Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SAL > SEC Filings for SAL > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SALISBURY BANCORP INC

Form 10-Q for SALISBURY BANCORP INC


14-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2011.

BUSINESS

Salisbury Bancorp, Inc. ("Salisbury"), a Connecticut corporation, formed in 1998, is a bank holding company for Salisbury Bank and Trust Company ("Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's principal business consists of the business of the Bank. The Bank, formed in 1848, is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and trust and wealth advisory services. The Bank conducts its banking business from eight full-service offices in the towns of Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and Sheffield, Massachusetts, Millerton and Dover Plains, New York, and operates its trust and wealth advisory services from offices in Lakeville, Connecticut.

Critical Accounting Policies and Estimates

Salisbury's consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Salisbury's significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements in Salisbury's 2011 Annual Report on Form 10-K for the year ended December 31, 2011 and, along with this Management's Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury's reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

The allowance for loan losses represents management's estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. Note 1 of Notes to Consolidated Financial Statements in Salisbury's 2011 Annual Report on Form 10-K for the period ended December 31, 2011 describes the methodology used to determine the allowance for loan losses. In addition, a discussion of the factors driving changes in the amount of the allowance for loan losses are included in the "Provision and Allowance for Loan Losses" section of Management's Discussion and Analysis of this Quarterly Report.

Management evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives, could have a material adverse impact on the results of operations.

Management evaluates securities for other-than-temporary impairment giving consideration to the extent to which the fair value has been less than cost, estimates of future cash flows, delinquencies and default severity, and the intent and ability of Salisbury to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors is subjective and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

The determination of the obligation and expense for pension and other postretirement benefits is dependent on certain assumptions used in calculating such amounts. Key assumptions used in the actuarial valuations include the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and health care costs.

Actual results could differ from the assumptions and market driven rates may fluctuate. Significant differences in actual experience or significant changes in the assumptions may materially affect the future pension and other postretirement obligations and expense.

RESULTS OF OPERATIONS

For the three month periods ended September 30, 2012 and 2011

Overview

Net income available to common shareholders was $1,094,000, or $0.65 per common share, for the quarter ended September 30, 2012 (third quarter 2012), versus $1,069,000, or $0.63 per common share, for the quarter ended June 30, 2012 (second quarter 2012), and $865,000, or $0.51 per common share, for the quarter ended September 30, 2011 (third quarter 2011).

Earnings per common share increased $0.02, or 3.2%, to $0.65 versus second quarter 2012, and increased $0.14, or 27.5%, versus third quarter 2011.

Tax equivalent net interest income decreased $121,000, or 2.5%, versus second quarter 2012, and decreased $80,000, or 1.64%, versus third quarter 2011.

Provision for loan losses was $330,000, versus $180,000 second quarter 2012 and third quarter 2011 respectively. Net loan charge-offs were $358,000, versus $138,000 second quarter 2012 and $132,000 third quarter 2011.

Non-interest income decreased $3,000, or 0.2%, versus second quarter 2012 and increased $553,000, or 41.5%, versus third quarter 2011. Second quarter 2012 included a $267,000 securities gain.

Non-interest expense decreased $333,000, or 6.6%, versus second quarter 2012 and increased $158,000, or 3.5%, versus third quarter 2011. Third quarter 2012 included non-recurring litigation expense of $150,000. Second quarter 2012 included a pension plan curtailment expense of $341,000 and litigation expenses of $294,000, of which $250,000 was non-recurring.

Preferred stock dividends paid were $46,000, versus $48,000 second quarter 2012 and $228,000 third quarter 2011.

Non-performing assets increased $1.5 million, or 17.4%, to $9.9 million, or 1.6% of total assets, at September 30, 2012 versus June 30, 2012 and decreased $4.1 million versus September 30, 2011. Accruing loans receivable 30-to-89 days past due increased $0.7 million to $3.2 million, or 0.83% of gross loans receivable, at September 30, 2012 versus June 30, 2012 and increased $0.8 million versus September 30, 2011.

Net Interest Income

Tax equivalent net interest income decreased $121,000, or 2.5%, versus second quarter 2012, and decreased $80,000, or 1.6%, versus third quarter 2011. Average total interest bearing deposits increased $14.0 million as compared with second quarter 2012 and increased $14.4 million, or 3.7%, as compared with third quarter 2011. Average earning assets increased $14.3 million as compared with second quarter 2012 and increased $4.6 million, or 0.8%, as compared with third quarter 2011. The net interest margin decreased 18 basis points versus second quarter 2012 and decreased 8 basis points versus third quarter 2011 to 3.35% for third quarter 2012.

The following table sets forth the components of Salisbury's tax-equivalent net interest income and yields on average interest-earning assets and interest-bearing funds.

Three months ended September 30,          Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)                     2012     2011     2012     2011      2012       2011
Loans (a)                                $383,953 $367,681  $ 4,501  $ 4,630      4.69%      5.03%
Securities (c)(d)                         129,945  139,608    1,303    1,549     4.01       4.44
FHLBB stock                                 5,747    6,032        8        5     0.51       0.36
Short term funds (b)                       52,461   54,159       25       30     0.19       0.22
Total earning assets                      572,106  567,480    5,837    6,214     4.08       4.37
Other assets                               40,220   35,066
Total assets                             $612,326 $602,546
Interest-bearing demand deposits         $ 65,813 $ 65,906       78      108     0.47       0.65
Money market accounts                     136,865  117,812      104      128     0.30       0.43
Savings and other                         102,039   97,330       67       95     0.26       0.39
Certificates of deposit                    97,354  106,627      331      417     1.35       1.55
Total interest-bearing deposits           402,071  387,675      580      748     0.57       0.77
Repurchase agreements                       3,596   15,439        3       19     0.29       0.50
FHLBB advances                             42,533   55,175      452      565     4.16       4.01
Total interest-bearing liabilities        448,200  458,289    1,035    1,332     0.92       1.15
Demand deposits                            89,225   79,599
Other liabilities                           4,808    3,238
Shareholders' equity                       70,093   61,420
Total liabilities & shareholders' equity $612,326 $602,546
Net interest income                                        $  4,802 $  4,882
Spread on interest-bearing funds                                                 3.16       3.22
Net interest margin (e)                                                          3.35       3.43

(a) Includes non-accrual loans.

(b) Includes interest-bearing deposits in other banks and federal funds sold.

(c) Average balances of securities are based on historical cost.

(d) Includes tax exempt income benefit of $229,000 and $258,000, respectively for 2012 and 2011 on tax-exempt securities whose income and yields are calculated on a tax-equivalent basis.

(e) Net interest income divided by average interest-earning assets.

The following table sets forth the changes in tax-equivalent interest due to volume and rate.

Three months ended September 30, (in thousands)         2012 versus 2011
Change in interest due to                         Volume      Rate       Net
Interest-earning assets
Loans                                           $     198  $    (327) $    (129)
Securities                                           (102)      (144)      (246)
 FHLBB stock                                            -          3          3
Short term funds                                       (1)        (4)        (5)
Total                                                  95       (472)      (377)
Interest-bearing liabilities
Deposits                                              (12)      (156)      (168)
Repurchase agreements                                 (12)        (4)       (16)
FHLBB advances                                       (132)        19       (113)
Total                                                (156)      (141)      (297)
Net change in net interest income               $     251  $    (331) $     (80)

Interest Income

Tax equivalent interest income decreased $377,000, or 6.1%, to $5.8 million for third quarter 2012 as compared with third quarter 2011. Loan income decreased $129,000, or 2.8%, primarily due to a 34 basis points decline in the average loan yield offset in part by a $16.3 million, or 4.3%, increase in average loans. Tax equivalent securities income decreased $246,000, or 15.6%, primarily due to a 43 basis points decline in the average yield and by a $9.7 million, or 6.9%, decrease in average volume. Changes in securities yields resulted from the effect of changes in market interest rates on securities purchases, calls of agency bonds and prepayments of mortgage backed securities. Income from short term funds decreased $5,000 as a result of a 3 basis points decline in the average yield and by a $1.7 million decrease in the average balance.

Interest Expense

Interest expense decreased $297,000, or 22.3%, to $1.0 million for third quarter 2012 as compared with third quarter 2011. Interest on deposit accounts and retail repurchase agreements decreased $184,000, or 2.4%, as a result of lower average rates, down 20 and 21 basis points respectively. Lower rates were offset in part by a $2.6 million, or 0.6%, increase in the average balance of deposits and repurchase agreements. The lower average rate resulted from the effect of lower market interest rates on rates paid and changes in product mix. The higher average volume resulted from deposit growth. Interest expense on FHLBB borrowings decreased $113,000 as a result of lower average borrowings, down $12.6 million, offset partially by an average borrowing rate increase of 15 basis points as compared with third quarter 2011. The decline in advances resulted from scheduled maturities that were not replaced with new advances.

Provision and Allowance for Loan Losses

The provision for loan losses was $330,000 for third quarter 2012 and $180,000
for third quarter 2011. Net loan charge-offs were $358,000 and $132,000, for the
respective quarters. The following table sets forth changes in the allowance for
loan losses and other selected statistics:

                                                           Three months            Nine months
Periods ended September 30, (dollars in                2012       2011        2012       2011
thousands)
Balance, beginning of period                     $   4,208   $   3,979   $   4,076  $   3,920
Provision for loan losses                               330        180         690        860
Charge-offs
   Real estate mortgages                               (354)      (155)       (532)      (531)
   Commercial & industrial                                -          -         (29)       (89)
   Consumer                                             (14)       (10)        (63)      (188)
Total charge-offs                                      (368)      (165)       (624)      (808)
Recoveries
   Real estate mortgages                                  3          1           7          4
   Commercial & industrial                                1         29           9         29
   Consumer                                               5          3          21         22
Total recoveries                                          9         33          37         55
Net charge-offs                                       (359)       (132)       (587)      (753)
Balance, end of period                             $   4,179 $   4,027   $   4,179   $   4,027
Loans receivable, gross                                                   $380,508    $365,961
Non-performing loans                                                         9,229     13,911
Accruing loans past due 30-89 days                                           3,152      2,398
Ratio of allowance for loan losses:
   to loans receivable, gross                                                 1.10%      1.10%
   to non-performing loans                                                   45.28     28.95
Ratio of non-performing loans to loans                                       2.43       3.80
receivable, gross
Ratio of accruing loans past due 30-89 days to                               0.83       0.66
loans receivable, gross

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, remained unchanged at 1.10% at September 30, 2012, June 30, 2012 and September 30, 2011.

During the first nine months of 2012, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $1.2 million to $9.2 million, or 2.43% of gross loans receivable, from 2.16% at December 31, 2011. Compared with a year ago non-performing loans decreased $4.7 from 3.80% of gross loans receivable at September 30, 2011. Accruing loans past due 30-89 days increased $0.8 million to 0.83% of gross loans receivable, from 0.66% at December 31, 2011 and 0.66% at September 30, 2011. See "Financial Condition - Loan Credit Quality" for further discussion and analysis.

The credit quality segments of loans receivable and the allowance for loan losses are as follows:

(in thousands)            September 30, 2012    December 31, 2011
                             Loans Allowance      Loans Allowance
Performing loans        $  351,971 $   2,426 $  346,303 $   2,436
Potential problem loans      9,630       289      7,289       234
Collectively evaluated     361,601     2,715    353,592     2,670
Performing loans               391        90        819        35
Potential problem loans      2,480        61      6,750       255
Impaired loans              16,036       920     12,677       874
Individually evaluated      18,907     1,071     20,246     1,164
Unallocated allowance            -       393          -       242
Totals                  $  380,508 $   4,179 $  373,838 $   4,076

The allowance for loan losses represents management's estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan or portion of a loan to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, where warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower's aggregate loan exposure, using either the fair value of the collateral if the loan is collateral dependent or the present value of expected future cash flows discounted at the loan's effective interest rate. An allowance is established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. There were no significant changes in Salisbury's policies or methodology pertaining to the general component of the allowance for loan losses during the quarter ended September 30, 2012.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management's estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Determining the adequacy of the allowance at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of the loan portfolio is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise and require increased provisions. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2012.

Management's loan risk rating assignments, loss percentages and specific reserves are subjected annually to an independent credit review by an external firm. In addition, the bank is examined annually on a rotational process by one of its two primary regulatory agencies, the FDIC and State of Connecticut Department of Banking ("CTDOB"). As an integral part of their examination process, the FDIC and CTDOB review the Bank's credit risk ratings and allowance for loan losses. The Bank was examined by the CTDOB in July 2012 and by the FDIC in May 2011.

Non-interest income

The following table details the principal categories of non-interest income.

Three months ended September 30,               2012        2011      2012 vs. 2011
(dollars in thousands)
Trust and wealth advisory fees           $      683   $     599  $       84     14.02%
Service charges and fees                        559         534          25     4.68
Gains on sales of mortgage loans, net           568         178         390   219.10
Mortgage servicing, net                          (9)        (35)         26   (74.29)
Gains on securities, net                          -           -           -        -
Other                                            86          58          28    48.28
Total non-interest income                $    1,887  $    1,334  $      553     41.45%

Non-interest income for third quarter 2012 increased $553,000 versus third quarter 2011. Trust and Wealth Advisory revenues increased $84,000 due primarily from growth in managed assets. Service charges and fees increased $25,000 mainly due to increased debit card interchange fees. Income from sales and servicing of mortgage loans increased $416,000 due to interest rate driven fluctuations in the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loans sales totaled $18.3 million for third quarter 2012 versus $7.6 million for third quarter 2011. Third quarter 2012 and third quarter 2011 included a mortgage servicing valuation impairment benefit of $12,000 and charge of $65,000 respectively. The increase in other income consisted primarily of bank owned life insurance income.

Non-interest expense

The following table details the principal categories of non-interest expense.

Three months ended September 30,               2012      2011     2012 vs. 2011
(dollars in thousands)
Salaries                                 $    1,810 $   1,816 $      (6)    (0.33)%
Employee benefits                               597       636       (39)  (6.13)
Premises and equipment                          603       582        21     3.61
Data processing                                 369       366         3     0.82
Professional fees                               299       307        (8)  (2.61)
Collections and OREO                            301       152       149    98.03
FDIC insurance                                  116       137       (21) (15.33)
Marketing and community contributions            92        85         7     8.24
Amortization of intangible assets                56        56          -       -
Other                                           450       398        52    13.07
Total non-interest expense               $    4,693 $   4,535 $     158     3.48%

Non-interest expense for third quarter 2012 increased $158,000 versus third quarter 2011. Compensation and employee benefits decreased $45,000 due to changes in staffing levels and mix. Premises and equipment increased $21,000 due primarily to increased machine and software maintenance, due to replaced and upgraded equipment and software, offset slightly by an expense for disposed assets in third quarter 2011.

Data processing increased $3,000. Higher volume of debit card and ATM transactions was partially offset by lower core processing expenses. Professional fees decreased $8,000. Lower usage of legal and consulting fees was partially offset by higher investment management fees due to increased assets under management in the Trust and Wealth Advisory division. Collections and OREO increased $149,000 versus third quarter 2011 due primarily to increased litigation expenses. FDIC insurance decreased $21,000 due to a decrease in the assessment base. Marketing and other operating expenses increased $59,000 due to higher administrative and operational expenses.

Income taxes

The effective income tax rates for third quarter 2012, second quarter 2012 and third quarter 2011 were 20.63%, 18.54% and 16.43%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the 34% federal statutory rate due to holdings of tax-exempt municipal bonds, some tax-exempt loans and bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2012 or 2011, other than minimum state income tax, as a result of its utilization of Connecticut tax legislation that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company ("PIC"). In accordance with this legislation, in 2004 the Bank formed a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in the State of Connecticut corporate tax law.

For the nine month periods ended September 30, 2012 and 2011

Overview

Net income available to common shareholders was $3,328,000, or $1.97 per common share, for the nine month period ended September 30, 2012 (nine month period 2012), compared with $2,459,000, or $1.46 per common share, for the nine month period ended September 30, 2011 (nine month period 2011).

Earnings per common share increased $0.51, or 34.9%, to $1.97 versus nine month period 2011.

Tax equivalent net interest income increased $133,000, or 0.9%, to $14.7 million, versus nine month period 2011.

Provision for loan losses was $690,000, versus $860,000 for nine month period 2011. Net loan charge-offs were $587,000, versus $753,000 for nine month period 2011.

Non-interest income increased $1,472,000, or 37.12%, versus nine month period . . .

  Add SAL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SAL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.