SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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_______________June 30, 2009___________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-24751
Salisbury Bancorp, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-1514263
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(State or Other Jurisdiction of
Incorporation or Organization) (I.R.S. Employer Identification No.)
5 Bissell Street Lakeville Connecticut 06039
-------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrants Telephone Number, Including Area Code (860) 435-9801
----------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: The Company had 1,686,701 shares
outstanding as of August 14, 2009.
SALISBURY BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
Item 1. Financial Statements: 3
Condensed Consolidated Balance Sheets -June 30, 2009 (unaudited)
and December 31, 2008 4
Condensed Consolidated Statements of Income (Loss) - six and
three months ended June 30, 2009 and 2008 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - six months
ended June 30, 2009 and 2008 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 4. Controls and Procedures 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 25
2
Part I-- FINANCIAL INFORMATION
Item 1. Financial Statements
3
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2009 and December 31, 2008
June 30, December 31,
2009 2008
------------ -------------
(unaudited)
ASSETS
------
Cash and due from banks $ 6,795,337 $ 7,082,317
Interest-bearing demand deposits with other banks 34,262,986 900,487
Money market mutual funds 4,601,031 1,476,999
Federal funds sold 0 200,000
------------- -------------
Cash and cash equivalents 45,659,354 9,659,803
Interest-bearing time deposit with other banks 5,000,000 0
Investments in available-for-sale securities (at fair value) 158,902,378 150,526,964
Investments in held-to-maturity securities (fair values of $64,257 as of
June 30, 2009 and $66,502 as of December 31, 2008) 64,086 66,443
Federal Home Loan Bank stock, at cost 5,742,800 5,323,000
Loans held-for-sale 211,000 2,314,250
Loans, less allowance for loan losses of $3,308,619 as of June 30, 2009
and $2,724,024 as of December 31, 2008 294,364,033 297,367,434
Investment in real estate 75,000 75,000
Other real estate owned 418,024 204,534
Premises and equipment 8,259,290 7,123,671
Goodwill 9,828,712 9,828,712
Core deposit intangible 1,082,960 1,165,068
Accrued interest receivable 2,341,363 2,704,385
Cash surrender value of life insurance policies 3,994,980 3,824,653
Deferred taxes 4,270,185 4,196,819
Other assets 1,966,624 1,373,424
------------- -------------
Total assets $ 542,180,789 $ 495,754,160
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 64,781,251 $ 65,479,271
Interest-bearing 337,251,355 279,445,961
------------- -------------
Total deposits 402,032,606 344,925,232
Securities sold under agreements to repurchase 10,325,843 11,203,289
Federal Home Loan Bank advances 77,174,189 87,913,667
Due to broker 0 7,631,919
Other liabilities 4,653,255 5,140,721
------------- -------------
Total liabilities 494,185,893 456,814,828
------------- -------------
Shareholders' equity:
Preferred stock, par value $.01 per share, authorized 25,000 shares; issued
and outstanding 8,816 shares at June 30, 2009 and 0 shares at
December 31, 2008. 88 0
Common stock, par value $.10 per share; authorized 3,000,000 shares; issued
and outstanding, 1,686,701 shares at June 30, 2009 and 1,685,861 shares at
December 31, 2008 168,670 168,586
Unused common stock warrants outstanding 111,998 0
Paid-in capital 21,883,898 13,157,883
Retained earnings 34,864,904 34,518,331
Accumulated other comprehensive loss (9,034,662) (8,905,468)
------------- -------------
Total shareholders' equity 47,994,896 38,939,332
------------- -------------
Total liabilities and shareholders' equity $ 542,180,789 $ 495,754,160
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
4
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
June 30, 2009 and 2008
(unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 8,989,464 $ 9,231,686 $ 4,479,794 $ 4,600,100
Interest on debt securities:
Taxable 2,596,292 2,630,080 1,264,481 1,343,164
Tax-exempt 1,276,827 1,153,251 633,198 578,789
Dividends on equity securities 0 129,726 0 51,478
Other interest 10,542 114,472 8,694 17,788
------------ ----------- ----------- -----------
Total interest and dividend income 12,873,125 13,259,215 6,386,167 6,591,319
------------ ----------- ----------- -----------
Interest expense:
Interest on deposits 2,994,686 3,639,485 1,511,104 1,666,257
Interest on securities sold under agreements to repurchase 67,280 0 28,253 0
Interest on Federal Home Loan Bank advances 1,530,381 2,078,343 768,864 1,043,181
------------ ----------- ----------- -----------
Total interest expense 4,592,347 5,717,828 2,308,221 2,709,438
------------ ----------- ----------- -----------
Net interest and dividend income 8,280,778 7,541,387 4,077,946 3,881,881
Provision for loan losses 745,000 170,000 315,000 110,000
------------ ----------- ----------- -----------
Net interest and dividend income
after provision for loan losses 7,535,778 7,371,387 3,762,946 3,771,881
------------ ----------- ----------- -----------
Noninterest income:
Trust/Wealth Advisory Services income 970,000 1,140,736 430,000 540,735
Loan commissions 1,548 1,543 0 1,544
Service charges on deposit accounts 415,528 401,404 207,282 203,245
Gain on sales of available-for-sale securities, net 436,210 354,405 8,872 36,435
Impairment loss on securities (1,127,889) 0 (1,127,889) 0
Gain on sales of loans held-for-sale 454,374 159,034 339,819 86,201
Other income 751,935 528,786 338,238 285,096
------------ ----------- ----------- -----------
Total noninterest income 1,901,706 2,585,908 196,322 1,153,256
------------ ----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 4,547,153 4,077,370 2,282,050 2,001,197
Occupancy expense 502,082 462,702 244,963 232,175
Equipment expense 440,018 431,302 213,301 220,215
Data processing 713,600 695,154 330,164 390,539
Insurance 55,483 69,908 32,033 34,915
FDIC Insurance 533,204 19,607 419,702 10,700
Printing and stationery 167,183 134,509 101,214 75,001
Professional fees 524,628 433,444 263,287 199,234
Legal expense 207,953 166,236 112,594 104,809
Amortization of core deposit intangible 82,107 82,108 41,054 41,054
Other expense 851,361 774,600 450,620 387,105
------------ ----------- ----------- -----------
Total noninterest expense 8,624,772 7,346,940 4,490,982 3,696,944
------------ ----------- ----------- -----------
Income (loss) before income taxes 812,712 2,610,355 (531,714) 1,228,193
Income taxes (85,103) 545,869 (348,354) 244,641
------------ ----------- ----------- -----------
Net income (loss) $ 897,815 $ 2,064,486 $ (183,360) $ 983,552
============ =========== =========== ===========
Net income (loss) available to common shareholders $ 763,061 $ 2,064,486 $ (318,114) $ 983,552
============ =========== =========== ===========
Earnings (loss) per common share $ .45 $ 1.23 $ (.19) $ .58
============ =========== =========== ===========
Dividends per common share outstanding $ .28(1) $ .56 $ 0(1) $ .28
============ =========== ============ ===========
(1) The $0.28 dividend for the second quarter was not declared until July 8,
2009 and will be reflected in the financial statements for the three (3) and
nine (9) month periods ended September 30, 2009.
The accompanying notes are an integral part of these consolidated financial
statements.
5
SALISBURY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Six months ended June 30, 2009 and 2008
(unaudited)
2009 2008
------------ ------------
Cash flows from operating activities:
Net income $ 897,815 $ 2,064,486
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of securities, net 268,621 35,640
Gain on sales of available-for-sale securities, net (436,210) (354,405)
Write down of available-for-sale securities 1,127,889 0
Provision for loan losses (745,000) (170,000)
Change in loans held-for-sale 2,103,250 (289,000)
Change in deferred loan costs, net (7,093) (23,046)
Net (increase) decrease in mortgage servicing rights (237,348) 16,852
Depreciation and amortization 351,232 324,320
Amortization of core deposit intangible 82,108 82,108
Accretion of fair value adjustment on deposits/borrowings (54,251) (65,102)
Amortization of fair value adjustment on loans 23,809 23,809
Decrease (increase) in interest receivable 332,408 (91,754)
Deferred tax expense 105,390 188,299
(Increase) decrease in income tax receivable (373,247) 41,901
Decrease in prepaid expenses 65,654 55,628
Increase in cash surrender value of insurance policies (170,327) (60,742)
Increase in other assets (58,288) (146,271)
Decrease in accrued expenses (326,388) (157,723)
Increase in interest payable 37,670 73,677
Increase in other liabilities 225,916 415,126
Issuance of shares for Directors' fees 84 27,720
Increase in unearned income on loans 6,230 5,896
------------ ------------
Net cash provided by operating activities 3,219,924 1,997,419
------------ ------------
Cash flows from investing activities:
Purchase of interest-bearing time deposits with other banks (5,000,000) 0
Purchase of Federal Home Loan Bank stock (419,800) (90,500)
Purchases of available-for-sale securities (78,868,360) (85,488,839)
Proceeds from sales of available-for-sale securities 33,679,138 82,989,725
Proceeds from maturities of available-for-sale securities 27,991,643 0
Proceeds from maturities of held-to-maturity securities 2,343 2,074
Loan originations and principal collections, net 3,572,618 (18,598,708)
Purchase of loans (76,266) (2,009,115)
Recoveries of loans previously charged-off 15,613 21,796
Capital expenditures (1,476,821) (887,190)
------------ ------------
Net cash used in investing activities (20,579,892) (24,060,757)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 28,692,783 19,522,481
Net increase (decrease) in time deposits 28,414,591 (4,476,559)
Federal Home Loan Bank advances 12,000,000 17,000,000
Principal payments on Federal Home Loan Bank advances (1,807,227) (10,327,583)
Net changes in short term advances (20,878,000) (2,372,000)
Decrease in securities sold under agreements to repurchase (877,446) 0
Proceeds from issuance of preferred stock 8,838,101 0
Dividends paid (1,023,283) (1,209,827)
------------ ------------
Net cash provided by financing activities 53,359,519 18,136,512
------------ ------------
Net increase (decrease) in cash and cash equivalents 35,999,551 (3,926,826)
Cash and cash equivalents at beginning of year 9,659,803 15,178,195
------------ ------------
Cash and cash equivalents at end of period $ 45,659,354 $ 11,251,369
============ ============
Supplemental disclosures:
Interest paid $ 4,554,677 $ 5,644,151
Income taxes paid 182,754 316,000
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SALISBURY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
------------------------------
The accompanying condensed consolidated interim financial statements are
unaudited and include the accounts of Salisbury Bancorp, Inc. (the "Company"),
its wholly owned subsidiary Salisbury Bank and Trust Company (the "Bank"), and
the Bank's subsidiaries, S.B.T. Realty, Inc. and SBT Mortgage Service
Corporation (the "PIC"). The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and with the
instructions to SEC Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
All significant intercompany accounts and transactions have been eliminated in
the consolidation. These financial statements reflect, in the opinion of
Management, all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and the
results of its operations and its cash flows for the periods presented.
Operating results for the six months ended June 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2008 Annual
Report on Form 10-K.
The year-end condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by GAAP.
NOTE 2 - COMPREHENSIVE INCOME (LOSS)
------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for disclosure of comprehensive
income which 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 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. The Company's primary
source of other comprehensive income (loss) is the net unrealized holding gain
(loss) on securities.
Comprehensive income (loss)
Six months ended Three months ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
(amounts in thousands) (amounts in thousands)
Net income $ 898 $ 2,064 $ (183) $ 983
Net change in unrealized (losses)
on securities and unrecognized
pension plan expense, net of tax
during period (42) (2,922) (1,977) (1,976)
----- ------- ------- ----
Comprehensive loss $(856) $ (858) $(2,160) $ (993)
===== ======= ======= =======
NOTE 3 - IMPACT OF NEW ACCOUNTING STANDARDS
-------------------------------------------
In September 2006, the FASB ratified the consensus reached by the Emerging
Issues Task Force (EITF) on Issue No. 06-4 "Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements," (EITF Issue 06-4). EITF 06-4 requires companies with an
endorsement split-dollar life insurance arrangement to recognize a liability for
future postretirement benefits. The effective date was for fiscal years
beginning after December 15, 2007, with earlier application permitted. The
Company should recognize the effects of applying this Issue through either (a) a
change in accounting principle through a cumulative effect adjustment to
retained earnings or (b) a change in accounting principle through retrospective
application to all periods. The Company adopted this Issue in 2008, and it did
not have a significant impact on its financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value under generally accepted accounting principles (GAAP) and expands
disclosures about fair value measurements. The FASB's FSP FAS 157-2, "Effective
Date of FASB Statement No. 157", defers until January 1, 2009, the application
of SFAS 157 to nonfinancial assets and nonfinancial liabilities not recognized
or disclosed at least annually at fair value. This includes nonfinancial assets
7
and nonfinancial liabilities initially measured at fair value in a business
combination or other new basis event, but not measured at fair value in
subsequent periods. The Company adopted this statement on January 1, 2008 and it
did not have a significant impact on its financial statements. See Note 5 Fair
Value Measurements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115" (SFAS 159). SFAS 159 permits entities, at specified election
dates, to choose to measure certain financial instruments at fair value that are
not currently required to be measured at fair value. The fair value option is
applied on an instrument-by-instrument basis, is irrevocable and can only be
applied to an entire instrument and not to specified risks, specific cash flows,
or portions of that instrument. Unrealized gains and losses on items for which
the fair value option has been elected will be reported in earnings at each
subsequent reporting date and upfront fees and costs related to those items will
be recognized in earnings as incurred and not deferred. SFAS No. 159 became
effective in fiscal years beginning after November 15, 2007. The Company adopted
SFAS 159 effective January 1, 2008 and it did not have a significant impact on
its financial statements. See Note 5 Fair Value Measurements
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements and Amendment of ARB No. 51" (SFAS No. 160).
The pronouncement requires all entities to report noncontrolling (minority)
interests in subsidiaries as a component of shareholders' equity. SFAS No. 160
is effective for fiscal years beginning after December 15, 2008. Early adoption
is prohibited. Management anticipates that this statement will not have a
material impact on the Company's financial condition and results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" (SFAS 141(R)). SFAS 141(R) significantly changes the accounting
for business combinations. Under SFAS 141(R), 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
noncontrolling (minority) interests and includes a substantial number of new
disclosure requirements. SFAS 141(R) 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 its financial
condition and results of operations.
In February 2008, the FASB issued FSP FAS 140-3, "Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions." This FSP provides
guidance on 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 new FSP did not have a material effect on the Company's results of
operations or financial position.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS
161). SFAS 161 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 SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
adoption of this statement did not have a material impact on its financial
condition and results of operations.
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life
of Intangible Assets." This FSP provides guidance as to factors considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible
Assets." This guidance became effective January 1, 2009. The adoption of this
new FSP did not have a material effect on the Company's results of operations or
financial position.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." This standard formalizes minor changes in prioritizing
accounting principles used in the preparation of financial statements that are
presented in conformity with GAAP. This standard became effective November 15,
2008.
8
In April 2009, the FASB issued FASB Staff Position 157-4, "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" (FSP
FAS 157-4). FSP FAS 157-4 provides additional guidance for estimating fair value
measurements in accordance with FASB Statement No. 157, "Fair Value
Measurements," when the volume and level of activity for the asset or liability
have significantly decreased. FSP FAS 157-4 is effective for interim and annual
reporting periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. The Company adopted this statement on April
1, 2009, and it did not have a significant impact on its financial statements.
See Note 5 - Fair Value Measurements
In April 2009, the FASB issued FASB Staff Position 107-1 and Accounting
Principles Board Opinion 28-1, "Interim Disclosures About Fair Value of
Financial Instruments" (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 amends FASB
Statement No. 107, "Disclosures About Fair Value of Financial Instruments," to
require entities to disclose the methods and significant assumptions used to
estimate the fair value of financial instruments in both interim and annual
financial statements. APB 28-1 amends APB Opinion No. 28, "Interim Financial
Reporting" to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim
and annual periods ending after June 15, 2009 with early adoption permitted for
periods ending after March 15, 2009. An entity may early adopt this FSP only if
it also elects to early adopt FSP FAS 157-4. The Company adopted this statement
on April 1, 2009, and it did not have a significant impact on its financial
statements. See Note 5 - Fair Value Measurements
In April 2009, the FASB issued FASB Staff Position 115-2 and 124-2, "Recognition
and Presentation of Other-Than-Temporary Impairments" (FSP FAS 115-2 and FAS
124-2). FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment
(OTTI) guidance for debt securities to make the guidance more operational and to
improve the presentation and disclosure of OTTI on debt and equity securities in
the financial statements. This FSP does not amend existing recognition and
measurement guidance related to OTTI of equity securities. FSP FAS 115-2 and FAS
124-2 are effective for interim and annual reporting periods after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009. The
Company adopted this statement on April 1, 2009. See Note 6 - Other
-Than-Temporary Impairment Losses for impact on its financial statements.
NOTE 4 - DEFINED BENEFIT PENSION PLAN
-------------------------------------
The following summarizes the net periodic benefit cost for the six and three
months ended June 30:
Six Months Ended Three Months Ended
June 30, June 30,
2009 2008 2009 2008
---- ---- ---- ----
Components of net periodic benefit cost:
Service cost $ 214,000 $ 201,904 107,000 $ 88,154
Interest cost 201,500 183,475 100,750 88,475
Expected return on plan assets (179,500) (213,496) (89,750) (107,746)
Amortization of:
Prior service costs 0 446 0 223
Actuarial loss 65,000 22,431 32,500 6,681
--------- --------- --------- ---------
Net periodic benefit cost $ 301,000 $ 194,760 $ 150,500 $ 75,787
========= ========= ========= =========
The following actuarial weighted average assumptions were used in calculating
net periodic benefit cost:
Discount rate 6.00% 6.00% 6.00% 6.00%
Average wage increase Graded Graded Graded Graded
table* table* table* table*
Return on plan assets 7.50% 7.50% 7.50% 7.50%
*5% at age 20 grading down to 3% at age 60 and beyond (roughly 3.25% on
average).
9
NOTE 5 - FAIR VALUE MEASUREMENTS
--------------------------------
Fair Value Measurements at Reporting Date using:
Quoted
Prices in
Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description 6/30/2009 (Level 1) (Level 2) (Level 3)
--------- --------- --------- ---------
Securities
available-for sale $158,902,378 $41,650 $157,684,925 $1,175,803
------------ ------- ------------ ----------
Impaired loans 7,879,645 0 7,879,645 0
------------ ------- ------------ ----------
Total $166,782,023 $41,650 $165,564,570 $1,175,803
============ ======= ============ ==========
Fair Value Measurements
Using Significant Unobservable Inputs
` Level 3
-------------------------------------
Available-for-sale
Securities Total
------------------- -----------
Beginning balance March 31, 2009 $ 413,432 $ 413,432
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)
Included in other comprehensive income 740,421 740,421
Amortization of securities, net 2,694 2,694
Transfers in and/or out of Level 3 19,256 19,256
------------- -----------
Ending balance, June 30, 2009 $ 1,175,803 $ 1,175,803
============= ===========
The 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 $ 0 $ 0
============= ===========
Fair Value Measurements
Using Significant Unobservable Inputs
Level 3
-------------------------------------
Available-for-Sale
Securities Total
------------------- -----------
Beginning balance January 1, 2009 $ 2,172,737 $ 2,172,737
Total gains or losses (realized/unrealized)
Included in earnings (or changes in net assets)
Included in other comprehensive income (1,034,889) (1,034,889)
Amortization of securities, net 5,138 5,138
Transfers in and/or out of Level 3 32,817 32,817
------------- -----------
Ending balance, June 30, 2009 $ 1,175,803 $ 1,175,803
============= ===========
The 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 $ 0 $ 0
============ ===========
10
The estimated fair values of the Bank's financials instruments, all of which are
held or issued for purposes other than trading, are as follows as of June 30,
2009 and December 31, 2008:
6/30/2009 12/31/2008
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 45,659,354 $ 45,659,354 $ 9,659,803 $ 9,659,803
Available-for-sale securities 158,902,378 158,902,378 150,526,964 150,526,964
Held-to-maturity securities 64,086 64,257 66,443 66,502
Federal Home Loan Bank stock 5,742,800 5,742,800 5,323,000 5,323,000
Loans held-for-sale 211,000 211,000 2,314,250 2,314,250
Loans, net 294,364,033 286,117,908 297,367,434 287,062,745
Accrued interest receivable 2,341,363 2,341,363 2,704,385 2,704,385
Financial liabilities:
Deposits 402,032,606 402,473,442 344,925,232 346,035,072
FHLB advances 77,174,189 80,435,465 87,913,667 90,205,661
Securities sold under agreements
to repurchase 10,325,843 10,325,843 11,203,289 11,203,289
Due to broker -- -- 7,631,919 7,631,919
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.
NOTE 6 - OTHER-THAN-TEMPORARY IMPAIRMENT LOSSES
-----------------------------------------------
The aggregate fair value and unrealized losses of securities that have
been in a continuous unrealized loss position for less than twelve months
and for twelve months or more, and are temporarily impaired, are as
follows as of June 30:
June 30, 2009
-----------------------------------------------------------------------------------
Less than 12 Months 12 Months or Longer Total
------------------------- -------------------------- ---------------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- ----------- ------------ ----------- ----------- ------------
Debt securities issued by the U.S.
Treasury and other U. S. government
corporations and agencies $22,687,703 $ 516,713 $ 0 $ 0 $ 22,687,703 $ 516,713
Debt securities issued by states of the
United States and political
subdivisions of the states 18,028,319 2,410,225 30,415,488 4,653,565 48,443,807 7,063,790
Mortgage-backed securities 18,037,536 987,913 11,930,243 2,990,894 29,967,779 3,978,807
Total temporarily impaired securities $58,753,558 $ 3,914,851 $42,345,731 $ 7,644,459 $101,099,289 $ 11,559,310
=========== =========== =========== =========== ============ ============
Securities exhibiting unrealized losses are analyzed to determine that the
impairments are not other-than-temporary and the following information is
considered. U.S. Government securities are backed by the full faith and credit
of the United States and therefore bear no credit risk. U.S. Government agency
securities, which have a significant impact in financial markets, have minimal
credit risk. The unrealized losses at June 30, 2009 are mainly attributable to
changes in market interest rates and current market inefficiencies. As Company
management has the ability and intent to hold securities until anticipated
recovery to cost basis occurs, no declines are deemed to be other than
temporary.
11
As of June 30, 2009 the Company adopted FSP FAS 115-2 and FAS 124-2 "Recognition
and Presentation of Other-Than-Temporary Impairments". For those debt securities
for which the fair value of the security is less than its amortized cost and the
Company does not intend to sell such security and it is more likely than not
that it will not be required to sell such security prior to recovery of its
amortized cost basis less any credit losses, FSP FAS 115-2 and FAS 124-2
requires that the credit component of the OTTI losses be recognized in earnings
while the non credit component is recognized in other comprehensive loss, net of
related taxes.
The following table summarizes OTTI losses on securities for the quarter ended
June 30, 2009:
Private Label Collateralized
Mortgage Obligations
Total other-than-temporary impairment losses $ 4,699,158
Less: unrealized other-than-temporary losses
recognized in other comprehensive loss(1) 3,571,269
------------
see impairment losses recognized in earnings(2) $ 1,127,889
============
(1) Represents the noncredit component of the other-than-temporary impairment on
securities
(2) Represents the credit component of the other-than-temporary impairment on
securities
Activity related to the credit component recognized in earnings on debt
securities held by the Company for which a portion of other-than-temporary
impairment was recognized in other comprehensive loss periods ending June 30,
2009 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2009 2009
---- ----
Beginning Balance $ 0 $ 0
Additions for the credit component on debt
securities in which other-than-temporary
impairment was not previously recognized 1,127,889 1,127,889
---------- -----------
Ending Balance $1,127,889 $ 1,127,889
========== ===========
12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Business
--------
The following provides Management's comments on the financial condition and
results of operations of Salisbury Bancorp, Inc. (the "Company"), a Connecticut
corporation that is the holding company for Salisbury Bank and Trust Company
(the "Bank"). The Company's sole subsidiary is the Bank, which has seven (7)
full service offices including a Trust/Wealth Services Division. Such offices
are located in the towns of Canaan, Lakeville, Salisbury and Sharon,
Connecticut, Sheffield and South Egremont, Massachusetts, and Dover Plains, New
York. In addition, the Bank has received regulatory approvals to open a
full-service branch in Millerton, New York. The Company and Bank were formed in
1998 and 1848, respectively. In order to provide a strong foundation for
building shareholder value and servicing customers, the Company remains
committed to investing in the technological and human resources necessary to
developing new personalized financial products and services to meet the needs of
customers. This discussion should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 2008.
RESULTS OF OPERATIONS
---------------------
Overview
--------
The Company's net income for the six months ended June 30, 2009 was $898,000.
This compares to earnings of $2,064,000 for the same period in 2008. Earnings
per share calculated on net income available to common shareholders for the six
months ended June 30, 2009 totaled $.45 per share, which compared to earnings
per share of $1.23 for the corresponding period in 2008. The decrease can be
attributed primarily to accounting adjustments involving a few investments
within the Bank's investment portfolio to reflect Other Than Temporary
Impairment (OTTI), as well as an increased provision for loan loss, and the
special assessment imposed by the Federal Deposit Insurance Corporation (FDIC)
upon the banking industry. The additional expenses related to these items were
$1,127,889, $745,000 and $244,000, respectively. The Company increased its
capital by $8,816,000 in March, 2009, by the issuance of preferred stock
pursuant to the U.S. Treasury's Capital Purchase Program under the Troubled
Asset Relief Program ("TARP CPP"). While such capital provides an additional
cushion against potential unforeseen economic uncertainties during these
unprecedented economic times, the cost of such preferred stock reduced the net
income available to common shareholders by $134,754 during the three (3) and six
(6) month periods ended June 30, 2009. Such reduction to the net income
available to common shareholders is considered to be warranted by the additional
capital strength, which such preferred stock brings to the Company, and by the
ability of the Company to prudently leverage such capital and increase the
Company's base of earning assets.
The Company's assets at June 30, 2009 totaled $542,181,000 compared to total
assets of $495,754,000 at December 31, 2008. During the first six months of
2009, net loans outstanding, not including loans held-for-sale decreased
$3,003,000 or 1.01% to $294,364,000. This compares to total net loans
outstanding, not including loans held-for-sale of $297,367,000 at December 31,
2008. This decrease is primarily attributable to decreased loan demand during
the period. Non-performing loans totaled $6,707,000 at June 30, 2009 or 2.25% of
total loans outstanding. This compares to non-performing loans totaling
$5,091,000 at December 31, 2008 or 1.68% of total loans outstanding. The Bank
continues to monitor the quality of the loan portfolio to ensure that loan
quality will not be sacrificed for growth or otherwise compromise the Company's
objectives. Deposits at June 30, 2009 totaled $402,033,000 as compared to total
deposits of $344,925,000 at December 31, 2008.
The Company is "well capitalized". The Company's total risk based capital ratio
was 14.27%; the Tier 1 capital ratio was 13.30% and the leverage ratio was
9.02%. On July 8, 2009, the Board of Directors declared a cash dividend of $.28
per common share, which was paid on August 5, 2009 to shareholders of record as
of July 22, 2009. This compared to a cash dividend of $.28 per common share that
was declared during the second quarter of 2008. As a result, year-to-date
dividends as of June 30, 2009 total $.28 per common share outstanding for this
year. This compares to total year-to-date dividends of $.56 per common share one
year ago. The $.28 dividend for the second quarter, which was not declared until
July 8, 2009, will be reflected in the financial statements for the three (3)
and nine (9) month periods ending September 30, 2009. Future dividends will
depend upon the condition and earnings of the Company as well as its need for
capital to support continued growth as well as to provide for the
13
eventual repayment of the U.S. Treasury TARP CPP preferred stock. The Company
anticipates redeeming the preferred stock as soon as it is practicable and
warranted by prevailing local and national economic conditions.
Critical Accounting Estimates
-----------------------------
In preparing the Company's financial statements, Management selects and applies
numerous accounting policies. In applying these policies, Management must make
estimates and assumptions. The accounting policy that is most susceptible to
critical estimates and assumptions is the allowance for loan losses. The
determination of an appropriate provision is based on an estimation of the
probable amount of credit losses in the loan portfolio. Many factors influence
the amount of estimated loan losses, relating to both the specific
characteristics of the loan portfolio and general economic conditions nationally
and locally. While Management carefully considers these factors in determining
the amount of the allowance for loan losses, future adjustments may be necessary
due to changing conditions, which could have an adverse impact on reported
earnings in the future. See "Provisions and Allowance for Loan Losses."
SIX MONTHS ENDED JUNE 30, 2009
AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2008
Net Interest and Dividend Income
--------------------------------
The Company's earnings are primarily dependent upon net interest and dividend
income, and to a lesser extent noninterest income. Net interest and dividend
income is the difference between interest and dividends earned primarily on the
loan and securities portfolios and interest paid on deposits and advances from
the Federal Home Loan Bank. Noninterest income is primarily derived from the
Trust/Wealth Advisory Services division, service charges and other fees related
to deposit and loan accounts and income from gains in securities transactions.
For the following discussion, net interest and dividend income is presented on a
fully taxable-equivalent (FTE) basis. FTE interest income restates reported
interest income on tax exempt securities as if such interest were taxed at the
Company's federal tax rate of 34% for all periods presented.
(amounts in thousands) Six Months Ended June 30
2009 2008
------- -------
Total Interest and Dividend Income
(financial statements) $12,873 $13,259
Tax Equivalent Adjustment 658 594
------- -------
Total Interest and Dividend Income
(on an FTE basis) 13,531 13,853
Total Interest Expense 4,592 5,718
------- -------
Net Interest and Dividend Income-FTE $ 8,939 $ 8,135
======= =======
Total interest and dividend income on a FTE basis for the six months ended June
30, 2009, when compared to the same period in 2008, decreased $322,000 or 2.32%.
The decrease was primarily attributable to an economic environment of lower
interest rates.
Interest expense on deposits for the first six months of 2009 totaled
$2,995,000, a decrease of $644,000 or 17.70% which compared to $3,639,000 for
the same period in 2008. The Bank's volume of Federal Home Loan Bank advances
outstanding at June 30, 2009 decreased 12.22% when compared to total advances
outstanding at December 31, 2008, resulting in a decrease of interest expense
totaling $548,000. During the fourth quarter of 2008, the Bank prepaid a $19
million advance from the Federal Home Loan Bank of Boston at a cost of $674,000
net of tax. The Bank took such action as part of a program to restructure a
portion of the Bank's borrowings. The restructuring decreased borrowing expense
in 2009. Total interest expense for the six months ended June 30, 2009 was
$4,592,000, a decrease of $1,126,000 or 19.69% when compared to the same period
in 2008. This decrease is a result of an economic environment of generally lower
interest rates combined with lower volumes of funds borrowed from the Federal
Home Loan Bank.
Overall, net interest and dividend income (on an FTE basis) increased $804,000
or 9.88% to $8,939,000 for the period ended June 30, 2009 when compared to the
same period in 2008.
14
Noninterest Income
------------------
Noninterest income totaled $1,902,000 for the six months ended June 30, 2009.
This is a decrease of $684,000 or 26.45% compared to noninterest income of
$2,586,000 for the six months ended June 30, 2008. A declining movement of
market rates resulted in decreased income of the Trust/Wealth Advisory Services
Division of $171,000 or 14.99% to $970,000 for the period ended June 30, 2009.
This compares to income totaling $1,141,000 for the corresponding period in
2008. Gains on sales of available-for-sale securities totaled $436,000 for the
first six months of 2009 compared to a gain of $354,000 for the same period in
2008. The Company's investment portfolio is analyzed for impairment on a
quarterly basis. At June 30, 2009, Management determined that five securities
exhibited varying levels of impairment, which in the aggregate totaled
$1,128,000. This determination necessitated an impairment loss of that amount,
which after taxes represented a loss of approximately $740,000. Other income
which primarily consists of fees associated with transaction accounts, fees
related to the origination and servicing of mortgage loans and gains related to
the sale of mortgage loans increased $532,000 or 48.76% to $1,623,000 from
$1,091,000 during the period ended June 30, 2009.
Noninterest Expense
-------------------
Noninterest expense increased 17.39% for the first six months of 2009 as
compared to the same period in 2008. This increase is primarily attributable to
an increase in FDIC insurance rates and the special assessment imposed by the
FDIC upon the banking industry. The additional expenses related to these items
are $270,000 and $244,000, respectively. Other increases in the described
noninterest expenses in the table below generally reflect business volume and
related growth. The components of noninterest expense and the changes in the
period were as follows:
2009 2008 Change % Change
------------------------------------- ---------- ---------- ---------- ---------
Salaries and employee benefits $4,547,153 $4,077,370 $469,783 11.52%
Occupancy expense 502,082 462,702 39,380 8.51
Equipment expense 440,018 431,302 8,716 2.02
Data Processing 713,600 695,154 18,446 2.65
Insurance 55,483 69,908 (14,425) (20.63)
FDIC Insurance 533,204 19,607 513,597 2,619.46
Printing and stationery 167,183 134,509 32,674 24.29
Professional fees 524,628 433,444 91,184 21.04
Legal expense 207,953 166,236 41,717 25.10
Amortization of core deposit intangible 82,107 82,108 (1) 0.00
Other expense 851,361 774,600 76,761 9.91
---------- ---------- ----------
Total noninterest expense $8,624,772 $7,346,940 $1,277,832 17.39%
========== ========== ==========
Income Taxes
------------
The income tax provision for the first six months of 2009 totaled a credit of
$85,000 in comparison to a provision of $546,000 for the same six-month period
in 2008. Pretax income in 2009 was $813,000 and included tax-exempt income
totaling $1,277,000. Pretax income in 2008 was $2,610,000 and included
tax-exempt income totaling $1,153,000. The decrease in the income tax provision
is primarily attributable to a decrease in taxable income.
Net Income
----------
Overall, net income totaled $898,000 for the six months ended June 30, 2009. Net
income available to shareholders totaled $763,000 for the six (6) months ended
June 30, 2009 and represents earnings of $.45 per average share outstanding.
This compares to net income of 2,064,000 or $1.23 per average share outstanding
for the same period in 2008. The costs of the preferred stock represented
$134,754 of the total decrease of $1,301,425 in net income available to common
shareholders during the six (6) month period ended June 30, 2009.
15
THREE MONTHS ENDED JUNE 30, 2009
AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2008
Net Interest and Dividend Income
--------------------------------
For the following discussion, net interest and dividend income is presented on a
fully taxable-equivalent (FTE) basis. FTE interest income restates reported
interest income on tax exempt loans and securities as if such interest were
taxed at the Company's federal tax rate of 34% for all periods presented.
(amounts in thousands) Three Months Ended June 30
2009 2008
------- -------
Total Interest and Dividend Income
(financial statements) $ 6,386 $ 6,591
Tax Equivalent Adjustment 326 298
------- -------
Total Interest and Dividend Income (on an FTE basis) 6,712 6,889
Total Interest (Expense) (2,308) (2,710)
------- -------
Net Interest and Dividend Income-FTE $ 4,404 $ 4,179
======= =======
Total interest and dividend income on an FTE basis for the three months ended
June 30, 2009 decreased $177,000 or 2.57% compared to the same period in 2008.
The decrease was primarily attributable to a decrease in interest rates.
Interest expense on deposits decreased $155,000 or 9.30% for the quarter to
$1,511,000 compared to $1,666,000 for the same quarter in 2008. This decrease is
primarily the result of an economic environment of generally lower interest
rates. The Bank's volume of Federal Home Loan Bank advances decreased during the
three-month period ended June 30, 2009 when compared to the corresponding period
in 2008. Interest expense on these advances decreased $274,000 or 26.27% and
totaled $769,000 for the three months ended June 30, 2009 compared to $1,043,000
for the corresponding period in 2008. During the fourth quarter of 2008, the
Bank prepaid a $19 million advance from the Federal Home Loan Bank of Boston at
a cost of $674,000 net of tax. The Bank took such action as part of a program to
restructure a portion of the Bank's borrowings. The restructuring decreased
borrowing expense in 2009. Total interest expense for the three months ending
June 30, 2009 was $2,308,000 compared to total interest expense for the same
period in 2008 of $2,710,000, a decrease of $402,000 or 14.83%. Overall, net
interest and dividend income (on a FTE basis) increased $225,000 or 5.38% to
$4,404,000 for the three-month period ended June 30, 2009 when compared to the
corresponding period in 2008.
Noninterest Income
------------------
Noninterest income totaled $196,000 for the three months ended June 30, 2009 as
compared to $1,153,000 for the three months ended June 30, 2008. The second
quarter performance is attributed primarily to accounting adjustments involving
investments within the Bank's investment portfolio to reflect Other Than
Temporary Impairment (OTTI) totaling $1,128,000 as previously discussed.
Noninterest Expense
-------------------
Noninterest expense totaled $4,491,000 for the three month period ended June 30,
2009 as compared to $3,697,000 for the same period in 2008, an increase of
$794,000 or 21.48%. Although there are increases in noninterest expenses that
are attributable to normal volumes of business, much of the overall increase in
the noninterest expenses listed in the table below is attributable to an
increase in FDIC insurance rates and the special assessment imposed by the FDIC
upon the banking industry. The additional expenses related to these items are
$165,000 and $244,000 respectively. The components of noninterest expense and
the changes in the period were as follows:
16
2009 2008 Change % Change
------------------------------------------------------------------------------------------
Salaries and employee benefits $2,282,050 $2,001,197 $ 280,853 14.03%
Occupancy expense 244,963 232,175 12,788 5.51
Equipment expense 213,301 220,215 (6,914) (3.14)
Data Processing 330,164 390,539 (60,375) (15.46)
Insurance 32,033 34,915 (2,882) (8.25)
FDIC Insurance 419,702 10,700 409,002 3,822.45
Printing and stationery 101,214 75,001 26,213 34.95
Professional fees 263,287 199,234 64,053 32.15
Legal expense 112,594 104,809 7,785 7.43
Amortization of core deposit intangible 41,054 41,054 0 0.00
Other expense 450,620 387,105 63,515 16.41
---------- ---------- --------- ---------
Total noninterest expense $4,490,982 $3,696,944 $ 794,038 21.48%
========== ========== =========
Income Taxes
------------
The income tax provision for the three-month period ended June 30, 2009 totaled
$(348,000) in comparison to $245,000 for the same three month period in 2008.
The decrease in the income tax provision is attributable to a decrease in
taxable income.
Net Income (Loss)
-----------------
Overall, the Company incurred a net loss of $(183,000) for the three months
ended June 30, 2009, and net income (loss) available to common shareholders
totaled $(318,000), which represents a loss of $(.19) per average share of
common stock outstanding. This compares to net income of $984,000 for the same
period in 2008, a decrease of $1,167,000 and compares to earnings per share of
$.58 for the 2008 period. The costs of the preferred stock represented $134,754
of the total decrease of $1,301,666 in net income available to common
shareholders during the three (3) month period ended June 30, 2009.
FINANCIAL CONDITION
-------------------
Total assets at June 30, 2009 were $542,181,000 compared to $495,754,000 at
December 31, 2008, an increase of 9.36%. The asset growth is primarily in cash
and cash equivalents, which enhance the Company's liquidity. Such increase is
primarily attributable to the result of the Company's participation in TARP CPP,
which was closed on March 13, 2009 in the amount of $8,816,000, which funds were
deployed by the Company in short-term liquid assets. Liabilities also increased
due to the inflow of interest-bearing deposits, reflecting the preference of
customers for the safety of deposits versus the uncertainty in the equity
markets, an increase in the savings rate from a consumer standpoint, and a
concerted effort by the Bank's staff to expand deposit relationships with
customers.
Securities
----------
The make up of the securities portfolio is diversified among U.S. Government
sponsored agencies, mortgage-backed securities and securities issued by states
of the United States and political subdivisions of the states. None of the
securities owned in the portfolio are collateralized by sub-prime mortgages.
During the six months ended June 30, 2009, the securities portfolio, including
Federal Home Loan Bank stock, increased $8,793,000 or 5.64% to $164,709,000 from
$155,916,000 at December 31, 2008.
Securities are classified in the portfolio as either securities
available-for-sale or securities held-to-maturity. Almost all securities are
classified as available-for-sale. The securities reported as available-for-sale
are stated at fair value in the financial statements of the Company. Unrealized
gains and losses on available-for-sale securities (accumulated other
comprehensive income/loss) are not included in earnings, but are reported as a
net amount (less expected tax) in a separate component of capital until
realized. At June 30, 2009, the unrealized loss net of tax was $7,140,000. This
compares to an unrealized loss net of tax of $6,968,000 at December 31, 2008.
The unrealized losses in these securities are attributable to changes in market
interest rates. A review and analysis of the securities
17
portfolio determined that there had been credit deterioration in five
investments, which in the aggregate totaled $1,127,889. This determination
necessitated an impairment loss of that amount, which after taxes netted out to
approximately $740,000. Management deems the remaining securities that are
currently in an unrealized loss position as not other than temporarily impaired.
The securities reported as securities held-to-maturity are stated at amortized
cost.
The increase in the portfolio is a reflection of securities being purchased in
order to deploy excess funds available due to the influx of deposits.
Lending
-------
Net loans outstanding (not including loans held-for-sale) totaled $294,364,000
at June 30, 2009 compared to net loans outstanding (not including loans
held-for-sale) of $297,367,000 at December 31, 2008, a decrease of $3,003,000 or
1.01%. The current economic environment has resulted in decreased loan demand.
The following table represents the composition of the loan portfolio comparing
June 30, 2009 to December 31, 2008:
June 30, 2009 December 31, 2008
------------- -----------------
Commercial, financial and agricultural $ 24,128,516 $ 20,784,842
Real estate-construction and land
development 27,371,138 33,342,610
Real estate-residential 171,730,965 177,048,233
Real estate-commercial 68,057,340 62,796,469
Consumer 5,050,462 5,551,172
Other 916,218 174,965
------------- -------------
297,254,639 299,698,291
Deferred costs, net 418,017 393,228
Unearned income (5) (61)
Allowance for loan losses (2,724,024) (3,308,619)
-------------------------------------------- ------------- -------------
Net Loans $ 294,364,032 $ 297,367,434
============= =============
Provisions and Allowance for Loan Losses
----------------------------------------
Credit risk is inherent in the business of extending loans. The Bank monitors
the quality of the portfolio to ensure that loan quality will not be sacrificed
for growth or otherwise compromise the Bank's objectives. Because of this risk
associated with extending loans, the Bank maintains an allowance for loan losses
through charges to earnings. The provision expense for allowances for loan
losses for the first six months of 2009 totaled $745,000, compared to $170,000
provision expense for loan losses for the comparable period in 2008.
The Bank evaluates the adequacy of the allowance no less frequently than on a
quarterly basis. No material changes have been made in the estimation methods or
assumptions that the Bank uses in making this determination during the period
ended June 30, 2009. Such evaluations are based on assessments of credit quality
and "risk rating" of loans by senior management, which is reviewed by the Bank's
Loan Committee on a regular basis. Loans are initially risk rated when
originated. If there is deterioration in the credit, the risk rating is adjusted
accordingly.
The allowance also includes a component resulting from the application of the
measurement criteria of Statements of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (SFAS No. 114). Impaired
loans receive individual evaluation of the allowance necessary on a monthly
basis. Loans to be considered for impairment are defined in the Bank's Loan
Policy as commercial loans with balances outstanding of $100,000 or more and
residential real estate mortgages with balances of $300,000 or more. Such loans
are considered impaired when it is probable that the Bank will not be able to
collect all principal and interest due according to the terms of the note.
Any such commercial loan or residential mortgage may be considered impaired due
to any of the following circumstances:
18
1. Non-accrual status;
2. Loans over 90 days delinquent;
3. Troubled debt restructures consummated after December 31, 1994;
4. Loans classified as "doubtful", meaning that they have weaknesses, which
make collection or liquidation in full, based on currently existing facts,
conditions, and values, highly questionable and improbable.
The individual allowance for any impaired loan is based upon the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the collateral if the loan is collateral dependent.
Specifically identifiable and quantifiable losses are immediately charged off
against the allowance.
In addition, a risk of loss factor is applied in evaluating categories of loans
generally as part of the periodic analysis of the Allowance for Loan Losses.
This analysis reviews the allocations of the different categories of loans
within the portfolio and it considers historical loan losses and delinquency
figures as well as any recent delinquency trends.
Concentrations of credit and local economic factors are also evaluated on a
periodic basis. Historical average net losses by loan type are examined as well
as trends by type. The Bank's loan mix over the same period of time is also
analyzed. A loan loss allocation is made for each type of loan multiplied by the
loan mix percentage for each loan type to produce a weighted average factor.
Nonperforming loans, which include all loans that are on a non-accrual status
along with loans that are 90 days or more past due and still accruing, and OREO
properties are closely monitored by Management. At June 30, 2009, nonperforming
loans totaled $6,707,000 or 2.25% of total loans outstanding of $297,673,000.
The allowance for loan losses totaled $3,309,000 representing 49.33% of
nonperforming loans. Nonperforming loans totaled $5,174,601 or 1.73% of total
loans outstanding, (which does not include loans held-for-sale) of $299,698,291
at December 31, 2008. The allowance for loan losses totaled $2,724,024 at
December 31, 2008 and represented 52.64% of nonperforming loans. A total of
$176,000 of loans was charged-off by the Bank during the six months ended June
30, 2009. These charged-off loans consisted primarily of commercial loans. This
compares to loans charged-off during the six-month period ended June 30, 2008 of
$42,000. A total of $16,000 of previously charged-off loans was recovered during
the six month period ended June 30, 2009. Recoveries for the same period in 2008
totaled $22,000. While Management estimates loan losses using the best available
information, no assurances can be given that future additions to the allowance
will not be necessary based on changes in economic and real estate market
conditions, further information obtained regarding problem loans, identification
of additional problem loans or other factors. Additionally, future additions to
the allowance may be necessary to maintain adequate coverage ratios. At June 30,
2009, the Bank had other real estate owned (OREO) in the amount of $418,000,
which is one commercial property.
Deposits
--------
The Company offers a variety of deposit accounts with a range of interest rates
and terms. Total deposits increased 16.56% from December 31, 2008 to June 30,
2009. The following table illustrates the composition of the Company's deposits
at June 30, 2009 and December 31, 2008:
June 30, 2009 December 31, 2008
------------ -----------------
Demand $ 64,781,251 $ 65,479,271
NOW 33,296,274 26,097,175
Money Market 68,445,264 57,648,106
Savings 81,575,387 70,180,841
Time 153,934,430 125,519,839
------------ -----------------
Total Deposits $402,032,606 $ 344,925,232
============ =================
Deposits constitute the principal funding source of the Company's assets.
Borrowings
----------
The Company utilizes advances from the Federal Home Loan Bank as part of its
operating strategy to supplement deposit growth and fund its asset growth, a
strategy that is designed to increase interest income. These advances are made
pursuant to various credit programs, each of which has its own interest rate and
range of maturities. At June 30, 2009, the Company had $77,174,000 in
outstanding advances from the Federal Home Loan Bank compared to
19
$87,914,000 at December 31, 2008. With the large increase in deposits,
Management has not had to supplement deposit growth with advances from the
Federal Home Loan Bank.
Off-Balance Sheet Arrangements
------------------------------
In the normal course of business the Company enters into certain relationships
characterized as lending related off-balance sheet arrangements. These lending
commitments have various terms and are designed to accommodate the financial
needs of consumers, businesses and other entities. Many of these loan
commitments have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of these commitments are expected to expire
without being funded, the total commitment amounts do not necessarily represent
future liquidity requirements.
Loan commitments have credit risk essentially the same as that involved in
extending loans to customers. They are subject to normal credit approval
procedures and policies. Collateral is obtained based on management's assessment
of the customer's credit. The accompanying table summarizes the Company's
off-balance sheet lending-related financial instruments by remaining maturity at
June 30, 2009:
June 30, 2009
(amounts in thousands)
By remaining maturity Less than 1 year 1 -3 years 4-5 years After 5 years Total
---------------------------------------------------------------------------------------------------
Off-balance sheet lending-related
Financial Instruments
Residential real estate related $2,136 $ 0 $ 4 $34,198 $36,338
Commercial related 1,995 4,378 2,197 10,235 18,805
Consumer related 1,313
Standby letters of credit 3 3
--------------------------------------------------------------------------------------------------
Total $4,131 $4,381 $2,201 $45,746 $56,459
--------------------------------------------------------------------------------------------------
Interest Rate Risk
------------------
Interest rate risk is the most significant market risk affecting the Company.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on net interest income. Net interest income is
sensitive to interest rate risk to the degree that interest bearing liabilities
mature or reprice on a different basis than earning assets. In an attempt to
manage its exposure to changes in interest rates, the Bank's assets and
liabilities are managed in accordance with policies established and reviewed by
the Bank's Board of Directors. The Bank's Asset/Liability Management Committee
monitors asset and deposit levels, developments and trends in interest rates,
liquidity and capital. One of the primary financial objectives is to manage
interest rate risk and control the sensitivity of earnings to changes in
interest rates in order to prudently improve net interest income and manage the
maturities and interest rate sensitivities of assets and liabilities.
To quantify the extent of these risks, both in its current position and in
actions it might take in the future, interest rate risk is monitored using gap
analysis which identifies the differences between assets and liabilities which
mature or reprice during specific time frames and model simulation which is used
to "rate shock" the Company's assets and liability balances to measure how much
of the Company's net interest income is "at risk" from sudden rate changes.
An interest rate sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within that
same period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
2009, the Company maintains an asset sensitive (positive gap) position. This
would suggest that during a period of increasing interest rates, the Company
would be in a better position to increase net interest income. To the contrary,
during a period of declining interest rates, a positive gap would result in a
decrease in interest income. The level of interest rate risk at June 30, 2009
was within the limits approved by the Board of Directors.
20
Liquidity
---------
Liquidity is the ability to raise funds on a timely basis at an acceptable cost
in order to meet cash needs. Adequate liquidity is necessary to handle
fluctuations in deposit levels, to provide for customers' credit needs, and to
take advantage of investment opportunities as they are presented. The Company
manages liquidity primarily with readily marketable investment securities,
deposits and loan repayments. The Company's subsidiary, the Bank, is a member of
the Federal Home Loan Bank of Boston. This enhances the liquidity position by
providing a source of available borrowings. At June 30, 2009, the Company had
approximately $56,459,000 in loan commitments outstanding. Management believes
that the current level of liquidity is ample to meet the Company's needs for
both the present and foreseeable future.
Capital
-------
At June 30, 2009, the Company had $47,995,000 in shareholders' equity, an
increase of 23.26% when compared to December 31, 2008 shareholders' equity
totaling $38,939,000. While most of such increase reflects an increase resulting
from the issuance of 8,816,000 in preferred stock pursuant to the U.S. Treasury
TARP CPP in March, 2009, several other components contributed to the change
since December 31, 2008. Earnings for the six-month period ended June 30, 2009
totaled $898,000. Securities in the portfolio that are classified as
available-for-sale are adjusted to fair value monthly and the unrealized losses
or gains are not included in earnings, but are reported as a net amount (less
expected tax) as a separate component of capital until realized. Market
fluctuations of fair value of the securities portfolio for the period ending
June 30, 2009 resulted in a net change in other comprehensive loss totaling
$172,000. The Company's capital was increased by $8,816,000 in March 2009 by the
issuance of preferred stock pursuant to the U.S. Treasury's TARP CPP. The
application of SFAS No. 158, as described in Note 3 resulted in other
comprehensive income net of tax of $43,000 for the six-month period ended June
30, 2009. The Company declared a quarterly dividend to shareholders resulting in
a decrease in capital of $472,000. The Company paid a dividend of $76,000 to the
U.S. Treasury's TARP CPP. The Company issued 840 new shares of common stock
under the terms of the Director Stock Retainer Plan that resulted in an increase
in capital of $19,000.
Under current regulatory definitions, the Company 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". One primary measure of capital adequacy for regulatory purposes is
based on the ratio of risk-based capital to risk-weighted assets. This method of
measuring capital adequacy helps to establish capital requirements that are more
sensitive to the differences in risk associated with various assets. It takes
into account off-balance sheet exposure in assessing capital adequacy and it
minimizes disincentives to holding liquid, low-risk assets. At June 30, 2009,
the Company had a total risk-based capital ratio of 14.27% compared to 11.59% at
December 31, 2008. Maintaining strong capital is essential to 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.
Impact of Inflation and Changing Prices
---------------------------------------
The Company's consolidated financial statements are prepared in conformity with
generally accepted accounting principles which 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 the Company are monetary and as a result, interest rates have a
greater impact on the Company'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 the Company with the Securities and
Exchange Commission, as well as other filings, reports and press releases made
or issued by the Company and the Bank, and oral statements made by executive
officers of the Company and the Bank, may include forward-looking statements
relating to such matters as:
21
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which the Company
and the Bank do business; and
(b) expectations for revenues and earnings for the Company 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, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Act of
1995.
The Company 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 affect the operation, performance, development and
results of the Company'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 environments that negatively
impact the Company 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 the Company's filings with the
Securities and Exchange Commission.
Such developments could have an adverse impact on the Company's and the Bank's
financial position and results of operations.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Interim Chief Financial Officer
concluded that, based upon an evaluation as of June 30, 2009, the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and forms and that
such information is accumulated and communicated to the Company's management
including its Chief Executive Officer and Interim Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
During the fiscal quarter ended June 30, 2009 there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company'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 previous capacity as a Trustee of the Erling C.
Christophersen Revocable Trust, in litigation currently pending in the
Connecticut Superior Court within the Judicial District of Bridgeport,
John R. Christophersen v Erling C. Christophersen et. al., which commenced
May 29, 2008. The other parties to the litigation are the Plaintiff, John
R. Christophersen of Norwalk, Connecticut and the 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
C. Christophersen, to the Erling C. Christophersen Trust, of which the
Bank was a co-Trustee. Subsequent to this conveyance, the Bank loaned
$3,386,609, to the Erling
22
Christophersen Trust, which was secured by an open-end commercial mortgage
in favor of the Bank on the Westport real estate referenced above.
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. The Plaintiff has alleged that the Bank failed to utilize reasonable
diligence in extending financing to the Co-Defendant, Erling, and that had
it engaged in reasonable diligence it would have discovered that the
Plaintiff had an interest in the above-referenced 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 Plaintiff's entitlements, and, therefore, holds the property in
trust for Plaintiff.
The Bank disputes the claims made by the Plaintiff and is vigorously
defending the case. At the inception of this loan, the Bank obtained a
Lenders Title insurance policy from the Chicago Title and Insurance
Company. Additionally, at the time of this financing, the appraised value
of the aforementioned real estate was significantly in excess of the loan
amount. Given current economic conditions, the Bank continues to monitor
the value of its collateral position, which remains well in excess of the
outstanding loan balance. The underlying loan is currently non-performing.
Until the litigation is resolved, the liquidity of the real estate
collateral that secures the loan will remain significantly impaired.
Item 2. -Unregistered Sales of Equity Securities and Use of Proceeds. On May 29,
2009, the Company issued 840 shares of common stock to members of its Board of
Directors under the terms of the Director Stock Retainer Plan. The shares were
issued in a private transaction in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended. No cash
consideration was received upon issuance of the shares.
Item 3. - Defaults Upon Senior Securities. None
Item 4. - Submission of Matters to a Vote of Security Holders. The Annual
Meeting of Shareholders of the Company, was held on Wednesday, May 27, 2009.
Shareholders voted on the election of directors, the ratification of the
appointment of independent auditors and the non-binding advisory vote on the
compensation of named executive officers.
The results of the votes of shareholders regarding each proposal are set forth
below:
PROPOSAL 1
ELECTION OF DIRECTORS
Each of the three nominees received in excess of a plurality of the votes cast
at the meeting and were elected to serve until their term expires or their
successors are elected and qualified.
The vote for electing nominees as directors was as follows:
Withholding
For Authority
John R. H. Blum Number of shares 1,313,082 37,956
Percentage of
Shares Voted: 97.2% 2.8%
Percentage of Shares
Entitled to Vote: 77.8% 2.3%
23
Withholding
For Authority
Holly J. Nelson Number of shares 1,320,229 30,809
Percentage of
Shares Voted: 97.7% 2.3%
Percentage of Shares
Entitled to Vote: 78.3% 1.8%
Withholding
For Authority
John F. Perotti Number of shares 1,318,547 32,491
Percentage of
Shares Voted: 97.6% 2.4%
Percentage of Shares
Entitled to Vote: 78.2% 1.9%
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The appointment of Shatswell, MacLeod & Company, P.C. as independent auditors
for the Company for the year ending December 31, 2009 was approved because the
votes for such appointment exceeded the votes against such appointment.
The vote to ratify the appointment of Shatswell, MacLeod & Company, P.C. as
independent auditors for the Company for the year ending December 31, 2009 was
as follows:
For Against Abstain
Number of Shares: 1,345,599 1,815 3,624
Percentage of Shares Voted: 99.6% .1% .3%
Percentage of Shares
Entitled to Vote: 79.8% .1% .2%
PROPOSAL 3
NON-BINDING ADVISORY VOTE ON THE COMPENSATION
OF NAMED EXECUTIVE OFFICERS
The vote to approve the non-binding advisory vote on the compensation of named
executive officers was as follows:
For Against Abstain
Number of Shares: 1,225,678 56,220 69,143
Percentage of Shares Voted: 90.7% 4.2% 5.1%
Percentage of Shares
Entitled to Vote: 72.7% 3.3% 4.1%
Item 5. - Other Information. None
Item 6. - Exhibits
11 Computation of Earnings (Loss) per Share.
31.1-Rule 13a-14(a)/15d-14(a) Certification of CEO.
31.2-Rule 13a-14(a)/15d-14(a) Certification of Interim CFO.
32- Section 1350 Certifications of CEO and Interim CFO.
24
SALISBURY BANCORP, INC.
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.
Date: August 14, 2009 by: /s/ Richard J. Cantele, Jr.
--------------- --------------------------------------
Richard J. Cantele, Jr.
President and Chief Executive Officer
Date: August 14, 2009 by: /s/ Richard J. Cantele, Jr.
--------------- --------------------------------------
Richard J. Cantele, Jr.
Interim Chief Financial Officer
25