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SAL > SEC Filings for SAL > Form 10-Q on 14-May-2013All Recent SEC Filings

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Form 10-Q for SALISBURY BANCORP INC


14-May-2013

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, 2012.

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 2012 Annual Report on Form 10-K for the year ended December 31, 2012 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 2012 Annual Report on Form 10-K for the period ended December 31, 2012 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 affect 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 March 31, 2013 and 2012

Overview

Net income available to common shareholders was $900,000, or $0.53 per common share, for the first quarter ended March 31, 2013 (first quarter 2013), compared with $531,000, or $0.31 per common share, for the fourth quarter ended December 31, 2012 (fourth quarter 2012), and $1,167,000, or $0.69 per common share, for the first quarter ended March 31, 2012 (first quarter 2012).

Earnings per common share of $0.53 increased $0.22 versus fourth quarter 2012, and decreased $0.16, versus first quarter 2012.

The net interest margin increased 22 basis points versus fourth quarter 2012 and remained the same as first quarter 2012 at 3.54%.

Tax equivalent net interest income increased $194,000, or 4%, versus fourth quarter 2012, and decreased $59,000, or 1%, versus first quarter 2012.

Provision for loan losses was $396,000, versus $380,000 for fourth quarter 2012 and $180,000 for first quarter 2012. Net loan charge-offs were $70,000, versus $199,000 for fourth quarter 2012 and $90,000 for first quarter 2012.

Non-interest income decreased $252,000, or 13%, versus fourth quarter 2012 and decreased $34,000, or 2%, versus first quarter 2012.

Non-interest expense decreased $629,000, or 12%, versus fourth quarter 2012 and increased $205,000, or 5%, versus first quarter 2012.

Net loans receivable increased $17.5 million or 4.5% during the first calendar quarter of 2013 to $406 million, which reflected an increase of $34.5 million or 9% from the end of the first quarter of 2012.

Non-performing assets decreased $807,000, or 8%, to $9.3 million, or 1.6% of total assets, versus fourth quarter 2012 and increased $1.7 million versus first quarter 2012. Accruing loans receivable 30-to-89 days past due decreased $911,000 to $4.7 million, or 1.15% of gross loans receivable, versus fourth quarter 2012 and increased $538,000 versus first quarter 2012.

Net Interest Income

Tax equivalent net interest income for first quarter 2013 increased $194,000, or 4%, versus fourth quarter 2012, and decreased $59,000, or 1%, versus first quarter 2012. Average total interest bearing deposits increased $0.7 million versus fourth quarter 2012 and increased $5.3 million versus first quarter 2012. Average earning assets decreased $12.4 million versus fourth quarter 2012 due to the early prepayment of a $10 million FHLBB advance in fourth quarter 2012, and decreased $5.9 million versus first quarter 2012. The net interest margin increased 22 basis points versus fourth quarter 2012 and remained the same as first quarter 2012 at 3.54%.

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

Three months ended March 31,            Average Balance           Income / Expense         Average Yield / Rate
(dollars in thousands)                2013          2012          2013        2012          2013           2012
Loans (a)                          $ 403,033     $ 377,704     $  4,485     $ 4,595           4.46 %        4.87 %
Securities (c)(d)                    118,410       149,699        1,199       1,519           4.05          4.06
FHLBB stock                            5,652         5,962            5          10           0.38          0.68
Short term funds (b)                  27,447        27,113           17          13           0.25          0.19
Total earning assets                 554,542       560,478        5,706       6,137           4.12          4.38
Other assets                          40,320        41,829
Total assets                       $ 594,862     $ 602,307
Interest-bearing demand deposits   $  66,689     $  68,510           69         109           0.42          0.64
Money market accounts                128,691       121,869           87         114           0.27          0.37
Savings and other                    105,934        95,919           52          77           0.20          0.32
Certificates of deposit               92,696       102,418          282         367           1.23          1.43
Total interest-bearing deposits      394,010       388,716          490         667           0.50          0.69
Repurchase agreements                  1,856        11,119            1          13           0.23          0.47
FHLBB advances                        31,709        46,963          312         495           3.93          4.22
Total interest-bearing
liabilities                          427,575       446,798          803       1,175           0.76          1.05
Demand deposits                       87,923        83,354
Other liabilities                      6,876         4,387
Shareholders' equity                  72,488        67,768
Total liabilities &
shareholders' equity               $ 594,862     $ 602,307
Net interest income                                            $  4,903     $ 4,962
Spread on interest-bearing funds                                                              3.36          3.33
Net interest margin (e)                                                                       3.54          3.54

(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 $300,000 and $279,000, respectively for 2013 and 2012 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 FTE interest due to volume and rate.

Three months ended March 31, (in thousands)           2013 versus 2012
Change in interest due to                       Volume       Rate        Net
Interest-earning assets
Loans                                         $    295     $ (405 )   $ (110 )
Securities                                        (317 )       (3 )     (320 )
FHLBB stock                                          -         (5 )       (5 )
Short term funds                                     -          4          4
Total                                              (22 )     (409 )     (431 )
Interest-bearing liabilities
Deposits                                           (23 )     (154 )     (177 )
Repurchase agreements                               (8 )       (4 )      (12 )
FHLBB advances                                    (155 )      (28 )     (183 )
Total                                             (186 )     (186 )     (372 )
Net change in net interest income             $    164     $ (223 )   $  (59 )

Interest Income

Tax equivalent interest income decreased $431,000, or 7.0%, to $5.7 million for first quarter 2013 as compared with first quarter 2012.

Loan income decreased $110,000, or 2.4%, primarily due to a 41 basis points decline in the average loan yield offset in part by a $25.3 million, or 6.7%, increase in average loans.

Tax equivalent securities income decreased $320,000, or 21.7%, for first quarter 2013 as compared with first quarter 2012, primarily due to a $31.3 million, or 20.9%, decrease in average volume calls and sales of agency bonds and prepayments of mortgage backed securities.

Interest Expense

Interest expense decreased $372,000, or 31.7%, to $0.8 million for first quarter 2013 as compared with first quarter 2012.

Interest on deposit accounts and retail repurchase agreements decreased $189,000, or 27.8%, as a result of lower average rates, down 19 basis points on deposits and 24 basis points on repurchase agreements. Decreased rates were offset in part by a $5.3 million, or 1.4%, increase in the average balance of deposits. 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 $183,000 as a result of lower average borrowings, down $15.3 million, and by the average borrowing rate decrease of 29 basis points as compared with first quarter 2012. The decline in advances resulted from scheduled maturities that were not replaced with new advances and the prepayment of a $10 million advance in December 2012.

Provision and Allowance for Loan Losses

The provision for loan losses was $396,000 for first quarter 2013 and $180,000
for first quarter 2012. Net loan charge-offs were $70,000 and $90,000, for the
respective quarters. The following table sets forth changes in the allowance for
loan losses and other selected statistics:

                                                               Three months
Periods ended March 31, (dollars in
thousands)                                                   2013                 2012
Balance, beginning of period                        $     4,360          $     4,076
Provision for loan losses                                   396                  180
Charge-offs
Real estate mortgages                                       (56 )                (60 )
Commercial & industrial                                      (4 )                (29 )
Consumer                                                    (13 )                (10 )
Total charge-offs                                           (73 )                (99 )
Recoveries
Real estate mortgages                                         -                    1
Commercial & industrial                                       -                    3
Consumer                                                      3                    5
Total recoveries                                              3                    9
Net charge-offs                                             (70 )                (90 )
Balance, end of period                              $     4,686          $     4,166
Loans receivable, gross                             $   409,876          $   374,877
Non-performing loans                                      8,587                7,606
Accruing loans past due 30-89 days                        4,718                4,181
Ratio of allowance for loan losses:
to loans receivable, gross                                 1.14 %               1.11 %
to non-performing loans                                   54.59                54.77
Ratio of non-performing loans to loans
receivable, gross                                          2.09                 2.03
Ratio of accruing loans past due 30-89 days
to loans receivable, gross                                 1.15                 1.12

Reserve coverage at March 31, 2013, as measured by the ratio of allowance for loan losses to gross loans, improved to 1.14%, as compared with 1.11% at December 31, 2012 and 1.11% a year ago at March 31, 2012.

During the first three months of 2013, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.3 million to $8.6 million, or 2.09% of gross loans receivable, from 2.51% at December 31, 2012 and 2.03% at March 31, 2012 while accruing loans past due 30-89 days decreased $0.9 million to $4.7 million, or 1.15% of gross loans receivable from 1.44% at December 31, 2012 and 1.12% at March 31, 2012. 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:

                                      Collectively evaluated         Individually evaluated            Total portfolio
March 31, 2013 (in thousands)          Loans        Allowance         Loans        Allowance        Loans        Allowance
Performing loans                   $  382,422     $     2,687     $       78     $        30     $ 382,500     $     2,717
Potential problem loans                 9,856             335          2,558              86        12,414             421
Impaired loans                              -               -         14,962           1,127        14,962           1,127
Unallocated allowance                       -               -              -             421             -             421
Totals                             $  392,278     $     3,022     $   17,598     $     1,664     $ 409,876     $     4,686
                                      Collectively evaluated         Individually evaluated            Total portfolio
December 31, 2012 (in thousands)       Loans        Allowance         Loans        Allowance        Loans        Allowance
Performing loans                   $  364,592     $     2,567     $      121     $        52     $ 364,713     $     2,619
Potential problem loans                 8,345             246          2,465             131        10,810             377
Impaired loans                              -               -         16,563             924        16,563             924
Unallocated allowance                       -               -              -             440             -             440
Totals                             $  372,937     $     2,813     $   19,149     $     1,547     $ 392,086     $     4,360

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 March 31, 2013.

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 March 31, 2013.

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 July 2012 and by the FDIC in July 2011.

Non-interest income

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

Three months ended March 31,
(dollars in thousands)                     2013            2012             2013 vs. 2012
Trust and wealth advisory fees      $      725      $      755      $      (30 )         (3.97 )%
Service charges and fees                   516             521              (5 )         (0.96 )
Gains on sales of mortgage
loans, net                                 279             372             (93 )        (25.00 )
Mortgage servicing, net                     26             (84 )           110          130.95
Gains on securities, net                     -              12             (12 )       (100.00 )
Other                                       79              83              (4 )         (4.82 )
Total non-interest income           $    1,625      $    1,659      $      (34 )         (2.05 )%

Non-interest income for first quarter 2013 decreased $252,000 versus fourth quarter 2012 and decreased $34,000 versus first quarter 2012. Trust and Wealth Advisory revenues decreased $47,000 versus fourth quarter 2012 and decreased $30,000 versus first quarter 2012. The year-over-year revenue decrease is the result of higher estate fees collected in first quarter 2012, offset by growth in managed assets. Service charges and fees decreased $45,000 versus fourth quarter 2012 and decreased $5,000 versus first quarter 2012. Income from sales and servicing of mortgage loans decreased $165,000 versus fourth quarter 2012 and increased $17,000 versus first quarter 2012 due to residential mortgage loan sales and mortgage servicing valuations. Mortgage loans sales totaled $8.7 million for first quarter 2013, $13.4 million for fourth quarter 2012 and $16.3 million for first quarter 2012. First quarter 2013, fourth quarter 2012, and first quarter 2012 included mortgage servicing valuation impairment (benefits)/charges of $(33,000), $(73,000), and $92,000, respectively. Other income includes bank owned life insurance income and rental income.

Non-interest expense

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

Three months ended March 31,
(dollars in thousands)                     2013            2012            2013 vs. 2012
Salaries                            $    1,750      $    1,710      $       40            2.34 %
Employee benefits                          685             690              (5 )         (0.72 )
Premises and equipment                     583             605             (22 )         (3.64 )
Data processing                            419             402              17            4.23
Professional fees                          380             313              67           21.41
Collections and OREO                       157             111              46           40.54
FDIC insurance                             125             128              (3 )         (2.34 )
Marketing and community
contributions                              122              87              35           40.23
Amortization of intangible
assets                                      56              56               -               -
Other                                      428             398              30            7.79
Non-interest expense                $    4,705      $    4,500      $      205            4.56 %

Non-interest expense for first quarter 2013 decreased $629,000 versus fourth quarter 2012 and increased $205,000 versus first quarter 2012. Salaries decreased $130,000 versus fourth quarter 2012 due to changes in staffing levels and mix. Employee benefits increased $17,000 versus fourth quarter 2012 due to new deferred compensation plans and an increase in the 401K Safe Harbor Plan in response to the freeze placed on the defined benefit pension plan as of December 31, 2012. Employee benefit expense for the period also reflects the current expense related to the award of 19,600 shares of restricted stock. The total expense of $490,000 will be recognized on a straight line basis over the thirty six month vesting period under which the shares were awarded on February 8, 2013. Premises and equipment decreased $26,000 versus fourth quarter 2012 and decreased $22,000 versus first quarter 2012. The current quarter's decrease in expense was a result of seasonal maintenance, and repairs to the Lakeville branch during the fourth quarter of 2012. The year-over-year decrease was due primarily to the prior year's one-time expense related to ADA compliance for ATMs. This favorable first quarter 2013 non-interest expense decrease was offset slightly by higher building maintenance and repairs, and weather related expenses this quarter as compared to the mild winter experienced in the Northeast during the prior quarter and year ago quarter.

Data processing increased $40,000 versus fourth quarter 2012 and $17,000 versus first quarter 2012. Professional fees increased $83,000 versus fourth quarter . . .

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