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

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Form 10-Q for SALISBURY BANCORP INC


14-Aug-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 June 30, 2013 and 2012

Overview

Net income available to common shareholders was $1,092,000, or $0.65 per common share, for the quarter ended June 30, 2013 (second quarter 2013), versus $890,000, or $0.53 per common share, for the quarter ended March 31, 2013 (first quarter 2013), and $1,069,000, or $0.63 per common share, for the quarter ended June 30, 2012 (second quarter 2012).

Earnings per common share of $0.65 increased $0.12, or 22.6%, as compared to $0.53 for the first quarter 2013, and increased $0.02, or 3.2%, as compared to second quarter 2012.

Tax equivalent net interest income increased $39,000, or 0.8%, versus first quarter 2013, and decreased $40,000, or 0.8%, versus second quarter 2012.

Provision for loan losses for the second quarter was $240,000 versus $396,000 for the first quarter 2013 and $180,000 for second quarter 2012. Net loan charge-offs were $294,000, versus $70,000 for first quarter 2013 and $138,000 for second quarter 2012.

Non-interest income increased $25,000, or 1.6%, versus first quarter 2013 and decreased $240,000, or 12.7%, versus second quarter 2012, which included $267,000 in gains on sale of securities.

Non-interest expense decreased $95,000, or 2.0%, versus first quarter 2013 and $415,000, or 8.3%, versus second quarter 2012. Second quarter 2012 included non-recurring expenses totaling $591,000 which consisted of $341,000 in pension plan curtailment expense and $250,000 in litigation expense.

Preferred stock dividends remained unchanged from the first quarter at $40,000 for second quarter 2013 and declined by $8,000 as compared with the second quarter 2012 dividend of $48,000.

Non-performing assets increased $0.3 million, or 4.0%, to $9.6 million, or 1.6% of total assets, at June 30, 2013 versus March 31, 2013 and increased $1.2 million versus June 30, 2012. Accruing loans receivable 30-to-89 days past due decreased $0.5 million to $4.3 million, or 1.02% of gross loans receivable at June 30, 2013, versus March 31, 2013 and increased $1.8 million versus June 30, 2012.

Net Interest Income

Tax equivalent net interest income for second quarter 2013 increased $39,000, or 0.8%, versus first quarter 2013, and decreased $40,000, or 0.8%, versus second quarter 2012. Average total interest bearing deposits increased $4.9 million as compared with first quarter 2013 and increased $10.8 million, or 2.8%, as compared with second quarter 2012. Average earning assets increased $4.7 million as compared with first quarter 2013 and increased $1.5 million, or 0.2%, as compared with second quarter 2012. The net interest margin on a tax equivalent basis remained unchanged from first quarter 2013 at 3.54% and increased 1 basis point versus second quarter 2012 from 3.53%.

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 June 30,               Average Balance   Income / Expense  Average Yield / Rate
(dollars in thousands)                     2013     2012      2013     2012      2013       2012
Loans (a)                                $413,979  $382,602  $ 4,535  $ 4,583      4.38%      4.79%
Securities (c)(d)                         108,977   139,621    1,184    1,398     4.35       4.00
FHLBB stock                                 5,340     5,747        5        8     0.42       0.54
Short term funds (b)                       30,960    29,830       19       15     0.24       0.20
Total earning assets                      559,256   557,800    5,743    6,004     4.11       4.31
Other assets                               39,556    39,130
Total assets                             $598,812  $596,930
Interest-bearing demand deposits         $ 70,627 $  64,702       70       93     0.40       0.58
Money market accounts                     131,274   125,142       90      105     0.27       0.34
Savings and other                         106,512    98,170       54       71     0.20       0.29
Certificates of deposit                    90,520   100,091      274      354     1.21       1.42
Total interest-bearing deposits           398,933   388,105      488      623     0.49       0.65
Repurchase agreements                       2,486     5,911        1        6     0.19       0.38
FHLBB advances                             31,319    42,938      312      452     3.94       4.16
Total interest-bearing liabilities        432,738   436,954      801    1,081     0.74       0.99
Demand deposits                            90,114    86,676
Other liabilities                           3,227     4,237
Shareholders' equity                       72,733    69,063
Total liabilities & shareholders' equity $598,812  $596,930
Net interest income                                          $ 4,942  $ 4,923
Spread on interest-bearing funds                                                  3.37       3.32
Net interest margin (e)                                                           3.54       3.53

(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 $309,000 and $236,000, 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 June 30, (in thousands)            2013 versus 2012
Change in interest due to                          Volume     Rate      Net
Interest-earning assets
 Loans                                           $   360  $  (408) $   (48)
 Securities                                         (320)     106     (214)
 FHLBB stock                                           -       (3)      (3)
 Short term funds                                      1        3        4
Total                                                 41     (302)    (261)
Interest-bearing liabilities
 Deposits                                            (14)    (121)    (135)
 Repurchase agreements                                (2)      (3)      (5)
 FHLBB advances                                     (119)     (21)    (140)
Total                                               (135)    (145)    (280)
Net change in net interest income                $   176  $  (157)  $   19

Interest Income

Tax equivalent interest income decreased $261,000, or 4.3%, to $5.7 million for second quarter 2013 as compared with second quarter 2012.

Loan income decreased $48,000, or 1.0%, primarily due to a 41 basis points decline in the average loan yield offset in part by a $31.4 million, or 8.2%, increase in average loans.

Tax equivalent securities income decreased $214,000, or 15.3%, for second quarter 2013 as compared with second quarter 2012, primarily due to a $30.6 million, or 21.9%, decrease in average volume calls and sales of agency bonds and prepayments of mortgage backed securities.

Interest Expense

Interest expense decreased $280,000, or 25.9%, to $0.8 million for second quarter 2013 as compared with second quarter 2012.

Interest on deposit accounts and retail repurchase agreements decreased $140,000, or 22.3%, as a result of lower average rates, down 16 basis points on deposits and 19 basis points on repurchase agreements. Decreased rates were offset in part by a $10.8 million, or 2.8%, 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 $140,000 as a result of lower average borrowings, down $11.7 million, and by the average borrowing rate decrease of 22 basis points as compared with second quarter 2012. 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 $240,000 for second quarter 2013 and $396,000
for first quarter 2013. Net loan charge-offs were $294,000 and $70,000, for the
respective quarters. The following table sets forth changes in the allowance for
loan losses and other selected statistics:

                                                    Three months             Six months
Periods ended June 30, (dollars in thousands)       2013        2012       2013        2012
Balance, beginning of period                    $ 4,687     $ 4,166     $ 4,360     $ 4,076
Provision for loan losses                           240         180         636         360
Charge-offs

 Real estate mortgages                    (291 )          (118 )          (347 )          (178 )
 Commercial & industrial                     -               -              (4 )           (29 )
 Consumer                                  (11 )           (39 )           (24 )           (49 )
Total charge-offs                         (302 )          (157 )          (375 )          (256 )
Recoveries
 Real estate mortgages                       5               1               6               2
 Commercial & industrial                     -               5               -               8
 Consumer                                    2              13               5              18
Total recoveries                             7              19              11              28
Net charge-offs                           (295 )          (138 )          (364 )          (228 )
Balance, end of period              $    4,632      $    4,208      $    4,632      $    4,208
Loans receivable, gross                                             $  420,232      $  380,384
Non-performing loans                                                     9,204           8,409
Accruing loans past due 30-89
days                                                                     4,271           2,459
Ratio of allowance for loan
losses:
  to loans receivable, gross                                              1.10 %          1.11 %
  to non-performing loans                                                50.32           50.04
Ratio of non-performing loans to
loans receivable, gross                                                   2.19            2.21
Ratio of accruing loans past due
30-89 days to loans receivable,
gross                                                                     1.02            0.65

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, remained stable at 1.10% at June 30, 2013 versus 1.14% at March 31, 2013 and 1.11% at June 30, 2012.

During the first six months of 2013, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $0.8 million to $9.2 million, or 2.19% of gross loans receivable, from 2.51% at December 31, 2012 and 2.21% at June 30, 2012 while accruing loans past due 30-89 days increased $1.8 million to $4.3 million, or 1.02% of gross loans receivable from 1.44% at December 31, 2012 and 0.65% at June 30, 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
June 30, 2013 (in thousands)            Loans      Allowance     Loans     Allowance    Loans   Allowance
Performing loans                       $ 393,819    $  2,719    $    227     $    33  $394,046   $ 2,752
Potential problem loans                     8,907         265       1,428         101    10,335       366
Impaired loans                                  -           -      15,851         965    15,851       965
Unallocated allowance                           -           -           -         549         -       549
Totals                                   $402,726    $  2,984    $ 17,506     $ 1,648  $420,232   $ 4,632
                                      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 June 30, 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 June 30, 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.

Non-interest income

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

 Three months ended June 30,
(dollars in thousands)                     2013            2012             2013 vs. 2012
Trust and wealth advisory fees      $      824      $      735      $      89            12.11 %
Service charges and fees                   575             547             28             5.12
Gains on sales of mortgage
loans, net                                 153             263            (110 )        (41.83 )
Mortgage servicing, net                      8              (5 )           13           260.00
Gains on securities, net                     -             267            (267 )       (100.00 )
Other                                       90              83              7             8.43
Total non-interest income           $    1,650      $    1,890      $     (240 )        (12.70 )%

Non-interest income increased $25,000, or 1.5%, versus first quarter 2013 and decreased $240,000, or 12.7%, versus second quarter 2012. Trust and Wealth Advisory revenues increased $99,000 versus first quarter 2013 and increased $89,000 versus second quarter 2012. The year-over-year revenue increase results from growth in managed assets and higher fees collected in second quarter 2013. Service charges and fees increased $59,000 versus first quarter 2013 and $28,000 versus second quarter 2012. Income from sales and servicing of mortgage loans in the second quarter decreased by $144,000 as compared to the first quarter 2013 and decreased $97,000 as compared to the second quarter 2012 due to interest rate driven fluctuations in the volume of fixed rate residential mortgage loan sales and mortgage servicing valuations. Mortgage loan sales totaled $5.1 million for second quarter 2013, $8.7 million for first quarter 2013 and $12.2 million for second quarter 2012. Second quarter 2013, first quarter 2013 and second quarter 2012 included mortgage servicing valuation benefit (impairment) charges of $1,000, $33,000 and ($10,000), respectively. Non-interest income for the second quarter 2012 included securities gain of $267,000 as a result of the sale of $2.5 million of US Treasury bonds which partially offset non-recurring pension curtailment and litigation expenses. Other income includes income from bank owned life insurance and rental income.

Non-interest expense

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

 Three months ended June 30,
(dollars in thousands)                     2013            2012             2013 vs. 2012
Salaries                            $    1,835      $    1,748      $       87            4.98 %
Employee benefits                          763             957            (194 )        (20.27 )
Premises and equipment                     583             591              (8 )         (1.35 )
Data processing                            367             418             (51 )        (12.20 )
Professional fees                          309             303               6            1.98
Collections and OREO                        75             356            (281 )        (78.93 )
FDIC insurance                             114             119              (5 )         (4.20 )
Marketing and community support            105              87              18           20.69
Amortization of intangible
assets                                      56              56               -               -
Other                                      403             390              13            3.33
Non-interest expense                $    4,610      $    5,025      $     (415 )         (8.26 )%

Non-interest expense for second quarter 2013 decreased $95,000 versus first quarter 2013 and $415,000 versus second quarter 2012. Compensation and employee benefits increased $163,000 versus first quarter 2013, and decreased $107,000 versus second quarter 2012. Second quarter 2012 included pension plan curtailment expense of $341,000 from retiree lump-sum withdrawals. The current quarter includes benefit accrual adjustments and one-time expenses related to staffing changes. Premises and equipment remained unchanged versus first quarter 2013 and decreased $8,000 versus second quarter 2012. Data processing decreased $52,000 versus first quarter 2013 and $51,000 versus second quarter 2012. Professional fees decreased $71,000 versus first quarter 2013, and increased $6,000 versus second quarter 2012. First quarter 2013 included legal expenses and an executive search. Collections and OREO decreased $82,000 versus first quarter 2013, and decreased $281,000 versus second quarter 2012 due primarily to decreased litigation and OREO expense. Salisbury had $435,000 in foreclosed property at June 30, 2013. FDIC insurance decreased $11,000 versus first quarter 2013 and decreased $5,000 versus second quarter 2012. Remaining operating expenses decreased $42,000 versus first quarter 2013 and increased $31,000 versus second quarter 2012 due primarily to reductions in other administrative and operational expenses.

Income taxes

The effective income tax rates for second quarter 2013, first quarter 2013 and second quarter 2012 were 20%, 17% and 19%, respectively. Fluctuations in the . . .

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