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

Show all filings for SALISBURY BANCORP INC

Form 10-Q for SALISBURY BANCORP INC


14-Nov-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 September 30, 2013 and 2012

Overview

Net income available to common shareholders was $976,000, or $0.57 per common share, for the quarter ended September 30, 2013 (third quarter 2013), versus $1,103,000, or $0.65 per common share, for the quarter ended June 30, 2013 (second quarter 2013), and $1,094,000, or $0.65 per common share, for the quarter ended September 30, 2012 (third quarter 2012).

Earnings per common share of $0.57 decreased $0.08, or 12.3%, as compared to $0.65 for the second quarter 2013 and third quarter 2012.

Tax equivalent net interest income increased $25,000, or 0.5%, versus second quarter 2013, and increased $120,000, or 2.5%, versus third quarter 2012.

Net loan charge-offs were $215,000 for third quarter 2013, versus $294,000 for second quarter 2013 and $358,000 for third quarter 2012. Provision for loan losses for the third quarter remained unchanged from the second quarter 2013 at $240,000, versus $330,000 for third quarter 2012.

Non-interest income decreased $191,000, or 11.6%, versus second quarter 2013 and decreased $428,000, or 22.7%, versus third quarter 2012; which included $568,000 in gains on sales of mortgage loans.

Non-interest expense increased $33,000, or 0.7%, versus second quarter 2013 and decreased $50,000, or 1.1%, versus third quarter 2012.

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

Non-performing assets increased $0.1 million, or 1.0%, to $9.7 million, or 1.7% of total assets, at September 30, 2013 versus June 30, 2013 and decreased $0.2 million versus September 30, 2012. Accruing loans receivable 30-to-89 days past due increased $0.8 million to $5.1 million, or 1.2% of gross loans receivable at September 30, 2013, versus June 30, 2013 and increased $1.9 million versus September 30, 2012.

Net Interest Income

Tax equivalent net interest income for third quarter 2013 increased $25,000, or 0.5%, versus second quarter 2013, and increased $120,000, or 2.5%, versus third quarter 2012. Average total interest bearing liabilities increased $12.6 million as compared with second quarter 2013 and decreased $2.8 million, or -0.6%, as compared with third quarter 2012. Average earning assets increased $6.7 million as compared with second quarter 2013 and decreased $6.2 million, or -1.1%, as compared with third quarter 2012. The net interest margin on a tax equivalent basis decreased 3 basis points from second quarter 2013 to 3.51% and increased 12 basis points versus third quarter 2012 from 3.39%.

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 September
30,                                     Average Balance           Income / Expense         Average Yield / Rate
 (dollars in thousands)               2013          2012          2013        2012          2013           2012
Loans (a)(d)                       $ 424,897     $ 383,954     $  4,581     $ 4,526           4.31 %        4.71 %
Securities (c)(d)                    102,361       129,945        1,131       1,324           4.42          4.08
FHLBB stock                            5,340         5,747            5           7           0.38          0.51
Short term funds (b)                  33,345        52,460           22          25           0.26          0.19
Total earning assets                 565,943       572,106        5,739       5,882           4.05          4.11
Other assets                          35,989        40,218
Total assets                       $ 601,932     $ 612,324
Interest-bearing demand deposits   $  83,271     $  65,813           71          78           0.34          0.47
Money market accounts                132,480       136,865           84         104           0.25          0.30
Savings and other                    107,665       102,039           56          67           0.20          0.26
Certificates of deposit               87,088        97,354          247         331           1.13          1.35
Total interest-bearing deposits      410,504       402,071          458         580           0.44          0.57
Repurchase agreements                  3,943         3,594            2           3           0.20          0.29
FHLBB advances                        30,935        42,535          312         452           3.94          4.16
Total interest-bearing
liabilities                          445,382       448,200          772       1,035           0.69          0.92
Demand deposits                       82,573        89,225
Other liabilities                      3,049         4,808
Shareholders' equity                  70,928        70,091
Total liabilities &
shareholders' equity               $ 601,932     $ 612,324
Net interest income                                            $  4,967     $ 4,847
Spread on interest-bearing funds                                                              3.36          3.19
Net interest margin (e)                                                                       3.51          3.39


23

(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 $308,000 and $275,000, respectively for 2013 and 2012 on tax-exempt securities and loans 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 September 30, (in thousands)           2013 versus 2012
Change in interest due to                            Volume       Rate        Net
Interest-earning assets
  Loans                                            $    462     $ (407 )   $   55
  Securities                                           (293 )      100       (193 )
  FHLBB stock                                             -         (2 )       (2 )
  Short term funds                                      (11 )        8         (3 )
Total                                                   158       (301 )     (143 )
Interest-bearing liabilities
  Deposits                                              (14 )     (108 )     (122 )
  Repurchase agreements                                  -          (1 )       (1 )
  FHLBB advances                                       (120 )      (20 )     (140 )
Total                                                  (134 )     (129 )     (263 )
Net change in net interest income                  $    292     $ (172 )   $  120

Interest Income

Tax equivalent interest income decreased $143,000, or 2.4%, to $5.7 million for third quarter 2013 as compared with third quarter 2012.

Loan income increased $55,000, or 1.2%, primarily due to a 40 basis points decrease in the average loan yield and by a $40.9 million, or 10.7%, increase in average loans.

Tax equivalent securities income decreased $193,000, or 14.6%, for third quarter 2013 as compared with third quarter 2012, primarily due to a $27.6 million, or 21.2%, decrease in average volume due to calls, prepayments of mortgage backed securities, and the sale of an agency bond in 2012.

Interest Expense

Interest expense decreased $263,000, or 25.4%, to $0.8 million for third quarter 2013 as compared with third quarter 2012.

Interest on deposit accounts and retail repurchase agreements decreased $123,000, or 21.1%, as a result of lower average rates, down 13 basis points on deposits and 9 basis points on repurchase agreements, offset partially by an $8.4 million, or 2.1%, increase in the average balance of deposits. The lower average rate resulted from the effect of currently lower market interest rates paid on interest bearing deposits and changes in product mix.

Interest expense on FHLBB borrowings decreased $140,000 as a result of lower average borrowings, down $11.6 million, and by the average borrowing rate decrease of 22 basis points as compared with third quarter 2012. The decline in advances resulted from scheduled maturities that were not replaced with new advances and the prepayment of a $10 million FHLBB advance in fourth quarter 2012.

Provision and Allowance for Loan Losses

The provision for loan losses was $240,000 for third quarter 2013 and $330,000
for third quarter 2012. Net loan charge-offs were $215,000 and $358,000, for the
respective quarters. The following table sets forth changes in the allowance for
loan losses and other selected statistics:

24


                                            Three months                    Nine months
 Periods ended September 30,
(dollars in thousands)                  2013            2012            2013            2012
Balance, beginning of period        $    4,631      $    4,207      $    4,360      $    4,076
Provision for loan losses                  240             330             876             690
Charge-offs
  Real estate mortgages                   (201 )          (353 )          (549 )          (532 )
  Commercial & industrial                    -               -              (4 )           (29 )
  Consumer                                 (23 )           (14 )           (47 )           (63 )
Total charge-offs                         (224 )          (367 )          (600 )          (624 )
Recoveries
  Real estate mortgages                      -               3               6               7
  Commercial & industrial                    -               1               -               9
  Consumer                                   9               5              14              21
Total recoveries                             9               9              20              37
Net charge-offs                           (215 )          (359 )          (580 )          (587 )
Balance, end of period              $    4,656      $    4,179      $    4,656      $    4,179
Loans receivable, gross                                             $  423,813      $  380,508
Non-performing loans                                                     9,166           9,229
Accruing loans past due 30-89
days                                                                     5,093           3,152
Ratio of allowance for loan
losses:
  to loans receivable, gross                                              1.10 %          1.10 %
  to non-performing loans                                                50.80           45.28
Ratio of non-performing loans to
loans receivable, gross                                                   2.16            2.43
Ratio of accruing loans past due
30-89 days to loans receivable,
gross                                                                     1.20            0.83

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, remained unchanged at 1.10% at September 30, 2013 and September 30, 2012.

During the third quarter of 2013, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) at $9.2 million, remained stable as 2.2% of gross loans receivable at September 30, 2013 and 2.2% at June 30, 2013 versus 2.4% at September 30, 2012. Accruing loans past due 30-89 days increased $0.8 million to $5.1 million, or 1.2% of gross loans receivable from 1.0% at June 30, 2013 and 0.8% at September 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
September 30, 2013 (in thousands)          Loans     Allowance    Loans      Allowance     Loans    Allowance
Performing loans                         $  398,638  $  2,693    $      80     $    27  $  398,718  $  2,720
Potential problem loans                        8,223       249          905         122       9,128       371
Impaired loans                                     -         -       15,967       1,030      15,967     1,030
Unallocated allowance                              -       535            -           -           -       535
Totals                                    $  406,861  $  3,477    $  16,952    $  1,179  $  423,813  $  4,656
                                       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  $  364,715  $  2,619
Potential problem loans                        8,345       246       2,4654         131      10,819       377
Impaired loans                                     -         -       16,562         924      16,562       924
Unallocated allowance                              -       440            -           -           -       440
Totals                                    $  372,939   $  3253    $  19,147    $  1,107  $  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 September 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 September 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 September 30,
(dollars in thousands)                   2013           2012                 2013 vs. 2012
Trust and wealth advisory fees        $    750      $      683      $       67            9.81 %
Service charges and fees                   595             559              36            6.44
Gains on sales of mortgage
loans, net                                  69             568            (499 )        (87.85 )
Mortgage servicing, net                    (37 )            (9 )           (28 )       (311.11 )
Gains on securities, net                     -               -               -               -
Other                                       82              86              (4 )         (4.65 )
Total non-interest income             $  1,459      $    1,887      $     (428 )        (22.68 )%

Non-interest income decreased $191,000, or 11.6%, versus second quarter 2013 and decreased $428,000, or 22.7%, versus third quarter 2012. Trust and Wealth Advisory revenues decreased $74,000 versus second quarter 2013 and increased $67,000 versus third quarter 2012. The year-over-year revenue increase results from growth in managed assets, offset by slightly lower estate fees collected in third quarter 2013. Service charges and fees increased $20,000 versus second quarter 2013 and $36,000 versus third quarter 2012. Income from sales and servicing of mortgage loans in the third quarter decreased by $129,000 as compared to the second quarter 2013 and decreased $527,000 as compared to the third 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 $2.2 million for third quarter 2013, $5.1 million for second quarter 2013 and $18.3 million for third quarter 2012. Third quarter 2013, second quarter 2013 and third quarter 2012 included mortgage servicing valuation (impairment) or benefit charges of ($38,000), $1,000 and $12,000, respectively. 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 September 30,
(dollars in thousands)                   2013           2012                 2013 vs. 2012
Salaries                             $   1,922      $    1,810      $      112            6.19 %
Employee benefits                          693             597              96           16.08
Premises and equipment                     622             603              19            3.15
Data processing                            358             369             (11 )         (2.98 )
Professional fees                          306             299               7            2.34
Collections and OREO                        74             301            (227 )        (75.42 )
FDIC insurance                             111             116              (5 )         (4.31 )
Marketing and community support             99              92               7            7.61
Amortization of intangible
assets                                      56              56               -               -
Other                                      402             450             (48 )        (10.67 )
Non-interest expense                 $   4,643      $    4,693      $      (50 )         (1.07 )%

Non-interest expense for third quarter 2013 increased $33,000 versus second quarter 2013 and decreased $50,000 versus third quarter 2012. Compensation and employee benefits increased $17,000 versus second quarter 2013, and increased $208,000 versus third quarter 2012. Year-over-year expenses include higher 401(k) expense and new compensation plan expenses implemented to compensate for the hard freeze placed on the defined benefit pension plan as of December 31, 2012. Premises and equipment increased $39,000 versus second quarter 2013 and $19,000 versus third quarter 2012, mainly due to disposed assets related to modifications of the Millerton branch. Data processing decreased $9,000 versus second quarter 2013 and $11,000 versus third quarter 2012. Professional fees decreased $3,000 versus second quarter 2013, and increased $7,000 versus third quarter 2012. Collections and OREO decreased $1,000 versus second quarter 2013, and $227,000 versus third quarter 2012 due primarily to decreased related litigation and OREO expense. Salisbury had $571,000 in foreclosed property at September 30, 2013 compared to $435,000 at June 30, 2013 and $641,000 at September 30, 2012. FDIC insurance premiums decreased $3,000 versus second quarter 2013 and $5,000 versus third quarter 2012. Remaining operating expenses decreased $7,000 versus second quarter 2013 and $41,000 versus third quarter 2012 due primarily to reductions in other administrative and operational expenses. . . .

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