rate risk and liquidity risk through an ALCO Committee comprised of outside
Directors and senior management. The committee monitors compliance with the
Bank's Asset/Liability Policy which provides guidelines to analyze and manage
gap, which is the difference between the amount of assets and the amounts of
liabilities which mature or reprice during specific time frames. Model
simulation is used to measure earnings volatility under both rising and falling
interest rate scenarios. The Company's interest rate risk and liquidity position
has not significantly changed from year end 2003. A discussion of credit risk
can be found in Part II, Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Form 10-K.
D-30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Auditors' January 20, 2004.......................... D-32
Consolidated Balance Sheets at December 31, 2003 and 2002................. D-33
Consolidated Statements of Income for the Years Ended
December 31, 2003, 2002 and 2001....................................... D-34
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2003, 2002 and 2001................... D-35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001....................................... D-36
Notes to Consolidated Financial Statements for the
Years Ended December 31, 2003, 2002 and 2001........................... D-38
Salisbury Bancorp, Inc. (parent company only)
Balance Sheet for the Years Ended December 31, 2003 and 2002........... D-57
Statement of Income for the Years Ended
December 31, 2003, 2002 and 2001....................................... D-58
Statement of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001....................................... D-59
Quarterly Results of Operations (unaudited)............................... D-60
D-31
To the Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Salisbury Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 20, 2004
D-32
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 7,687,979 $ 7,548,911
Interest bearing demand deposits with other banks 1,668,310 784,035
Money market mutual funds 500,512 536,982
Federal funds sold 2,272,000 1,750,000
------------- -------------
Cash and cash equivalents 12,128,801 10,619,928
Investments in available-for-sale securities (at fair value) 143,020,363 135,168,536
Investments in held-to-maturity securities (fair values of $234,394 as of
December 31, 2003 and $331,544 as of December 31, 2002) 229,425 321,287
Federal Home Loan Bank stock, at cost 3,771,000 2,945,200
Loans, less allowance for loan losses of $1,664,274 and $1,458,359 as of
December 31, 2003 and 2002, respectively 139,563,318 135,631,604
Loans held-for-sale 275,000
Investment in real estate 75,000 75,000
Premises and equipment 2,892,162 2,805,477
Other real estate owned 75,000
Goodwill 2,357,884 2,357,884
Core deposit intangible 731,961 800,316
Accrued interest receivable 1,875,948 1,933,616
Cash surrender value of life insurance policies 3,153,941 104,356
Other assets 1,025,466 268,578
------------- -------------
Total assets $ 311,100,269 $ 293,106,782
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 45,201,440 $ 38,929,897
Interest-bearing 173,256,010 172,107,507
------------- -------------
Total deposits 218,457,450 211,037,404
Federal Home Loan Bank advances 60,897,311 51,890,607
Other liabilities 2,895,296 2,833,825
------------- -------------
Total liabilities 282,250,057 265,761,836
------------- -------------
Stockholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,424,078 shares in 2003 and 1,423,238 shares in 2002 142,408 142,324
Paid-in capital 2,327,151 2,303,547
Retained earnings 25,694,836 23,164,693
Accumulated other comprehensive income 685,817 1,734,382
------------- -------------
Total stockholders' equity 28,850,212 27,344,946
------------- -------------
Total liabilities and stockholders' equity $ 311,100,269 $ 293,106,782
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
D-33
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Interest and dividend income:
Interest and fees on loans $ 9,226,484 $ 9,677,332 $ 11,343,508
Interest on debt securities:
Taxable 3,874,819 4,143,851 4,204,364
Tax-exempt 2,086,134 1,995,114 977,487
Dividends on equity securities 423,889 219,245 203,806
Other interest 38,496 121,891 360,226
------------ ------------ ------------
Total interest and dividend income 15,649,822 16,157,433 17,089,391
------------ ------------ ------------
Interest expense:
Interest on deposits 2,866,495 4,039,427 5,301,623
Interest on Federal Home Loan Bank advances 2,746,975 2,858,310 2,999,174
------------ ------------ ------------
Total interest expense 5,613,470 6,897,737 8,300,797
------------ ------------ ------------
Net interest and dividend income 10,036,352 9,259,696 8,788,594
Provision for loan losses 312,500 300,000 150,000
------------ ------------ ------------
Net interest and dividend income after provision for
loan losses 9,723,852 8,959,696 8,638,594
------------ ------------ ------------
Other income:
Trust department income 1,252,000 1,100,160 1,070,017
Service charges on deposit accounts 560,291 472,201 472,120
Gain on sales of available-for-sale securities, net 1,058,140 634,080 130,117
Gain on sales of loans held-for-sale 262,088 227,244 183,618
Gain on sales of other real estate owned 52,151
Other income 799,429 688,128 531,265
------------ ------------ ------------
Total other income 3,984,099 3,121,813 2,387,137
------------ ------------ ------------
Other expense:
Salaries and employee benefits 4,833,913 4,235,122 3,833,838
Occupancy expense 359,458 306,486 246,549
Equipment expense 579,395 568,422 486,393
Data processing 575,441 533,405 494,856
Insurance 114,806 114,184 92,323
Printing and stationery 183,970 187,021 178,624
Legal expense 127,772 60,561 56,286
Amortization of core deposit intangible 68,355 68,354 19,936
Amortization of unidentifiable intangible assets from branch
acquisition 27,831
Other expense 1,756,789 1,701,389 1,318,218
------------ ------------ ------------
Total other expense 8,599,899 7,774,944 6,754,854
------------ ------------ ------------
Income before income taxes 5,108,052 4,306,565 4,270,877
Income taxes 1,267,950 1,107,770 1,369,674
------------ ------------ ------------
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
============ ============ ============
Earnings per common share $ 2.70 $ 2.25 $ 2.03
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
D-34
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Number
of
Shares Common Paid-in Retained Treasury
Issued Stock Capital Earnings Stock
---------- ----------- ----------- ------------ -----------
Balance, December 31, 2000 1,458,366 $ 145,837 $ 2,968,894 $ 19,516,414 $
Comprehensive income:
Net income 2,901,203
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Repurchase of common stock, 36,008 shares (691,080)
Transfer treasury stock to reduce shares
issued (36,008) (3,601) (687,479) 691,080
Dividends declared ($.84 per share) (1,199,462)
---------- ----------- ----------- ------------ -----------
Balance, December 31, 2001 1,422,358 142,236 2,281,415 21,218,155
Comprehensive income:
Net income 3,198,795
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect
Comprehensive income
Issuance of 880 shares for Directors' fees 880 88 22,132
Dividends declared ($.88 per share) (1,252,257)
---------- ----------- ----------- ------------ -----------
Balance, December 31, 2002 1,423,238 142,324 2,303,547 23,164,693
Comprehensive income:
Net income 3,840,102
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect
Comprehensive income
Issuance of 840 shares for Directors' fees 840 84 23,604
Dividends declared ($.92 per share) (1,309,959)
---------- ----------- ----------- ------------ -----------
Balance, December 31, 2003 1,424,078 $ 142,408 $ 2,327,151 $ 25,694,836 $
========== =========== =========== ============ ===========
Accumulated
Other
Comprehensive
Income (Loss) Total
------------- ------------
Balance, December 31, 2000 $ (170,889) $ 22,460,256
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect (107,771)
Comprehensive income 2,793,432
Repurchase of common stock, 36,008 shares (691,080)
Transfer treasury stock to reduce shares
issued
Dividends declared ($.84 per share) (1,199,462)
------------- ------------
Balance, December 31, 2001 (278,660) 23,363,146
Comprehensive income:
Net income
Net change in unrealized holding loss
on available-for-sale securities, net of
tax effect 2,013,042
Comprehensive income 5,211,837
Issuance of 880 shares for Directors' fees 22,220
Dividends declared ($.88 per share) (1,252,257)
------------- ------------
Balance, December 31, 2002 1,734,382 27,344,946
Comprehensive income:
Net income
Net change in unrealized holding gain
on available-for-sale securities, net of
tax effect (1,048,565)
Comprehensive income 2,791,537
Issuance of 840 shares for Directors' fees 23,688
Dividends declared ($.92 per share) (1,309,959)
------------- ------------
Balance, December 31, 2003 $ 685,817 $ 28,850,212
============= ============
Reclassification disclosure for the years ended December 31:
2003 2002 2001
------------ ------------ ----------
Net unrealized (losses) gains on available-for-sale securities $ (370,016) $ 3,931,446 $ (46,411)
Reclassification adjustment for net realized gains in net income (1,058,140) (634,080) (130,117)
------------ ------------ ----------
Other comprehensive (loss) income before income tax effect (1,428,156) 3,297,366 (176,528)
Income tax benefit (expense) 556,267 (1,284,324) 68,757
------------ ------------ ----------
(871,889) 2,013,042 (107,771)
------------ ------------ ----------
Minimum pension liability adjustment (289,396)
Income tax benefit 112,720
------------ ------------ ----------
(176,676)
------------ ------------ ----------
Other comprehensive (loss) income, net of tax $ (1,048,565) $ 2,013,042 $ (107,771)
============ ============ ==========
Accumulated other comprehensive income (loss) consists of the following as of
December 31:
2003 2002 2001
---------- ----------- ----------
Net unrealized holding gains (losses) on available-for-sale securities, net of taxes $ 862,493 $ 1,734,382 $ (278,660)
Minimum pension liability adjustment, net of taxes (176,676)
---------- ----------- ----------
Accumulated other comprehensive income (loss) $ 685,817 $ 1,734,382 $ (278,660)
========== =========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
D-35
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization (accretion) of securities, net 395,030 454,034 (49,133)
Gain on sales of available-for-sale securities, net (1,058,140) (634,080) (130,117)
Gain on sales of other real estate owned (52,151)
Provision for loan losses 312,500 300,000 150,000
Change in loans held-for-sale (275,000)
Net increase in mortgage servicing rights (67,250)
Depreciation and amortization 335,672 378,204 345,544
Amortization of intangible assets from branch acquisition 27,831
Amortization of core deposit intangible 68,355 68,354 19,936
Accretion of fair value adjustment on deposits (11,450) (100,484) (136,287)
(Increase) decrease in interest receivable 57,668 (252,348) 108,960
Deferred tax expense (benefit) 137,341 14,647 (24,072)
(Increase) decrease in prepaid expenses (124,330) 94,379 (84,167)
Increase in cash surrender value of insurance policies (49,585) (13,342) (16,811)
Increase in income tax receivable (154,792) (20,977) (43,254)
(Increase) decrease in other assets (205,831) (11,058) 2,717
Increase in accrued expenses 197,428 166,703 176,341
Decrease in interest payable (80,151) (30,825) (39,979)
Increase (decrease) in other liabilities 20,000 (1,026) (7,275)
Issuance of shares for Directors fees 23,688 22,220
------------- -------------- -------------
Net cash provided by operating activities 3,309,104 3,633,196 3,201,437
------------- -------------- -------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (825,800) (14,900)
Purchases of available-for-sale securities (89,014,647) (104,324,117) (88,096,807)
Proceeds from sales of available-for-sale securities 49,353,780 41,970,330 19,419,941
Proceeds from maturities of available-for-sale securities 31,044,359 28,715,141 48,212,964
Proceeds from maturities of held-to-maturity securities 91,497 70,445 10,032
Loan purchases (1,017,677) (2,800,000)
Loan originations and principal collections, net (4,157,060) 8,112,107 (2,128,114)
Recoveries of loans previously charged off 48,508 29,148 103,658
Other real estate owned - expenditures capitalized (8,511)
Capital expenditures (475,024) (393,809) (329,877)
Premiums paid on insurance policies (12,381) (12,381)
Purchase of life insurance policies (3,000,000)
Life insurance policy proceeds 192,443
------------- -------------- -------------
Net cash used in investing activities (16,942,898) (26,658,370) (25,635,484)
------------- -------------- -------------
D-36
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
(continued)
2003 2002 2001
------------ ------------- ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts 9,642,776 6,479,009 18,060,288
Net (decrease) increase in time deposits (2,211,280) 3,307,391 (9,573,854)
Assumption of net deposits on branch acquisitions 22,897,443
Long term advances from Federal Home Loan Bank 20,000,000
Principal payments on advances from Federal Home Loan Bank (10,993,296) (1,113,139) (14,353,547)
Net changes in short term advances 20,000,000
Dividends paid (1,295,533) (1,237,840) (1,454,946)
Net repurchase of common stock (691,080)
------------ ------------- -------------
Net cash provided by financing activities 15,142,667 7,435,421 34,884,304
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,508,873 (15,589,753) 12,450,257
Cash and cash equivalents at beginning of year 10,619,928 26,209,681 13,759,424
------------ ------------- -------------
Cash and cash equivalents at end of year $ 12,128,801 $ 10,619,928 $ 26,209,681
============ ============= =============
Supplemental disclosures:
Interest paid $ 5,693,621 $ 7,029,046 $ 8,477,063
Income taxes paid 1,285,401 1,114,100 1,437,000
Transfer of allowance for loan losses to other liabilities 64,073
Loan granted to finance sale of other real estate owned 135,662
Loan transferred to other real estate owned 75,000
Branch office acquisition:
Deposits assumed $ 26,565,337
Loans acquired (121,423)
Fixed assets acquired (272,150)
-------------
Net liabilities assumed 26,171,764
Cash received (22,897,443)
-------------
Intangible assets $ 3,274,321
=============
The accompanying notes are an integral part of these consolidated financial
statements.
D-37
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and 2001
NOTE 1 - NATURE OF OPERATIONS
Salisbury Bancorp, Inc. (Bancorp) is a Connecticut corporation that was
organized on April 24, 1998 to become a holding company, under which Salisbury
Bank & Trust Company (Bank) operates as its wholly-owned subsidiary. (Bancorp
and the Bank are referred to together as the (Company).
The Bank is a state chartered bank which was incorporated in 1874 and is
headquartered in Lakeville, Connecticut. The Bank operates its business from
four banking offices located in Connecticut. The Bank is engaged principally in
the business of attracting deposits from the general public and investing those
deposits in residential and commercial real estate, consumer and small business
loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its subsidiary conform
to accounting 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 Company
and its wholly-owned subsidiary, the Bank, and the Bank's wholly-owned
subsidiary, SBT Realty, Inc. SBT Realty, Inc. holds and manages bank owned
real estate situated in New York state. All significant intercompany
accounts and transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, cash items, due from banks, interest bearing demand deposits
with other banks, money market mutual funds and federal funds sold.
Cash and due from banks as of December 31, 2003 and December 31, 2002
includes $906,000 and $1,781,000, respectively, 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 so as to approximate the interest method. Gains
or losses on sales of investment securities are computed on a specific
identification basis.
D-38
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale or trading. This security
classification may be modified after acquisition only under certain
specified conditions. In general, securities may be classified as
held-to-maturity only if the Company has the positive intent and ability
to hold them to maturity. Trading securities are defined as those bought
and held principally for the purpose of selling them in the near term. All
other securities must be classified as available-for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings or in a separate component
of capital. They are merely disclosed in the notes to the
consolidated financial statements.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses are not included in earnings but are reported as a net
amount (less expected tax) in a separate component of capital
until realized.
-- Trading securities are carried at fair value on the
consolidated balance sheets. Unrealized holding gains and
losses for trading securities are included in earnings.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold until
maturity or payoff, are reported at their outstanding principal balances
adjusted for any charge-offs, the allowance for loan losses and any
deferred fees or costs on originated loans or unamortized premiums or
discounts on purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination, commitment fees and certain direct origination costs are
deferred, and the net amount amortized as an adjustment of the related
loan's yield. The Company is amortizing these amounts over the contractual
life of the related loans.
Residential real estate loans are generally placed on nonaccrual when
reaching 90 days past due or in process of foreclosure. All closed-end
consumer loans 90 days or more past due and any equity line 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 is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of the
cash receipts of interest income on impaired loans is recognized as
interest income if the remaining net carrying amount of the loan is deemed
to be fully collectible. When recognition of interest income on an
impaired loan on a cash basis is appropriate, the amount of income that is
recognized is limited to that which would have been accrued on the net
carrying amount of the loan at the contractual interest rate. Any cash
interest payments received in excess of the limit and not applied to
reduce the net carrying amount of the loan are recorded as recoveries of
charge-offs until the charge-offs are fully recovered.
D-39
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant
revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Cost and related allowances for depreciation and
amortization of premises and equipment retired or otherwise disposed of
are removed from the respective accounts with any gain or loss included in
income or expense. Depreciation and amortization are calculated
principally on the straight-line method over the estimated useful lives of
the assets. Estimated lives are 3 to 40 years for buildings and 2 to 25
years for furniture and equipment.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through foreclosure
and properties classified as in-substance foreclosures in accordance with
Statement of Financial Accounting Standards (SFAS) No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring." These properties
are carried at the lower of cost or estimated fair value less estimated
costs to sell. Any writedown from cost to estimated fair value required at
the time of foreclosure or classification as in-substance foreclosure is
charged to the allowance for loan losses. Expenses incurred in connection
with maintaining these assets and subsequent writedowns are included in
other expense.
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," the Company classifies loans as in-substance repossessed or
foreclosed if the Company receives physical possession of the debtor's
assets regardless of whether formal foreclosure proceedings take place.
D-40
ADVERTISING:
The Company directly expenses costs associated with advertising as they
are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are established for
the temporary differences between the accounting basis and the tax basis
of the Company's assets and liabilities at enacted tax rates expected to
be in effect when the amounts related to such temporary differences are
realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
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
sheet for cash and cash equivalents approximate those assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held-for-sale: Fair values of mortgage loans held-for-sale are based
on commitments on hand from investors or prevailing market prices.
Loans receivable: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for interest and
non-interest checking, passbook savings and money market accounts are, by
definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank
advances are estimated using a discounted cash flow technique that applies
interest rates currently being offered on advances to a schedule of
aggregated expected monthly maturities on Federal Home Loan Bank advances.
Due to broker: The carrying amount of due to broker approximates its fair
value.
Off-balance sheet instruments: The fair value of commitments to originate
loans is estimated using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments and the unadvanced portion of loans, fair value also considers
the difference between current levels of interest rates and the committed
rates. The fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them
or otherwise settle the obligation with the counterparties at the
reporting date.
D-41
STOCK BASED COMPENSATION:
The Company has a stock-based plan to compensate non-employee directors
for their services. This plan is more fully described in Note 14.
Compensation cost for these services is reflected in net income in an
amount equal to the fair value of the shares of company common stock
payable to the directors.
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value only
when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. This
Statement did not have a material impact on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and
144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and FASB Interpretation
No. 9 "Applying APB Opinions No. 16 and 17 When a Savings and Loan
Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method" provided interpretive guidance on
the application of the purchase method to acquisitions of financial
institutions. Except for transactions between two or more mutual
enterprises, SFAS No. 147 removes acquisitions of financial institutions
from the scope of both Statement 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize
(and subsequently amortize) any excess of the fair value of liabilities
assumed over the fair value of tangible and identifiable intangible assets
acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of SFAS No. 147. In addition, SFAS No. 147
amends SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions that SFAS No. 144 requires for other long-lived
assets that are held and used. Paragraph 5 of SFAS No. 147, which relates
to the application of the purchase method of accounting, was effective for
acquisitions for which the date of acquisition was on or after October 1,
2002. The provisions in paragraph 6 related to accounting for the
impairment or disposal of certain long-term customer-relationship
intangible assets were effective on October 1, 2002. Transition provisions
for previously recognized unidentifiable intangible assets in paragraphs
8-14 were effective on October 1, 2002, with earlier application
permitted.
In accordance with paragraph 9 of SFAS No. 147, the Company, has
reclassified, as of September 30, 2002 its recognized unidentifiable
intangible asset related to branch acquisition(s). This asset was
reclassified as goodwill (reclassified goodwill). The amount reclassified
was $2,357,884, the carrying amount as of January 1, 2002. The
reclassified goodwill is being accounted for and reported prospectively as
goodwill under SFAS No. 142, with no amortization expense. Accordingly,
the consolidated financial statements for the year ended December 31, 2002
do not reflect amortization in the amount of $95,429 that would have been
recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of
December 31, 2003. The Company determined that its reclassified goodwill
as of those dates was not impaired.
D-42
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30,
2002, the Company reclassified its core deposit intangible asset and
accounted for it as an asset apart from the unidentifiable intangible
asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. FIN 45 clarifies that a
guarantor is required to disclose (a) the nature of the guarantee; (b) the
maximum potential amount of future payments under the guarantee; (c) the
carrying amount of the liability; (d) the nature and extent of any
recourse provisions or available collateral that would enable the
guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December
15, 2002. The Company adopted the initial recognition and initial
measurement provisions of FIN 45 effective as of January 1, 2003 and
adopted the disclosure requirements effective as of December 31, 2002. The
adoption of this interpretation did not have a material effect on the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"),
which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
Statement (a) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (b)
clarifies when a derivative contains a financing component, (c) amends the
definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
and (d) amends certain other existing pronouncements. The provisions of
SFAS No. 149 are effective for contracts entered into or modified after
June 30, 2003. There was no substantial impact on the Company's
consolidated financial statements on adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). This Statement establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that
certain financial instruments that were previously classified as equity
must be classified as a liability. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This Statement did not have any
material effect on the Company's consolidated financial statements.
D-43
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company
should include in its financial statements the assets, liabilities and
activities of another entity. In December 2003, the FASB revised
Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN
46(R)"). The objective of this interpretation is not to restrict the use
of variable interest entities but to improve financial reporting by
companies involved with variable interest entities. Until now, one company
generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. This
interpretation changes that, by requiring a variable interest entity to be
consolidated by a company only if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
The Company is required to apply FIN 46, as revised, to all entities
subject to it no later than the end of the first reporting period ending
after March 15, 2004. However, prior to the required application of FIN
46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those
entities that are considered to be special-purpose entities as of the end
of the first fiscal year or interim period ending after December 15, 2003.
The adoption of this interpretation has not and is not expected to have a
material effect on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an
amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132
(revised 2003)"). This Statement revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans required by SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which it replaces. It
requires additional disclosures to those in the original Statement 132
about assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal
years ending after December 15, 2003 and interim periods beginning after
December 15, 2003. Adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
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:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
Available-for-sale securities:
December 31, 2003:
Equity securities $ 3,031 $ 132,552 $ $ 135,583
U.S. government agencies preferred stock 8,074,043 (463,628) 7,610,415
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 51,886,017 329,421 (235,866) 51,979,572
Debt securities issued by states of the
United States and political subdivisions
of the states 44,609,900 1,521,298 (143,363) 45,987,835
Money market mutual funds 500,512 500,512
Mortgage-backed securities 37,034,607 372,971 (100,620) 37,306,958
------------- ------------- ------------- -------------
142,108,110 2,356,242 (943,477) 143,520,875
Money market mutual funds included in
cash and cash equivalents (500,512) (500,512)
------------- ------------- ------------- -------------
$ 141,607,598 $ 2,356,242 $ (943,477) $ 143,020,363
============= ============= ============= =============
D-44
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
------------- ------------- ------------- -------------
December 31, 2002:
Equity securities $ 3,031 $ 86,154 $ $ 89,185
U.S. government agencies preferred stock 4,047,250 131,930 4,179,180
Debt securities issued by the U.S. Treasury
and other U. S. government corporations
and agencies 41,294,731 383,557 (43,163) 41,635,125
Debt securities issued by states of the
United States and political subdivisions
of the states 41,564,707 1,234,464 (6,855) 42,792,316
Money market mutual funds 536,982 536,982
Mortgage-backed securities 45,417,896 1,091,525 (36,691) 46,472,730
------------- ------------- ------------- -------------
132,864,597 2,927,630 (86,709) 135,705,518
Money market mutual funds included in
cash and cash equivalents (536,982) (536,982)
------------- ------------- ------------- -------------
$ 132,327,615 $ 2,927,630 $ (86,709) $ 135,168,536
============= ============= ============= =============
Gross Gross
Amortized Unrecognized Unrecognized
Cost Holding Holding Fair
Basis Gains Loss Value
------------- ------------- ------------- -------------
Held-to-maturity securities:
December 31, 2003:
Mortgage-backed securities $ 229,425 $ 4,969 $ $ 234,394
========== ========= ======== ==========
December 31, 2002:
Mortgage-backed securities $ 321,287 $ 10,257 $ $ 331,544
========== ========= ======== ==========
The scheduled maturities of debt securities were as follows as of
December 31, 2003:
Available-For-Sale Held-To-Maturity
------------------ ---------------------
Amortized
Fair Cost Fair
Value Basis Value
------------- --------- ---------
Due after one year through five years $ 240,648 $ $
Due after five years through ten years 7,305,085
Due after ten years 98,032,089
Mortgage-backed securities 37,306,958 229,425 234,394
------------- --------- ---------
$ 142,884,780 $ 229,425 $ 234,394
============= ========= =========
During 2003, proceeds from sales of available-for-sale securities amounted to
$49,353,780. Gross realized gains and gross realized losses on those sales
amounted to $1,136,732 and $78,592, respectively. During 2002, proceeds from
sales of available-for-sale securities amounted to $41,970,330. Gross realized
gains and gross realized losses on those sales amounted to $634,705 and $625,
respectively. During 2001, proceeds from sales of available-for-sale securities
amounted to $19,419,941. Gross realized gains on those sales amounted to
$130,117. The tax provision applicable to these net realized gains amounted to
$412,146, $246,974 and $50,681, respectively.
D-45
The amortized cost basis and fair market value of securities of issuers which
exceeded 10% of equity were as follows as of December 31, 2003:
Amortized
Cost Fair
Basis Value
----------- -----------
Federal Home Loan Mortgage Corporation Preferred Stock $ 6,074,043 $ 5,772,347
=========== ===========
Total carrying amounts of $2,586,127 and $4,629,082 of debt securities were
pledged to secure public deposits, treasury tax and loan and for other purposes
as required by law as of December 31, 2003 and 2002, respectively.
Debt and equity securities as of December 31, 2003 where the fair value is below
the book value are as follows:
Less than 12 Months 12 Months or Longer Total
--------------------------- --------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------------ ------------ ------------ ------------ ------------ ------------
Description of securities:
U.S. government agencies preferred
stock $ 7,610,415 $ 463,628 $ $ $ 7,610,415 $ 463,628
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies 11,153,693 235,866 11,153,693 235,866
Debt securities issued by states of the
United States and political
subdivisions of the states 7,127,832 143,363 7,127,832 143,363
Mortgage-backed securities 12,208,853 87,493 875,856 13,127 13,084,709 100,620
------------ ------------ ------------ ------------ ------------ ------------
Total temporarily impaired
securities $ 38,100,793 $ 930,350 $ 875,856 $ 13,127 $ 38,976,649 $ 943,477
============ ============ ============ ============ ============ ============
The securities that have been in an unrealized loss position for over twelve
consecutive months are adjustable rate mortgage securities guaranteed by the
Government National Mortgage Association and the Federal Home Loan Mortgage
Corporation. The decline is due to rapid prepayments on the underlying
collateral and a low interest rate environment. Since there has been no credit
deterioration and the market price decline is due to the current interest rate
environment, management deems the securities are not other than temporarily
impaired. The securities that have been in an unrealized loss position for less
than twelve months consist of debt and equity securities issued by the U.S.
treasury, U.S. government corporations and agencies, and states of the United
States and political subdivisions of the states. The unrealized losses in these
securities are attributable to changes in market interest rates. Company
management does not intend to sell any of the securities in the near term, and
due to the relative short duration of the securities, anticipates that the
unrealized losses that currently exist will be dramatically reduced going
forward.
NOTE 4 - LOANS
Loans consisted of the following as of December 31:
2003 2002
------------- -------------
Commercial, financial and agricultural $ 9,148,870 $ 10,126,812
Real estate - construction and land development 15,306,946 6,027,041
Real estate - residential 90,806,942 93,635,616
Real estate - commercial 19,199,687 18,002,442
Consumer 6,691,762 9,007,417
Other 73,385 290,635
------------- -------------
141,227,592 137,089,963
Allowance for loan losses (1,664,274) (1,458,359)
------------- -------------
Net loans $ 139,563,318 $ 135,631,604
============= =============
D-46
Certain directors and executive officers of the Company and companies in which
they have significant ownership interest were customers of the Bank during 2003.
Total loans to such persons and their companies amounted to $852,341 as of
December 31, 2003. During 2003 advances of $168,303 were made and repayments
totaled $350,318.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2003 2002 2001
----------- ----------- -----------
Balance at beginning of period $ 1,458,359 $ 1,444,504 $ 1,291,502
Provision for loan losses 312,500 300,000 150,000
Recoveries of loans previously charged off 48,508 29,148 103,658
Loans charged off (155,093) (251,220) (100,656)
Transfer to liability account for estimated losses
on loan commitments (64,073)
----------- ----------- -----------
Balance at end of period $ 1,664,274 $ 1,458,359 $ 1,444,504
=========== =========== ===========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2003 2002
----- -----
(in thousands)
Total nonaccrual loans $ 75 $ 855
===== =====
Accruing loans which are 90 days or more overdue $ 535 $ 124
===== =====
Information about loans that meet the definition of an impaired loan in SFAS No.
114 is as follows as of December 31:
2003 2002
------------------------ ------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
----------- ---------- ----------- ----------
Loans for which there is a related allowance for credit losses $ 0 $ 0 $ 511,063 $ 81,899
Loans for which there is no related allowance for credit losses
--------- --- --------- --------
Totals $ 0 $ 0 $ 511,063 $ 81,899
========= === ========= ========
Average recorded investment in impaired loans during the
year ended December 31 $ 353,758 $ 397,162
========= =========
Related amount of interest income recognized during the time,
in the year ended December 31, that the loans were impaired
Total recognized $ 43,762 $ 18,156
========= =========
Amount recognized using a cash-basis method of
accounting $ 43,762 $ 930
========= =========
In 2003 the Company capitalized mortgage servicing rights totaling $69,844 and
amortized $1,924. The balance of capitalized mortgage servicing rights included
in other assets at December 31, 2003 was $67,250. Prior to 2003, the Company did
not sell loans with servicing retained and, therefore, did not record any
mortgage servicing rights.
D-47
Following is an analysis of the aggregate changes in the valuation allowance for
mortgage servicing rights for the year ended December 31, 2003.
Balance, beginning of year $ 0
Additions 670
Reductions 0
Direct write-downs 0
-----
Balance, end of year $ 670
=====
The fair value of the mortgage servicing rights was $74,512 as of December 31,
2003.
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 $6,753,826 and $0 at December 31, 2003 and 2002,
respectively.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31:
2003 2002
------------ ------------
Land $ 350,644 $ 350,644
Buildings 2,766,168 2,681,394
Furniture and equipment 1,888,716 1,781,712
------------ ------------
5,005,528 4,813,750
Accumulated depreciation and amortization (2,113,366) (2,008,273)
------------ ------------
$ 2,892,162 $ 2,805,477
============ ============
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000 or
more as of December 31, 2003 and 2002 was $23,588,591 and $23,047,271,
respectively.
For time deposits as of December 31, 2003, the scheduled maturities for years
ended December 31 are:
2004 $ 40,657,829
2005 11,127,709
2006 7,988,668
2007 3,748,711
2008 3,779,089
------------
$ 67,302,006
============
Certain directors and executive officers of the Company and companies in which
they have a significant ownership interest were customers of the Bank during
2003. Total deposits to such persons and their companies amounted to $610,337 as
of December 31, 2003 and $745,840 as of December 31, 2002.
D-48
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the FHLB for the five fiscal years ending after
December 31, 2003 and thereafter are summarized as follows:
AMOUNT
------------
2004 $ 20,766,823
2005 263,339
2006 188,605
2007 200,582
2008 99,200
Thereafter 39,378,762
------------
$ 60,897,311
============
An advance of $19,000,000 is redeemable on January 26, 2004 and quarterly
thereafter, an advance of $10,000,000 is redeemable on February 26, 2004 and
quarterly thereafter and an advance of $10,000,000 is redeemable on March 15,
2004 and quarterly thereafter.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Borrowings from the FHLB are secured by a blanket lien on qualified collateral,
consisting primarily of loans with first mortgages secured by one to four family
properties, certain unencumbered investment securities and other qualified
assets.
At December 31, 2003, the interest rates on FHLB advances ranged from 1.15
percent to 6.45 percent. At December 31, 2003, the weighted average interest
rate on FHLB advances was 4.06 percent.
NOTE 8 - EMPLOYEE BENEFITS
The Company has an insured noncontributory defined benefit retirement plan
available to all employees eligible as to age and length of service. Benefits
are based on a covered employee's final average compensation, primary social
security benefit and credited service. The Company makes annual contributions
which meet the Employee Retirement Income Security Act minimum funding
requirements.
D-49
The following tables set forth information about the plan as of December 31 and
the years then ended:
2003 2002
----------- -----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 2,019,027 $ 2,345,618
Actuarial loss 489,531 67,008
Service cost 188,104 124,322
Interest cost 148,033 189,459
Benefits paid (82,680) (707,380)
----------- -----------
Benefit obligation at end of year 2,762,015 2,019,027
----------- -----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,396,711 2,171,193
Actual return on plan assets 205,463 (244,376)
Contributions 268,069 177,274
Benefits paid (82,680) (707,380)
----------- -----------
Fair value of plan assets at end of year 1,787,563 1,396,711
----------- -----------
Funded status (974,452) (622,316)
Unrecognized net loss from actuarial experience 560,356 177,951
Unrecognized prior service cost 93,653 94,544
Unamortized net asset existing at date of adoption of
SFAS No. 87 58,364 58,364
----------- -----------
Accrued benefit cost included in other liabilities $ (262,079) $ (291,457)
=========== ===========
Amounts recognized in the balance sheet as of December 31, 2003 consist of:
Accrued benefit cost $ (262,079)
Accrued benefit liability (441,413)
Intangible asset 152,017
Accumulated other comprehensive loss 289,396
-----------
Net amount recognized $ (262,079)
===========
The accumulated benefit obligation for the Company's defined benefit pension
plan was $2,491,054 and $1,590,800 at December 31, 2003 and 2002, respectively.
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation were
6.0% and 6.0% and 8.0% and 6.0% for 2003 and 2002, respectively. The expected
long-term rate of return on assets was 7.25% and 8.0% for 2003 and 2002.
The overall expected long-term rate of return on assets is primarily determined
by historical performance and evaluation of current economic and market
conditions.
Components of net periodic cost:
2003 2002 2001
--------- --------- ---------
Service cost $ 188,104 $ 124,322 $ 141,721
Interest cost on benefit obligation 148,033 189,459 168,343
Expected return on assets (107,010) (176,526) (180,290)
Amortization of prior service cost 9,564 9,564 9,564
--------- --------- ---------
Net periodic cost $ 238,691 $ 146,819 $ 139,338
========= ========= =========
D-50
Plan Assets
The Company's pension plan asset allocations by asset category are as follows:
December 31 2003 December 31, 2002
--------------------- --------------------
Asset Category Fair Value Percent Fair Value Percent
---------------------------------------------- ----------- ------- ---------- -------
Equity securities $ 1,082,595 60.6% $ 777,979 55.7%
U.S. Government treasury and agency securities 596,662 33.4 503,845 36.1
Corporate bonds 24,015 1.3
Money market mutual funds 84,291 4.7 114,887 8.2
----------- ----- ----------- -----
Total $ 1,787,563 100.0% $ 1,396,711 100.0%
=========== ===== =========== =====
The pension plan investments are managed by the Trust Department of the Bank.
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 the 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 are applied to the
management of the funds and investment selections.
The Company adopted a 401(k) Plan effective in 2000. Under the Plan eligible
participants may contribute up to fifteen percent of their pay. The Company may
make discretionary contributions to the Plan. The Company's contribution in the
years ended December 31, 2003, 2002 and 2001 amounted to approximately $46,000,
$53,000 and $48,000, respectively. Discretionary contributions vest in full
after five years.
Eleven of the Company's executives have a change in control agreement
("agreement") with the Company. The agreements provide that if following a
"change-in-control" of the Company or Bank, an Executive Officer is terminated
under certain defined circumstances, or is reassigned, within a period of twelve
(12) months following the change in control, such Executive Officer will be
entitled to a lump sum payment equal to six or 12 months of his or her
compensation based upon the most recent aggregate base salary paid to the
Executive Officer in the twelve (12) month period immediately preceding the date
of change in control.
NOTE 9 - INCOME TAXES
The components of income tax expense are as follows for the years ended
December 31:
2003 2002 2001
----------- ----------- -----------
Current:
Federal $ 708,089 $ 790,590 $ 1,073,942
State 422,520 302,533 319,804
----------- ----------- -----------
1,130,609 1,093,123 1,393,746
----------- ----------- -----------
Deferred:
Federal 126,996 4,143 (19,437)
State 10,345 10,504 (4,635)
----------- ----------- -----------
137,341 14,647 (24,072)
----------- ----------- -----------
Total income tax expense $ 1,267,950 $ 1,107,770 $ 1,369,674
=========== =========== ===========
D-51
The reasons for the difference between the statutory federal income tax rates
and the effective tax rates are summarized as follows for the years ended
December 31:
2003 2002 2001
------ ------ ------
% of % of % of
Income Income Income
------ ------ ------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (15.8) (16.8) (7.8)
Other items 1.0 3.5 1.0
State tax, net of federal tax benefit 5.6 5.0 4.9
----- ----- ----
Effective tax rates 24.8% 25.7% 32.1%
===== ===== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as
follows as of December 31:
2003 2002
------------ ------------
Deferred tax assets:
Allowance for loan losses $ 482,312 $ 396,543
Interest on non-performing loans 2,426 20,197
Accrued deferred compensation 18,724 18,721
Post retirement benefits 31,939 24,149
Other real estate owned property writedown 25,317 25,317
Deferred organization costs 1,000
Accrued pensions 102,080 113,523
Minimum pension liability 112,720
Alternative minimum tax 65,433
------------ ------------
Gross deferred tax assets 775,518 664,883
------------ ------------
Deferred tax liabilities:
Core deposit intangible asset (208,252) (151,839)
Accelerated depreciation (400,660) (337,585)
Discount accretion (9,383) (19,809)
Mortgage servicing rights (26,194)
Net unrealized holding gain on available-for-sale securities (550,272) (1,106,539)
------------ ------------
Gross deferred tax liabilities (1,194,761) (1,615,772)
------------ ------------
Net deferred tax liabilities $ (419,243) $ (950,889)
============ ============
Deferred tax assets as of December 31, 2003 and 2002 have not been reduced by a
valuation allowance because management believes that it is more likely than not
that the full amount of deferred tax assets will be realized.
As of December 31, 2003, the Company had no operating loss and tax credit
carryovers for tax purposes.
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company entered into an agreement with a third party in which the third
party is to provide the Company with account processing services and other
miscellaneous services. Under the agreement, the Company is obligated to pay
monthly processing fees through January 31, 2006 and the Company may cancel the
agreement at any time, provided the Company pays a termination fee based on the
remaining unused term of the agreement. The amount of the termination fee is to
be determined by multiplying the average monthly invoice during the prior twelve
months by 65% times the remaining months under the agreement.
D-52
NOTE 11 - FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include secured interests in mortgages, accounts receivable, inventory,
property, plant and equipment and income producing properties.
Standby letters of credit are conditional commitments issued by the Company 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, 2003 and 2002, the
maximum potential amount of the Company's obligation was $20,000 and $20,000,
respectively, for financial and standby letters of credit. The Company's
outstanding letters of credit generally have a term of less than one year. If a
letter of credit is drawn upon, the Company may seek recourse through the
customer's underlying line of credit. If the customer's line of credit is also
in default, the Company may take possession of the collateral, if any, securing
the line of credit.
The estimated fair values of the Company's financial instruments, all of which
are held or issued for purposes other than trading, are as follows as of
December 31:
2003 2002
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- ------------- -------------
Financial assets:
Cash and cash equivalents $ 12,128,801 $ 12,128,801 $ 10,619,928 $ 10,619,928
Available-for-sale securities 143,020,363 143,020,363 135,168,536 135,168,536
Held-to-maturity securities 229,425 234,394 321,287 331,544
Federal Home Loan Bank stock 3,771,000 3,771,000 2,945,200 2,945,200
Loans, net 139,563,318 140,419,000 135,631,604 137,453,000
Loans held-for-sale 275,000 278,719
Accrued interest receivable 1,875,948 1,875,948 1,933,616 1,933,616
Financial liabilities:
Deposits 218,457,450 219,891,000 211,037,404 212,283,000
FHLB advances 60,897,311 61,245,695 51,890,607 53,173,000
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.
D-53
The amounts of financial instrument liabilities with off-balance sheet credit
risk are as follows as of December 31:
2003 2002
------------ ------------
Commitments to originate loans $ 2,337,315 $ 10,421,946
Standby letters of credit 20,000 20,000
Unadvanced portions of loans:
Home equity 10,374,759 8,893,908
Commercial lines of credit 6,935,664 6,383,820
Construction 3,349,345 1,754,774
Consumer 5,986,321 5,737,646
------------ ------------
$ 29,003,404 $ 33,212,094
============ ============
There is no material difference between the notional amounts and the estimated
fair values of the off-balance sheet liabilities.
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Bank's business activity is with customers located in northwestern
Connecticut and bordering New York and Massachusetts towns. There are no
concentrations of credit to borrowers that have similar economic
characteristics. The majority of the Bank's loan portfolio is comprised of loans
collateralized by real estate located in northwestern Connecticut and bordering
New York and Massachusetts towns.
NOTE 13 - REGULATORY MATTERS
The Company and its subsidiary the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have
a direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Their capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2003, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
D-54
The Company and the Bank's actual capital amounts and ratios are also presented
in the table.
For Capital
Actual Adequacy Purposes
---------------- ---------------------------------------
Amount Ratio Amount Ratio
-------- ----- -------- ----------------------------
(Dollar amounts in thousands)
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated $ 26,308 16.44% $ 12,803 GREATER THAN OR EQUAL TO 8.0%
Salisbury Bank & Trust Company 25,882 16.19 12,788 GREATER THAN OR EQUAL TO 8.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 24,566 15.35 6,402 GREATER THAN OR EQUAL TO 4.0
Salisbury Bank & Trust Company 24,140 15.10 6,394 GREATER THAN OR EQUAL TO 4.0
Tier 1 Capital (to Average Assets)
Consolidated 24,566 8.05 12,203 GREATER THAN OR EQUAL TO 4.0
Salisbury Bank & Trust Company 24,140 7.92 12,188 GREATER THAN OR EQUAL TO 4.0
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated 24,073 17.21 11,199 GREATER THAN OR EQUAL TO 8.0
Salisbury Bank & Trust Company 23,838 17.06 11,194 GREATER THAN OR EQUAL TO 8.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated 22,453 16.05 5,600 GREATER THAN OR EQUAL TO 4.0
Salisbury Bank & Trust Company 22,218 15.90 5,597 GREATER THAN OR EQUAL TO 4.0
Tier 1 Capital (to Average Assets)
Consolidated 22,453 7.80 11,513 GREATER THAN OR EQUAL TO 4.0
Salisbury Bank & Trust Company 22,218 7.73 11,497 GREATER THAN OR EQUAL TO 4.0
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
----------------------------------------
Amount Ratio
-------- -----------------------------
(Dollar amounts in thousands)
As of December 31, 2003:
Total Capital (to Risk Weighted Assets)
Consolidated N/A
Salisbury Bank & Trust Company $ 15,986 GREATER THAN OR EQUAL TO 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated N/A
Salisbury Bank & Trust Company 9,591 GREATER THAN OR EQUAL TO 6.0
Tier 1 Capital (to Average Assets)
Consolidated N/A
Salisbury Bank & Trust Company 15,235 GREATER THAN OR EQUAL TO 5.0
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)
Consolidated N/A
Salisbury Bank & Trust Company 13,992 GREATER THAN OR EQUAL TO 10.0
Tier 1 Capital (to Risk Weighted Assets)
Consolidated N/A
Salisbury Bank & Trust Company 8,395 GREATER THAN OR EQUAL TO 6.0
Tier 1 Capital (to Average Assets)
Consolidated N/A
Salisbury Bank & Trust Company 14,371 GREATER THAN OR EQUAL TO 5.0
The declaration of cash dividends is dependent on a number of factors, including
regulatory limitations, and the Company's operating results and financial
condition. The stockholders of the Company will be entitled to dividends only
when, and if, declared by the Company's Board of Directors out of funds legally
available therefore. The declaration of future dividends will be subject to
favorable operating results, financial conditions, tax considerations, and other
factors.
As of December 31, 2003 the Bank is restricted from declaring dividends to the
Company in an amount greater than approximately $11,952,000 as such declaration
would decrease capital below the Bank's required minimum level of regulatory
capital.
NOTE 14 - DIRECTORS STOCK RETAINER PLAN
At the 2001 annual meeting the stockholders of the Company voted to approve the
"Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the Plan)." This plan
provides non-employee directors of the Company with shares of restricted stock
of the Company as a component of their compensation for services as directors.
The maximum number of shares of stock that may be issued pursuant to the plan 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
the Company. In 2003 and 2002, 840 and 880 shares, respectively, were issued
under the Plan and the related compensation expense amounted to $23,688 and
$22,220, respectively.
D-55
NOTE 15 - ACQUISITION
On November 17, 2003, the Company executed a definitive agreement (the
"Agreement") to acquire Canaan National Bancorp, Inc., with the Company being
the surviving corporation.
Under the terms of the Agreement, which was unanimously approved by the Board of
Directors, the shareholders of the Canaan National Bancorp, Inc. will be
entitled to receive merger consideration consisting of $31.20 in cash and 1.3371
shares of Company common stock for every share of Canaan National Bancorp, Inc.
stock, subject to possible adjustment.
The merger is subject to approval by state and federal bank supervisory agencies
and the Canaan National Bancorp, Inc.'s shareholders.
NOTE 16 - RECLASSIFICATION
Certain amounts in the prior years have been reclassified to be consistent with
the current year's statement presentation.
NOTE 17 - 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.
D-56
SALISBURY BANCORP, INC.
(Parent Company Only)
BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
ASSETS
Checking account in Salisbury Bank & Trust Company $ 391 $ 185
Money market mutual funds 500,512 536,982
Investment in subsidiary 28,424,203 27,110,438
Due from subsidiary 33,000 9,453
Other assets 219,644 1,000
------------ ------------
Total assets $ 29,177,750 $ 27,658,058
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 327,538 $ 313,112
------------ ------------
Total liabilities 327,538 313,112
Total stockholders' equity 28,850,212 27,344,946
------------ ------------
Total liabilities and stockholders' equity $ 29,177,750 $ 27,658,058
============ ============
D-57
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF INCOME
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Dividend income from subsidiary $ 1,540,000 $ 1,300,000 $ 1,740,000
Taxable interest on securities 2,873 5,616 14,442
----------- ----------- -----------
1,542,873 1,305,616 1,754,442
----------- ----------- -----------
Legal expense 26,823 6,909 8,596
Supplies and printing 6,873 4,407 6,211
Other expense 63,405 18,591 13,297
----------- ----------- -----------
97,101 29,907 28,104
----------- ----------- -----------
Income before income tax (benefit) expense
and equity in undistributed net income of subsidiary 1,445,772 1,275,709 1,726,338
Income tax (benefit) expense (32,000) (8,260) (4,645)
----------- ----------- -----------
Income before equity in undistributed net income of subsidiary 1,477,772 1,283,969 1,730,983
Equity in undistributed net income of subsidiary 2,362,330 1,914,826 1,170,220
----------- ----------- -----------
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
=========== =========== ===========
D-58
SALISBURY BANCORP, INC.
(Parent Company Only)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,840,102 $ 3,198,795 $ 2,901,203
Adjustments to reconcile net income to net cash provided
by operating activities:
Undistributed income of subsidiary (2,362,330) (1,914,826) (1,170,220)
Deferred tax expense 1,000 1,193 1,193
Increase in due from subsidiary (23,547) (3,615) (6,222)
Increase in other assets (219,644)
Issuance of shares for Director's fees 23,688 22,220
------------ ------------ ------------
Net cash provided by operating activities 1,259,269 1,303,767 1,725,954
------------ ------------ ------------
Cash flows from investing activities:
Maturities of available-for-sale securities 230,000
------------ ------------ ------------
Net cash provided by investing activities 230,000
------------ ------------ ------------
Cash flows from financing activities:
Net repurchase of common stock (691,080)
Dividends paid (1,295,533) (1,237,840) (1,454,946)
------------ ------------ ------------
Net cash used in financing activities (1,295,533) (1,237,840) (2,146,026)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (36,264) 65,927 (190,072)
Cash and cash equivalents at beginning of year 537,167 471,240 661,312
------------ ------------ ------------
Cash and cash equivalents at end of year $ 500,903 $ 537,167 $ 471,240
============ ============ ============
D-59
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial data for 2003 and 2002 follows:
(In thousands, except earnings per share)
2003 Quarters Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 4,050 $ 3,955 $ 3,849 $ 3,796
Interest expense 1,526 1,461 1,316 1,310
-------- ------- -------- -------
Net interest and dividend income 2,524 2,494 2,533 2,486
Provision for loan losses 37 38 38 200
Other income 982 880 955 1,167
Other expense 2,042 1,958 2,074 2,526
-------- ------- -------- -------
Income before income taxes 1,427 1,378 1,376 927
Income tax expense 398 377 361 132
-------- ------- -------- -------
Net income $ 1,029 $ 1,001 $ 1,015 $ 795
======== ======= ======== =======
Basic earnings per common share $ .72 $ .70 $ .71 $ .57
======== ======= ======== =======
(In thousands, except earnings per share)
2002 Quarters Ended
-----------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Interest and dividend income $ 4,061 $ 4,063 $ 4,048 $ 3,985
Interest expense 1,798 1,763 1,727 1,609
-------- ------- -------- -------
Net interest and dividend income 2,263 2,300 2,321 2,376
Provision for loan losses 37 38 37 188
Other income 564 782 902 874
Other expense 1,815 1,984 1,880 2,096
-------- ------- -------- -------
Income before income taxes 975 1,060 1,306 966
Income tax expense 253 310 328 217
-------- ------- -------- -------
Net income $ 722 $ 750 $ 978 $ 749
======== ======= ======== =======
Basic earnings per common share $ .51 $ .53 $ .69 $ .52
======== ======= ======== =======
D-60
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 its independent accountants on accounting
and financial disclosure matters.
ITEM 9A. CONTROLS AND PROCEDURES
Based upon an evaluation as of December 31, 2003, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC rules and forms. During the year
ended December 31, 2003, there were no significant changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT OF THE COMPANY
The following table sets forth the name and age of each Executive Officer, his
principal occupation for the last five (5) years and the year in which he was
first appointed an Executive Officer of the Company.
Executive Officer
Name Age Position of the Company since:
---- --- -------- ---------------------
John F. Perotti 57 President and 1998(1)
Chief Executive Officer
Richard J. Cantele, Jr. 44 Secretary 2001(2)
John F. Foley 53 Chief Financial Officer 1998(3)
(1) Mr. Perotti is also the President and Chief Executive Officer of the Bank
and has been an Executive Officer of the Bank since 1982.
(2) Mr. Cantele is also the Executive Vice President, Treasurer and Chief
Operating Officer of the Bank and has been an Executive Officer of the
Bank since 1989.
(3) Mr. Foley is also the Senior Vice President, Comptroller and Principal
Financial Officer of the Bank and has been an Executive Officer of the
Bank since 1986.
Board of Directors
The Certificate of Incorporation and Bylaws of the Company provide for a Board
of Directors of not less than seven (7) members, as determined from time to time
by resolution of the Board of Directors. The Board of Directors has set the
number of directorships at eight (8). The Board of Directors of the Company is
divided into three (3) classes as nearly equal in number as possible. Classes of
directors serve for staggered three (3) year terms. A successor class is to be
elected at each annual meeting of shareholders when the terms of office of the
members of one class expire. Vacant directorships may be filled, until the
expiration of the term of the vacated directorship, by the vote of a majority of
the directors then in office.
D-61
The following table sets forth certain information, as of March 5, 2004, with
respect to the directors of the Company.
NOMINEES FOR ELECTION AT THE 2004 ANNUAL MEETING TO BE HELD ON APRIL 28, 2004
Name Positions Held Director
Expiring Age with the Company Since Term
---------------------- --- ----------------------- -------- ----
John F. Perotti 57 President, 1998 2004
Chief Executive Officer
and Director
Michael A. Varet 61 Director 1998 2004
CONTINUING DIRECTORS
John R. H. Blum 74 Chairman 1998 2005
Louise F. Brown 60 Director 1998 2005
Nancy F. Humphreys 62 Director 2001 2005
Gordon C. Johnson, DVM 69 Director 1998 2006
Holly J. Nelson 50 Director 1998 2006
Walter C. Shannon, Jr. 68 Director 1998 2006
Presented below is additional information concerning the directors of the
Company. Unless otherwise stated, all directors have held the position described
for at least five (5) years.
John R. H. Blum is an attorney in private practice and former Commissioner of
Agriculture for the State of Connecticut. He has been a director of the Bank
since 1995 and was elected Chairman of the Board of Directors of the Company and
the Bank in 1998.
Louise F. Brown has been a director of the Bank since 1992 and is a partner in
the law firm of Ackerly Brown, LLP.
Nancy F. Humphreys has been a director of the Bank since 2001. She retired from
Citigroup New York, Citibank in February of 2000, as Managing Director and
Treasurer of Global Corporate Investment Bank North America.
Gordon C. Johnson has been a director of the Bank since 1994 and is a Doctor of
Veterinary Medicine.
Holly J. Nelson has been a director of the Bank since 1995. She is a member of
Horses North, LLC, a tour operator, and is a member in Oblong Property
Management, LLC.
John F. Perotti is President and Chief Executive Officer of the Company and the
Bank. Prior to that he served as Executive Vice President and Chief Operating
Officer of the Bank and prior to that, he was Vice President and Treasurer of
the Bank. He has been a director of the Bank since 1985.
Walter C. Shannon, Jr. is President Emeritus of Wagner McNeil, Inc. and
President of William J. Cole Agency, Inc. He has been a director of the Bank
since 1993.
Michael A. Varet is a partner in the law firm of Piper Rudnick LLP. Mr. Varet
has been a director of the Bank since 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers, directors and persons who own more than ten
percent (10%) of the Company's Common Stock, to file with the Securities and
Exchange Commission (the "SEC") reports of ownership and changes in ownership of
the Company's Common Stock. Executive officers, directors and any shareholders
owning greater than ten percent (10%) of the Company's Common Stock are required
by the SEC's regulations to furnish the Company with copies of all such reports
that they file.
D-62
Based solely on a review of copies of reports filed with the SEC since January
1, 2003 and of written representations by certain executive officers and
directors, all persons subject to the reporting requirements of Section 16(a)
are believed by management to have filed the required reports on a timely basis.
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, Salisbury Bancorp, Inc., 5 Bissell Street, P. O.
Box 1868, Lakeville, CT 06039.
The Company has a separately standing Audit Committee which is comprised of the
following independent Directors: Louise F. Brown, Nancy F. Humphreys, Gordon C.
Johnson, DVM, Holly J. Nelson and Michael A. Varet. While no member of the Audit
Committee qualifies as an "audit committee financial expert" as such term is
defined by federal securities laws and regulations, the Board of Directors
believes the members of the Audit Committee bring a range of education, business
and professional experience that is beneficial to the Audit Committee function
of the Company and the Bank and is sufficient to enable the Audit Committee to
fulfill its responsibility.
ITEM 11. EXECUTIVE COMPENSATION
Fees
During 2003, each director received an annual retainer of $3,000. In addition,
directors received $500 for each Board of Directors meeting attended and $250
for each committee meeting attended. Director Perotti received no additional
compensation for his service as director or member of any board committee during
2003. During 2001, the Board of Directors and Shareholders approved a Directors
Stock Retainer Plan which, beginning in 2002, provides each non-employee
director with up to 120 shares of restricted common stock as a component of
their compensation. The Plan is described in more detail on page 13 of the
Proxy.
The following table provides certain information regarding the compensation paid
to certain executive officers of the Company and the Bank for services rendered
in all capacities during the fiscal years ended December 31, 2003, 2002, and
2001. No other current executive officer of the Company or the Bank received
cash compensation in excess of $100,000 during the year ended December 31, 2003.
All compensation expense was paid by the Bank.
Summary Compensation Table
Annual Compensation
Name and Principal All Other
Position Year Salary($) Bonus($) Compensation($)
------------------------------------------ ---- --------- -------- ---------------
John F. Perotti 2003 $ 195,178 $ 28,101 $ 4,000(4)
President and 2002 187,816 32,092 4,000(3)
Chief Executive Officer 2001 179,920 25,949 3,400(2)
of the Company and the Bank
Richard J. Cantele, Jr. 2003 $ 124,237 $ 18,857 $ 2,862(4)
Secretary of the Company 2002 109,434 18,332 2,553(3)
Executive Vice President, Treasurer 2001 93,652 17,063 2,145(2)
and Chief Operating Officer of the Bank
Todd M. Clinton 2003 $ 89,604 $ 14,601 $ 2,084(4)
Sr. Vice President, Compliance 2002 84,762 17,392 2,041(3)
& Operations Officer of the Bank 2001 73,150 12,379 1,713(2)
Diane E. R. Johnstone 2003 $ 119,734 $ 16,412 $ 2,723(4)
Sr. Vice President & Trust Officer 2002 109,321 16,690 2,522(3)
of the Bank 2001 81,530 9,900 1,832(2)
William C. Lambert (5) 2003 $ 115,333 $ 14,521 $ 2,597(4)
Vice President & Trust Officer 2002 110,522 2,200(3)
of the Bank 2001 29,159
D-63
(1) Compensation above does not include accrual of benefits under the Bank?s
defined pension plan or supplemental retirement arrangements described below.
(2) The Bank's matching contribution to the 401(k) plan for 2001.
(3) The Bank's matching contribution to the 401(k) plan for 2002.
(4) The Bank's matching contribution to the 401(k) plan for 2003.
(5) William C. Lambert was hired on September 17, 2001.
Insurance
In addition to the cash compensation paid to the executive officers of the
Company and the Bank, the executive officers receive group life, health,
hospitalization and medical insurance coverage. However, these plans do not
discriminate in scope, term, or operation, in favor of officers or directors of
the Company and the Bank and are available generally to all full-time employees.
Pension Plan
The Bank maintains a non-contributory defined pension plan for officers and
other salaried employees of the Bank who become participants after attaining age
21 and completing one (1) year of service.
PENSION PLAN TABLE
ESTIMATED ANNUAL RETIREMENT BENEFIT WITH
YEARS OF SERVICE AT RETIREMENT
Average Base
Salary at
Retirement 15 20 25 30 35
------------ -------- -------- -------- -------- ---------
$ 75,000 $ 18,654 $ 24,871 $ 31,089 $ 32,964 $ 34,839
$ 100,000 $ 26,154 $ 34,871 $ 43,589 $ 46,089 $ 48,589
$ 125,000 $ 33,654 $ 44,871 $ 56,089 $ 59,214 $ 62,339
$ 150,000 $ 41,154 $ 54,871 $ 68,589 $ 72,339 $ 76,089
$ 175,000 $ 48,654 $ 64,871 $ 81,089 $ 85,464 $ 89,839
$ 200,000 $ 56,154 $ 74,871 $ 93,589 $ 98,589 $ 103,589
Pension benefits are based upon average salary (determined as of each January
1st) during the highest five (5) consecutive years of services prior to
attaining normal retirement age. The amount of the annual benefit is 2% of
Average Salary offset by .65% of Social Security wage base as provided under the
1994 Act per year of service (to a maximum of 25 years) plus one-half of 1% of
Average Salary for each year of service over 25 years (to a maximum of ten
years). This benefit formula may be modified to conform with changes in the
pension laws.
The present average salary (using last five years of salary only) and years of
service to date of Messrs. Perotti, Cantele, Clinton and Ms. Johnstone are: Mr.
Perotti: $198,564 with; 31 years of service; Mr. Cantele: $114,308 with; 22
years of service; Mr. Clinton: $90,366 with; 17 years of service; and Ms.
Johnstone: $101,191 with; 16 years of service. The above table shows estimated
annual retirement benefits payable at normal retirement date as a straight life
annuity for various average salary and service categories. The offset of social
security was included in the table based on a participant being 65 years of age
in 2003.
Supplemental Retirement Arrangement
In 1994, the Bank entered into a supplemental retirement arrangement (the
"Supplemental Retirement Agreement") with John F. Perotti. Following disability
or retirement at the earlier of the age of 65, or after thirty (30) years of
service to the Bank, Mr. Perotti will receive monthly payments of $1,250
(adjusted annually to reflect the lesser of a five percent (5%) increase or "The
Monthly Consumer Price Index for All Urban Consumers, United States City
Average, All Items" published by the Bureau of Labor Statistics) for a period of
ten (10) years. These payments are in addition to any payments under the Bank's
retirement plan. The Supplemental Retirement Agreement includes provisions which
would prevent Mr. Perotti from working for a competitor in the proximity of the
Bank.
D-64
Directors Stock Retainer Plan
The shareholders of the Company voted to approve the "Directors Stock Retainer
Plan of Salisbury Bancorp, Inc." (the "Plan") at the 2001 Annual Meeting of
Shareholders. The Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their compensation
for services as non-employee directors. The maximum number of shares of stock
that may be issued pursuant to the Plan shall not exceed 15,000. The first grant
date under the plan was April 26, 2002. The "annual stock retainer" consisted of
120 shares of restricted 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. The total number of restricted
shares issued was 840. The next grant date under this plan will immediately
precede the 2004 Annual Meeting of Shareholders.
Change in Control Agreements
The Bank entered into change in control agreements in 2003 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 M. Hobby, William C.
Lambert, Sharon A. Pilz and Geoffrey A. Talcott. The agreements provide that if
following a "change-in-control" of the Company or Bank, an Officer is terminated
under certain defined circumstances, or is reassigned, within a period of twelve
(12) months following the change in control, such Officer will be entitled to a
lump sum payment equal to his or her twelve (12) month compensation based upon
the most recent aggregate base salary paid to the Officer in the twelve (12)
month period immediately preceding the date of change in control. In addition,
the Bank entered into a change in control agreement in 2003 with Elizabeth
Summerville, who recently joined the Bank, which provides that if following a
"change in control" of the Company or Bank, the Officer is terminated under
certain defined circumstances, or is reassigned, within a period of twelve (12)
months following the change in control, such Officer will be entitled to a lump
sum payment equal to her six (6) month compensation based upon the most recent
aggregate base salary paid to the Officer in the twelve (12) month period
immediately preceding the date of the change in control. In no event shall such
payments be made in an amount which would cause them to be deemed non-deductible
to the Bank by reason of the operation of Section 280G of the Internal Revenue
Code.
401(k) Plan
The Bank offers a 401(k) profit sharing plan. This plan began in the year 2000.
Each Plan Year, the Bank will announce the amount of the matching contributions,
if any. The amount of the matching contributions is directly related to the
employees' 401(k) salary deferral contribution. For the Plan Year that began
January 1, 2002, all eligible participants received a matching contribution
equal to fifty percent (50%) of their 401(k) salary deferral contribution to the
Plan; however, it is limited to two percent (2%) of the plan compensation not to
exceed $4,000. The Plan expense was $49,484 for 2003.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities remaining
Number of securities to Weighted-average available for future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities reflected in
warrants and rights warrants and rights column (a))
(a) (b) (c)
----------------------- -------------------- ------------------------------------
Equity compensation plans None None 13,280 (1)
approved by security holders
Equity compensation plans not None None None
approved by security holders
Total None None 13,280
(1) At the 2001 annual meeting the shareholders of the Company voted to
approve the "Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (the
"Plan"). This Plan provides non-employee directors of the Company with
shares of restricted stock of the Company as a component of their
compensation for services as directors. The maximum number of shares of
stock that may be issued pursuant to the Plan is 15,000. The first grant
date under this Plan preceded the 2002 annual meeting of shareholders.
Each director whose term of office begins with or continues after the date
the Plan was approved by the shareholders is issued a "annual stock
retainer" consisting of 120 shares of fully vested restricted common stock
of the Company. In 2003, 840 shares were issued under the Plan and the
related compensation expense amounted to $23,688.
D-65
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
The following table sets forth certain information as of March 5, 2004 regarding
the number of shares of Common Stock beneficially owned by each director and
executive officer of the Company and by all directors and executive officers of
the Company as a group.
Number of Shares (1) Percentage of Class (2)
-------------------- -----------------------
John R. H. Blum 15,576 (3) 1.09%
Louise F. Brown 3,396 (4) .24%
Richard J. Cantele, Jr. 2,883 (5) .20%
John F. Foley 3,696 (6) .26%
Nancy F. Humphreys 1,240 (7) .09%
Gordon C. Johnson, DVM 1,742 (8) .12%
Holly J. Nelson 1,288 (9) .09%
John F. Perotti 10,839 (10) .76%
Walter C. Shannon, Jr. 3,844 (11) .27%
Michael A. Varet 65,886 (12) 4.63%
------------------------------ ------- ----
(All Directors and Executive 110,390 7.75%
Officers of the Company
as a group of (10) persons)
(1) The shareholdings also include, in certain cases, shares owned by or in
trust for a director's spouse and/or children or grandchildren, and in
which all beneficial interest has been disclaimed by the director.
(2) Percentages are based upon the 1,424,078 shares of the Company's Common
Stock outstanding and entitled to vote on March 5, 2004. The definition of
beneficial owner includes any person who, directly or indirectly, through
any contract, agreement or understanding, relationship or otherwise has or
shares voting power or investment power with respect to such security.
(3) Includes 2,100 shares owned by John R. H. Blum's wife.
(4) Includes 1,068 shares owned by Louise F. Brown's daughter.
(5) Includes 1,197 shares owned jointly by Richard J. Cantele, Jr. and his
wife and 6 shares owned by Richard J. Cantele, Jr. as custodian for his
daughter.
(6) Includes 1,518 shares owned jointly by John F. Foley and his wife and 66
shares owned by John F. Foley as custodian for his children.
(7) Includes 1,000 shares owned jointly by Nancy F. Humphreys and her husband.
(8) Includes 660 shares which are owned by Gordon C. Johnson's wife and for
which Dr. Johnson has disclaimed beneficial ownership.
(9) Includes 6 shares owned by Holly J. Nelson as guardian for a minor child.
(10) Includes 9,514 shares owned jointly by John F. Perotti and his wife, 761
shares owned by his wife and 564 shares in trust for his son.
(11) All shares are owned individually by Walter C. Shannon, Jr.
(12) Includes 18,540 shares which are owned by Michael A. Varet's wife, 18,546
shares which are owned by his children. Michael A. Varet has disclaimed
beneficial ownership for all of these shares.
D-66
Principal Shareholders of the Company
Management is not aware of any person (including any "group" as that term is
used in Section 13 (d)(3) of the Exchange Act) who owns beneficially more than
5% of the Company's Common Stock as of the Record Date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with directors, officers,
principal shareholders and their associates on substantially the same terms as
those available for comparable transactions with others.
John R. H. Blum is Chairman of the Board of Directors and an attorney engaged in
the private practice of law. The Company has engaged Mr. Blum in past years and
even though his services were not used in 2003, the Company may engage his
services in 2004 in connection with certain legal matters.
Louise F. Brown is a director of the Company and a partner in the law firm of
Ackerly Brown, LLP. The Company has engaged Ms. Brown in past years but her
services were not used in 2003.
Walter C. Shannon, Jr. is a director of the Company and President Emeritus of
Wagner McNeil, Inc. which serves as the insurance agent for many of the
Company's insurance needs.
Some of the directors and executive officers of the Company and the Bank, as
well as firms and companies with which they are associated, are or have been
customers of the Bank and as such have had banking transactions with the Bank.
As a matter of policy, loans to directors and executive officers are made in the
ordinary course of business on substantially the same terms, including interest
rates, collateral and repayment terms, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectibility or present other unfavorable features.
Since January 1, 2003, the highest aggregate outstanding principal amount of all
loans extended by the Bank to its directors, executive officers and all
associates of such persons as a group was $1,032,500 representing an aggregate
principal amount equal to 3.66% of the equity capital accounts of the Bank.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
1. Audit Fees
The aggregate fees billed for professional services rendered for the audit
of the Company's annual financial statements for the last two (2) fiscal years
and the reviews of the financial statements included in the Company's Form 10-Q
for the quarters of the fiscal years ended December 31, 2003 and December 31,
2002 were $76,625 and $75,860, respectively.
2. Audit-Related Fees
The aggregate fees billed for services rendered in each of the last two
(2) years for assurance and related services by Shatswell, MacLeod & Company,
P.C. that are reasonably related to performance of the auditor review of the
Company's financial statements were $12,117 for the fiscal year ended December
31, 2003 and $10,672 for the fiscal year ended December 31, 2002.
3. Tax Fees
The aggregate fees billed in each of the last two (2) years for
professional services rendered by Shatswell, MacLeod & Company, P.C. for tax
compliance, tax advice and tax planning for the fiscal years ended December 31,
2003 and December 31, 2002 were $8,100 each year.
4. All Other Fees
There were no aggregate fees billed for services rendered by Shatswell,
MacLeod & Company, P.C., other than the services covered above, for the fiscal
year ended December 31, 2003 and December 31, 2002.
D-67
Independence
The Audit Committee of the Board of Directors of the Company has
considered and determined that the provision of services rendered by Shatswell,
MacLeod & Company, P.C. relating to matters 2 through 4 above, is compatible
with maintaining the independence of such accountants.
The Audit Committee's policy is to pre-approve all audit and non-audit
services provided by the independent auditors, other than those listed under the
de minimus exception. These services may include audit services, audit-related
services, tax services and other services. Pre-approval is detailed as to a
particular service or category of services, and is generally subject to a
specific budget. The Audit Committee has delegated pre-approval authority to its
Chairman when expeditious delivery of services is necessary. The independent
auditors and management are required to report to the full Audit Committee
regarding the extent of services provided by independent auditors in accordance
with this pre-approval, and the fees for the services performed to date. None of
the audited-related fees, tax fees or other fees paid in 2003 and 2002 were
approved per the Audit Committee's pre-approval policies.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report on Form l0-K.
1. Financial Statements:
The financial statements filed as part of this report are listed in the
index appearing at Item 8.
2. Financial Statement Schedules:
Such schedules are omitted because they are inapplicable or the
information is included in the consolidated financial statements or notes
thereto.
3. Exhibits Required by Item 601 of Regulation S-K:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of Salisbury Bancorp,
Inc. (1)
3.2 Bylaws of Salisbury Bancorp, Inc., as amended (2)
10. Pension Supplement Agreement with John F. Perotti (3)
10.2 Form of Change in Control Agreement with Executive
Officers (4)
10.3 Director Stock Retainer Plan (5)
11 Computation of Earnings per Share
21. Subsidiaries of the Company (6)
23.1 Consent of Independent Certified Public Accountants
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.
D-68
(2) Exhibit was filed on March 30, 2001 as Exhibit 3.2 to Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2001 and is
incorporated herein by reference.
(3) Exhibit was filed on April 23, 1998 as Exhibit 10 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(4) Exhibit was filed on May 8, 2002, as Exhibit 10.2 to the Company's
Annual Report on Form 10-KSB/A for the fiscal year ended December 31, 2002
and is incorporated herein by reference.
(5) Exhibit was filed on May 8, 2002, as Exhibit 10.3 to the Company's
Annual Report on Form 10KSB for the fiscal year ended December 31, 2002
and is incorporated herein by reference.
(6) Exhibit was filed on April 23, 1998 as Exhibit 21 to Company's
Registration Statement on Form S-4 (No. 333-50857) and is incorporated
herein by reference.
(b) CURRENT REPORTS: The following reports on Form 8-K were filed during
the fourth quarter of the 2003 fiscal year:
1. The Company filed a Form 8-K on October 24, 2003 to report that the
Company had issued a press release announcing earnings for the third
quarter of 2003.
2. The Company filed a Form 8-K on November 18, 2003 to report that the
Company had issued a press release disclosing the proposed merger
with Canaan National Bancorp, Inc.
3. The Company filed a Form 8-K on November 25, 2003 to report that the
Company's Board of Directors declared a quarterly cash dividend of
$.23 per share to be paid on January 30, 2004 to shareholders of
record as of December 31, 2003.
D-69
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Lakeville, Connecticut
on March 26, 2004.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
----------------------
John F. Perotti
President and
Chief Executive Officer
By: /s/ John F. Foley
--------------------
John F. Foley
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John F. Perotti President, March 26, 2004
-------------------------------- Chief Executive Officer
(John F. Perotti) and Director
/s/ John R. H. Blum Director March 26, 2004
-----------------------------
(John R. H. Blum)
/s/ Louise F. Brown Director March 26, 2004
------------------------------
(Louise F. Brown)
/s/ Nancy F. Humphreys Director March 26, 2004
--------------------------------
(Nancy F. Humphreys)
/s/ Gordon C. Johnson Director March 26, 2004
----------------------------
(Gordon C. Johnson)
/s/ Holly J. Nelson Director March 26, 2004
---------------------------------
(Holly J. Nelson)
/s/ Walter C. Shannon, Jr. Director March 26, 2004
----------------------------
(Walter C. Shannon, Jr.)
/s/ Michael A. Varet Director March 26, 2004
--------------------------
(Michael A. Varet)
D-70
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The Company has computed and presented earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128. Reconciliation of the
numerators and the denominators of the basic and diluted per share computation
for net income are as follows:
(amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Twelve months ended December 31, 2003
Basic EPS
Net income and income available to common stockholders $ 3,840 1,424 $ 2.70
Effect of dilutive securities, options 0
------- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 3,840 1,424 $ 2.70
======= =====
Twelve months ended December 31, 2002
Basic EPS
Net income and income available to common stockholders $ 3,199 1,423 $ 2.25
Effect of dilutive securities, options 0
------- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 3,199 1,423 $ 2.25
======= =====
(amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Three months ended December 31, 2003
Basic EPS
Net income and income available to common stockholders $ 795 1,424 $.57
Effect of dilutive securities, options 0 0
------ -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 795 1,424 $.57
====== =====
Three months ended December 31, 2002
Basic EPS
Net income and income available to common stockholders $ 749 1,423 $.52
Effect of dilutive securities, options 0 0
------ -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 749 1,423 $.52
====== =====
D-71
Exhibit 31.1
RULE 13a-15(e) CERTIFICATION
I, John F. Perotti, certify that:
1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 26, 2004
By: /s/ John F. Perotti
-------------------
President and CEO
D-72
Exhibit 31.2
RULE 13a-15(e) CERTIFICATION
I, John F. Foley, certify that:
1. I have reviewed this annual report on Form 10-K of Salisbury Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 26, 2003
By: /s/ John F. Foley
-----------------
Chief Financial Officer
D-73
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Salisbury Bancorp, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
John F. Perotti, Chief Executive Officer of the Company, and I, John F. Foley,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ John F. Perotti /s/ John F. Foley
-------------------------- ------------------
John F. Perotti John F. Foley
Chief Executive Officer Chief Financial Officer
D-74
Exhibit 21
Subsidiaries of the Company
Percent owned
Subsidiary State of Incorporation by Company
---------- ---------------------- ------------
Salisbury Bank and Trust Company Connecticut 100%
D-75
Exhibit 23.1
[LETTERHEAD OF SHATSWELL, MacLEOD & COMPANY, P.C.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Salisbury Bancorp, Inc.
Lakeville, Connecticut
We hereby consent to the use of our report dated January 20, 2004 in the
Form 10-K of Salisbury Bancorp, Inc. and the reference to us in the section
designated "Experts".
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
March 24, 2004
D-76
Appendix E
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
|_| 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
Salisbury Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
5 Bissell Street Lakeville Connecticut 06039
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 whether the registrant is an accelerated filer.
Yes |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 26, 2004
1,424,078
E-1
SALISBURY BANCORP, INC.
TABLE OF CONTENTS
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements: E-2
Condensed Consolidated Balance Sheets -March 31, 2004 (unaudited)
and December 31, 2003 E-4
Condensed Consolidated Statements of Income -three months ended March 31, 2004
and 2003 (unaudited) E-5
Condensed Consolidated Statements of Cash Flows -three months ended March 31, 2004 and 2003
(unaudited) E-6
Notes to Condensed Consolidated Financial Statements E-8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations E-10
Item 3. Quantitative and Qualitative Disclosures about Market Risk E-17
Item 4. Controls and Procedures E-17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings E-17
Item 2. Changes in Securities and Use of Proceeds E-17
Item 3. Defaults Upon Senior Securities E-17
Item 4. Submission of Matters to a Vote of Security Holders E-17
Item 5. Other Information E-17
Item 6. Exhibits and Reports on Form 8-K E-17
Signatures E-18
E-2
Part I--FINANCIAL INFORMATION
Item 1. Financial Statements.
E-3
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share data)
March 31, 2004 and December 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
(unaudited)
ASSETS
Cash & due from banks $ 7,044 $ 7,688
Interest bearing demand deposits with other banks 1,189 1,668
Money market mutual funds 507 501
Federal funds sold 1,020 2,272
------------ ------------
Cash and cash equivalents 9,760 12,129
Investment in available-for-sale securities (at fair value) 163,465 143,020
Investments in held to maturity securities (fair values of $229,000 as
of March 31, 2004 and $235,000 as of December 31, 2003) 226 229
Federal Home Loan Bank stock, at cost 3,868 3,771
Loans, less allowance for loan losses of $1,708,000 as of March 31, 2004
and $1,664,000 as of December 31, 2003 137,359 139,563
Loans held-for-sale 1,037 275
Investment in real estate 75 75
Premises and equipment 2,945 2,892
Other real estate owned 0 0
Goodwill 2,358 2,358
Core deposit intangible 715 732
Accrued interest receivable 1,864 1,876
Cash surrender value of life insurance 3,192 3,154
Other assets 899 1,026
------------ ------------
Total Assets $ 327,763 $ 311,100
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 43,583 $ 43,631
Interest-bearing 174,986 174,826
------------ ------------
Total Deposits 218,569 218,457
Federal Home Loan Bank advances 75,635 60,897
Other liabilities 3,171 2,896
------------ ------------
Total Liabilities 297,375 282,250
------------ ------------
Shareholders' equity:
Common stock, par value $.10 per share; authorized 3,000,000 shares;
issued and outstanding 1,424,078 shares at December 31, 2003 142 142
and 1,424,078 shares at March 31, 2004
Paid-in capital 2,327 2,327
Retained earnings 26,425 25,695
Accumulated other comprehensive income 1,494 686
------------ ------------
Total Shareholders' Equity 30,388 28,850
------------ ------------
Total Liabilities and Shareholders' Equity $ 327,763 $ 311,100
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
E-4
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
March 31, 2004 and 2003
(unaudited)
Three Months Ended
March 31
2004 2003
-------- --------
Interest and dividend income:
Interest and fees on loans $ 2,163 $ 2,287
Interest and dividends on securities:
Taxable 1,022 1,224
Tax-exempt 532 506
Dividends on equity securities 26 26
Other interest 12 7
-------- --------
Total interest and dividend income 3,755 4,050
-------- --------
Interest expense:
Interest on deposits 619 787
Interest on Federal Home Loan Bank advances 650 739
-------- --------
Total interest expense 1,269 1,526
-------- --------
Net interest and dividend income 2,486 2,524
Provision for loan losses 60 37
-------- --------
Net interest and dividend income after provision
for loan losses 2,426 2,487
-------- --------
Other income:
Trust department income 354 290
Service charges on deposit accounts 145 133
Gain on sales of available-for-sale securities, net 356 337
Gain on sale of loans held-for-sale 51 22
Other income 186 200
-------- --------
Total other income 1,092 982
-------- --------
Other expense:
Salaries and employee benefits 1,262 1,173
Occupancy expense 90 95
Equipment expense 131 116
Data processing 151 153
Insurance 29 27
Printing and stationery 45 34
Legal expense 25 37
Amortization of core deposit intangible 17 18
Other expense 327 389
-------- --------
Total other expense 2,077 2,042
-------- --------
Income before income taxes 1,441 1,427
Income taxes 369 398
-------- --------
Net income $ 1,072 $ 1,029
======== ========
Earnings per common share $ .75 $ .72
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
E-5
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2004 and 2003
(unaudited)
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 1,072 $ 1,029
Adjustments to reconcile net income to net cash provided by
operating activities:
Accretion of securities, net 60 78
Gain/loss on sales of available-for-sale securities, net (356) (337)
Provision for loan losses 60 37
Depreciation and amortization 67 81
Amortization of core deposit intangible 17 18
Accretion of fair value adjustment on deposits 0 (10)
(Increase) decrease in interest receivable 12 (89)
Deferred tax expense (benefit) 0 13
Increase in prepaid expenses (57) (91)
Increase in other assets 128 (71)
(Decrease) increase in income tax payable (457) 276
Decrease in accrued expenses (333) (310)
Increase (decrease) in interest payable 19 (2)
Increase in other liabilities 748 27
-------- --------
Net cash provided by operating activities 699 649
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank stock (97) (808)
Purchases of available-for-sale securities (50,317) (29,171)
Proceeds from sales of available-for-sale securities 22,335 9,386
Proceeds from maturities of available-for-sale securities 9,112 4,316
Proceeds from maturities of held-to-maturity securities 49 3
Loan originations and principal collections, net 1,380 (4,389)
Recoveries of loans previously charged-off 2 3
Capital expenditures (103) (118)
-------- --------
Net cash used in investing activities (17,639) (20,778)
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
E-6
SALISBURY BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Three months ended March 31, 2004 and 2003
(unaudited)
(continued)
2004 2003
---------- ----------
Cash flows from financing activities:
Net increase in demand deposits, NOW and
savings accounts (2,.423) (3,078)
Net increase in time deposits 2,535 783
Advances from Federal Home Loan Bank 15,000 20,000
Principal payments on advances from Federal Home Loan Bank (262) (259)
Dividends paid (328) 313
Net cash provided by financing activities 14,522 17,133
---------- ----------
Net increase in cash and cash equivalents (2,369) (2,996)
Cash and cash equivalents at beginning of year 12,129 10,620
---------- ----------
Cash and cash equivalents at end of period $ 9,760 $ 7,624
========== ==========
Supplemental disclosures:
Interest paid $ 1,250 $ 1,528
Income taxes paid 109
The accompanying notes are an integral part of these condensed consolidated
financial statements.
E-7
SALISBURY BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Salisbury Bancorp, Inc. (the "Company"),
those of Salisbury Bank and Trust Company (the "Bank"), its wholly-owned
subsidiary and the Bank's subsidiary, S.B.T. Realty, Inc. The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to SEC Form 10-Q. Accordingly, they do not
include all the information and footnotes required by GAAP for complete
financial statements. All significant intercompany accounts and transactions
have been eliminated in the consolidation. These financial statements reflect,
in the opinion of Management, all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the Company's
financial position and the results of its operations and its cash flows for the
periods presented. Operating results for the three months ended March 31, 2004
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2004. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's 2003 Annual Report on Form 10-K.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 -COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for disclosure of comprehensive income, which
includes net income and any changes in equity from non-owner sources that are
not recorded in the income statement (such as changes in the net unrealized
gains (losses) on securities). The purpose of reporting comprehensive income is
to report a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than transactions
with owners in their capacity as owners. The Company's one source of other
comprehensive income is the net unrealized gain (loss) on securities.
Comprehensive Income
Three months ended
March 31
2004 2003
------- -------
Net income $ 1,072 $ 1,029
Net unrealized losses
on securities during period 808 (97)
------- -------
Comprehensive income $ 1,880 $ 932
======= =======
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). This Statement requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This Statement did not have a material impact on the
Company's consolidated financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial
Institutions" ("SFAS No. 147"), an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17 When a Savings and Loan Association or a Similar
Institution Is Acquired in a Business Combination Accounted for by the Purchase
Method" provided interpretive guidance on the application of the purchase method
to acquisitions of financial institutions. Except for transactions between two
or more mutual enterprises, SFAS No. 147 removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of SFAS No. 147. In addition, SFAS No. 147 amends SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" to include in its scope
long-term customer-relationship intangible assets of financial institutions such
as depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that SFAS No. 144 requires for other long-lived assets
that are held and used. Paragraph 5 of SFAS No. 147, which relates to the
application of the purchase method of accounting, was effective for acquisitions
for which the date of acquisition was on or after October 1, 2002. The
provisions in paragraph 6 related to accounting for the impairment or disposal
of certain long-term customer-relationship intangible assets were effective on
October 1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets in paragraphs 8-14 were effective on October 1, 2002, with
earlier application permitted.
E-8
In accordance with paragraph 9 of SFAS No. 147, the Company, has reclassified,
as of September 30, 2002 its recognized unidentifiable intangible asset related
to branch acquisition(s). This asset was reclassified as goodwill (reclassified
goodwill). The amount reclassified was $2,357,884, the carrying amount as of
January 1, 2002. The reclassified goodwill is being accounted for and reported
prospectively as goodwill under SFAS No. 142, with no amortization expense.
Accordingly, the consolidated financial statements for the year ended December
31, 2002 do not reflect amortization in the amount of $95,429 that would have
been recorded if SFAS No. 147 had not been issued. In accordance with SFAS No.
147 the Company tested its reclassified goodwill for impairment as of December
31, 2003. The Company determined that its reclassified goodwill as of those
dates was not impaired.
Also in accordance with paragraph 9 of SFAS No. 147, as of September 30, 2002,
the Company reclassified its core deposit intangible asset and accounted for it
as an asset apart from the unidentifiable intangible asset and not as goodwill.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose
(a) the nature of the guarantee; (b) the maximum potential amount of future
payments under the guarantee; (c) the carrying amount of the liability; (d) the
nature and extent of any recourse provisions or available collateral that would
enable the guarantor to recover the amounts paid under the guarantee.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure
requirements effective as of December 31, 2002. The adoption of this
interpretation did not have a material effect on the Company's financial
position or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement (a) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative, (b) clarifies when a derivative contains a financing component, (c)
amends the definition of an underlying to conform to language used in FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d)
amends certain other existing pronouncements. The provisions of SFAS No. 149 are
effective for contracts entered into or modified after June 30, 2003. There was
no substantial impact on the Company's consolidated financial statements on
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial instruments
that were previously classified as equity must be classified as a liability.
Most of the guidance in SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. This
Statement did not have any material effect on the Company's consolidated
financial statements.
E-9
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities of
another entity. In December 2003, the FASB revised Interpretation No. 46, also
referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that, by requiring a variable
interest entity to be consolidated by a company only if that company is subject
to a majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both. The
Company is required to apply FIN 46, as revised, to all entities subject to it
no later than the end of the first reporting period ending after March 15, 2004.
However, prior to the required application of FIN 46, as revised, the Company
shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be
special-purpose entities as of the end of the first fiscal year or interim
period ending after December 15, 2003. The adoption of this interpretation has
not and is not expected to have a material effect on the Company's consolidated
financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment of
SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans required by SFAS No. 87, "Employers' Accounting for Pensions,"
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
Statement retains the disclosure requirements contained in SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits," which
it replaces. It requires additional disclosures to those in the original
Statement 132 about assets, obligations, cash flows and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. This Statement is effective for financial statements with fiscal years
ending after December 15, 2003 and interim periods beginning after December 15,
2003. Adoption of this Statement did not have a material impact on the Company's
consolidated financial statements.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Business
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation which is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has four (4) full
service offices including a Trust Department located in the towns of North
Canaan, Lakeville, Salisbury and Sharon, Connecticut. The Company and Bank were
formed in 1998 and 1848, respectively. In order to provide a strong foundation
for building shareholder value and servicing customers, the Company remains
committed to investing in the technological and human resources necessary to
developing new personalized financial products and services to meet the needs of
customers. This discussion should be read in conjunction with Salisbury Bancorp,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 2003. On
November 18, 2003, the Company announced it had entered into an Agreement and
Plan of Merger providing for the merger of Canaan National Bancorp, Inc. with
and into the Company. The transaction is expected to close in the third quarter
of 2004, subject to the approval of the shareholders of Canaan National Bancorp,
Inc. and other conditions.
E-10
RESULTS OF OPERATIONS
For the three month period ended March 31, 2004 and 2003
Overview
The Company's net income for the three months ended March 31, 2004 was
$1,072,000, an increase of $43,000 or 4.2% over the same period ended March 31,
2003. Earnings per share also increased 4.2% and amounted to $.75 per share as
compared to $.72 earnings per share for the same period a year ago. The
improvement in net income is primarily the result of a reduction in interest
expense as well as an increase in other noninterest income.
The Company's assets at March 31, 2004 totaled $327,763,000 and represents
growth of $16,663,000 or 5.4% since December 31, 2003. This increase is
primarily the result of a strategy to increase interest income. This strategy
involved a 24.2% increase in funding advances from the Federal Home Loan Bank of
Boston which were invested in securities yielding a rate greater than the
borrowing rate, resulting in an increase in interest income. Loan demand
decreased 1.6% during the first quarter and net loans totaled $137,359,000 at
March 31, 2004. The Bank continues to monitor the quality of the loan portfolio
to ensure that loan quality will not be sacrificed for growth or otherwise
compromise the Company's objectives. During the first three months of 2004,
non-performing loans increased $204,000 to $814,000. Management does not believe
that this increase represents any trends towards increased delinquency of loans.
Deposits at March 31, 2004 totaled $218,569,000 and is basically flat with total
deposits at December 31, 2003.
As a result of the Company's first quarter financial performance, the Board of
Directors declared a first quarter cash dividend of $.24 per common share,
payable April 28, 2004 to shareholders of record as of March 31, 2004. This
compares to a cash dividend of $.23 per common share that was declared for the
first quarter of 2003.
The Company's risk based capital ratios at March 31, 2004, which include the
risk weighted assets and capital of the Bank, were 15.89% for tier 1 capital and
17.00% for total risk based capital. The Company's leverage ratio was 8.19% at
March 31, 2004.
THREE MONTHS ENDED MARCH 31, 2004
AS COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Net Interest Income
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent its noninterest income, from its community
banking operations. Net interest and dividend income is the difference between
interest and dividends earned on the loan and securities portfolio and interest
paid on deposits and advances from the Federal Home Loan Bank. Noninterest
income is primarily derived from the Trust Department, service charges and other
fees related to deposit and loan accounts and from gains taken on the sale of
available-for-sale securities. For the following discussion, net interest and
dividend income is presented on a fully taxable-equivalent ("FTE") basis. FTE
interest income restates reported interest income on tax exempt loans and
securities as if such interest were taxed at the Company's federal tax rate of
34% for all periods presented.
(amounts in thousands)
Three months ended March 31 2004 2003 2002
Interest and Dividend Income
(financial statements) $ 3,755 $ 4,050 $ 4,061
Tax Equivalent Adjustment 274 261 224
------- ------- -------
Total Interest and Dividend Income
(on an FTE basis) 4,029 4,311 4,285
Interest Expense 1,269 1,526 1,798
Net Interest and Dividend Income-FTE $ 2,760 $ 2,785 $ 2,487
======= ======= ======
E-11
Interest and dividend income on an FTE basis for the three months ended March
31, 2004 totaled $4,029,000, as compared to $4,311,000 for the same period in
2003. This is a decrease of $282,000 or approximately 6.5%. Although there was
an increase in earning assets, this decrease in interest and dividend income was
primarily the result of competition and an economic environment of generally
lower interest rates that continue to pressure interest margins. A continuing
change in the mix of earning assets has resulted in an increase of 5.0% in the
tax equivalent adjustment for the first three months of 2004.
Interest expense on deposits for the first three months of 2004 totaled
$619,000, a decrease of 21.4% compared to the same period in 2003. This decrease
is primarily the result of an economic environment of lower interest rates.
Although Federal Home Loan Bank advances have increased, interest expense on
these advances decreased $89,000 or 12.0% compared to the corresponding period
in 2003. Total interest expense for the three months ending March 31, 2004 was
$1,269,000, a decrease of 16.8% compared to the same period in 2003.
Overall, net interest and dividend income (on an FTE basis) decreased $25,000 to
$2,760,000 for the period ended March 31, 2004.
Noninterest Income
Noninterest income totaled $1,092,000 for the three months ended March 31, 2004,
an increase of 11.2% compared to the three months ended March 31, 2003.
Continuing growth of the Trust Department has resulted in an increase in income
of $64,000 or 22.1% to $354,000 for the first quarter of 2004, compared to the
same period in 2003. Gains on sales of available-for-sale securities increased
5.6% for the first three months of 2004 as compared to the corresponding period
in 2003. Service charges on deposit accounts increased 10.5% for the period
ended March 31, 2004 when compared to the first quarter of 2003.
Noninterest Expense
Noninterest expense increased 1.7% for the first three months of 2004 as
compared to the same period in 2004. Salary and employee benefit expenses
increased $89,000 or 7.6%, primarily due to an increase in staff along with
salary increases and the increase in the cost of employee benefits. Occupancy
expenses decreased $5,000 or 5.26% when comparing the first three months of 2004
to the same three months expense in 2003. Equipment expense increased 12.9% when
comparing the same periods in 2004 and 2003. This increase reflects some one
time maintenance costs incurred during the 2004 period. Legal expenses decreased
to $25,000 at March 31, 2004 compared to legal expenses of $37,000 at March 31,
2003. Other operating expenses decreased 15.9% at March 31, 2004 from $389,000
at March 31, 2003. These decreases reflect management's continuing efforts to
control operating expenses.
Income Taxes
The income tax provision for the first three months of 2004 totaled $369,000 in
comparison to $398,000 for the same three months period in 2003. This decrease
reflects a decrease in taxable income.
Net Income
Overall, net income totaled $1,072,000 for the three months ended March 31,
2004. This compares to net income of $1,029,000 for the same period in 2003, an
increase of 4.2% and represents earnings of $.75 per share. This compares to
earnings per share of $.72 for the corresponding period in 2003. The improvement
in net income is primarily the result of an increase in noninterest income and
reductions in interest expense.
FINANCIAL CONDITION
Total assets at March 31, 2004 were $327,763,000, compared to $311,100,000 at
December 31, 2003, an increase of 5.4%. The increase was primarily due to
additional advances taken from the Federal Home Loan Bank as part of a strategy
to increase interest income.
E-12
Securities
During the three months ended March 31, 2004, the securities portfolio,
including Federal Home Loan Bank stock, increased $20,539,000 or 14.0% to
$167,559,000 from $147,020,000 at December 31, 2003. The increase is primarily a
reflection of the strategy to increase interest income as the advances from the
Federal Home Loan Bank were used to purchase securities.
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage backed securities and securities issued by states
of the United States and political subdivisions of the states.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities are
classified as available-for-sale. The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company. Unrealized
holding gains and losses (accumulated other comprehensive income/loss) are not
included in earnings, but are reported as a net amount (less expected tax) in a
separate component of capital until realized. At March 31, 2004, the unrealized
gain net of tax was $1,494,000. This compares to an unrealized gain net of tax
of $686,000 at December 31, 2003. The securities reported as securities
held-to-maturity are stated at amortized cost.
Lending
Competition for loans remains aggressive in the Bank's market area. Coupled with
an economic environment of generally lower interest rates that promote
refinancing to shorter-term fixed rate products and a local economy that
anxiously awaits the arrival of spring, these factors have resulted in a
decrease in the loan portfolio at March 31, 2004 as compared to December 31,
2003. The following table represents the composition of the loan portfolio
comparing March 31, 2004 to December 31, 2003:
March 31, 2004 December 31, 2003
-------------- -----------------
(amounts in thousands)
Commercial, financial and agricultural $ 8,687 $ 9,149
Real Estate-construction and land
development 12,238 15,307
Real Estate-residential 92,579 90,806
Real Estate-commercial 19,654 19,200
Consumer 5,833 6,692
Other 76 73
--------- ---------
139,067 141,227
Allowance for loan losses (1,708) (1,664)
--------- ---------
Loans Outstanding $ 137,359 $ 139,563
========= =========
Provisions and Allowance for Loan Losses
Total net loans at March 31, 2004 decreased 1.6% when compared to total net
loans at December 31, 2003. At March 31, 2004 approximately 90% of the Bank's
loan portfolio was related to real estate products. The concentration remained
consistent as approximately 89% of the portfolio was related to real estate at
December 31, 2003. There were no material changes in the composition of the loan
portfolio during this period.
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Bank's objectives. Because of this risk
associated with extending loans, the Bank maintains an allowance or reserve for
credit losses through charges to earnings. The loan loss provision for the
three-month period ended March 31, 2004 was $60,000
The Bank evaluates the adequacy of the allowance on a monthly basis. No material
changes have been made in the estimation methods or assumptions that the Bank
uses in making this determination during the period ended March 31, 2004. Such
evaluations are based on assessments of credit quality and "risk rating" of
loans by senior management, which are submitted to the Bank's Board of Directors
for approval. Loans are initially risk rated when originated. If there is
deterioration in the credit, the risk rating is adjusted accordingly.
E-13
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan ("SFAS114"). Impaired loans
receive individual evaluation of the allowance necessary on a monthly basis.
Impaired loans are defined in the Bank's Loan Policy as residential real estate
mortgages with balances of $300,000 or more and commercial loans of $100,000 or
more when it is probable that the Bank will not be able to collect all principal
and interest due according to the terms of the note. Any such commercial loans
and residential mortgages will be considered impaired under any of the following
circumstances:
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994; or
4. Loans classified as "doubtful", meaning that they have weaknesses,
which make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
The credit card delinquency and loss history is separately evaluated and given a
special loan loss factor because management recognizes the higher risk involved
in such loans. Concentrations of credit and local economic factors are also
evaluated on a periodic basis. Historical average net losses by loan type are
examined as well as trends by type. The Bank's loan mix over the same period of
time is also analyzed. A loan loss allocation is made for each type of loan
multiplied by the loan mix percentage for each loan type to produce a weighted
average factor. There have been no reallocations within the allowance during the
three months ended March 31, 2004.
At March 31, 2004, the allowance for loan losses totaled $1,708,000,
representing 209.8% of nonperforming loans, which totaled $814,000, and 1.2% of
total loans of $139,067,000. This compares to an allowance for loan losses of
$1,664,000, representing 272.8% of nonperforming loans, which totaled $610,000,
and 1.18% of total loans of $141,227,000 at December 31, 2003. A total of
$18,000 of loans were charged off by the Bank during the three months ended
March 31, 2004. These charged-off loans consisted primarily of consumer loans.
No loans were charged off during the three month period ended March 31, 2003. A
total of $2,000 of previously charged-off loans was recovered during the three
month period ended March 31, 2004. Recoveries for the same period in 2003
totaled $3,000. While management estimates loan losses using the best available
information, no assurances can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans or other factors. Additionally, with expectations of
the Bank to grow its existing portfolio, future additions to the allowance may
be necessary to maintain adequate coverage ratios.
DEPOSITS
The Company offers a variety of deposit accounts with a range of interest rates
and terms. The following table illustrates the composition of the Company's
deposits at March 31, 2004 and December 31, 2003:
March 31, 2004 December 31, 2003
-------------- -----------------
(amounts in thousands)
Demand $ 43,583 $ 43,147
NOW 19,251 21,437
Money Market 35,006 38,357
Savings 50,406 47,729
Time 70,323 67,787
--------- ---------
Total Deposits $ 218,569 $ 218,457
========= =========
Deposits constitute the principal funding source of the Company's assets.
E-14
Borrowings
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy 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 March 31, 2004, the Company had $75,635,000 in
outstanding advances from the Federal Home Loan Bank compared to $60,897,000 at
December 31, 2003. Management expects that it will continue this strategy of
supplementing deposit growth with advances from the Federal Home Loan Bank.
Interest Rate Risk
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets.
In an attempt to manage its exposure to changes in interest rates, the Bank's
assets and liabilities are managed in accordance with policies established and
reviewed by the Bank's Board of Directors. The Bank's Asset/Liability Management
Committee monitors asset and deposit levels, developments and trends in interest
rates, liquidity and capital. One of the primary financial objectives is to
manage interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At March 31,
2004, the Company was slightly asset sensitive (positive gap). [State effect in
rising and declining interest rate environments.] The level of interest rate
risk at March 31, 2004 is within the limits approved by the Board of Directors.
Liquidity
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuation in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings.
At March 31, 2004 the Company had approximately $31,740,000 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.
E-15
Capital
At March 31, 2004, the Company had $30,388,000 in shareholder equity, an
increase of 5.3% compared to December 31, 2003. Several components contributed
to the change. Earnings for the three-month period ended March 31, 2004 totaled
$1,072,000. Market conditions have resulted in an increase in unrealized
comprehensive income of $808,000. The Company also declared a quarterly dividend
resulting in a decrease in capital of $350,000. Under current regulatory
definitions, the Company and the Bank are considered to be "well capitalized"
for capital adequacy purposes. As a result, the Bank pays the lowest federal
deposit insurance deposit premiums possible. One primary measure of capital
adequacy for regulatory purposes is based on the ratio of risk-based capital to
risk-weighted assets. This method of measuring capital adequacy helps to
establish capital requirements that are more sensitive to the differences in
risk associated with various assets. It takes into account off-balance sheet
exposure in assessing capital adequacy and it minimizes disincentives to holding
liquid, low-risk assets. At March 31, 2004, the Company had a risk-based capital
ratio of 16.26% compared to 16.4% at December 31, 2003. Maintaining strong
capital is essential to bank safety and soundness. However, the effective
management of capital resources requires generating attractive returns on equity
to build value for shareholders while maintaining appropriate levels of capital
to fund growth, meet regulatory requirements and be consistent with prudent
industry practices. Management believes that the capital ratios of the Company
and Bank are adequate to continue to meet the foreseeable capital needs of the
institutions.
Impact of Inflation and Changing Prices
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of the Company are monetary and as a result, interest rates have a
greater impact on the Company's performance than do the effects of general
levels of inflation although they do not necessarily move in the same direction
or with the same magnitude as the prices of goods and services. Although not an
influence in recent years, inflation could impact earnings in future periods.
Forward Looking Statements
This Form 10-Q 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 revenues and earnings for the Company and Bank.
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.
E-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The main components of market risk for the Company are interest rate risk and
liquidity risk. The Company manages interest rate risk and liquidity risk
through an ALCO Committee comprised of outside Directors and senior management.
The committee monitors compliance with the Bank's Asset/Liability Policy which
provides guidelines to analyze and manage gap, which is the difference between
the amount of assets and the amounts of liabilities which mature or reprice
during specific time frames. Model simulation is used to measure earnings
volatility under both rising and falling rate scenarios. The Company's interest
rate risk and liquidity position has not significantly changed from year end
2003.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer concluded
that, based upon an evaluation within the 90 days prior to the filing date of
this report as of March 31, 2004, the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms. During the quarter ended March 31,
2004 there were no changes in the Company's internal control over financial
reporting that materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1. - Legal Proceedings. Not applicable
Item 2. - Changes in Securities and Use of Proceeds. Not applicable
Item 3. - Defaults Upon Senior Securities. Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders. Not applicable
Item 5. - Other Information. Not applicable
Item 6. - Exhibits and Reports on Form 8-K
a. Exhibits
11. Computation of Earnings per Share.
31.1. Rule 13a-14(a)/15d-14(a) Certification.
31.2. Rule 13a-14(a)/15d-14(a) Certification.
32. Section 1350 Certification.
b. Reports on Form 8-K:
1. The Company filed a Form 8-K on March 3, 2004 to report that the
Company had issued a press release announcing earnings for the year
ended December 31, 2003 and that the Company's Board of Directors
declared a quarterly cash dividend of $.24 per share to be paid on
April 28, 2004 to shareholders of record as March 31, 2004.
E-17
SALISBURY BANCORP, INC.
Pursuant to the requirements 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.
Salisbury Bancorp, Inc.
Date: May 7, 2004 by: /s/ John F. Perotti
---------------------
John F. Perotti
President/Chief Executive Officer
Date: May 7, 2004 by: /s/ John F. Foley
-------------------
John F. Foley
Chief Financial Officer
E-18
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
The Company has computed and presented earnings per share ("EPS") in accordance
with Statement of Financial Accounting Standards No. 128. Reconciliation of the
numerators and the denominators of the basic and diluted per share computation
for net income are as follows:
(amounts in thousands, except per share data)
(unaudited)
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Three months ended March 31, 2004
Basic EPS
Net income and income available to common stockholders $ 1,072 1,424 $ .75
Effect of dilutive securities, options 0
-------- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 1,072 1,424 $ .75
======= =====
Three months ended March 31, 2003
Basic EPS
Net income and income available to common stockholders $ 1,029 1,423 $ .72
Effect of dilutive securities, options 0
------- -----
Diluted EPS
Income available to common stockholders and assumed
conversions $ 1,029 1,423 $ .72
======= =====
E-19
Exhibit 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
I, John F. Perotti, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
d) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
By: /s/ John F. Perotti
-------------------
President and CEO
E-20
Exhibit 31.2
RUL 13a-14(a)/15d-14(a) CERTIFICATION
I, John F. Foley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004
By: /s/ John F. Foley
-----------------
Chief Financial Officer
E-21
EXHIBIT 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Salisbury Bancorp, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John F.
Perotti, Chief Executive Officer of the Company, and I, John F. Foley, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ John F. Perotti /s/ John F. Foley
---------------------------- ------------------
John F. Perotti John F. Foley
Chief Executive Officer Chief Financial Officer
May 7, 2004.
The foregoing certificate is furnished solely for purposes of complying with
Section 906 of the Sarbanes-Oxley Act of 2002 and for no other purpose
whatsoever. Notwithstanding anything to the contrary set forth herein or in any
of the Company's previous filings under the Securities Act of 1933, as amended,
or the Securities Exchange Act of 1934, as amended, that might incorporate the
Company's future filings, including this Report on Form 10-Q, in whole or in
part, this Certificate shall not be incorporated by reference into any such
filings.
E-22
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Reference is made to the provisions of Article Ninth of Salisbury's
certificate of incorporation, and the provisions of Article V of Salisbury's
bylaws, as amended.
Salisbury is a Connecticut corporation subject to the applicable
indemnification provisions of the Connecticut Business Corporation Act of the
State of Connecticut (the "Bus. Corp. Act"). The Bus. Corp. Act provides for
four (4) types of indemnification: permissible; mandatory; obligatory; and court
ordered. Sections 33-771 and 33-776 of the Bus. Corp. Act provide for the
indemnification, under certain circumstances, of persons who are or were
directors, officers, employees or agents of Salisbury against liability incurred
in a proceeding to which such individual is a party. In the case of actions
brought by or in the right of Salisbury, Section 33-771(d) provides for
indemnification only of reasonable expenses, and only upon a determination by a
court of competent jurisdiction or the court in which such action or suit was
brought.
Salisbury's bylaws provide for indemnification of directors, officers,
employees and agents of Salisbury to the extent permitted and/or required by
Sections 33-770 - 33-778 of the Bus. Corp. Act.
Article Ninth of Salisbury's certificate of incorporation provides that
the personal liability to Salisbury or its shareholders of a person who is or
was a director of Salisbury for monetary damages for breach of duty as a
director shall be limited to the amount of compensation received by such
director for serving Salisbury during the year of the violation if such breach
did not (1) involve a knowing and culpable notation of law; (2) enable the
director or an associate as defined in Section 33-840 of the Bus. Corp. Act to
receive improper personal economic gain; (3) show a lack of good faith and a
conscious disregard for the duty of the director to Salisbury under
circumstances in which the director was aware that his conduct or omission
created an unjustifiable risk of serious injury to Salisbury; (4) constitute a
sustained and unexcused pattern of inattention that amounts to an abdication of
duty; or (5) create liability for unlawful distribution under Section 33-757 of
the Bus. Corp. Act or under Section 36a-58 of the Connecticut Banking Law. The
foregoing indemnity and insurance provisions have the effect of reducing
directors' and officers' exposure to personal liability for actions taken in
connection with their respective positions.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Salisbury pursuant to the foregoing provisions, or otherwise, Salisbury has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Salisbury of
expenses incurred or paid by a director, officer or controlling person of
Salisbury in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Salisbury will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
II-1
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
No. Description
2.1 Agreement and Plan of Merger by and among Salisbury Bancorp, Inc.
and Canaan National Bancorp, Inc., dated November 17, 2003 (included
as Appendix A to the proxy statement/prospectus which is part of
this registration statement).
2.2 Shareholder's Agreement, dated November 17, 2003, by and between
Salisbury Bancorp, Inc., Canaan National Bancorp, Inc. and the
Shareholders of Canaan National Bancorp, Inc. named therein (filed
as Exhibit 2.2 to the Corporation's Registration Statement on Form
S-4 (File No. 333-116333) filed with the SEC on June 9, 2004 and
incorporated herein by reference).
2.3 Stock Option Agreement, dated November 17, 2003, between Canaan
National Bancorp, Inc. and Salisbury Bancorp, Inc. (filed as Exhibit
2.3 to the Corporation's Registration Statement on Form S-4 (File
No. 333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
4.1 Specimen common stock certificate for Salisbury Bancorp, Inc.'s
common stock (filed as Exhibit 4.1 to the Corporation's Registration
Statement on Form S-3 (File No. 333-81563) filed with the SEC on
June 25, 1999 and incorporated herein by reference).
5.1 Opinion of Cranmore, FitzGerald & Meaney as to the validity of the
shares being registered.
8.1 Opinion of Day, Berry & Howard regarding certain tax matters.
23.1 Consent of Cranmore, FitzGerald & Meaney (included in Exhibit 5.1).
23.2 Consent of Day, Berry & Howard (included in Exhibit 8.1).
23.3 Consent of Shatswell, MacLeod & Company, P.C. (filed as Exhibit 23.3
to the Corporation's Registration Statement on Form S-4 (File No.
333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
23.4 Consent of Shatswell, MacLeod & Company, P.C. (filed as Exhibit 23.4
to the Corporation's Registration Statement on Form S-4 (File No.
333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
23.5 Consent of HAS Associates, Inc. (included as Appendix B to the proxy
statement/prospectus which is part of this registration statement).
24.1 Power of Attorney (included on signature page of this Registration
Statement filed on June 9, 2004).
99.1 Form of Canaan National Bancorp, Inc. proxy card (filed as Exhibit
99.1 to the Corporation's Registration Statement on Form S-4 (File
No. 333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
II-2
Item 22. Undertakings.
(a) Salisbury hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement
(or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a
fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered
(if the total dollar value of the securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set
forth in the "Calculation of the Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) Salisbury hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of
Salisbury's annual report pursuant to section 13(a) or section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Salisbury hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), Salisbury undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by
the other items of the applicable form.
(d) Salisbury undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that
purports to meet the requirements of section 10(a)(3) of the
Securities Act of 1933 and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
(e) Salisbury hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by
first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
(g) Salisbury hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
SIGNATURES
Registrant. Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the town of Lakeville,
state of Connecticut, on this 6th day of July, 2004.
SALISBURY BANCORP, INC.
By: /s/ John F. Perotti
-------------------------------------
John F. Perotti
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below, on this 6th day of July, 2004.
Signature Title
--------- -----
/s/ John F. Perotti President and Chief Executive Officer and
------------------------------ Director
John F. Perotti (Principal Executive Officer)
/s/ John F. Foley Chief Financial Officer
------------------------------
John F. Foley (Principal Financial Officer and Principal
Accounting Officer)
/s/ John R.H. Blum* Director
------------------------------
John R. H. Blum
/s/ Louise F. Brown* Director
------------------------------
Louise F. Brown
/s/ Nancy F. Humphreys* Director
------------------------------
Nancy F. Humphreys
/s/ Gordon C. Johnson* Director
------------------------------
Gordon C. Johnson
/s/ Holly J. Nelson* Director
------------------------------
Holly J. Nelson
/s/ Walter C. Shannon, Jr.* Director
------------------------------
Walter C. Shannon, Jr.
/s/ Michael A. Varet* Director
------------------------------
Michael A. Varet
* by John F. Perotti, attorney-in-fact.
II-5
Exhibit Index
Exhibit
No. Exhibit
2.1 Agreement and Plan of Merger by and among Salisbury Bancorp, Inc.
and Canaan National Bancorp, Inc., dated November 17, 2003 (included
as Appendix A to the proxy statement/prospectus which is part of
this registration statement).
2.2 Shareholder's Agreement, dated November 17, 2003, by and between
Salisbury Bancorp, Inc., Canaan National Bancorp, Inc. and the
Shareholders of Canaan National Bancorp, Inc. named therein (filed
as Exhibit 2.2 to the Corporation's Registration Statement on Form
S-4 (File No. 333-116333) filed with the SEC on June 9, 2004 and
incorporated herein by reference).
2.3 Stock Option Agreement, dated November 17, 2003, between Canaan
National Bancorp, Inc. and Salisbury Bancorp, Inc. (filed as Exhibit
2.3 to the Corporation's Registration Statement on Form S-4 (File
No. 333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference)
4.1 Specimen common stock certificate for Salisbury Bancorp, Inc.'s
common stock (filed as Exhibit 4.1 to the Corporation's Registration
Statement on Form S-3 (File No. 333-81563) filed with the SEC on
June 25, 1999 and incorporated herein by reference).
5.1 Opinion of Cranmore, FitzGerald & Meaney as to the validity of the
shares being registered.
8.1 Opinion of Day, Berry & Howard regarding certain tax matters.
23.1 Consent of Cranmore, FitzGerald & Meaney (included in Exhibit 5.1).
23.2 Consent of Day, Berry & Howard (included in Exhibit 8.1).
23.3 Consent of Shatswell, MacLeod & Company, P.C. (filed as Exhibit 23.3
to the Corporation's Registration Statement on Form S-4 (File No.
333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
23.4 Consent of Shatswell, MacLeod & Company, P.C. (filed as Exhibit 23.4
to the Corporation's Registration Statement on Form S-4 (File No.
333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
23.5 Consent of HAS Associates, Inc. (included as Appendix B to the proxy
statement/prospectus which is part of this registration statement).
24.1 Power of Attorney (included on signature page of this Registration
Statement filed on June 9, 2004).
99.1 Form of Canaan National Bancorp, Inc. proxy card (filed as Exhibit
99.1 to the Corporation's Registration Statement on Form S-4 (File
No. 333-116333) filed with the SEC on June 9, 2004 and incorporated
herein by reference).
Exhibit 5.1
July 6, 2004
The Board of Directors
Salisbury Bancorp, Inc.
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039-1868
Re: Salisbury Bancorp, Inc. Registration Statement of Form S-4
Ladies and Gentlemen:
We are counsel to Salisbury Bancorp, Inc., a Connecticut Corporation
with its principal office in Lakeville, Connecticut (the "Company"), and have
acted as such in connection with the registration statement on Form S-4 (the
"Registration Statement") filed with the Securities and Exchange Commission
relating to the proposed offering of up to 247,670 shares of the Company's
Common Stock, par value $0.01 per share (the "Common Stock") to the shareholders
of Canaan National Bancorp, Inc. pursuant to an Agreement and Plan of
Reorganization, dated November 17, 2003, which provides, among other things, for
the merger of the Canaan National Bancorp, Inc. ("Canaan") with and into the
Company (the "Reorganization"), and the issuance of 1.3371 shares of the Canaan
Common Stock and payment in the amount of $31.20 for each share of the Canaan
common stock outstanding at the time of the Reorganization.
During the course of our representation, and in rendering our
opinion, we have reviewed such documents as we have deemed necessary or
advisable to render the opinions stated herein, and, in connection therewith, we
have examined originals or copies, authenticated to our satisfaction, of the
following: (i) the Certificate of Incorporation of the Company; (ii) the Bylaws
of the Company; (iii) the Agreement and Plan of Reorganization; (iv) resolutions
of the Board of Directors of the Company; (v) the Registration Statement on Form
S-4 of the Company registering shares of Common Stock to be issued in connection
with the Reorganization; and (vi) such other documents and instruments as we
have deemed necessary for purposes of this opinion. In our examination, we have
assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, the authenticity of the originals of such latter
documents, the validity of all applicable statutes and regulations, the legal
authority and the capacity of all persons executing documents and proper
indexing and accuracy of all public records and documents. As to any facts
material to this opinion which we did not independently establish or verify, we
have relied upon statements and representations of officers and other
representatives of the Company. The opinions set forth herein are based on the
laws of the State of Connecticut as the same exist on the date hereof, and no
opinion is expressed as to the laws of any other jurisdiction.
Based upon the foregoing, we are of the opinion that upon
consummation of the Reorganization, the shares of Common Stock of the Company
that will be issued to the shareholders of Canaan pursuant to the terms of the
Reorganization will be duly and validly authorized, legally issued, fully paid
and non-assessable.
The opinions expressed herein are made as of the date hereof
pursuant to the requirements of Regulation S-K, Item 601, of the SEC in regard
to the shares being registered pursuant to the Registration Statement.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to us under the caption "Legal
Matters" in the Registration Statement and Proxy Statement/Prospectus.
Sincerely,
/s/ Cranmore, Fitgerald & Meaney
CRANMORE, FITZGERALD & MEANEY
CFM/mcd
Exhibit 8.1
Day, Berry & Howard LLP
COUNSELLORS AT LAW
July 6, 2004
Salisbury Bancorp, Inc.
5 Bissell Street
P.O. Box 1868
Lakeville, CT 06039
Canaan National Bancorp, Inc.
100 Main Street
Canaan, CT 06018
Re: Agreement and Plan of Merger by and between Salisbury Bancorp,
Inc. and Canaan National Bancorp, Inc. (the "Merger
Agreement")
Ladies and Gentlemen:
You have requested our opinion relating to certain federal income
tax consequences arising out of the transactions described in the Merger
Agreement. Capitalized terms used but not defined in this letter have the
meaning given them in the Merger Agreement.
Our conclusions are based upon the facts set forth in the
Registration Statement of Salisbury Bancorp, Inc. on Form S-4 and accompanying
exhibits dated June 9 , 2004 (the "Registration Statement'), as well as facts
set forth in officers' certificates of Canaan National Bancorp, Inc. and
Salisbury Bancorp, Inc. (collectively, the "Officers' Certificates"). We have
made no independent investigation with regard to the facts set forth in the
Registration Statement or the Officers' Certificates. In rendering our opinion
we have assumed, with your consent, that the preceding facts are true, complete
and accurate as of the date hereof and will be true, complete and accurate as of
the Effective Time.
In rendering our opinion, we have considered the applicable
provisions of the Code, Treasury Regulations promulgated thereunder, pertinent
judicial authorities, interpretive rulings of the Internal Revenue Service (the
"Service") and such other authorities as we have considered relevant. It should
be noted that statutes, regulations, judicial decisions and administrative
interpretations are subject to change at any time and in certain circumstances
with retroactive effect.
In connection with our opinion addressing the transactions
contemplated by the Merger Agreement, we have assumed, with your consent, that
all representations and facts set forth in the Merger Agreement are true,
complete and accurate as of the date hereof and will be true, complete and
accurate as of the Effective Time, and that the transactions described in the
Merger Agreement will be carried out in accordance with its terms.
Based upon and subject to the assumptions, representations and
limitations described above, our examination of the Merger Agreement, the facts
set forth in the Registration Statement and Officers' Certificates, and the
relevant legal authorities, it is our opinion that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code, and that, with respect to Canaan shareholders not
subject to special rules as listed in the Registration Statement under "THE
MERGER--Material Federal Income Tax Consequences," the exchange of Canaan Stock
for Salisbury Stock and cash pursuant to the Merger will not give rise to the
recognition of income in excess of the amount of cash received
If any fact, representation or assumption described above or
contained in the Merger Agreement, Registration Statement or Officers'
Certificates is not true, correct and complete, or in the event of a change in
law after the date hereof adversely affecting the conclusions reached in this
letter, our opinion shall be void and of no force or effect. You should be aware
that although this letter represents our opinion concerning the matters
specifically discussed, it is not binding on the courts or on any administrative
agency, including the Service, and a court or agency may act or hold to the
contrary. We undertake no obligation to update this letter or our opinion at any
time after the Effective Time. Our opinion is provided to you as a legal opinion
only, and not as a guaranty or warranty, and is limited to the specific
transactions, documents and matters described above. We express no opinion as to
the truth, accuracy or completeness of any facts set forth in the Registration
Statement or any representation relied upon in rendering our opinion and no
opinion may be implied or inferred beyond that which is expressly stated in this
letter.
Our opinion may not be relied upon by any person or entity other
than you, and no person may be subrogated to any rights you have in connection
with our opinion. Without our prior written consent, this opinion may not be
furnished to any other person or entity and may not be quoted in whole or in
part or otherwise referred to in (or be the basis for) any report or document
furnished to any person or entity, except in connection with inspection of the
addressee's files by internal company or governmental examiners or auditors,
except that we hereby consent to the filing of this opinion letter as Exhibit
8.1 to the Registration Statement.
Very truly yours,
/s/ Day, Berry & Howard LLP
DAY, BERRY & HOWARD, LLP
KEW/RGS0