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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Connecticut 06-1514263
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5 Bissell Street, Lakeville, CT 06039
(Address of principal executive offices) (Zip code)
(860) 435-9801
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes_________ No_________
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer, accelerated filer" and "smaller
reporting company in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |_|
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
The number of shares of Common Stock outstanding as of November 16, 2009, is
1,686,701.
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1
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheet as of
September 30, 2009 and December 31, 2008.................... 3
Consolidated Statement of Income
for the three month and nine month periods
ended September 30, 2009 and September 30, 2008............. 4
Consolidated Statement of Changes in
Shareholders' Equity for the nine month
periods ended September 30, 2009 and September 30, 2008..... 5
Consolidated Statement of Cash Flows
for the nine month periods ended
September 30, 2009 and September 30, 2008................... 6
Notes to Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 16
Item 3. Quantitative and Qualitative Disclosures
about Market Risk........................................... 28
Item 4T. Controls and Procedures..................................... 29
PART II Other Information
Item 1. Legal Proceedings........................................... 29
Item 1A. Risk Factors................................................ 29
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.................................................... 29
Item 3. Defaults upon Senior Securities............................. 30
Item 4. Submission of matters to a vote of security holders......... 30
Item 5. Other information........................................... 30
Item 6. Exhibits.................................................... 30
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(unaudited, dollars in thousands) 2009 2008
-----------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 7,259 $ 7,083
Interest bearing demand deposits with other banks 23,724 900
Money market mutual funds 4,319 1,477
Federal funds sold -- 200
-----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 35,302 9,660
Interest bearing time deposit with other banks 5,000 --
Securities
Available-for-sale at fair value 174,765 150,527
Held-to-maturity at amortized cost
(fair value: $63 and $67) 63 66
Federal Home Loan Bank stock at cost 5,893 5,323
Loans held-for-sale 1,173 2,314
Loans (net of allowance for loan losses: $3,429 and $2,724) 311,251 297,367
Investment in real estate 75 75
Other real estate owned 418 205
Bank premises and equipment, net 8,890 7,124
Goodwill 9,829 9,829
Intangible assets (net of accumulated amortization: $880 and $757) 1,042 1,165
Accrued interest receivable 2,467 2,704
Cash surrender value of life insurance policies 3,636 3,825
Deferred taxes 2,046 4,197
Other assets 2,437 1,373
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Total Assets $ 564,287 $ 495,754
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LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing) $ 64,718 $ 65,479
NOW accounts 35,915 24,872
Money market 65,252 57,648
Savings and other 87,804 71,405
Certificates of deposit 161,110 125,521
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Total deposits 414,799 344,925
Repurchase agreements 15,462 11,203
Federal Home Loan Bank advances 76,767 87,914
Due to broker -- 7,632
Accrued interest and other liabilities 4,781 5,141
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Total Liabilities 511,809 456,815
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Commitments and contingencies -- --
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Shareholders' Equity
Preferred stock - $.01 per share par value
Authorized: 25,000 and 0; Shares issued: 8,816 and 0 -- --
Common stock - $.10 per share par value
Authorized: 3,000,000 and 3,000,000;
Shares issued: 1,686,701 and 1,685,861 169 169
Unused common stock warrants outstanding 112 --
Paid-in capital 21,889 13,157
Retained earnings 34,997 34,518
Accumulated other comprehensive loss, net (4,689) (8,905)
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Total Shareholders' Equity 52,478 38,939
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Total Liabilities and Shareholders' Equity $ 564,287 $ 495,754
=====================================================================================================
See accompanying notes to consolidated financial statements.
3
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands except per share amounts) 2009 2008 2009 2008
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Interest and dividend income
Interest and fees on loans $ 4,642 $ 4,686 $ 13,633 $ 13,918
Interest on debt securities:
Taxable 1,369 1,358 3,965 3,988
Tax exempt 635 622 1,912 1,775
Dividends on equity securities -- 39 -- 169
Other interest 57 7 67 121
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Total interest and dividend income 6,703 6,712 19,577 19,971
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Interest expense
Deposits 1,433 1,485 4,428 5,124
Repurchase agreements 33 46 100 46
FHLB Advances 791 1,056 2,322 3,135
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Total interest expense 2,257 2,587 6,850 8,305
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Net interest and dividend income 4,446 4,125 12,727 11,666
Provision for loan losses 180 520 925 690
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Net interest and dividend income
after provision for loan losses 4,266 3,605 11,802 10,976
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Non-interest income
Trust and wealth advisory 463 543 1,433 1,684
Service charges on deposit accounts 225 209 641 610
Losses on available-for-sale securities -- (2,671) (692) (2,317)
Gains on sales of mortgage loans, net 101 77 555 236
Other 469 497 1,223 1,028
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Total non-interest income (loss) 1,258 (1,345) 3,160 1,241
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Non-interest expense
Salaries and employee benefits 2,784 2,147 7,332 6,225
Occupancy 238 258 740 721
Equipment 265 219 705 650
Data processing 327 310 1,040 1,005
Insurance 40 41 96 112
FDIC insurance 204 17 737 36
Printing and stationary 58 66 225 201
Postage and telecommunications 162 145 307 278
Professional fees 308 218 832 651
Legal 68 116 276 282
Amortization of intangibles 41 41 123 123
Other 307 257 1,014 898
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Total non-interest expense 4,802 3,835 13,427 11,182
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Income before income taxes 722 (1,575) 1,535 1,035
Income tax provision 2 337 (83) 883
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Net income (loss) $ 720 $ (1,912) $ 1,618 $ 152
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Net income (loss) available to
common shareholders $ 549 $ (1,912) $ 1,368 $ 152
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Per common share
Diluted earnings $ 0.33 $ (1.13) $ 0.81 $ 0.09
Cash dividends 0.28 0.28 0.56 0.84
See accompanying notes to consolidated financial statements.
4
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
other comp- Total
rehensive share-
Common Stock Preferred Paid-in Retained (loss) holders'
(unaudited, dollars in thousands) Shares Amount stock Warrants capital earnings income equity
-----------------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2008 1,685,861 $ 169 $ -- $ -- $ 13,157 $ 34,518 $ (8,905) $ 38,939
Net income for period -- -- -- -- -- 1,618 -- 1,618
Other comprehensive income
net of taxes -- -- -- -- -- 4,216 4,216
---------
Total comprehensive income 5,834
---------
Common stock dividends paid -- -- -- -- (944) -- (944)
Issuance of preferred stock and
warrants -- -- -- 112 8,704 -- -- 8,816
Amortization of warrants -- -- -- -- 9 (9) -- --
Preferred stock dividends paid -- -- -- -- -- (186) -- (186)
Issuance of common stock for
Directors fees 840 -- -- -- 19 -- -- 19
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Balances at September 30, 2009 1,686,701 $ 169 $ -- $ 112 $ 21,889 $ 34,997 $ (4,689) $ 52,478
===================================================================================================================================
Balances at
December 31, 2007 1,685,021 $ 169 $ -- $ -- $ 13,130 $ 35,583 $ (3,319) $ 45,563
Net income for period -- -- -- -- -- 152 -- 152
Other comprehensive loss,
net of taxes -- -- -- -- -- -- (5,325) (5,325)
---------
Total comprehensive loss (5,173)
---------
Common stock dividends paid -- -- -- -- -- (1,416) -- (1,416)
Issuance of common stock for
Directors fees 840 -- -- -- 28 -- -- 28
Cumulative effect of change in
Accounting principles:
Initial application of
EITF Issue No. 06-4 -- -- -- -- -- (283) -- (283)
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Balances at September 30, 2008 1,685,861 $ 169 $ -- $ -- $ 13,158 $ 34,036 $ (8,644) $ 38,719
===================================================================================================================================
See accompanying notes to consolidated financial statements.
5
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
(unaudited, dollars in thousands) 2009 2008
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Operating Activities
Net income $ 1,618 $ 152
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of securities, net 392 57
Gain on sales of available-for-sale securities, net (436) (539)
Write-downs of available-for-sale securities 1,128 2,856
Provision for loan losses 925 690
Decrease (increase) in loans held-for-sale 1,141 (2)
Change in deferred loan costs, net (112) (2)
Increase in mortgage servicing rights, net (254) (1)
Depreciation and amortization of bank premises and equipment 535 519
Amortization of intangible assets 123 123
Accretion of fair value adjustment on deposits and borrowings (54) (98)
Amortization of fair value adjustment on loans 36 36
Decrease in interest receivable 207 144
Deferred tax benefit (20) (138)
Increase in taxes receivable (477) (13)
Increase in prepaid expenses (345) (30)
Increase in cash surrender value of life insurance policies (215) (92)
Proceeds from life insurance policies 404 --
Increase in other assets (19) (159)
Increase in accrued expenses 114 213
Increase (decrease) in interest payable 72 (164)
Increase (decrease) in other liabilities 11 (8)
Issuance of shares for Directors' fees 19 28
Increase (decrease) in unearned income on loans 6 (1)
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Net cash provided by operating activities 4,799 3,571
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Investing Activities
Placement of interest-bearing time deposit with other bank (5,000) --
Purchase of Federal Home Loan Bank stock (570) (147)
Purchases of available-for-sale securities (98,738) (102,304)
Proceeds from sales of available-for-sale securities 44,124 94,723
Proceeds from maturities of available-for-sale securities 27,991 --
Proceeds from maturities of held-to-maturity securities 4 3
Loan originations, advances and principal collections, net (15,105) (24,372)
Purchase of loans (76) (1,935)
Recoveries of loans previously charged-off 25 36
Proceeds from sale of other real estate owned 205 --
Payments to improve other real estate owned -- (204)
Purchases of bank premises and equipment, net (2,270) (941)
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Net cash utilized by investing activities (49,410) (35,141)
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Financing Activities
Net increase in demand deposits, NOW and savings accounts 34,284 24,927
Net increase in time deposits 35,590 1,940
Net increase in securities sold under agreements to repurchase 4,259 12,370
Federal Home Loan Bank advances 12,000 17,000
Principal payments on Federal Home Loan Bank advances (2,215) (16,786)
Net change in Federal Home Loan Bank short term advances (20,878) (8,637)
Proceeds from issuance of preferred stock 8,824 0
Cash dividends paid (1,611) (1,682)
-----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70,253 29,132
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Increase (decrease) in cash and cash equivalents 25,642 (2,438)
Cash and cash equivalents, beginning of period 9,660 15,178
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 35,302 $ 12,740
=====================================================================================================
Cash paid during period
Interest to depositors and on borrowings $ 6,777 $ 8,567
Income taxes 415 1,034
Non-Cash Transfers
From Loans to OREO 418 205
See accompanying notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The interim consolidated financial statements of Salisbury Bancorp, Inc.
("Salisbury") include those of Salisbury and its wholly owned subsidiary,
Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the
interim unaudited consolidated financial statements include all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial position of Salisbury and the statements of income and shareholder's
equity and cash flows for the interim periods presented.
The financial statements have been prepared in accordance with generally
accepted accounting principles. In preparing the financial statements,
management is required to make extensive use of estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and valuation
of real estate, management obtains independent appraisals for significant
properties.
Certain financial information, which is normally included in financial
statements prepared in accordance with generally accepted accounting principles,
but which is not required for interim reporting purposes, has been condensed or
omitted. Operating results for the three and nine month periods ended September
30, 2009 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2009. The accompanying condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in Salisbury's Annual Report for the period ended December 31,
2008.
The allowance for loan losses is a significant accounting policy and is
presented in the Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis, which provide information on how significant assets are
valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses to be the
accounting area that requires the most subjective judgments, and as such could
be most subject to revision as new information becomes available.
Impact of New Accounting Pronouncements Issued
In June 2009, the Financial Accounting Standards Board ("FASB") issued an update
to Accounting Standard Codification 105-10, "Generally Accepted Accounting
Principles." This standard establishes the FASB Accounting Standard Codification
("Codification" or "ASC") as the source of authoritative U.S. GAAP recognized by
the FASB for nongovernmental entities. The Codification is effective for interim
and annual periods ending after September 15, 2009. The Codification is a
reorganization of existing U.S. GAAP and does not change existing U.S. GAAP.
Salisbury adopted this standard during the third quarter of 2009. The adoption
had no impact on Salisbury's financial position or results of operations.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets", and SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)." These standards are effective for the first interim reporting period of
2010. SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a
qualifying special-purpose entity ("QSPE") and changes some of the requirements
for derecognizing financial assets. SFAS No. 167 amends the consolidation
guidance in ASC 810-10. Specifically, the amendments will (a) eliminate the
exemption for QSPEs from the new guidance, (b) shift the determination of which
enterprise should consolidate a variable interest entity ("VIE") to a current
control approach, such that an entity that has both the power to make decisions
and right to receive benefits or absorb losses that could potentially be
significant, will consolidate a VIE, and (c) change when it is necessary to
reassess who should consolidate a VIE. Salisbury is evaluating the impact that
these standards will have on its financial statements.
In August 2009, the FASB issued Accounting Standards Update ("ASU") 2009-05,
"Measuring Liabilities at Fair Value," which updates ASC 820-10, "Fair Value
Measurements and Disclosures." The updated guidance clarifies that the fair
value of a liability can be measured in relation to the quoted price of the
liability when it trades as an asset in an active market, without adjusting the
7
price for restrictions that prevent the sale of the liability. This guidance is
effective beginning January 1, 2010. Salisbury does not expect that the guidance
will change its valuation techniques for measuring liabilities at fair value.
In May 2009, the FASB updated ASC 855, "Subsequent Events." ASC 855 establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before financial statements are issued or are
available to be issued. Salisbury adopted this guidance during the second
quarter of 2009. In accordance with the update, Salisbury evaluates subsequent
events through the date its financial statements are issued. The adoption of
this guidance did not have an impact on Salisbury's financial position or
results of operations.
In April 2009, the FASB updated ASC 320-10, "Investments - Debt and Equity
Securities." The guidance amends the other-than-temporary impairment ("OTTI")
guidance for debt securities. If the fair value of a debt security is less than
its amortized cost basis at the measurement date, the updated guidance requires
Salisbury to determine whether it has the intent to sell the debt security or
whether it is more likely than not it will be required to sell the debt security
before the recovery of its amortized cost basis. If either condition is met, an
entity must recognize full impairment. For all other debt securities that are
considered other-than-temporarily impaired and do not meet either condition, the
guidance requires that the credit loss portion of impairment be recognized in
earnings and the temporary impairment related to all other factors be recorded
in other comprehensive income. In addition, the guidance requires additional
disclosures regarding impairments on debt and equity securities. Salisbury
adopted this guidance effective April 1, 2009. The adoption of this guidance did
not have an impact on Salisbury's financial position or results of operations.
In April 2009, the FASB updated ASC 820-10, "Fair Value Measurements and
Disclosures," to provide guidance on determining fair value when the volume and
level of activity for the asset or liability have significantly decreased and
identifying transactions that are not orderly. This issuance provides guidance
on estimating fair value when there has been a significant decrease in the
volume and level of activity for the asset or liability and for identifying
transactions that may not be orderly. The guidance requires entities to disclose
the inputs and valuation techniques used to measure fair value and to discuss
changes in valuation techniques and related inputs, if any, in both interim and
annual periods. Salisbury adopted this guidance during 2009 and the adoption did
not have a material impact on Salisbury's financial position and results of
operations. The enhanced disclosures related to this guidance are included in
Note 5, "Fair Value Measurements," to the consolidated Financial Statements.
In April 2009, the FASB updated ASC 825-10 "Financial Instruments." This update
amends the fair value disclosure guidance in ASC 825-10-50 and requires an
entity to disclose the fair value of its financial instruments in interim
reporting periods as well as in annual financial statements. The methods and
significant assumptions used to estimate the fair value of financial instruments
and any changes in methods and assumptions used during the reporting period are
also required to be disclosed both on an interim and annual basis. Salisbury
adopted this guidance during 2009. The required disclosures have been included
in Note 5, "Fair Value Measurements," to the consolidated Financial Statements.
In June 2008, the FASB updated ASC 260-10, "Earnings Per Share." The guidance
concludes that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents are participating securities that
should be included in the earnings allocation in computing earnings per share
under the two-class method. The guidance is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those years. All prior period earnings per share data presented must be
adjusted retrospectively. The adoption of this update, effective January 1,
2009, did not have a material impact on Salisbury's financial position, results
of operations, and earnings per share.
In March 2008, the FASB updated ASC 815, "Derivatives and Hedging." This
guidance changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance in ASC 815 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. This guidance encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. The adoption of
this guidance did not have a material impact on its financial condition and
results of operations.
8
In February 2008, the FASB updated ASC 860, "Transfers and Servicing." This
guidance clarifies how the transferor and transferee should separately account
for a transfer of a financial asset and a related repurchase financing if
certain criteria are met. This guidance became effective January 1, 2009. The
adoption of this guidance did not have a material effect on Salisbury's results
of operations or financial position.
In December 2007, the FASB updated ASC 810-10, "Consolidation", which provides
new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest should be reported as a component of equity in the
consolidated financial statements. This guidance also required expanded
disclosures that identify and distinguish between the interests of the parent's
owners and the interests of the noncontrolling owners of an entity. The adoption
of this guidance did not have a material impact on Salisbury's results of
operations or financial position.
In December 2007, the FASB updated ASC 805, "Business Combinations." The updated
guidance significantly changes the accounting for business combinations. Under
ASC 805, an acquiring entity is required to recognize all the assets acquired
and liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. It also amends the accounting treatment for certain specific
items including acquisition costs and non controlling minority interests and
includes a substantial number of new disclosure requirements. ASC 805 applies
prospectively to business combinations for which the acquisition date is on or
after January 1, 2009. The adoption of this statement did not have a material
impact on Salisbury's financial condition and results of operations.
Pending Acquisition
On August 25, 2009, Salisbury announced the Bank had entered into a purchase and
assumption agreement (the "Agreement") to purchase the Canaan, Connecticut
branch of Webster Bank. The Agreement provides that, subject to the receipt of
regulatory approvals and the satisfaction of normal closing conditions, the Bank
will assume certain deposits, fixed assets, and certain loans. The Bank also
agreed to retain all branch-based employees of the Webster Canaan Branch as part
of the transaction.
In the aggregate, the transaction includes approximately $17 million in deposits
and approximately $4 million in loans. Under the terms of the Agreement, the
acquisition is expected to be completed in the fourth quarter of 2009.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
Disclosure of comprehensive income includes net income and any changes in equity
from non-owner sources that are not recorded in the income statement (such as
changes in the net unrealized gains (losses) on securities). The purpose of
reporting comprehensive income (loss) is to report a measure of all changes in
equity that result from recognized transactions and other economic events of the
period other than transactions with owners in their capacity as owners.
Salisbury's sources of other comprehensive income (loss) are the net changes in
unrealized holding (losses) or gains on securities and the net change in
unrecognized pension plan expense.
The components of comprehensive income (loss) are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2009 2008 2009 2008
----------------------------------------------------------------------------------------
Net income (loss) $ 720 $(1,912) $ 1,618 $ 152
Other comprehensive income (loss), before tax
Net change in unrealized (losses) gains
on securities available-for-sale and net
change in unrecognized pension plan
expense 6,554 (3,644) 9,924 (9,250)
Income tax (expense) benefit (2,208) 1,241 (5,708) 3,925
----------------------------------------------------------------------------------------
Other comprehensive income (loss) 4,346 (2,403) 4,216 (5,325)
----------------------------------------------------------------------------------------
Comprehensive income (loss) $ 5,066 $(4,315) $ 5,834 $(5,173)
----------------------------------------------------------------------------------------
9
NOTE 3 - SECURITIES
Securities classified as available-for-sale (carried at fair value) were as
follows:
Gross Gross
Amortized unrealized unrealized Fair
(in thousands) cost gains losses value
---------------------------------------------------------------------------------------------------
September 30, 2009
U.S. Treasury bills
Within 1 year $ 3,248 $ 1 $ -- $ 3,249
U.S. Government Agency notes
Within 1 year 23,289 126 (6) 23,409
After 1 year but within 5 years 14,947 84 (8) 15,023
After 5 years but within 10 years 3,539 51 (29) 3,561
After 10 years but within 15 years 3,000 -- (16) 2,984
Municipal bonds
Within 1 year 555 -- -- 555
After 1 year but within 5 years 3,996 31 (8) 4,019
After 5 years but within 10 years 26,105 348 (683) 25,770
After 10 years but within 15 years 11,211 25 (740) 10,496
After 15 years 15,987 33 (1,701) 14,319
U.S. Government Agency mortgage backed
securities 36,926 580 (163) 37,343
Non-agency collateralized mortgage obligations 28,201 474 (2,811) 25,864
SBA bonds 6,921 22 (32) 6,911
Corporate bonds
After 1 year but within 5 years 1,076 34 -- 1,110
After 15 years 20 132 -- 152
---------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 179,021 $ 1,941 $ (6,197) $ 174,765
===================================================================================================
Gross Gross
Amortized unrealized unrealized Fair
(in thousands) cost gains losses value
---------------------------------------------------------------------------------------------------
December 31, 2008
U.S. Government Agency notes
Within 1 year $ 35,472 $ 48 $ (298) $ 35,222
After 1 year but within 5 years 5,987 62 -- 6,049
Municipal bonds
After 1 year but within 5 years 2,201 -- (73) 2,128
After 5 years but within 10 years 9,524 90 (380) 9,234
After 10 years but within 15 years 18,907 33 (2,290) 16,650
After 15 years 32,883 11 (5,210) 27,684
U.S. Government Agency mortgage backed
securities 28,651 137 (178) 28,610
Non-agency collateralized mortgage obligations 24,901 307 (2,873) 22,335
Agency collateralized mortgage obligations 2,538 57 -- 2,595
After 15 years 20 -- -- 20
Preferred Stock 119 -- -- --
---------------------------------------------------------------------------------------------------
Total securities available-for-sale $ 161,084 $ 745 $ (11,302) $ 150,527
===================================================================================================
10
Securities classified as held-to-maturity (carried at amortized cost) were as
follows:
Gross Gross
Amortized unrealized unrealized Fair
(in thousands) cost gains losses value
--------------------------------------------------------------------------------
September 30, 2009
Mortgage backed security $63 $ -- $ -- $63
================================================================================
December 31, 2008
Mortgage backed securities $66 $ 1 $ -- $67
================================================================================
The following table summarizes, for all securities in an unrealized loss
position at September 30, 2009, the aggregate fair value, gross unrealized loss,
and number of securities that have been continuously in an unrealized loss
position for less than and greater than twelve months:
Less than 12 Months 12 Months or Longer Total
----------------------------------------------------------------------------------------------------------
September 30, 2009 Fair Unrealized Fair Unrealized Fair Unrealized
(in thousands) value losses value losses value losses
----------------------------------------------------------------------------------------------------------
Municipal Bonds $ 8,610 $ 90 $ -- $ -- $ 8,610 $ 90
Mortgage backed securities 10,054 1,002 23,029 2,128 33,083 3,130
Collateralized mortgage
backed securities 11,620 590 10,855 2,377 22,476 2,967
----------------------------------------------------------------------------------------------------------
Total Temporarily impaired securities $30,284 $ 1,682 $ 33,884 $ 4,505 $64,169 $6,187
==========================================================================================================
Salisbury adopted ASC 320-10-65, Investments-Debt and Equity
Securities/Transition and Open Effective Date Information, (previously FSP FAS
No. 115-2 and FAS No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments), effective April 1, 2009. ASC 320-10-65 (FSP
FAS No. 115-2 and FAS No. 124-2) requires an assessment of OTTI whenever the
fair value of a security is less than its amortized cost basis at the balance
sheet date. Amortized cost basis includes adjustments made to the cost of a
security for accretion, amortization, collection of cash and previous OTTI
recognized into earnings.
Salisbury evaluates its individual available for sale investment securities for
OTTI on at least a quarterly basis. As part of this process, Salisbury considers
its intent to sell each debt security and whether it is more likely than not
that it will be required to sell the security before its anticipated recovery.
If either of these conditions is met, Salisbury recognizes an OTTI charge to
earnings equal to the entire difference between the security's amortized cost
basis and its fair value at the balance sheet date. For securities that meet
neither of these conditions, an analysis is performed to determine if any of
these securities are at risk for OTTI.
Salisbury believes that principal and interest on U.S Treasury securities,
mortgage-backed securities or securities backed by a U.S. government sponsored
entity and the Small Business Administration and bank qualified insured
municipal securities are deemed recoverable.
As of September 30, 2009, Salisbury performed a detailed cash flow analysis of
its non-agency Collateralized Mortgage Obligations ("CMO") to assess whether any
of the securities were OTTI. Salisbury uses a third party provider to generate
cash flow forecasts of each security based on a variety of market driven
assumptions and securitization terms, including prepayment speed, default or
delinquency rate, and default severity for losses including interest, legal
fees, property repairs, expenses and realtor fees, that, together with the loan
amount are subtracted from collateral sales proceeds to determine severity.
For the quarter ended June 30, 2009 Salisbury determined that five non-agency
CMO securities reflected OTTI and recognized credit losses of $1,128,000. No
additional OTTI was determined for the quarter ended September 30, 2009 and all
other CMO securities were judged not to be OTTI as of September 30, 2009. It is
possible that future loss assumptions could change and cause future OTTI credit
losses in these securities.
Salisbury does not intend to sell the securities which it has judged to be OTTI
and it is not more likely than not that it will be required to sell these
securities before its anticipated recovery of each security's remaining
amortized cost basis. For the remainder of Salisbury's securities portfolio that
have experienced decreases in the fair value, the decline is considered to be
11
temporary as Salisbury expects to recover the entire amortized cost basis on the
securities and neither intends to sell these securities nor is it more likely
than not that it will be required to sell these securities.
The following table presents the non-agency CMOs for which an OTTI has been
recognized based on Salisbury's impairment analysis of its securities portfolio:
September 30,
(in thousands) 2009
--------------------------------------------------------------------------------
Amortized cost (net of credit related OTTI write-down) $5,758
Unrealized losses (1,671)
--------------------------------------------------------------------------------
Fair value $4,087
================================================================================
The following table presents activity related to credit losses recognized into
earnings on the non-agency CMOs held by Salisbury for which a portion of an OTTI
charge was recognized in accumulated other comprehensive income:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2009 2008 2009 2008
-----------------------------------------------------------------------------
Balance, beginning of period $ 1,128 $ -- $ -- $ --
Credit losses for which OTTI
was not previously recognized -- -- 1,128 --
-----------------------------------------------------------------------------
Balance, end of period $ 1,128 $ -- $ 1,128 $ --
=============================================================================
NOTE 4 - PLEDGED ASSETS
At September 30, 2009 and December 31, 2008, certain securities and loans were
pledged to secure public and trust deposits, assets sold under agreements to
repurchase, other borrowings and credit facilities available.
September 30, December 31,
(in thousands) 2009 2008
--------------------------------------------------------------------------------
Securities available-for-sale $ 66,876 $ 91,120
Loans and Leases 100,742 99,619
--------------------------------------------------------------------------------
Total pledged assets $167,618 $190,739
================================================================================
NOTE 5 - LOANS
The composition of the loan portfolio is as follows:
September 30, December 31,
(in thousands) 2009 2008
--------------------------------------------------------------------------------
Real estate mortgages:
Residential $155,607 $151,441
Commercial 67,220 62,796
Construction, land & land development 30,228 33,343
Home equity credit 30,995 25,608
--------------------------------------------------------------------------------
Total mortgage loans 284,050 273,188
Commercial and industrial 24,514 20,784
Consumer and other 5,611 5,726
--------------------------------------------------------------------------------
Total loans, gross 314,175 299,698
Deferred loan origination fees and costs, net 505 393
Allowance for loan losses (3,429) (2,724)
--------------------------------------------------------------------------------
Total loans, net $311,251 $297,367
================================================================================
12
Impaired loans
September 30, December 31,
(in thousands) 2009 2008
-------------------------------------------------------------------------------
With no valuation allowance $ 8,636 $ 3,709
With valuation allowance 2,164 797
-------------------------------------------------------------------------------
Total impaired loans $ 10,800 $ 4,506
-------------------------------------------------------------------------------
Valuation allowance $ 144 $ 83
Salisbury's loans consist primarily of residential and commercial real estate
loans located principally in western Connecticut and proximate areas of New York
State and Massachusetts, which constitute Salisbury's service area. Salisbury
offers a broad range of loan and credit facilities to borrowers in its service
area, including residential mortgage loans, commercial real estate loans,
construction loans, working capital loans, equipment loans, and a variety of
consumer loans, including home equity lines of credit, and installment and
collateral loans. All residential and commercial mortgage loans are
collateralized by first or second mortgages on real estate. The ability and
willingness of borrowers to satisfy their loan obligations are dependent in
large part upon the status of the regional economy and regional real estate
market. Accordingly, the ultimate collectability of a substantial portion of the
Salisbury's loan portfolio and the recovery of a substantial portion of Other
Real Estate Owned ("OREO") are susceptible to changes in market conditions.
Changes in the allowance for loan losses are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2009 2008 2009 2008
--------------------------------------------------------------------------------
Balance, beginning of period $3,309 $2,625 $2,724 $2,475
Provision for loan losses 180 520 925 690
Charge-offs (69) (54) (245) (96)
Recoveries 9 14 25 36
--------------------------------------------------------------------------------
Balance, end of period $3,429 $3,105 $3,429 $3,105
--------------------------------------------------------------------------------
NOTE 6 - NON-PERFORMING ASSETS
The components of non-performing assets are as follows:
September 30, December 31,
(in thousands) 2009 2008
------------------------------------------------------------------------------
Non-accruing loans $ 6,240 $ 5,075
Accruing loans past due 90 days or more 160 100
Accruing restructured loans 350 --
------------------------------------------------------------------------------
Total non-performing loans 6,750 5,175
Real estate acquired in settlement of loans 418 205
------------------------------------------------------------------------------
Total non-performing assets $7,168 $5,380
==============================================================================
Real estate acquired in settlement of loans consists of collateral acquired
through foreclosure, forgiveness of debt or otherwise in lieu of debt.
13
NOTE 7 - INCOME TAXES
The components of the income tax provision are as follows:
Three months ended Nine months ended
September 30, September 30,
(in thousands) 2009 2008 2009 2008
---------------------------------------------------------------------------------------
Federal $ (8) $ 653 $ (219) $ 987
State 10 10 31 33
---------------------------------------------------------------------------------------
Total Current provision 2 663 (188) 1,020
---------------------------------------------------------------------------------------
Federal -- (326) (21) (138)
State -- -- -- --
---------------------------------------------------------------------------------------
Total Deferred benefit -- (326) (21) (138)
---------------------------------------------------------------------------------------
Income tax provision $ 2 $ 337 $ (83) $ 883
=======================================================================================
Connecticut tax legislation 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 Salisbury formed a PIC, Salisbury Mortgage Company.
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.
NOTE 8 - SHAREHOLDERS' EQUITY
Capital Requirements
--------------------
Salisbury and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. The Bank was classified at its
most recent notification as "well capitalized". Salisbury and the Bank's
regulatory capital ratios at September 30, 2009 are as follows:
Well Capitalized Salisbury Bank
------------------------------------------------------------------------------
Leverage ratio 5.00% 8.57% 6.78%
Tier 1 risk-based ratio 6.00 12.29 9.74
Total risk-based ratio 10.00 13.22 10.68
Restrictions on Cash Dividends to Common Shareholders
-----------------------------------------------------
Salisbury's ability to pay cash dividends is dependent on the Bank's ability to
pay cash dividends to Salisbury. There are certain restrictions on the payment
of cash dividends and other payments by the Bank to Salisbury. Under Connecticut
law the Bank cannot declare a cash dividend except from net profits, defined as
the remainder of all earnings from current operations. The total of all cash
dividends declared by the Bank in any calendar year shall not, unless
specifically approved by the Commissioner of Banking, exceed the total of its
net profits of that year combined with its retained net profits of the preceding
two years.
Federal Reserve Board Supervisory Letter SR 09-4, February 24, 2009 revised
March 27, 2009 notes that, as a general matter, the board of directors of a bank
holding company ("BHC") should inform the Federal Reserve and should eliminate,
defer, or significantly reduce dividends if (1) net income available to
shareholders for the past four quarters, net of dividends previously paid during
that period, is not sufficient to fully fund the dividends; (2) the prospective
rate of earnings retention is not consistent with capital needs and overall
current and prospective financial condition; or (3) the BHC will not meet, or is
in danger of not meeting, its minimum regulatory capital adequacy ratios.
Moreover, a BHC should inform the Federal Reserve reasonably in advance of
declaring or paying a dividend that exceeds earnings for the period (e.g.,
quarter) for which the dividend is being paid or that could result in a material
adverse change to the BHC capital structure.
Further restrictions on cash dividends are imposed on Salisbury Capital Purchase
Program because of Salisbury's participation in the United States Treasury's
Troubled Asset Relief Program, Capital Purchase Program ("TARP, CPP"). These
preclude the payment of any common stock cash dividends if Salisbury is not
paying the preferred stock dividend. Additionally, the common stock dividend may
not be increased without prior approval from the Treasury for the first three
years Salisbury is a TARP participant unless all TARP preferred shares are
redeemed or transferred to third parties.
14
NOTE 9 - RETIREMENT PLANS
Salisbury has retirement plans, which are described more fully in Note 9
(Employee Benefits) to the Consolidated Financial Statements in Salisbury's 2008
Form 10-K. Salisbury has a non-contributory defined benefit pension plan (the
"Pension Plan") covering all eligible employees. In 2006, the Pension Plan was
amended, effective September 1, 2006, to provide that employees hired or rehired
on or after September 1, 2006 are not eligible to participate in the plan. The
following are components of net periodic benefit expense for Salisbury's Pension
Plan:
Three months ended Nine months ended
(in thousands) 2009 2008 2009 2008
-----------------------------------------------------------------------------------------------
Components of net periodic expense:
Service cost $ 69 $ 101 $ 284 $ 303
Interest cost 79 92 280 275
Expected return on plan assets (85) (107) (265) (320)
Amortization of prior service cost -- -- -- --
Amortization of unrecognized net loss 21 11 86 34
Amortization of net transition obligation 437 -- 437 --
-----------------------------------------------------------------------------------------------
Net periodic benefit expense $ 521 $ 97 $ 822 $ 292
===============================================================================================
Actuarial assumptions:
Discount rate 6.00% 6.00% 6.00% 6.00%
Average wage increase Note 1 Note 1 Note 1 Note 1
Expected return on plan assets 7.50 7.25 7.50 7.25
Note 1. 5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
NOTE 10 - FAIR VALUE OF ASSETS AND LIABILITIES
Salisbury uses fair value measurements to state certain assets and liabilities
at fair value and to support fair value disclosures. Securities available for
sale and impaired loans are recorded at fair value on a recurring basis.
Additionally, from time to time, Salisbury may be required to record other
financial assets at fair value on a nonrecurring basis, such as loans held for
sale. These nonrecurring fair value adjustments typically involve application of
lower-of-cost-or-market accounting or write-downs of individual assets.
Fair Value Hierarchy
Under ASC 820-10 (SFAS No. 157), Salisbury groups its assets and liabilities at
fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine
fair value. These levels are:
Level 1 -- Valuation is based upon unadjusted quoted prices for
identical instruments traded in active markets.
Level 2 -- Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the
market, or are derived principally from or corroborated by observable
market data, by correlation or by other means.
Level 3 -- Valuation is generated from model-based techniques that use
significant assumptions not observable in the market. These
unobservable assumptions reflect Salisbury's estimates of assumptions
that market participants would use in pricing the asset or liability.
Valuation techniques include use of option pricing models, discounted
cash flow models and similar techniques.
Assets and liabilities measured at fair value on a recurring basis were as
follows:
September 30, 2009 (in thousands) Total Level 1 Level 2 Level 3
--------------------------------------------------------------------------------
Securities available-for sale $174,765 $151 $174,614 $ --
Impaired loans 10,800 -- 10,800 --
--------------------------------------------------------------------------------
Total $185,565 $151 $185,414 $ --
================================================================================
15
Changes in Level 3 of assets and liabilities measured at fair value on a
recurring basis were as follows:
Available-for-sale Securities
------------------------------------------------------------------------------------------------------
Three months ended, Nine months ended
(in thousands) September 30, 2009 September 30, 2009
------------------------------------------------------------------------------------------------------
Balance, beginning of period $ 1 $ 2
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets) -- (1)
Included in other comprehensive income -- --
Amortization of securities, net -- --
Transfers in and/or out of Level 3 (1) (1)
------------------------------------------------------------------------------------------------------
Balance, end of period $ -- $ --
======================================================================================================
Amount of total gains or losses for the period included
in earnings (or changes in net assets) attributable
to the change in unrealized gains or losses relating to
assets still held at the reporting date $ -- $ --
======================================================================================================
The estimated fair values of the Bank's financial instruments, all of which are
held or issued for purposes other than trading, were as follows:
September 39, 2009 December 31, 2008
---------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(in thousands) Amount Value Amount Value
---------------------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 35,302 $ 35,302 $ 9,660 $ 9,660
Available-for-sale securities 174,766 174,766 150,527 150,527
Held-to-maturity securities 63 63 66 67
Federal Home Loan Bank stock 5,893 5,893 5,323 5,323
Loans held-for-sale 1,173 1,744 2,314 2,314
Loans, net 311,251 301,139 297,367 287,063
Accrued interest receivable 2,467 2,467 2,704 2,704
Financial liabilities
Deposits 414,799 414,832 344,925 346,035
FHLB advances 76,766 81,710 87,914 90,206
Securities sold under agreements
to repurchase 15,462 15,462 11,203 11,203
Due to broker -- -- 7,632 7,632
The carrying amounts of financial instruments shown in the above table are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
16
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 period ended December 31, 2008.
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 seven
full-service offices in the towns of Canaan, Lakeville, Salisbury and Sharon,
Connecticut, South Egremont and Sheffield, Massachusetts, and Dover Plains, New
York, and its trust and wealth advisory services from offices in Lakeville,
Connecticut. In addition, the Bank has received regulatory approvals to open a
full-service branch in Millerton, NY.
Pending Acquisition
-------------------
On August 25, 2009 Salisbury announced the Bank had entered into a purchase and
assumption agreement (the "Agreement") to purchase the Canaan, Connecticut
branch of Webster Bank. The Agreement provides that, subject to the receipt of
regulatory approvals and the satisfaction of normal closing conditions, the Bank
will assume certain deposits, fixed assets, and certain loans. The Bank also
agreed to retain all branch-based employees of the Webster Canaan Branch as part
of the transaction.
In the aggregate, the transaction includes approximately $17 million in deposits
and approximately $4 million in loans. Under the terms of the Agreement, the
acquisition is expected to be completed in the fourth quarter of 2009.
Application of Critical Accounting Policies
-------------------------------------------
Salisbury's consolidated financial statements are prepared in accordance with US
GAAP and follow general practices within 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. These policies, along with the disclosures
presented in Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis, provide information on how significant assets are
valued in the financial statements and how those values are determined. Based on
the valuation techniques used and the sensitivity of financial statement amounts
to the methods, assumptions and estimates underlying those amounts, management
has identified the determination of the allowance for loan losses to be the
accounting area that requires the most subjective judgments, and as such could
be most subject to revision as new information becomes available.
The allowance for loan losses represents management's estimate of credit losses
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
17
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 describes the methodology used to determine the allowance for loan
losses. A discussion of the factors driving changes in the amount of the
allowance for loan losses is included in the "Provision and Allowance For Loan
Losses" section of Management's Discussion and Analysis.
RESULTS OF OPERATIONS
For the three-month periods ended September 30, 2009 and 2008
Overview
--------
Net income available to common shareholders was $549,000, or $.33 per common
share, for the third quarter ended September 30, 2009, compared to a net loss of
$(1,912,000), or $(1.13) per common share, for the third quarter of 2008.
Annualized return on average common shareholder's equity was 5.40% for the third
quarter of 2009 compared with -18.03% for the third quarter of 2008. Third
quarter 2008 included a securities loss arising from a $2,856,000 OTTI
write-down of Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock
following the U.S. Government placing FHLMC into conservatorship.
Net interest and dividend income for the quarter increased $321,000 due
primarily to a $78.6 million increase in average earning assets, which more than
offset a 33 basis point decrease in the net interest margin to 3.52%. Excluding
securities losses, all other non-interest income decreased $68,000 as a result
of a decrease in credit card fees, attributable to the sale of the credit card
portfolio in 2008, and lower Trust/Wealth Advisory Services income, offset in
part by a $130,000 one-time life insurance benefit and increased banking service
fees. Non-interest expense increased $967,000 due primarily to a $637,000
increase in compensation expense and $330,000 in all other operating expenses.
The increase in compensation expense included $378,000 in additional pension
expense. The increase in all other operating expense included $187,000 in
additional FDIC deposit insurance premiums due to an increase in assessments and
deposit growth.
Analysis of net interest and dividend income Fully-Taxable Equivalent Basis
--------------------------------------------------------------------------------
("FTE")
-------
Salisbury's net interest margin was 3.52% for the quarter compared to 3.43% in
the second quarter of 2009 and 3.85% in the third quarter of 2008. The
compression in the net interest margin was mostly due to the decline in short
term rates and the prolonged flatness of the yield curve, which has reduced the
gap between short- and intermediate-term interest rates and the spread between
what banks earn on loans and securities and pay on deposits and borrowings. Also
contributing to the year-over-year decrease in the net interest margin were
reduced spreads on new loans and securities as a result of an intensely
competitive market, an increase in low yielding cash and cash equivalents in
relation to total earning assets, the absence of Federal Home Loan Bank of
Boston ("FHLBB") dividend income for the quarter, and, to a lesser extent to
other changes in the mix of earning assets and funding liabilities, asset and
liability growth, and the impact of asset and liability re-pricing. During the
last twelve-months the Federal Funds Target Rate has fallen by 175 basis points,
while the yield on the 5-year US Treasury Note has fallen by 67 basis points.
During the last twenty-four months the Federal Funds Target Rate has fallen by
450 basis points while the yield on the 5-year US Treasury Note has fallen by
194 basis points.
Salisbury seeks to grow earning assets and during the current quarter average
earning assets increased $27.8 million, or 5.5%, over the second quarter of
2009, and $78.6 million, or 17.2%, over the third quarter of 2008. Fully taxable
equivalent ("FTE") net interest and dividend income increased $320,000 for the
quarter ended September 30, 2009 as compared with the prior year period. Average
interest bearing deposits increased $83.0 million, or 31.3% over the prior year
period.
The following table sets forth the components of Salisbury's FTE net interest
income and FTE yields on average interest-earning assets and interest-bearing
funds.
18
Three months ended September 30, Average Income/ Average
Balance Expense Yield/Rate
(in thousands) 2009 2008 2009 2008 2009 2008
---------------------------------------------------------------------------------------------------------------
Loans (a) $309,756 $292,111 $ 4,637 $ 4,678 5.99% 6.41%
Short term funds (b) 44,786 2,643 56 6 0.50 0.91
MBS and CMO securities (c) 64,270 48,191 889 637 5.53 5.29
Other securities (c)(d) 117,530 114,841 1,410 1,681 4.80 5.86
----------------------------------------------------------------------------------------
Total earning assets 536,342 457,786 6,992 7,002 5.21 6.12
--------------------
Other assets 25,122 22,903
------------------------------------------------------------
Total assets $561,464 $480,689
============================================================
NOW accounts $ 38,802 $ 26,186 85 14 0.87 0.21
Money market accounts 66,262 62,624 102 276 0.62 1.76
Savings & other 84,801 64,973 158 228 0.74 1.40
Certificates of deposit 158,502 111,613 1,088 967 2.75 3.47
----------------------------------------------------------------------------------------
Total interest-bearing deposits 348,367 265,396 1,433 1,485 1.65 2.24
Repurchase agreements 14,242 7,912 33 46 0.93 2.33
FHLB advances 76,910 92,566 791 1,056 4.11 4.56
----------------------------------------------------------------------------------------
Total interest-bearing funds 439,519 365,874 2,257 2,587 2.05 2.83
--------------------
Demand deposits 68,238 69,735
Other liabilities 4,499 2,923
Shareholders' equity 49,208 42,157
------------------------------------------------------------
Total liabilities &
shareholders' equity $561,464 $480,689
============================================================
Net interest income $ 4,735 $ 4,415
====================
Spread on interest-bearing funds 3.16 3.29
Net interest margin (e) 3.52 3.85
(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 benefits of $289,000 and $290,000, respectively for periods
2009 and 2008 on tax-exempt securities whose income and yields are
calculated on an FTE basis.
(e) FTE 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, 2009 versus 2008
(in thousands) Change in interest due to
----------------------------------------------------------------
Volume (1) Rate (1) Net
----------------------------------------------------------------
Interest-earning assets:
Loans $ 283 $ (324) $ (41)
Short term funds 101 (51) 50
MBS and CMO securities 212 40 252
Other securities 39 (310) (271)
----------------------------------------------------------------
Total 635 (645) (10)
----------------------------------------------------------------
Interest-bearing liabilities:
Deposits 499 (551) (52)
FHLB advances & other (142) (136) (278)
Long term debt -- -- --
----------------------------------------------------------------
Total 357 (687) (330)
----------------------------------------------------------------
Net change to interest income $ 278 $ 42 $ 320
================================================================
(1) Changes attributable to rate/volume are allocated proportionately to both
rate and volume.
19
Interest income (FTE)
---------------------
Total interest and dividend income changed at $6,992,000 for the quarter ended
September 30, 2009, as compared with $7,002,000 for the same period a year ago.
Loan income decreased slightly, by $41,000, primarily as a result of lower
yields offset in part by higher volume during the period. Average loans grew by
$17.6 million, or 6.0%. The decrease in the average loan yield, down 42 basis
points, resulted from lower interest rates in 2009 and their effect on loan
re-pricing and loan re-financing activity.
Investment income increased slightly, by $31,000, over the prior year period, as
a result of higher average volume offset by lower yields due to portfolio
re-pricing, the discontinuation of FHLBB dividend income for the quarter,
compared with $53,000 for the prior year period, and a change in mix arising
from the increase in short term funds relative to total investments. Average
securities grew by $18.8 million, or 11.5%, while short term funds increased by
$42.1 million from $2.6 million for the prior year period.
Interest expense
----------------
Interest expense for the quarter ended September 30, 2009 decreased $330,000, or
12.7%, as compared with the prior year period as a result of decreases in
interest rates paid offset by higher average interest bearing balances.
Deposit expense decreased $52,000, or 3.5%, as a result of lower deposit rates
and changes in deposit mix offset by a significant increase in average deposit
levels. Average interest bearing deposits increased $83.0 million, or 31.3%. The
average cost of interest-bearing deposits decreased 59 basis points to 1.65%.
Interest expense on FHLB advances and other borrowings decreased $278,000, or
25.2%, primarily due to lower average FHLB advances, down $15.7 million, and a
decrease in borrowing rates, down 45 basis points to 4.11%, over the period.
Provision and Allowance for Loan Losses
---------------------------------------
The provision for loan losses for the quarter ended September 30, 2009 of
$180,000 compares with $315,000 for the second quarter and $520,000 for the
third quarter of 2008. The following table sets forth key data and ratios for
the periods presented.
---------------------------------------------------------------------------------------------
At or for the three months ended, September 30, June 30 December 31, September 30,
(dollars in thousands) 2009 2009 2008 2008
---------------------------------------------------------------------------------------------
Provision for loan losses $ 180 $ 315 $ 589 $ 520
Charge offs, net of recoveries 60 160 1,029 40
Allowance for loan losses 3,429 3,309 2,724 3,105
Non-performing loans 6,750 6,707 5,175 1,591
Ratio of allowance for loan losses:
to gross loans 1.10% 1.11% 0.92% 1.05%
to non-performing loans 50.80 52.62 54.81 195.16
Ratio of non-performing loans
to gross loans 2.15 2.11 1.73 0.54
Ratio of past-due loans
to gross loans 3.51 3.44 3.15 2.86
As of September 30, 2009, reserve coverage, as measured by the ratio of
allowance for loan losses to gross loans was substantially unchanged as compared
with last quarter. Similarly, the level of past-due loans and non-performing
loans were also substantially unchanged. For additional discussion on loan
quality see "Non-Performing Assets".
Salisbury determines its allowance and provisions for loan losses based upon a
detailed evaluation of the loan portfolio through a process which considers
numerous factors, including estimated credit losses based upon internal and
external portfolio reviews, delinquency levels and trends, estimates of the
current value of underlying collateral, concentrations, portfolio volume and
mix, changes in lending policy, current economic conditions and historical loan
loss experience over a 10-to-15 year economic cycle. Determining the level of
the allowance at any given period is difficult, particularly during
deteriorating or uncertain economic periods, and therefore management takes a
relatively long view of loan loss asset quality measures. Management must make
20
estimates using assumptions and information that are often subjective and
changing rapidly. The review of the loan portfolio is a continuing event in the
light of a changing economy and the dynamics of the banking and regulatory
environment. In management's judgment, Salisbury remains adequately reserved
both against total loans and non-performing loans at September 30, 2009.
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. The allowance for loan losses is reviewed and
approved by the Bank's Board of Directors on a quarterly basis. The allowance
for loan losses is computed by segregating the portfolio into various risk
rating and product categories. Some loans have been further segregated and carry
specific reserve amounts. All other loans that do not have specific reserves
assigned are reserved based on a loss percentage assigned to the outstanding
balance. The percentage applied to the outstanding balance varies depending on
the loan's risk rating and product category, as well as present economic
conditions, which have or may adversely affect the financial capacity and/or
collateral values supporting the loan.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies could require the Bank to recognize additions to the allowance
based on their judgments of information available to them at the time of their
examination. The Bank was last examined by the FDIC in February 2009 and by the
State of Connecticut's Department of Banking in August 2007 and no additions to
the allowance were warranted as a result of these examinations.
Non-interest income
-------------------
The following table details the principal categories of non-interest income.
Three months ended September 30,
(in thousands) 2009 2008 Change
-------------------------------------------------------------------------------
Losses on securities, net $ -- $ (2,671) $ 2,671 100.0%
Trust and wealth advisory 463 543 (80) (14.7)
Service charges 268 237 31 13.1
Gains on sales of mortgage loans 63 50 13 26.0
Mortgage servicing 65 58 7 12.1
Other 399 438 (39) (8.9)
-------------------------------------------------------------------------------
Total non-interest income (loss) $ 1,258 $ (1,345) $ 2,603 193.5%
================================================================================
The increase in non-interest income for the quarter ended September 30, 2009 as
compared to the prior year period principally resulted from the inclusion in
2008 of a securities loss arising from a $2,856,000 write-down of FHLMC
preferred stock following the U.S. Government placing FHLMC into
conservatorship. Excluding securities losses, all other non-interest income
decreased $68,000 as a result of a decrease in credit card fees, attributable to
the sale of the credit card portfolio in 2008, and lower Trust/Wealth Advisory
Services fees, due to the decline in asset values, offset in part by a $130,000
one-time life insurance benefit and increased banking service fees.
21
Non-interest expense
--------------------
The following table details the principal categories of non-interest expense.
Three months ended September 30,
(in thousands) 2009 2008 Change
-------------------------------------------------------------------------------
Salaries and employee benefits $ 2,784 $ 2,147 $ 637 29.7%
Occupancy 238 258 (20) (7.8)
Equipment 265 219 46 21.0
Data processing 327 310 17 5.5
Insurance 40 41 (1) 2.4
FDIC insurance 204 17 187 1100.0
Printing and stationery 58 66 (8) (12.1)
Postage and telecommunications 162 145 17 11.7
Professional services 308 218 90 41.3
Legal 68 116 (48) (41.4)
Amortization of intangibles 41 41 -- 0.0
Other 307 257 50 19.5
-------------------------------------------------------------------------------
Total operating expenses $ 4,802 $ 3,835 $ 967 25.2%
===============================================================================
Non-interest expense increased $967,000 due primarily to a $637,000 increase in
compensation expense and a $187,000 increase in FDIC insurance premiums. The
increase in compensation expense included additional pension expense. The
increase in FDIC insurance premiums was due to an increase in assessments and
deposit growth.
Income taxes
------------
Net income for the quarter included an income tax provision of $2,000
representing a 0.14% effective rate, due to tax-exempt income, as compared with
a provision of $337,000 a year ago against a pre-tax net loss of $1,575,000.
The third quarter 2008 results are distorted by a timing difference arising from
the inclusion in the third quarter of the $2,856,000 FHLMC preferred stock OTTI
loss while the corresponding tax benefit of $971,000 was included in the fourth
quarter following the enactment of the Emergency Economic Stabilization Act
(EESA) in October 2008 that permitted Salisbury to record the tax benefit.
Salisbury's effective tax rate is generally less than the 34% federal statutory
rate due to holdings of tax-exempt municipal bonds and bank owned life
insurance.
RESULTS OF OPERATIONS
For the nine month periods ended September 30, 2009 and 2008
Overview
--------
For the nine-month period ended September 30, 2009 net income available to
common shareholders was $1,368,000, or $.81 per common share, compared to
$152,000, or $.09 per common share, for the nine month period ended September
30, 2008. Annualized return on average common shareholder's equity was 4.59% for
the 2009 period compared with 0.55% for the 2008 period. Net interest and
dividend income increased $1,061,000 due primarily to a $58.1 million increase
in average earning assets, which more than offset a 14 basis point decrease in
the net interest margin to 3.58%. Securities losses for 2009 result from a
$1,128,000 write-down for other than temporary impairment on five non-agency CMO
securities in June 2009, offset in part by securities gains. Securities losses
for 2008 result from the aforementioned $2,856,000 write-down of FHLMC preferred
stock. Excluding securities losses, all other non-interest income increased
$293,000 due to increases in gains on mortgage sales, mortgage servicing income,
banking service fees and other income, including the aforementioned $130,000
one-time life insurance death benefit, offset in part by a $251,000 decrease in
Trust/Wealth Advisory Services income due to the decline in the market value of
assets under management, and a decrease in credit card fees, attributable to the
sale of the credit card portfolio in 2008. Non-interest expense increased
$2,245,000 due primarily to a $1,107,000 increase in compensation expense,
$701,000 in FDIC insurance premiums, $181,000 in professional services and
$256,000 in all other operating expenses. The increase in compensation expense
included $530,000 in pension expense and $477,000 in salaries. The increase in
22
FDIC deposit insurance was due to the 2009 special assessment, deposit growth
and an increase in premiums.
Analysis of net interest and dividend income (FTE)
--------------------------------------------
Net interest and dividend income decreased $377,000 for the nine months ended
September 30, 2009 as compared with the prior year period. The decrease in net
interest income resulted primarily from a decrease in the net interest margin
offset somewhat by the growth in average earning assets. The net interest margin
decreased 14 basis points to 3.58% from 3.72% over the prior period. The change
in the net interest margin was due to the changes in the mix of earning assets
and funding liabilities, asset and liability growth, changes in market interest
rates, the discontinuation of the FHLB dividend income in 2009, and the impact
of asset and liability re-pricing. Average earning assets increased $58.1
million, or 13.0%, over the prior year period. Average total interest bearing
deposits increased $57.1 million, or 21.5%, over the prior year period. The
following table sets forth the components of Salisbury's net interest income and
yields on average interest-earning assets and interest-bearing funds. Income and
yields on tax-exempt securities are presented on a fully taxable equivalent
basis.
Nine months ended September 30, Average Income/ Average
Balance Expense Yield/Rate
(in thousands) 2009 2008 2009 2008 2009 2008
---------------------------------------------------------------------------------------------------------------
Loans (a) $303,448 $283,484 $13,633 $13,918 5.99% 6.54%
Short term funds (b) 29,877 6,892 67 121 0.30 2.34
MBS and CMO securities (c) 65,402 48,331 2,610 1,870 5.32 5.16
Other securities (c)(d) 108,181 110,066 4,153 4,931 5.12 5.97
----------------------------------------------------------------------------------------
Total earning assets 506,908 448,773 20,463 20,840 5.38 6.19
--------------------
Other assets 24,278 24,595
------------------------------------------------------------
Total assets $531,186 $473,368
============================================================
NOW accounts $ 30,977 $ 24,675 149 40 0.64 0.22
Money market accounts 65,964 65,990 469 999 0.95 2.02
Savings & other 79,648 60,419 551 677 0.93 1.49
Certificates of deposit 146,492 114,913 3,259 3,408 2.97 3.95
----------------------------------------------------------------------------------------
Total interest-bearing deposits 323,081 265,997 4,428 5,124 1.83 2.57
Repurchase agreements 11,120 2,657 100 46 1.20 2.32
FHLB advances 78,590 89,537 2,322 3,135 3.90 4.60
----------------------------------------------------------------------------------------
Total interest-bearing funds 412,791 358,191 6,850 8,305 2.21 3.08
--------------------
Demand deposits 66,189 67,916
Other liabilities 5,508 3,142
Shareholders' equity 46,698 44,119
------------------------------------------------------------
Total liabilities &
shareholders' equity $531,186 $473,368
============================================================
Net interest income $13,613 $12,535
====================
Spread on interest-bearing funds 3.17 3.11
Net interest margin (e) 3.58 3.72
(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 benefits of $886,000 and $869,000, respectively for periods
2009 and 2008 on tax-exempt securities whose income and yields are
calculated on an FTE basis.
(e) FTE net interest income divided by average interest-earning assets.
23
The following table sets forth the changes in FTE interest due to volume and
rate.
Nine months ended September 30, 2009 versus 2008
(in thousands) Change in interest due to
------------------------------------------------------------------------------
Volume (1) Rate (1) Net
------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 980 $ (1,265) $ (285)
Short term funds 401 (455) (54)
MBS and CMO securities 660 80 740
Other securities (84) (694) (778)
------------------------------------------------------------------------------
Total 1,957 (2,334) (377)
------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits 1,160 (1,856) (696)
FHLB advances & other (236) (523) (759)
------------------------------------------------------------------------------
Total 924 (2,379) (1,455)
------------------------------------------------------------------------------
Net change to interest income $ 1,033 $ 45 $ 1,078
==============================================================================
(1) Changes attributable to rate/volume are allocated proportionately to both
rate and volume.
Interest income (FTE)
---------------------
Total interest and dividend income decreased $377,000 to $20.5 million for the
nine months ended September 30, 2009, as compared with $20.8 million for the
same period a year ago. Loan income decreased $285,000, or 2.0%, primarily as a
result of lower yields offset in part by an increase in average loans of $20.0
million, or 7.0%. The decrease in the average loan yield, down 55 basis points,
was caused by lower interest rates in 2009 and their effect on loan re-pricing
and loan re-financing activity.
Investment income increased $1.7 million, or 30.1%, as a result of higher
average volume and by higher yields due to portfolio re-pricing. Average
securities increased $71.4 million, or 29.3%.
Interest expense
----------------
Interest expense for the nine months ended September 30, 2009 decreased
$1,455,000, or 17.5%, as compared with the prior year period as a result of
decreases in interest rates paid and lower average FHLB borrowings, offset by
higher average interest bearing deposits and repurchase agreements. Deposit
expense decreased $696,000, or 13.6%, as a result of lower deposit rates, offset
in part by higher average deposit balances, up $57.1 million, or 21.5%, and
changes in deposit mix. The average cost of interest-bearing deposits decreased
74 basis points to 1.83%.
Repurchase agreements, whose average balance increased $8.5 million, or 318.5%,
over the period represent collateralized obligations to retail customers.
Interest expense on FHLB advances decreased $813,000, or 25.9%, primarily due to
lower average balances, down $10.9 million, and lower average borrowing rates,
down 70 basis points, over the period.
Provision and Allowance for Loan Losses
---------------------------------------
The provision for loan losses for the nine months ended September 30, 2009 of
$925,000 compares with $690,000 for the prior year period. The increase in the
provision is attributable to the year-over-year increases in loan delinquencies,
non-performing loans and net charge-offs. Net charge offs were $220,000 and
$59,000, respectively, for the 2009 and 2008 periods.
For additional discussion on Salisbury's allowance for loan losses refer to
"Results of Operations-For the Three months ended September 30, 2009 and 2008"
above.
24
Non-interest income
-------------------
The following table details the principal categories of non-interest income.
Nine months ended September 30,
(in thousands) 2009 2008 Change
-------------------------------------------------------------------------------
Losses on securities, net $( 692) $(2,317) $1,625 70.1%
Trust and wealth advisory 1,433 1,684 (251) (14.9)
Service charges 641 610 31 5.1
Gains on sales of mortgage loans 312 161 (249) 26.0
Mortgage servicing 391 110 7 12.1
Other 1,075 933 (39) 8.9
-------------------------------------------------------------------------------
Total non-interest income $3,160 $1,241 $1,919 154.6%
===============================================================================
Securities losses for 2009 result from a $1,128,000 OTTI write-down on five
non-agency CMO securities in June 2009, offset in part by securities gains.
Securities losses for 2008 result from the aforementioned $2,856,000 OTTI
write-down of FHLMC preferred stock. Excluding securities losses, all other
non-interest income increased $293,000 due to increases in gains on mortgage
sales, mortgage servicing income, banking service fees and other income,
including the aforementioned $130,000 one-time life insurance death benefit,
offset in part by a $251,000 decrease in Trust/Wealth Advisory Services income
due to the decline in the market value of assets under management, and a
decrease in credit card fees, attributable to the sale of the credit card
portfolio in 2008.
Non-interest expense
--------------------
The following table details the principal categories of non-interest expense.
Nine months ended September 30,
(in thousands) 2009 2008 Change
-------------------------------------------------------------------------------
Salaries and employee benefits $ 7,332 $ 6,225 $ 1,107 17.8%
Occupancy 740 721 19 2.6
Equipment 705 650 55 8.5
Data processing 1,040 1,005 35 3.5
Insurance 96 112 (16) (14.3)
FDIC insurance 737 36 701 1947.2
Printing and stationary 225 201 24 11.9
Postage and telecommunications 307 278 29 10.4
Professional services 832 651 181 27.8
Legal 276 282 (6) (2.1)
Amortization of intangibles 123 123 -- 0.0
Other 1,014 898 116 12.9
-------------------------------------------------------------------------------
Total operating expenses $ 13,427 $ 11,182 $ 2,245 20.1%
===============================================================================
Non-interest expense increased $2,245,000 due primarily to a $1,107,000 increase
in compensation expense, $701,000 in FDIC insurance premiums, $181,000 in
professional services and $256,000 in all other operating expenses. The increase
in compensation expense included $530,000 in pension expense, $477,000 in
salaries and $100,000 in benefits and payroll taxes. The increase in FDIC
deposit insurance premiums was due to the 2009 special assessment, deposit
growth and an increase in premiums. Other changes in expenses relate to normal
fluctuations in operating expenses.
Income taxes
------------
Net income for the nine month period ended September 30, 2009 included an income
tax benefit of $83,000, as compared with a provision of $883,000 a year ago. The
2008 results are distorted by a timing difference arising from the inclusion in
the third quarter of the FHLMC preferred stock OTTI loss while the corresponding
tax benefit of $971,000 was included in the fourth quarter following the
enactment of the Emergency Economic Stabilization Act (EESA) in October 2008
that permitted Salisbury to record the tax benefit. Salisbury's effective tax
rate is generally less than the 34% federal statutory rate due to holdings of
25
tax-exempt municipal bonds and bank owned life insurance.
FINANCIAL CONDITION
Overview
--------
Total assets increased to $564 million, up $69 million since December 31, 2008.
Total net loans, including loans held for sale, were $312 million at September
30, 2009 reflecting an increase of $13 million, or 4.25%, since December 31,
2008. Non-performing assets increased $0.5 million during the quarter to $7.2
million at September 30, 2009 from $6.7 million at June 30, 2009, and compare
with $5.1 million at December 31, 2008. A single loan relationship accounts for
$3.4 million of the 2009 increase. Reserve coverage, as measured by the ratio of
the allowance for loan losses to gross loans, increased slightly to 1.10% at
September 30, 2009 compared with 0.92% at December 31, 2008 and 1.05% at
September 30, 2008.
Deposits increased $70 million to $415 million from $345 million at December 31,
2008. This significant growth in deposits stems from customer preference for the
safety of insured deposits versus market risk in the equity markets and a
concerted effort by the Bank's staff to expand deposit relationships with
customers.
At September 30, 2009, book value per common share was $25.89. Tier 1 leverage
and total risk-based capital ratios were 8.57% and 13.22%, respectively, and
Salisbury was "well capitalized" as defined by the Federal Reserve Board.
Securities and Short Term Funds
-------------------------------
Salisbury's debt securities include U.S. Treasury bills, U.S. Government
sponsored agency bonds and agency mortgage backed securities ("MBS"), bank
qualified municipal bonds, non-agency collateralized mortgage obligations
("CMO") and Small Business Administration ("SBA") pools. During the nine-month
period ended September 30, 2009 total debt securities increased $24.2 million to
$174.8 million. During this period Salisbury purchased $98.7 million of debt
securities, primarily U.S. Treasury bills, U.S. Government sponsored agency
bonds and agency mortgage backed securities, non-agency CMO and Small Business
Administration ("SBA") pools. At September 30, 2009, the portfolio had a
projected weighted average life of 8.9 years, based on median projected
prepayment speeds for MBS and CMO, and likelihood of call for callable
securities, at current interest rates. At September 30, 2009, substantially all
securities were classified as available-for-sale.
For the quarter ended June 30, 2009 Salisbury determined that five non-agency
CMO securities reflected OTTI and recognized credit losses of $1,128,000 by
writing down the carrying value of such securities. Salisbury does not intend to
sell the securities which it has judged to be OTTI and it is not more likely
than not that it will be required to sell these securities before its
anticipated recovery of each security's remaining amortized cost basis. No
additional OTTI was determined for the quarter ended September 30, 2009 and all
other non-agency CMO securities were judged not to be OTTI as of September 30,
2009. It is possible that future loss assumptions could change and cause future
OTTI credit losses in these securities.
Salisbury believes that principal and interest on all other debt securities,
principally U.S Treasury securities, mortgage-backed securities and securities
backed by U.S. government sponsored entities and the SBA and bank qualified
insured municipal securities are deemed recoverable. Accumulated other
comprehensive income at September 30, 2009 included net unrealized holding
losses, net of tax, of $2.9 million that management deems as temporary
impairment.
26
Loans
-----
During the nine-month period ended September 30, 2009 net loans increased $13.9
million, or 4.7%. The ratio of net loans to assets decreased to 55.2% at
September 30, 2009, compared with 60.0% at December 31, 2008, as loan demand
remains soft and competition for loans remains aggressive in Salisbury's market
area. Major loan classifications, excluding loans held-for-sale, are as follows:
September 30, December 31,
(in thousands) 2009 2008
--------------------------------------------------------------------------------
Real estate mortgages:
Residential $155,607 $151,441
Commercial 67,220 62,796
Construction, land & land development 30,228 33,343
Home equity credit 30,995 25,608
--------------------------------------------------------------------------------
Total mortgage loans 284,050 273,188
Commercial and industrial 24,514 20,784
Consumer and other 5,611 5,726
--------------------------------------------------------------------------------
Total loans, gross 314,175 299,698
Deferred loan origination fees and costs, net 505 393
Allowance for loan losses (3,429) (2,724)
--------------------------------------------------------------------------------
Total loans, net $311,251 $297,367
================================================================================
The Commercial Lending department specializes in lending to small and mid-size
companies and businesses and provides short-term and long-term financing,
construction loans, commercial mortgages, equipment, working capital and
property improvement loans. The department also works with both the SBA and USDA
Government Guaranteed Lending Programs. However total loans outstanding
represent a very small percent of the Commercial Portfolio. The Residential
Mortgage department, in addition to traditional portfolio lending, originates
loans for sale to the secondary market enabling the Bank to offer a
comprehensive mortgage product line. The Consumer Lending department also offers
home equity loans and lines of credit and consumer installment loans.
Non-performing assets
---------------------
The composition of non-performing assets is as follows:
September 30, December 31,
(in thousands) 2009 2008
-------------------------------------------------------------------------------
Non-accruing loans $ 6,240 $ 5,075
Accruing loans past due 90 days or more 160 100
Accruing restructured loans 350 --
-------------------------------------------------------------------------------
Total non-performing loans 6,750 5,175
Real estate acquired in settlement of loans 418 205
-------------------------------------------------------------------------------
Total non-performing assets $7,168 $5,380
===============================================================================
Percent of non-performing loans to gross loans 2.15% 1.70%
Percent of non-performing assets to total assets 1.27% 1.07%
During the nine-month period ended September 30, 2009 non-performing assets
increased $1.9 million to $7.2 million. Non-performing assets, although at a
historical high for Salisbury, are relatively low for the industry at 1.27% of
total assets at September 30, 2009, and at 1.07% at December 31, 2008. The level
of non-performing assets reflects Salisbury's prudent credit policy and rigorous
ongoing credit management process. Non-performing loans include a $3.0 million
loan which is the subject of litigation. (See Legal Proceedings.)
In addition to non-performing assets, at September 30, 2009 Salisbury had $13.7
million of performing classified loans that are considered potential problem
loans. Although not impaired, performing classified loans, in the opinion of
management, exhibit a higher than normal degree of risk and warrant monitoring
due to various considerations, including (i) the degree of documentation
supporting the borrower's current
27
financial position, (ii) potential weaknesses in the borrowers' ability to
service the loan, (iii) possible collateral value deficiency, and (iv) other
risk factors such as geographic location, industry focus and negatively trending
financial results. These deficiencies create some uncertainty, but not serious
doubt, as to the borrowers' ability to comply with the loan repayment terms in
the future. Management believes that reserves for these loans are adequate.
Salisbury pursues the resolution of all non-performing assets through
restructurings, credit enhancements or collections. When collection procedures
do not bring a loan into performing or restructured status, Salisbury generally
initiates action to foreclose the property or to acquire it by deed in lieu of
foreclosure. Salisbury actively markets all OREO property.
Deposits and Borrowings
-----------------------
During the nine-month period ended September 30, 2009 deposits grew $69.9
million, or 20.3%, to $414.8 million, and retail repurchase agreements grew $4.3
million to $15.5 million. The significant deposit growth is attributed to
customer preference for the safety of insured bank deposits over market risk
during this period of considerable market volatility.
During this period Salisbury reduced its Federal Home Loan Bank (FHLB) advances
by $11.1 million. Remaining advances consist of term loans having an average
remaining maturity of 4.7 years.
LIQUIDITY
Salisbury manages its liquidity position to ensure that there is sufficient
funding availability at all times to meet both anticipated and unanticipated
deposit withdrawals, loan originations and advances, securities purchases and
other operating cash outflows. Salisbury's primary sources of liquidity are
principal payments and maturities of securities and loans, short-term borrowings
through repurchase agreements and Federal Home Loan Bank advances, net deposit
growth and funds provided by operations. Liquidity can also be provided through
sales of loans and available-for-sale securities.
Operating activities for the nine-month period ended September 30, 2009 provided
net cash of $4.8 million. Investing activities utilized net cash of $49.4
million, principally for $98.7 million of securities purchases and $15.1 million
of net loan advances, offset in part by $72.1 million of security repayments and
maturities. Financing activities provided net cash of $70.3 million, principally
from $74.1 of net deposit inflows and repurchase agreements and $8.8 million
from the issuance of preferred stock pursuant to the U.S. Treasury's TARP CPP,
offset in part by $11.1 million of FHLB advance repayments and maturities and
$1.6 million of cash dividends paid.
At September 30, 2009, Salisbury's liquidity ratio, as represented by cash,
short term available-for-sale securities and marketable assets to net deposits
and short term unsecured liabilities, was 37.3% and exceeded Salisbury's minimum
guideline of 30%.
At September 30, 2009, Salisbury had outstanding commitments to fund new loan
originations of $3.5 million, construction mortgage commitments of $3.6 million
and unused lines of credit of $46.2 million. Salisbury believes that these
commitments can be met in the normal course of business. Salisbury believes that
its liquidity sources will continue to provide funding sufficient to support
operating activities, loan originations and commitments, and deposit
withdrawals.
CAPITAL RESOURCES
During the nine-month period ended September 30, 2009 shareholders' equity
increased $13.5 million, or 34.8%, to $52.5 million and book value per share
increased $2.79 to $25.10. In March 2009 Salisbury issued $8,816,000 of
preferred stock to the U.S. Treasury pursuant to the Treasury's TARP CPP. Also
contributing to the increase was net income of $1.6 million, or $0.81 per common
share, and a decrease in accumulated other comprehensive loss, net of $4.2
million, principally from a net decrease in unrealized holding losses on
securities available-for-sale, net of taxes. Reducing shareholders' equity was
$1.6 million of dividends declared and paid.
Capital requirements
--------------------
Salisbury and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Under current regulatory
28
definitions, Salisbury and the Bank are considered to be "well capitalized" for
capital adequacy purposes. As a result, the Bank pays lower federal deposit
insurance premiums than those banks that are not "well capitalized." Salisbury
and the Bank's regulatory capital ratios at September 30, 2009 are as follows:
Well September 30, 2009 December 31, 2008
capitalized Salisbury Bank Salisbury Bank
--------------------------------------------------------------------------------
Leverage ratio 5.00% 8.57% 6.78% 7.74% 7.52%
Tier I risk-based ratio 6.00 12.29 9.74 10.78 10.53
Total risk-based ratio 10.00 13.22 10.68 11.59 11.34
A well capitalized institution, which is the highest capital category for an
institution as defined by the Prompt Corrective regulations issued by the FDIC
and the Federal Reserve Board ("FRB"), is one which maintains a Total Risk-Based
ratio of 10% or above, a Tier I Risk-Based ratio of 6% or above and a Leverage
ratio of 5% or above, and is not subject to any written order, written
agreement, capital directive, or prompt corrective action directive to meet and
maintain a specific capital level. Maintaining strong capital is essential to
Salisbury and the Bank safety and soundness. However, the effective management
of capital resources requires generating attractive returns on equity to build
value for shareholders while maintaining appropriate levels of capital to fund
growth, meet regulatory requirements and be consistent with prudent industry
practices.
Dividends
---------
During the nine month period ended September 30, 2009 Salisbury has paid
$186,000 in preferred stock dividends to the U.S. Treasury's TARP CPP, and
$1,416,000 in common stock dividends.
The Board of Directors of Salisbury declared a common stock dividend of $.28 per
common share payable on November 6, 2009 to shareholders of record on October
23, 2009. Salisbury is changing the timing of future common stock dividend
announcements to coincide with quarterly earnings announcements. Common stock
dividends, when declared, will generally be paid the last business day of
February, May, August and November, although Salisbury is not obligated to pay
dividends on those dates or at any other time.
Salisbury's ability to pay cash dividends is dependent on the Bank's ability to
pay cash dividends to Salisbury. There are certain restrictions on the payment
of cash dividends and other payments by the Bank to Salisbury. Under Connecticut
law the Bank cannot declare a cash dividend except from net profits, defined as
the remainder of all earnings from current operations. The total of all cash
dividends declared by the Bank in any calendar year shall not, unless
specifically approved by the Commissioner of Banking, exceed the total of its
net profits of that year combined with its retained net profits of the preceding
two years.
Federal Reserve Board Supervisory Letter SR 09-4, February 24, 2009 revised
March 27, 2009 notes that, as a general matter, the board of directors of a bank
holding company ("BHC") should inform the Federal Reserve and should eliminate,
defer, or significantly reduce dividends if (1) net income available to
shareholders for the past four quarters, net of dividends previously paid during
that period, is not sufficient to fully fund the dividends; (2) the prospective
rate of earnings retention is not consistent with capital needs and overall
current and prospective financial condition; or (3) the BHC will not meet, or is
in danger of not meeting, its minimum regulatory capital adequacy ratios.
Moreover, a BHC should inform the Federal Reserve reasonably in advance of
declaring or paying a dividend that exceeds earnings for the period (e.g.,
quarter) for which the dividend is being paid or that could result in a material
adverse change to the BHC capital structure.
Further restrictions on cash dividends are imposed on Salisbury because of
Salisbury's participation in the TARP, CPP program. These preclude the payment
of any common stock cash dividends if Salisbury is not paying the preferred
stock dividend. Additionally, the common stock dividend may not be increased
without prior approval from the Treasury for the first three years Salisbury is
a TARP participant unless all TARP preferred shares are redeemed or transferred
to third parties.
Salisbury believes that the payment of common stock cash dividends is
appropriate, provided that such payment considers Salisbury's capital needs,
asset quality, and overall financial condition and does not adversely affect the
financial stability of Salisbury or the Bank. The continued payment of common
stock cash dividends by Salisbury will be dependent on Salisbury's future core
earnings, financial condition and capital needs, regulatory restrictions, and
29
other factors deemed relevant by the Board of Directors of Salisbury.
IMPACT OF INFLATION AND CHANGING PRICES
Salisbury's consolidated financial statements are prepared in conformity with
generally accepted accounting principles that require the measurement of
financial condition and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money, over time, due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of Salisbury are monetary and as a result, interest rates have a
greater impact on Salisbury's performance than do the effects of general levels
of inflation, although interest rates do not necessarily move in the same
direction or with the same magnitude as the prices of goods and services.
Although not a material factor in recent years, inflation could impact earnings
in future periods.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and future filings made by Salisbury with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by Salisbury and the Bank, and oral statements made by executive
officers of Salisbury and the Bank, may include forward-looking statements
relating to such matters as:
(a) assumptions concerning future economic and business conditions and their
effect on the economy in
(b) general and on the markets in which Salisbury and the Bank do business;
and expectations for revenues and earnings for Salisbury and Bank.
Such forward-looking statements are based on assumptions rather than historical
or current facts and, therefore, are inherently uncertain and subject to risk.
For those statements, Salisbury claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
Salisbury notes that a variety of factors could cause the actual results
or experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. The risks
and uncertainties that may effect the operation, performance, development and
results of Salisbury's and Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking
industry generally and in the specific markets in which the Bank
operates;
(b) changes in the legislative and regulatory environment that negatively
impacts Salisbury and Bank through increased operating expenses;
(c) increased competition from other financial and non-financial
institutions; (d) the impact of technological advances; and
(e) other risks detailed from time to time in Salisbury's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on Salisbury's and the Bank's
financial position and results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Not applicable
Item 4T. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
------------------------------------------------
Salisbury's management, including its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the disclosure controls as of September 30, 2009. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that the information required to be disclosed in reports
30
filed or submitted under the Securities Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
our reports filed under the Exchange Act is accumulated and communicated to
management, including the principle executive officer and principle financial
officer, as appropriate to allow timely decisions regarding required disclosure.
In addition, based on an evaluation of its internal controls over financial
reporting, no change in Salisbury's internal control over financial reporting
occurred during the quarter ended September 30, 2009 that has materially
affected, or is reasonably likely to materially affect, Salisbury's internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Bank is a party defendant, both in its capacity as Salisbury Bank and Trust
Company and in its former capacity as the Trustee of the Erling C.
Christophersen Revocable Trust, in litigation currently pending in the
Connecticut Superior Court within the Judicial District of Bridgeport. The other
parties to the litigation are the Plaintiff, John R. Christophersen of Norwalk,
Connecticut and Defendants, Erling C. Christophersen, of Westport, Connecticut;
Bonnie Christophersen of Westport, Connecticut; Elena Dreiske of Wanetka,
Illinois; and People's United Bank with its principal place of business in
Bridgeport, Connecticut.
The litigation involves the ownership of certain real property located within
Westport, Connecticut, which was conveyed by the Defendant, Erling
Christophersen, to the Erling Christophersen Trust, of which the Bank was a
co-Trustee. Subsequent to this conveyance, the Bank loaned $3,386,609 to the
Erling Christophersen Trust which was secured by an open-end commercial mortgage
in favor of the Bank on the Westport real estate referenced above, which was
appraised at a value significantly greater than the loan amount.
The claim of the Plaintiff John R. Christophersen is that he had an interest in
the real property of which he was wrongfully divested. He has brought this
action seeking restoration of his allegedly divested interest as well as money
damages.
In addition to his efforts to restore his alleged interest in the real property,
the Plaintiff has made two additional claims directed at the Bank. He has
alleged that by financing the property, and holding it as a co-Trustee, the Bank
participated in "stealing" the value of the Plaintiff's interest in the
property. He has also alleged an implied trust against the Bank alleging that it
acquired title to the property adverse to the Plaintiff's interest and in
contravention of the Plaintiffs entitlements, and therefore holds the property
in trust for Plaintiff. The Bank, at the time of the financing referenced above,
acquired a lender's title insurance policy from the Chicago Title & Insurance
Company. The Bank has resigned as a trustee and is actively defending the case.
The validity of the conveyance to Erling Christophersen is also the subject of a
probate proceeding in New York State. This Connecticut proceeding has been
stayed until the New York Court litigation is resolved. Prior to the resolution,
the liquidity of the real estate collateral which secures the loan is
diminished.
Item 1A. RISK FACTORS
Not applicable.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
31
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS
11.1 Statement regarding Computation of Net Income Per Common Share.
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALISBURY BANCORP, INC.
November 16, 2009 by /s/ Richard J. Cantele, Jr.
-------------------------------
Richard J. Cantele, Jr.,
Chief Executive Officer
November 16, 2009 by /s/ B. Ian McMahon
-------------------------------
B. Ian McMahon,
Chief Financial Officer
32