SALISBURY BANCORP, INC. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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ý
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2009
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
file number 0-24751
SALISBURY
BANCORP, INC.
(Exact
name of registrant as specified in its charter)
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Connecticut
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06-1514263
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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5
Bissell Street, Lakeville, CT
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06039
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(Address
of principal executive offices)
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(Zip
code)
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(Registrant's
telephone number, including area code: (860) 435-9801
Securities
registered pursuant to Section 12(b) of the Act:
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Common
Stock, par value $.10 per share
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NYSE
Amex Equities
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(Title
of each class)
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(Name
of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes ý No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. o Yes ý No
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 ý No o
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 during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). o Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K o
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
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer o
Accelerated filer o
Non-accelerated filer o Smaller reporting
company ý
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o No ý
The
aggregate market value of common stock held by non-affiliates of the registrant
on June 30, 2009 was $38,031,755 based on the closing sales price of $24.31 of
such stock. The number of shares of the registrant’s Common Stock outstanding as
of March 3, 2010, was 1,686,701.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant's definitive Proxy Statement dated April 9, 2010 for the 2010
Annual Meeting of Shareholders are incorporated by reference into Part III
(Items 10, 11, 12, 13 and 14) of this Form 10-K.
1
FORM
10-K
SALISBURY
BANCORP, INC.
For the
Year Ended December 31, 2009
TABLE OF CONTENTS
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Description
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Page
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PART
I
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Item
1.
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3
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Item
1A.
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13
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Item
1B.
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16
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Item
2.
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16
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Item
3.
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16
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Item
4.
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17
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PART
II
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Item
5.
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17
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Item
6.
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17
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Item
7.
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19
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Item
7A.
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31
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Item
8.
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33
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Item
9.
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63
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Item
9A(T).
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63
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Item
9B.
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63
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PART
III
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Item
10.
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63
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Item
11.
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64
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Item
12.
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64
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Item
13.
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64
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Item
14.
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64
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PART
IV
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Item
15.
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64
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PART
I
Forward-Looking
Statements
This
Annual Report on Form 10-K may contain and incorporates by reference statements
relating to future results of Salisbury Bancorp, Inc. ("Salisbury") that are
considered “forward-looking” within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to, among other
things, expectations concerning loan demand, growth and performance, simulated
changes in interest rates and the adequacy of the allowance for loan
losses. Actual results may differ materially from those expressed or
implied as a result of certain risks and uncertainties, including, but not
limited to, changes in political and economic conditions, interest rate
fluctuations, competitive product and pricing pressures within Salisbury’s
markets, equity and fixed income market fluctuations, personal and corporate
customers’ bankruptcies, inflation, acquisitions and integrations of acquired
businesses, technological changes, changes in law and regulations, changes in
fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in
gaining regulatory approvals when required as well as other risks and
uncertainties reported from time to time in Salisbury’s filings with the
Securities and Exchange Commission.
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Item 1.
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BUSINESS
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Salisbury
Bancorp, Inc.
Salisbury
Bancorp, Inc. ("Salisbury"), a Connecticut corporation, formed in 1998, is the
bank holding company for Salisbury Bank and Trust Company (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC")
insured commercial bank headquartered in Lakeville, Connecticut. Salisbury
common stock is traded on the NYSE Amex Equities under the symbol “SAL”.
Salisbury's principal business consists of the business of the
Bank. The Bank, formed in 1848, provides commercial banking, consumer
financing, retail banking and trust and wealth advisory services through eight
banking offices, 10 ATMs and its internet website
(www.salisburybank.com).
Lending
Activities
General
The Bank
originates commercial loans, commercial real estate loans, residential and
commercial construction loans, residential real estate loans collateralized by
one- to- four family residences, home equity lines of credit and fixed rate
loans and other consumer loans predominately in the States of Connecticut’s
Litchfield County, Massachusetts’ Berkshire County and New York’s Dutchess
County in towns proximate to the Bank’s 8 full service offices.
Real
estate secured the majority of the Bank’s loans as of December 31, 2009,
including some loans classified as commercial loans. Interest rates charged on
loans are affected principally by the Bank’s current asset/liability strategy,
the demand for such loans, the cost and supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by general economic and credit conditions, monetary policies of the
federal government, including the Federal Reserve Board (the “FRB”), federal and
state tax policies and budgetary matters.
Residential Real Estate
Loans
A
principal lending activity of the Bank is to originate prime loans secured by
first mortgages on one-to-four family residences. The Bank originates
residential real estate loans through commissioned mortgage representatives. The
Bank originates both fixed rate and adjustable rate mortgages.
The Bank
currently sells the majority of the fixed rate residential real estate loans it
originates, except for certain long term fixed rate loans to borrowers with low
to moderate income, to the Federal Home Loan Bank of Boston under the Mortgage
Partnership Finance program while retaining servicing.
The
retention of adjustable rate residential mortgage loans in the portfolio and the
sale of longer term, fixed rate residential mortgage loans helps reduce the
Bank’s exposure to interest rate risk. However, adjustable rate mortgages
generally pose credit risks different from the credit risks inherent in fixed
rate loans primarily because as interest rates rise, the underlying debt service
payments of the borrowers rise, thereby increasing the potential for default.
Management believes that these risks, which have not had a material adverse
effect on the Bank to date, generally are less onerous than the interest rate
risks associated with holding long-term fixed rate loans in the loan
portfolio.
Commercial Real Estate
Loans
The Bank
makes commercial real estate loans for the purpose of acquiring, developing,
constructing, improving or refinancing commercial real estate where the property
is the primary collateral securing the loan, and the income generated from the
property is the primary repayment source. Office buildings, light industrial,
retail facilities or multi-family income properties, normally collateralize
commercial real estate loans. Among the reasons for management’s continued
emphasis on commercial real estate lending is the desire to invest in assets
with yields which are generally higher than yields on one-to-four family
residential mortgage loans, and are more sensitive to changes in market interest
rates. These loans typically have terms of up to 25 years and interest rates
which adjust over periods of 3 to 10 years based on one of various rate
indices.
Commercial
real estate lending generally poses a greater credit risk than residential
mortgage lending to owner occupants. The repayment of commercial real estate
loans depends on the business and financial condition of the borrower. Economic
events and changes in government regulations, which the Bank and its borrowers
do not control, could have an adverse impact on the cash flows generated by
properties securing commercial real estate loans and on the market value of such
properties. Commercial properties tend to decline in value more rapidly than
residential owner-occupied properties during economic recessions and individual
loans on commercial properties tend to be larger than individual loans on
residential properties.
Construction
Loans
The Bank
originates both residential and commercial construction loans. Typically loans
are made to owner-borrowers who will occupy the properties (residential and
commercial construction) and to licensed and experienced developers for the
construction of single-family homes.
The
proceeds of commercial construction loans are disbursed in stages and the terms
may require developers to pre-sell a certain percentage of the properties they
plan to build before the Bank will advance any construction financing. Bank
officers, appraisers and/or independent engineers inspect each project’s
progress before additional funds are disbursed to verify that borrowers have
completed project phases.
Residential
construction loans to owner-borrowers generally convert to a fully amortizing
long-term mortgage loan upon completion of construction. Commercial construction
loans generally have terms of six months to two years. Some
construction-to-permanent loans have fixed interest rates for the permanent
portion, but the Bank originates mostly adjustable rate construction
loans.
Construction
lending, particularly commercial construction lending, poses greater credit risk
than mortgage lending to owner occupants. The repayment of commercial
construction loans depends on the business and financial condition of the
borrower and on the economic viability of the project financed. A number of
borrowers have more than one construction loan outstanding with the Bank at any
one time. Economic events and changes in government regulations, which the Bank
and its borrowers do not control, could have an adverse impact on the value of
properties securing construction loans and on the borrower’s ability to complete
projects financed and, if not the borrower’s residence, sell them for amounts
anticipated at the time the projects commenced.
Commercial
Loans
Commercial
loans are primarily collateralized by equipment, inventory, accounts receivable
and/or leases. Many of the Bank’s commercial loans are also collateralized by
real estate, but are not classified as commercial real estate loans because such
loans are not made for the purpose of acquiring, refinancing or constructing the
real estate securing the loan. Commercial loans primarily provide working
capital, equipment financing, financing for leasehold improvements and financing
for expansion. The Bank offers both term and revolving commercial loans. Term
loans have either fixed or adjustable rates of interest and, generally, terms of
between two and seven years. Term loans generally amortize during their life,
although some loans require a balloon payment at maturity if the amortization
exceeds seven years. Revolving commercial lines of credit typically have one or
two-year terms, are renewable annually and have a floating rate of interest
which are normally indexed to the Bank’s “base rate” of interest and
occasionally indexed to the London Interbank Offered Rate
(“LIBOR”).
Commercial
lending generally poses a higher degree of credit risk than real estate lending.
Repayment of both secured and unsecured commercial loans depends substantially
on the success of the borrower’s underlying business, financial condition and
cash flows. Unsecured loans generally involve a higher degree of risk of loss
than do secured loans because, without collateral, repayment is primarily
dependent upon the success of the borrower’s business. There are very few
unsecured loans in the Bank’s portfolio.
Secured
commercial loans are generally collateralized by equipment, inventory, accounts
receivable and leases. Compared to real estate, such collateral is more
difficult to monitor, its value is more difficult to validate, it may depreciate
more rapidly and it may not be as readily saleable if repossessed.
Consumer
Loans
The Bank
originates various types of consumer loans, including home equity loans and
lines of credit, auto, and personal installment loans. Home equity loans and
lines of credit are secured by one-to-four family owner-occupied properties,
typically by second mortgages. Home equity loans have fixed interest rates,
while home equity lines of credit normally adjust based on the Bank’s base rate
of interest. Consumer loans are originated through the branch
network.
Credit
Risk Management and Asset Quality
One of
the Bank’s key objectives is to maintain a high level of asset quality. The Bank
utilizes the following general practices to manage credit risk: limiting the
amount of credit that individual lenders may extend; establishing a process for
credit approval accountability; careful initial underwriting and analysis of
borrower, transaction, market and collateral risks; ongoing servicing of
individual loans and lending relationships; continuous monitoring of the
portfolio, market dynamics and the economy; and periodically reevaluating the
Bank’s strategy and overall exposure as economic, market and other relevant
conditions change.
Credit
Administration is responsible for the completion of credit analyses for all
loans above a specific threshold, for determining loan loss reserve adequacy and
for preparing monthly and quarterly reports regarding the credit quality of the
loan portfolio, which are submitted to Loan Committee to ensure compliance with
the credit policy. In addition, Credit Administration is responsible for
managing non-performing and classified assets. On a quarterly basis, the Loan
Committee reviews commercial and commercial real estate loans that are risk
rated Special Mention or worse, focusing on the current status and strategies to
improve the credit.
The loan
review function is outsourced to a third party to provide an evaluation of the
creditworthiness of the borrower and the appropriateness of the risk rating
classifications. The findings are reported to Credit Administration and summary
information is then presented to the Loan Committee.
Trust
and Wealth Advisory Services
The Bank
provides a range of fiduciary and trust services and general investment
management and wealth advisory services to individuals, families and
institutions.
Investments
The
primary objective of the investment portfolio is to achieve a profitable rate of
return on the investments over a reasonable period of time based on prudent
management practices and sensible risk taking. The portfolio is also used to
help manage the net interest rate risk position of the Bank. As a tool to manage
interest rate risk, the flexibility to utilize long term fixed rate investments
is quite limited. In view of the Bank’s lending capacity and generally higher
rates of return on loans, management prefers lending activities as its primary
source of revenue with the securities portfolio serving a secondary role. The
investment portfolio, however, is expected to continue to represent a
significant portion of the Bank’s assets, and includes U.S. Government and
Agency securities, mortgage-backed securities, collateralized mortgage
obligations and bank qualified tax exempt municipal bonds. The portfolio will
continue to serve the Bank’s liquidity needs as projected by management and as
required by regulatory authorities. The portfolio is also used to collateralize
certain types of deposits.
Sources
of Funds
The Bank
uses deposits, repayments and prepayments of loans and securities, proceeds from
sales of loans and securities and proceeds from maturing securities and
borrowings to fund lending, investing and general operations. Deposits represent
the Bank’s primary source of funds.
Deposits
The Bank
offers a variety of deposit accounts with a range of interest rates and other
terms, which are designed to meet customer financial needs. Retail and
commercial deposits are received through the Bank’s banking offices. Additional
depositor related services provided to customers includes ATM, telephone,
Internet Banking and Internet Bill Pay services.
The FDIC
insures deposits up to certain limits (generally, $100,000 per depositor and
$250,000 for certain retirement plan accounts). The Economic Emergency
Stabilization Act (“EESA”) raised the $100,000 limit on insured deposits to
$250,000 through December 31, 2013. In addition, under the FDIC’s Temporary
Liquidity Guaranty Program (“TLGP”), non-interest bearing transaction deposit
accounts and interest-bearing transaction accounts paying 50 basis points or
less will be fully insured above and beyond the $250,000 limit through June 30,
2010.
Deposit
flows are significantly influenced by economic conditions, the general level of
interest rates and the relative attractiveness of competing deposit and
investment alternatives. Deposit pricing strategy is monitored weekly by the
Pricing Committee, composed of members of Senior Management. When determining
deposit pricing, the Bank considers strategic objectives, competitive market
rates, deposit flows, funding commitments and investment alternatives, Federal
Home Loan Bank of Boston (the “FHLBB”) advance rates and rates on other sources
of funds.
National,
regional and local economic and credit conditions, changes in competitor money
market, savings and time deposit rates, prevailing market interest rates and
competing investment alternatives all have a significant impact on the level of
the Bank’s deposits. In 2009, deposit generation was a key focus for the banking
industry as a source of liquidity and to fund asset growth due to the recessive
economy and tightening credit conditions experienced over the year. As a result,
competition for deposits has been and is expected to remain strong.
Borrowings
The Bank
is a member of the FHLBB that provides credit
facilities for regulated, federally insured depository institutions
and certain other home financing institutions. Members of the FHLBB are required
to own capital stock in the FHLBB and are authorized to apply for advances on
the security of their FHLBB stock and certain home mortgages and other assets
(principally securities, which are obligations of, or guaranteed by, the United
States Government or its agencies) provided certain creditworthiness standards
have been met. Under its current credit policies, the FHLBB limits advances
based on a member’s assets, total borrowings and net worth. Long-term and
short-term FHLBB advances are utilized as a source of funding to meet liquidity
and planning needs when the cost of these funds are favorable as compared to
deposits or alternate funding sources.
Additional
funding sources are available through securities sold under agreements to
repurchase and the Federal Reserve Bank of Boston.
Subsidiaries
Salisbury
has one subsidiary, Salisbury Bank and Trust Company. The Bank is
Salisbury's primary subsidiary and accounts for the majority of Salisbury's
income. At December 31, 2009, the Bank had two wholly-owned
subsidiaries, SBT Mortgage Service Corporation and SBT Realty, Incorporated. SBT
Mortgage Service Corporation is a passive investment company ("PIC") that holds
loans collateralized by real estate originated or purchased by the
Bank. Income of the PIC and its dividends to Salisbury are exempt
from the Connecticut Corporate Business Tax. SBT Realty, Inc. was
formed to hold New York State real estate and is presently
inactive.
Employees
At
December 31, 2009, the Bank had 133 full-time employees and 17 part-time
employees. None of the employees were represented by a collective bargaining
group. The Bank maintains a comprehensive employee benefit program providing,
among other benefits, group medical and dental insurance, life insurance,
disability insurance, a pension plan and an employee 401(k) investment plan.
Management considers relations with its employees to be good.
Market
Area
Salisbury
and the Bank are headquartered in Lakeville, Connecticut, which is located in
the northwestern quadrant of Connecticut’s Litchfield County. The Bank has 8
banking offices located in Connecticut's Litchfield County, Massachusetts’
Berkshire County and New York’s Dutchess County. The Bank’s primary
deposit gathering and lending area consists of the communities and surrounding
towns that are served by its branch network in Litchfield, Berkshire and
Dutchess counties. The Bank also has deposit , lending and trust relationships
outside of these areas.
Competition
The Bank
faces strong competition in attracting and retaining deposits and in making
loans. The primary factors in competing for deposits are interest
rates, personalized services, the quality and range of financial services,
convenience of office locations, automated services and office hours. Its most
direct competition for deposits and loans has come from commercial banks,
savings banks and credit unions located in its market area. Competition for
deposits also comes from non-banking companies such as brokerage houses that
offer a range of deposit and deposit-like products. Although the Bank expects
this continuing competition to have an effect upon the cost of funds, it does
not anticipate any substantial adverse effect on maintaining the current deposit
base. The Bank is competitive within its market area in the various deposit
products it offers to depositors. Due to this fact, management
believes the Bank has the ability to maintain its deposit base. The
Bank does not rely upon any individual, group or entity for a significant
portion of its deposits.
The
Bank's competition for real estate loans comes primarily from mortgage banking
companies, savings banks, commercial banks, insurance companies, and other
institutional lenders. The primary factors in competing for loans are
interest rates, loan origination fees, the quality and range of lending services
and personalized service. Factors that affect competition include, among others,
the general availability of funds and credit, general and local economic
conditions, current interest rate levels and volatility in the mortgage
markets.
The
banking industry is also experiencing rapid changes in technology. In addition
to improving customer services, effective use of technology increases efficiency
and enables financial institutions to reduce costs. Technological advances are
likely to increase competition by enabling more companies to provide cost
effective products and services.
Regulation
and Supervision
General
Salisbury
is required to file reports and otherwise comply with the rules and regulations
of the FRB, the Connecticut Banking Commissioner and the Securities and Exchange
Commission (the “SEC”) under the Federal securities laws.
The Bank
is subject to extensive regulation by the Connecticut Department of Banking (the
“CTDOB”), as its chartering agency, and by the FDIC, as its deposit insurer. The
Bank is required to file reports with, and is periodically examined by, the FDIC
and the CTDOB concerning its activities and financial condition. It must obtain
regulatory approvals prior to entering into certain transactions, such as
mergers.
The
following discussion of the laws and regulations material to the operations of
Salisbury and the Bank is a summary and is qualified in its entirety by
reference to such laws and regulations. Any change in such laws or regulations,
whether by the Department of Banking, the FDIC, the SEC or the FRB, could have a
material adverse impact on Salisbury or the Bank.
Bank Holding Company
Regulation
Salisbury
is a registered bank holding company under the Bank Holding Company Act (the
“BHCA”) and is subject to comprehensive regulation and regular examinations by
the FRB. The FRB also has extensive enforcement authority over bank holding
companies, including, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to require that a
holding company divest subsidiaries (including its bank subsidiaries). In
general, enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices. Under Connecticut banking law, no
person may acquire beneficial ownership of more than 10% of any class of voting
securities of a Connecticut-chartered bank, or any bank holding company of such
a bank, without prior notification of, and lack of disapproval by, the CTDOB.
The CTDOB will disapprove the acquisition if the bank or holding company to be
acquired
has been in existence for less than five years, unless the CTDOB waives this
five-year restriction, or if the acquisition would result in the acquirer
controlling 30% or more of the total amount of deposits in insured depository
institutions in Connecticut. Similar restrictions apply to any person who holds
in excess of 10% of any such class and desires to increase its holdings to 25%
or more of such class.
Under FRB
policy, a bank holding company must serve as a source of strength for its
subsidiary bank. Under this policy, the FRB may require, and has required in the
past, a holding company to contribute additional capital to an undercapitalized
subsidiary bank.
Bank
holding companies must obtain FRB approval before: (i) acquiring, directly or
indirectly, ownership or control of another bank or bank holding company; (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding
company.
The BHCA
also prohibits a bank holding company, with certain exceptions, from acquiring
direct or indirect ownership or control of any company which is not a bank or
bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these prohibitions
involve certain non-bank activities which, by statute or by FRB regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The list of activities permitted by
the FRB includes, among other things: (i) operating a savings institution,
mortgage company, finance company, credit card company or factoring company;
(ii) performing certain data processing operations; (iii) providing certain
investment and financial advice; (iv) underwriting and acting as an insurance
agent for certain types of credit-related insurance; (v) leasing property on a
full-payout, non-operating basis; (vi) selling money orders, travelers’ checks
and United States Savings Bonds; (vii) real estate and personal property
appraising; (viii) providing tax planning and preparation services; (ix)
financing and investing in certain community development activities; and (x)
subject to certain limitations, providing securities brokerage services for
customers.
Dividends
The FRB
has issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the FRB’s view that a bank holding company should be
a “source of strength” to its bank subsidiary and should pay cash dividends only
to the extent that the holding company’s net income for the past year is
sufficient to cover both the cash dividends and a rate of earnings retention
that is consistent with the holding company’s capital needs, asset quality and
overall financial condition. The FRB also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, the FRB may prohibit a bank holding company
from paying any dividends if the holding company’s bank subsidiary is classified
as “undercapitalized” or if the dividend would violate applicable law or would
be an unsafe or unsound banking practice.
Financial
Modernization
The
Gramm-Leach-Bliley Act (“GLBA”) permits greater affiliation among banks,
securities firms, insurance companies, and other companies under a new type of
financial services company known as a “financial holding company”. A financial
holding company essentially is a bank holding company with significantly
expanded powers. Financial holding companies are authorized by statute to engage
in a number of financial activities previously impermissible for bank holding
companies, including securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; and merchant banking activities. The act also permits the FRB and the
Treasury Department to authorize additional activities for financial holding
companies if they are “financial in nature” or “incidental” to financial
activities. A bank holding company may become a financial holding company if
each of its subsidiary banks is well capitalized, well managed, and has at least
a “satisfactory” Community Reinvestment Act rating. A financial holding company
must provide notice to the FRB within 30 days after commencing activities
previously determined by statute or by the FRB and the Treasury Department to be
permissible. Salisbury is a registered financial holding company.
Under
GLBA, all financial institutions are required to establish policies and
procedures to restrict the sharing of nonpublic customer data with nonaffiliated
parties and to protect customer data from unauthorized access. In addition, the
Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) includes many
provisions concerning national credit reporting standards, and permits
consumers, including customers of Salisbury, to opt out of information sharing
among affiliated companies for marketing purposes. The FACT Act also requires
banks and other financial institutions to notify their customers if they report
negative information about them to a credit bureau or if they are granted credit
on terms less favorable than those generally available. The Federal Reserve
Board and the Federal Trade Commission are granted extensive rulemaking
authority under the FACT Act, and Salisbury and the Bank are subject to those
provisions. The Bank has developed policies and procedures for itself and its
affiliate, Salisbury, and believes it is in compliance with all privacy,
information sharing, and notification provisions of GLBA and the FACT
Act.
Connecticut Banking Laws and
Supervision
The Bank
is a state-chartered commercial bank under Connecticut law and as such is
subject to regulation and examination by the CTDOB. The CTDOB regulates
commercial banks, among other financial institutions, for compliance with the
laws and regulations of the State of Connecticut, as well as the appropriate
rules and regulations of federal agencies. The approval of the CTDOB is required
for, among other things, the establishment of branch offices and business
combination transactions. The CTDOB conducts periodic examinations of
Connecticut-chartered banks. The FDIC also regulates many of the areas regulated
by the CTDOB, and federal law may limit some of the authority provided to
Connecticut-chartered banks by Connecticut law.
Lending
Activities
Connecticut
banking laws grant commercial banks broad lending authority. With certain
limited exceptions, total secured and unsecured loans made to any one obligor
under this statutory authority may not exceed 10% and 15%, respectively, of a
bank’s equity capital and reserves for loan and lease losses.
Dividends
The Bank
may pay cash dividends out of its net profits. For purposes of this restriction,
“net profits” represents the remainder of all earnings from current operations.
Further, the total amount of all dividends declared by the Bank in any year may
not exceed the sum of its net profits for the year in question combined with its
retained net profits from the preceding two years, unless the CTDOB approves the
larger dividend. Federal law also prevents the Bank from paying dividends or
making other capital distributions that would cause it to become
“undercapitalized.” The FDIC may limit the Bank’s ability to pay dividends. No
dividends may be paid to the Bank’s Shareholders if such dividends would also
reduce Shareholders’ equity below the amount of the liquidation account required
by the Connecticut conversion regulations.
Powers
Connecticut
law permits Connecticut banks to sell insurance and fixed- and variable-rate
annuities if licensed to do so by the Connecticut Insurance CTDOB. With the
prior approval of the CTDOB, Connecticut banks are also authorized to engage in
a broad range of activities related to the business of banking, or that are
financial in nature or that are permitted under the BHCA or the Home Owners’
Loan Act (“HOLA”), both federal statutes, or the regulations promulgated as a
result of these statutes. Connecticut banks are also authorized to engage in any
activity permitted for a national bank or a federal savings association upon
filing notice with the CTDOB, unless the CTDOB disapproves the
activity.
Assessments
Connecticut
banks are required to pay annual assessments to the CTDOB to fund the CTDOB’s
operations. The general assessments are paid pro-rata based upon a bank’s asset
size.
Enforcement
Under
Connecticut law, the CTDOB has extensive enforcement authority over Connecticut
banks and, under certain circumstances, affiliated parties, insiders, and
agents. The CTDOB’s enforcement authority includes cease and desist orders,
fines, receivership, conservatorship, removal of officers and directors,
emergency closures, dissolution and liquidation.
New York and Massachusetts
Banking Laws and Supervision
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or the
Interstate Banking Act, permits adequately capitalized bank holding companies to
acquire banks in any state subject to specified concentration limits and other
conditions. The Interstate Banking Act also authorizes the interstate merger of
banks. In addition, among other things, the Interstate Banking Act permits banks
to establish new branches on an interstate basis provided that such action is
specifically authorized by the law of the host state. The Bank conducts
activities and operates branch offices in New York and Massachusetts as well as
Connecticut. The Bank, with respect to offices in New York and
Massachusetts, may conduct any activity that is authorized under Connecticut law
that is permissible for either New York or Massachusetts state banks or for an
out-of-state national bank, at its New York and Massachusetts branch offices,
respectively. The New York State Superintendent of Banks may exercise regulatory
authority with respect to the Bank’s New York branch offices and the Bank is
subject to certain rules related to community reinvestment, consumer protection,
fair lending, establishment of intra-state branches and the conduct of banking
activities with respect to its branches located in New York
State. The Massachusetts Commissioner of Banks may exercise similar
authority and the Bank is subject to similar rules under Massachusetts Banking
Law with respect to the Bank’s Massachusetts branch offices.
Federal
Regulations
Capital
Requirements
Under
FDIC regulations, federally insured state-chartered banks, such as the Bank,
that are not members of the Federal Reserve System (“state non-member banks”)
are required to comply with minimum leverage capital requirements. If the FDIC
determines that an institution is not anticipating or experiencing significant
growth and is, in general, a strong banking organization, rated composite 1
under the Uniform Financial Institutions Ranking System established by the
Federal Financial Institutions Examination Council, the minimum capital leverage
requirement is a ratio of Tier 1 capital to total assets of 3%. For all other
institutions, the minimum leverage capital ratio is not less than 4%. Tier 1
capital is the sum of common Shareholders’ equity, noncumulative perpetual
preferred stock (including any related surplus) and minority investments in
certain subsidiaries, less intangible assets (except for certain servicing
rights and credit card relationships) and certain other specified
items.
The FDIC
regulations require state non-member banks to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
regulatory capital to regulatory risk-weighted assets is referred to as a bank’s
“risk-based capital ratio.” Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items (including recourse
obligations, direct credit substitutes and residual interests) to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater
risk.
State
non-member banks, such as the Bank, must maintain a minimum ratio of total
capital to risk-weighted assets of at least 8%, of which at least one-half must
be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or
supplementary capital items, which include allowances for loan losses in an
amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and
certain other capital instruments, and a portion of the net unrealized gain on
equity securities. The includable amount of Tier 2 capital cannot exceed the
amount of the institution’s Tier 1 capital. Banks that engage in specified
levels of trading activities are subject to adjustments in their risk based
capital calculation to ensure the maintenance of sufficient capital to support
market risk.
The FDIC
Improvement Act (the “FDICIA”) required each federal banking agency to revise
its risk-based capital standards for insured institutions to ensure that those
standards take adequate account of interest-rate risk, concentration of credit
risk, and the risk of nontraditional activities, as well as to reflect the
actual performance and expected risk of loss on multi-family residential loans.
The FDIC, along with the other federal banking agencies, has adopted a
regulation providing that the agencies will take into account the exposure of a
bank’s capital and economic value to changes in interest rate risk in assessing
a bank’s capital adequacy. The FDIC also has authority to establish individual
minimum capital requirements in appropriate cases upon determination that an
institution’s capital level is, or is likely to become, inadequate in light of
the particular circumstances.
As a bank
holding company, Salisbury is subject to FRB capital adequacy guidelines for
bank holding companies similar to those of the FDIC for state-chartered
banks.
Prompt
Corrective Regulatory Action
Federal
law requires, among other things, that federal bank regulatory authorities take
“prompt corrective action” with respect to banks that do not meet minimum
capital requirements. For these purposes, the law establishes five capital
categories:
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Well
capitalized – at least 5% leverage capital, 6% tier one risk based capital
and 10% total risk based capital.
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•
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Adequately
capitalized – at least 4% leverage capital, 4% tier one risk based capital
and 8% total risk based capital.
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•
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Undercapitalized
– less than 4% leverage capital, 4% tier one risk based capital and less
than 8% total risk based capital. “Undercapitalized” banks must adhere to
growth, capital distribution (including dividend) and other limitations
and are required to submit a capital restoration plan. A bank’s compliance
with such a plan is required to be guaranteed by any company that controls
the undercapitalized institution in an amount equal to the lesser of 5% of
the institution’s total assets when deemed undercapitalized or the amount
necessary to achieve the status of adequately
capitalized.
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Significantly
undercapitalized – less than 3% leverage capital, 3% tier one risk based
capital and less than 6% total risk-based capital. “Significantly
undercapitalized” banks must comply with one or more of a number of
additional restrictions, including but not limited to an order by the FDIC
to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets, cease receipt of deposits from
correspondent banks or dismiss directors or officers, and restrictions on
interest rates paid on deposits, compensation of executive officers and
capital distributions by the parent holding
company.
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Critically
undercapitalized – less than 2% tangible capital. “Critically
undercapitalized” institutions are subject to additional measures
including, subject to a narrow exception, the appointment of a receiver or
conservator within 270 days after it obtains such
status.
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As of
December 31, 2009, the Bank was “well capitalized”.
Transactions
with Affiliates
Under
federal law, transactions between depository institutions and their affiliates
are governed by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). In
a holding company context, at a minimum, the parent holding company of a bank
and any companies which are controlled by such parent holding company are
affiliates of the bank. Generally, Sections 23A and 23B are intended to protect
insured depository institutions from suffering losses arising from transactions
with non-insured affiliates, by limiting the extent to which a bank or its
subsidiaries may engage in covered transactions with any one affiliate and with
all affiliates of the bank in the aggregate, and by requiring that such
transactions be on terms that are consistent with safe and sound banking
practices.
Further,
Section 22(h) of the FRA restricts loans to directors, executive officers, and
principal shareholders (“insiders”). Under Section 22(h), loans to insiders and
their related interests may not exceed, together with all other outstanding
loans to such persons and affiliated entities, the institution’s total capital
and surplus. Loans to insiders above specified amounts must receive the prior
approval of the board of directors. Further, under Section 22(h), loans to
directors, executive officers and principal Shareholders must be made on terms
substantially the same as offered in comparable transactions to other persons,
except that such insiders may receive preferential loans made under a benefit or
compensation program that is widely available to the bank’s employees and does
not give preference to the insider over the employees. Section 22(g) of the FRA
places additional limitations on loans to executive officers.
Enforcement
The FDIC
has extensive enforcement authority over insured banks, including the Bank. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, issue cease and desist orders and remove directors and
officers. In general, these enforcement actions may be initiated in response to
violations of laws and regulations and unsafe or unsound practices.
Insurance of Deposit
Accounts
The
Bank’s deposit accounts are insured by the FDIC up to applicable legal limits
(generally, $100,000 per depositor and $250,000 for certain retirement plan
accounts) and are subject to deposit insurance assessments. Through the
enactment of EESA, the $100,000 limit on insured deposits has been increased to
$250,000 through December 31, 2013.
The Bank
is participating in the FDIC’s TLGP. As a result, the Bank’s non-interest
bearing transaction deposit accounts and interest-bearing transaction accounts
paying 50 basis points or less will be fully insured above and beyond the
$250,000 limit through June 30, 2010. While this unlimited insurance coverage is
in effect, covered deposits in excess of the $250,000 limit are subject to a
surcharge of $0.10 per $100 of deposits by the FDIC.
The FDIC
has adopted a risk-based assessment system. The FDIC assigns an institution to
one of three capital categories based on the institution’s financial condition
consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of three supervisory subcategories within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution’s primary
federal regulator and information which the FDIC determines to be relevant to
the institution’s financial condition and the risk posed to the deposit
insurance funds. An institution’s assessment rate depends on the capital
category and supervisory category to which it is assigned.
In
November 2006, the FDIC Board of Directors approved a final rule to implement a
One-Time Assessment Credit, as required by the Federal Deposit Insurance Reform
Act of 2005. For 2007 assessment periods, effective with the June 2007 invoice,
credits were used to fully offset the Bank’s assessment. For assessment periods
beginning in 2008-2010, credits may not be applied to more than 90% of an
institution’s assessment. The Bank’s credit covered 90% of its 2008 FDIC
assessment expense and was largely exhausted by December 31, 2008.
In
addition, FDIC insured institutions are required to pay assessments to the FDIC
at an annual rate of approximately 1.14 basis points of insured deposits to fund
interest payments on bonds issued by The Financing Corporations, an agency of
the federal government established to recapitalize the predecessor to the
Savings Association Insurance Fund. These assessments will continue until the
Financing Corporation bonds mature in 2017 through 2019. The assessment rate is
adjusted quarterly to reflect changes in the assessment bases of the fund based
on quarterly Call Report and Thrift Financial Report submissions.
Recently,
the FDIC adopted a restoration plan that would increase the reserve ratio to the
1.15% threshold within seven years. As part of that plan, in December, 2008, the
FDIC increased risk-based assessment rates due to deteriorating financial
conditions in the banking industry. Changes to the risk-based
assessment system include increasing premiums
for institutions that rely on excessive amounts of brokered deposits, including
CDARS, increasing premiums for excessive use of secured liabilities, including
Federal Home Loan Bank advances, lowering premiums for smaller
institutions with very high capital levels, and adding financial ratios and debt
issuer ratings to the premium calculations for banks with over $10 billion in
assets, while providing a reduction for their unsecured debt. It is generally
expected that rates will continue to increase in the near future due to the
significant cost of bank failures and the increase in the number of both
troubled banks and bank failures. The FDIC, in view of the significant decrease
in the deposit insurance funds’ reserves, imposed a special assessment in the
second quarter of 2009. Banks must continue to pay base premium rates
on top of any special assessment. Furthermore, banks may be subject to an
“emergency” special assessment in addition to other special assessments and
regular premium rates. The amount of an emergency special assessment imposed on
a bank will be determined by the FDIC if such amount is necessary to provide
sufficient assessment income to repay amounts borrowed from the U.S. Department
of Treasury; to provide sufficient assessment income to repay obligations issued
to and other amounts borrowed from insured depository institutions; or for any
other purpose the FDIC may deem necessary.
The FDIC
may terminate insurance of deposits, after notice and a hearing, if it finds
that the institution is in an unsafe or unsound condition to continue
operations, has engaged in unsafe or unsound practices, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Federal Reserve
System
The FRB
regulations require depository institutions to maintain reserves against their
transaction accounts (primarily NOW and regular checking accounts). The FRB
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $44.4 million or less (which may be adjusted by the FRB) the reserve
requirement is 3%; and for amounts greater than $44.4 million, 10% (which may be
adjusted by the FRB between 8% and 14%), against that portion of total
transaction accounts in excess of $44.4 million. The first $10.3 million of
otherwise reservable balances (which may be adjusted by the FRB) are exempted
from the reserve requirements. The Bank is in compliance with these
requirements.
Federal Home Loan Bank
System
The Bank
is a member of the Boston region of the Federal Home Loan Bank System, which
consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank of
Boston (the “FHLBB”) provides a central credit facility primarily for member
institutions. Member institutions are required to acquire and hold shares of
capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year and 4.5% of its advances
(borrowings) from the FHLBB. The Bank was in compliance with this requirement.
At December 31, 2009, the Bank had FHLBB stock of $6.0 million and FHLBB
advances of $76.4 million.
The
Federal Home Loan Banks are required to provide funds for certain purposes
including the resolution of insolvent thrifts in the late 1980s and to
contributing funds for affordable housing programs. These requirements could
reduce the ability of the Federal Home Loan Banks to pay dividends to their
members and result in the Federal Home Loan Banks imposing a higher rate of
interest on advances to their members. Recent legislation has changed the
structure of the Federal Home Loan Banks’ funding obligations for insolvent
thrifts, revised the capital structure of the Federal Home Loan Banks and
implemented entirely voluntary membership for Federal Home Loan
Banks.
The
regional banks within the Federal Home Loan Bank System have significant
held-to-maturity portfolios of private-label mortgage-backed securities with
significant unrealized losses. In response to the unprecedented market
conditions and potential future losses, to preserve capital they have adopted a
revised retained earnings target, declared a moratorium on excess stock
repurchases and restricted quarterly dividend payments to no more than 50% of
net profit until the retained earnings target is met. As a consequence, in
February 2009 the FHLBB announced a suspension of quarterly dividends and the
Bank received no FHLBB dividends in 2009. There can be no assurance that the
impact of recent market conditions on the financial condition of the Federal
Home Loan Banks or future legislation on the Federal Home Loan Banks also will
not cause a decrease in the value of the FHLBB stock held by the
Bank.
Emergency Economic
Stabilization Act of 2008
In 2008,
the U.S. government enacted the EESA in response to the financial crises
affecting the overall banking system and financial markets. EESA included a
provision for an increase in the amount of deposits insured by the FDIC to
$250,000 until December 2009, and subsequently extended to December 31, 2013, to
strengthen confidence in the banking system. Also in 2008, the FDIC implemented
the TLGP, which provides unlimited deposit insurance on funds in
non-interest-bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000. Participating institutions will be
assessed a 10 basis point surcharge on the additional insured deposits.
Salisbury is participating in the deposit insurance portion of the TLGP and
incurs the surcharge as a cost of participation.
Troubled Asset Relief
Program and Capital Purchase Program
The
Troubled Asset Relief Program (“TARP”) was established as part of EESA in
October 2008. The TARP gave the Treasury authority to deploy up to $700 billion
into the financial system with the objective of improving liquidity in the
capital markets. On October 24, 2008, the Treasury announced plans to direct
$250 billion of the $700 billion authorized into preferred stock investments in
banks (the Capital Purchase Program or the “CPP”). The general terms of this
preferred stock program for a participant bank that is a public company are as
follows: pay 5% dividends on the Treasury’s preferred stock for the first five
years and 9% dividends thereafter; cannot increase common dividends for three
years while the Treasury is an investor; the Treasury receives warrants
entitling the Treasury to buy participating bank’s common stock equal to 15% of
the Treasury’s total investment in the participating bank; and participating
bank executives must agree to certain compensation restrictions, and
restrictions on the amount of executive compensation which is tax deductible and
other detailed terms and conditions. In addition to the executive compensation
restrictions announced by the Department of Treasury, participants in the CPP
are also subject to the more stringent executive compensation limits enacted as
part of the American Recovery and Reinvestment Act of 2009 (the “ARRA”), which
was signed into law on February 17, 2009. Among other things, the ARRA more
strictly limits the payment of incentive compensation and any severance or
golden parachute payments to certain highly compensated employees of CPP
participants, expands the scope of employees who are subject to a claw-back of
bonus and incentive compensation that is based on results that are later found
to be materially inaccurate, adds additional corporate governance requirements,
and requires the Department of Treasury to perform a retroactive review of
compensation to the five highest compensated employees of all CPP
participants.
On March
13, 2009, Salisbury entered into a Purchase Agreement with the Treasury pursuant
to which Salisbury issued and sold to the Treasury (i) 8,816 shares of
Salisbury’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value
$0.01 per share, having a liquidation preference of $1,000 per share (the Series
A Preferred Stock) and (ii) a ten-year warrant to purchase up to 57,671 shares
of Salisbury’s common stock, par value $0.10 per share, at an exercise price of
$22.93 per share (the “Warrant”), for an aggregate purchase price of $8,816,000
in cash. All of the proceeds from the sale of the Series A Preferred Stock are
treated as Tier 1 Capital for regulatory purposes. Additional terms or
restrictions to those mentioned above may be imposed by Treasury or Congress at
a later date, and these restrictions may apply retroactively, so long as
Salisbury remains a participant in the CPP. Such restrictions could have a
material adverse affect on Salisbury’s operations, revenue and financial
condition, and on its ability to pay dividends.
Other
Regulations
Sarbanes-Oxley
Act of 2002
The
stated goals of the Sarbanes-Oxley Act of 2002 (“SOX”) are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.
SOX
includes very specific additional disclosure requirements and new corporate
governance rules, requires the SEC and securities exchanges to adopt extensive
additional disclosure, corporate governance and other related rules, and
mandates further studies of certain issues by the SEC and the Comptroller
General. SOX represents significant federal involvement in matters traditionally
left to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board
of directors and management and between a board of directors and its
committees.
SOX
addresses, among other matters, audit committees; certification of financial
statements and internal controls by the Chief Executive Officer and Chief
Financial Officer; the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer’s securities by directors
and senior officers in the twelve-month period following initial publication of
any financial statements that later require restatement; a prohibition on
insider trading during pension plan black-out periods; disclosure of off-balance
sheet transactions; a prohibition on certain loans to directors and officers;
expedited filing requirements for Forms 4; disclosure of a code of ethics and
filing a Form 8-K for significant changes or waivers of such code; “real time”
filing of periodic reports; the formation of a public company accounting
oversight board; auditor independence; and various increased criminal penalties
for violations of securities laws. The SEC has enacted rules to implement
various provisions of SOX.
USA
PATRIOT Act
Under
Title III of the USA PATRIOT Act, all financial institutions are required to
take certain measures to identify their customers, prevent money laundering,
monitor customer transactions and report suspicious activity to U.S. law
enforcement agencies. Financial institutions also are required to respond to
requests for information from federal banking regulatory authorities and law
enforcement agencies. Information sharing among financial institutions for the
above purposes is encouraged by an exemption granted to complying financial
institutions from the privacy provisions of GLBA and other privacy laws.
Financial institutions that hold correspondent accounts for foreign banks or
provide private banking services to foreign individuals are required to take
measures to avoid dealing with certain foreign individuals or entities,
including foreign banks with profiles that raise money laundering concerns, and
are prohibited from dealing with foreign “shell banks” and persons from
jurisdictions of particular concern. The primary federal banking regulators and
the Secretary of the Treasury have adopted regulations to implement several of
these provisions. All financial institutions also are required to establish
internal anti-money laundering programs. The effectiveness of a financial
institution in combating money laundering activities is a factor to be
considered in any application submitted by the financial institution under the
Bank Merger Act or the BHCA. Salisbury has in place a Bank Secrecy Act and USA
PATRIOT Act compliance program, and engages in very few transactions of any kind
with foreign financial institutions or foreign persons.
Community
Reinvestment Act and Fair Lending Laws
Salisbury
has a responsibility under the Community Reinvestment Act of 1977 (“CRA”) to
help meet the credit needs of our communities, including low- and
moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution’s discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
In connection with its examination, the FDIC assesses the Bank’s record of
compliance with the CRA. In addition, the Equal Credit Opportunity Act and the
Fair Housing Act prohibit discrimination in lending practices on the basis of
characteristics specified in those statutes. The Bank’s failure to comply with
the provisions of the CRA could, at a minimum, result in regulatory restrictions
on our activities. The Bank’s failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions
against the Bank by the FDIC as well as other federal regulatory agencies and
the Department of Justice. The Bank’s latest FDIC CRA rating was
“satisfactory”.
Impact
of Inflation and Changing Prices
The
Consolidated Financial Statements and their Notes presented within this document
have been prepared in accordance with generally accepted accounting principles
in the United States of America (“GAAP”), which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
Salisbury’s operations. Unlike the assets and liabilities of industrial
companies, nearly all of the assets and liabilities of Salisbury are monetary in
nature. As a result, interest rates have a greater impact on Salisbury’s
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Availability
of Securities and Exchange Commission Filings
Salisbury
makes available free of charge on its website (www.salisburybank.com) a link to
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable
after such reports are electronically filed with or furnish it to the SEC. Such
reports filed with the SEC are also available on its website (www.sec.gov). The
public may also read and copy any materials filed with the SEC at the SEC’s
Public Reference Room, 100 F Street, NE, Washington, DC 20549. Information about
the Public Reference Room can be obtained by calling 1-800-SEC-0330. Information
on Salisbury’s website is not incorporated by reference into this report.
Investors are encouraged to access these reports and the other information about
Salisbury’s business and operations on its website. Copies of these filings may
also be obtained from Salisbury free of charge upon request.
Guide
3 Statistical Disclosure by Bank Holding Companies
The
following information required by Securities Act Guide 3 “Statistical Disclosure
by Bank Holding Companies” is located on the pages noted below.
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Page
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I.
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Distribution
of Assets, Liabilities and Shareholders’ Equity; Interest Rates and
Interest Differentials
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21
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II.
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Investment
Portfolio
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26,
44-46
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III.
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Loan
Portfolio
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26-28,
47
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IV.
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Summary
of Loan Loss Experience
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22-23,
47
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V.
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Deposits
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28,
49-50
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VI.
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Return
on Equity and Assets
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18
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VII.
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Short-Term
Borrowings
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28,
50
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Item 1A.
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RISK
FACTORS
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Salisbury
is the registered bank holding company for the Bank, a wholly-owned
subsidiary. Salisbury's activity is currently limited to the holding
of the Bank's outstanding capital stock and the Bank is Salisbury's primary
investment.
An
investment in Salisbury common stock entails certain risks. Salisbury
considers the most significant factors affecting risk in Salisbury common stock
as those that are set forth below. These are not the only risks of an
investment in Salisbury common stock, and none of the factors set forth below
relates to the personal circumstances of individual
investors. Investors should read this
entire Form 10-K, as well as other documents and exhibits that are incorporated
by reference in the 10-K and that have been filed with the SEC, in order to
better understand these risks and to evaluate investment in Salisbury common
stock.
Changes
in interest rates and spreads could have a negative impact on
earnings.
Salisbury’s
earnings and financial condition are dependent to a large degree upon net
interest income, which is the difference between interest earned from loans and
investments and interest paid on deposits and borrowings. The narrowing of
interest rate spreads, meaning the difference between interest rates earned on
loans and investments and the interest rates paid on deposits and borrowings,
could adversely affect Salisbury’s earnings and financial condition. Salisbury
cannot predict with certainty or control changes in interest rates. Regional and
local economic conditions and the policies of regulatory authorities, including
monetary policies of the FRB, affect interest income and interest expense.
Salisbury has ongoing policies and procedures designed to manage the risks
associated with changes in market interest rates.
However,
changes in interest rates still may have an adverse effect on Salisbury’s
profitability. For example, high interest rates could also affect the
volume of loans
that Salisbury originates, because higher rates could cause customers to apply
for fewer mortgages, or cause depositors to shift funds from accounts that have
a comparatively lower rate, to accounts with a higher rate or experience
customer attrition due to competitor pricing. If the cost of interest-bearing
deposits increases at a rate greater than the yields on interest-earning assets
increase, net interest income will be negatively affected. Changes in the asset
and liability mix may also affect net interest income. Similarly, lower interest
rates cause higher yielding assets to prepay and floating or adjustable rate
assets to reset to lower rates. If Salisbury is not able to reduce its funding
costs sufficiently, due to either competitive factors or the maturity schedule
of existing liabilities, then Salisbury’s net interest margin will
decline.
Weakness
in the markets for residential or commercial real estate, including the
secondary residential mortgage loan markets, could reduce Salisbury’s net income
and profitability.
Declines
in home prices, increases in delinquency and default rates, and constrained
secondary credit markets affect the mortgage industry generally. Salisbury’s
financial results may be adversely affected by changes in real estate values.
Decreases in real estate values could adversely affect the value of property
used as collateral for loans and investments. If poor economic conditions result
in decreased demand for real estate loans, Salisbury’s net income and profits
may decrease.
Weakness
in the secondary market for residential lending could have an adverse impact
upon Salisbury’s profitability. The effects of ongoing mortgage market
challenges, combined with the ongoing correction in residential real estate
market prices and reduced levels of home sales, could result in further price
reductions in single family home values, adversely affecting the value of
collateral securing mortgage loans held, mortgage loan originations and gains on
sale of mortgage loans. Continued declines in real estate values and home sales
volumes, and financial stress on borrowers as a result of job losses, or other
factors, could have further adverse effects on borrowers that result in higher
delinquencies and greater charge-offs in future periods beyond that which is
provided for in Salisbury’s allowance for loan losses, which would adversely
affect Salisbury’s financial condition or results of operations.
Salisbury’s
allowance for loan losses may be insufficient.
Salisbury’s
business is subject to periodic fluctuations based on national and local
economic conditions. These fluctuations are not predictable, cannot be
controlled and may have a material adverse impact on Salisbury’s operations and
financial condition. For example, recent declines in housing activity including
declines in building permits, housing starts and home prices may make it more
difficult for Salisbury’s borrowers to sell their homes or refinance their debt.
Sales may also slow, which could strain the resources of real estate developers
and builders. The current economic uncertainty has affected employment levels
and could impact the ability of Salisbury’s borrowers to service their debt.
Bank regulatory agencies also periodically review Salisbury’s allowance for loan
losses and may require an increase in the provision for credit losses or the
recognition of further loan charge-offs, based on judgments different than those
of management. In addition, if charge-offs in future periods exceed the
allowance for loan losses Salisbury will need additional provisions to increase
the allowance for loan losses. Any increases in the allowance for loan losses
will result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on Salisbury’s financial condition and results of
operations. Salisbury may suffer higher loan losses as a result of these factors
and the resulting impact on its borrowers.
Credit
market conditions may impact Salisbury’s investments.
Significant
credit market anomalies may impact the valuation and liquidity of Salisbury’s
investment securities. The problems of numerous financial institutions have
reduced market liquidity, increased normal bid-asked spreads and increased the
uncertainty of market participants. Such illiquidity could reduce the market
value of Salisbury’s investments, even those with no apparent credit exposure.
The valuation of Salisbury’s investments requires judgment and as market
conditions change investment values may also change.
If
all or a significant portion of the unrealized losses in Salisbury’s portfolio
of investment securities were determined to be other-than-temporarily impaired,
Salisbury would recognize a material charge to its earnings and its capital
ratios would be adversely impacted.
As of
December 31, 2009, Salisbury had $3.8 million of after-tax gross unrealized
losses associated with its portfolio of securities available-for-sale, compared
with $7.0 million at December 31, 2008. The fair value of such securities is
supplied by third-party sources.
Management
must assess whether unrealized losses are other-than-temporary and relies on
data supplied by third-party sources to do so. The determination of whether a
decline in fair value is other-than-temporary considers numerous factors, many
of which involve significant judgment.
To the
extent that any portion of the unrealized losses in Salisbury’s portfolio of
investment securities is determined to be other-than-temporarily impaired,
Salisbury will recognize a charge to its earnings in the quarter during which
such determination is made and its earnings and capital ratios will be adversely
impacted. In 2009, Salisbury recognized $744,000 in after-tax charges to
earnings as a result of other-than-temporary impairment
determinations.
If
the goodwill that Salisbury has recorded in connection with its acquisitions
becomes impaired, it could have a negative impact on Salisbury’s
profitability.
Applicable
accounting standards require that the purchase method of accounting be used for
all business combinations. Under purchase accounting, if the purchase price of
an acquired company exceeds the fair value of the acquired company’s net assets,
the excess is carried on the acquirer’s balance sheet as goodwill. At December
31, 2009, Salisbury had $9.8 million of goodwill on its balance sheet. Salisbury
must evaluate goodwill for impairment at least annually. Write-downs of the
amount of any impairment, if necessary, are to be charged to the results of
operations in the period in which the impairment occurs. There can be no
assurance that future evaluations of goodwill will not result in findings of
impairment and related write-downs, which may have a material adverse effect on
Salisbury’s financial condition and results of operations.
Salisbury’s
participation in the U.S. Treasury’s Capital Purchase Program restricts
Salisbury’s ability to increase dividends on its common stock.
In March
2009, the U.S. Treasury invested $8.8 million in preferred stock in Salisbury
under the CPP. The U.S. Treasury was issued warrants entitling Treasury to buy
Salisbury common stock equal to 15% of Treasury’s preferred stock investment.
The terms of CPP require Salisbury to pay 5% dividends on the Treasury’s
preferred stock for the first five years, and then 9% dividends thereafter (not
tax deductible) and restrict Salisbury’s ability to increase its dividends on
its common stock, redeem the preferred stock, undertake stock repurchase
programs and pay executive compensation so long as Salisbury remains a
participant in the CPP. The Treasury or Congress may impose additional
restrictions in the future which may apply retroactively. These restrictions
have a material effect on Salisbury’s operations, revenue and financial
condition and its ability to pay dividends.
Salisbury
may not pay dividends if it is unable to receive dividends from the
Bank.
Cash
dividends from the Bank and Salisbury’s liquid assets are the principal sources
of funds for paying cash dividends on Salisbury’s common stock and preferred
stock. Unless Salisbury receives dividends from the Bank or chooses to use its
liquid assets, it may not be able to pay dividends. The Bank’s ability to pay
dividends to Salisbury is subject to its ability to earn net income and to meet
certain regulatory requirements.
Strong competition within Salisbury’s
market areas may limit growth and profitability.
Competition
in the banking and financial services industry is intense. Salisbury competes
with commercial banks, savings institutions, mortgage brokerage firms, credit
unions, finance companies, mutual funds, insurance companies, and brokerage and
investment banking firms operating locally and elsewhere. As Salisbury grows, it
may expand into contiguous market areas where it may not be as well known as
other institutions that have been operating in those areas for some time. In
addition, larger banking institutions may become increasingly active in its
market areas and may have substantially greater resources and lending limits
than it has and may offer certain services that it does not or cannot
efficiently provide. Salisbury’s profitability depends upon its continued
ability to successfully compete in its market areas. The greater resources and
deposit and loan products offered by some competitors may limit its ability to
grow profitably.
Salisbury
is subject to extensive government regulation and supervision.
Salisbury
and the Bank are subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’
funds, federal deposit insurance funds and the banking system as a whole, not
Shareholders. These regulations affect Salisbury’s lending practices, capital
structure, investment practices, dividend policy and growth, among other things.
Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Changes to statutes, regulations
or regulatory policies, including changes in interpretation or implementation of
statutes, regulations or policies, could affect Salisbury in substantial and
unpredictable ways. Such changes could subject Salisbury to additional costs,
limit the types of financial services and products it may offer and/or increase
the ability of non-banks to offer competing financial services and products,
among other things. Failure to comply with laws, regulations or policies could
result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on Salisbury’s
business, financial condition and results of operations. While Salisbury has
policies and procedures designed to prevent any such violations, there can be no
assurance that such violations will not occur. See the section captioned
“Supervision and Regulation” in Item 1 of this report for further
information.
Salisbury’s
stock price can be volatile.
Salisbury’s
stock price can fluctuate widely in response to a variety of factors
including:
|
|
•
|
Actual
or anticipated variations in quarterly operating
results
|
|
|
•
|
Recommendations
by securities analysts
|
|
|
•
|
New
technology used, or services offered, by
competitors
|
|
|
•
|
Significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving Salisbury or Salisbury’s
competitors
|
|
|
•
|
Failure
to integrate acquisitions or realize anticipated benefits from
acquisitions
|
|
|
•
|
Operating
and stock price performance of other companies that investors deem
comparable to Salisbury
|
|
|
•
|
News
reports relating to trends, concerns and other issues in the financial
services industry
|
|
|
•
|
Changes
in government regulations
|
|
|
•
|
Geopolitical
conditions such as acts or threats of terrorism or military
conflicts
|
|
|
•
|
Extended
recessionary environment
|
General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes, credit loss trends or currency fluctuations could also cause
Salisbury’s stock price to decrease regardless of Salisbury’s operating
results.
Salisbury
may not be able to attract and retain skilled personnel.
Salisbury’s
success depends, in large part, on its ability to attract and retain key people.
Competition for people with specialized knowledge and skills can be intense and
Salisbury may not be able to hire people or to retain them. The unexpected loss
of services of one or more of Salisbury’s key personnel could have a material
adverse impact on the business because of their skills, knowledge of the market,
years of industry experience and the difficulty of promptly finding qualified
replacement personnel.
Salisbury
continually encounters technological change.
The
financial services industry is continually undergoing rapid technological change
with frequent introductions of new technology-driven products and services. The
effective use of technology can increase efficiency and enable financial
institutions to better serve customers and to reduce costs. However, some new
technologies needed to compete effectively result in incremental operating
costs. Salisbury’s future success depends, in part, upon its ability to address
the needs of its customers by using technology to provide products and services
that will satisfy customer demands, as well as to create additional efficiencies
in operations. Many of Salisbury’s competitors have substantially greater
resources to invest in technological improvements. Salisbury may not be able to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to its customers. Failure to
successfully keep pace with technological change affecting the financial
services industry could have a material adverse impact on Salisbury’s business
and, in turn, its financial condition and results of operations.
Salisbury’s
controls and procedures may fail or be circumvented.
Management
regularly reviews and updates Salisbury’s internal controls, disclosure controls
and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of the controls
and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on Salisbury’s business, results
of operations and financial condition.
Customer
information may be obtained and used fraudulently.
Risk of
theft of customer information resulting from security breaches by third parties
exposes Salisbury to reputation risk and potential monetary loss. Salisbury has
exposure to fraudulent use of our customer’s personal information resulting from
its general business operations through loss or theft of the information and
through customer use of financial instruments, such as debit cards.
Changes
in accounting standards can materially impact Salisbury’s financial
statements.
Salisbury’s
accounting policies and methods are fundamental to how Salisbury records and
reports its financial condition and results of operations. From time to time,
the Financial Accounting Standards Board or regulatory authorities change the
financial accounting and reporting standards that govern the preparation of
Salisbury’s financial statements. These changes can be hard to predict and can
materially impact how it records and reports its financial condition and results
of operations. In some cases, it could be required to apply a new or revised
standard retroactively, resulting in Salisbury restating prior period financial
statements.
Changes
and interpretations of tax laws and regulations may adversely impact Salisbury’s
financial statements.
Local,
state or federal tax authorities may interpret tax laws and regulations
differently than Salisbury and challenge tax positions that Salisbury has taken
on its tax returns. This may result in the disallowance of deductions or
differences in the timing of deductions and result in the payment of additional
taxes, interest or penalties that could materially affect Salisbury’s
performance.
Unprecedented
disruption and significantly increased risk in the financial markets may impact
Salisbury.
The
banking industry has experienced unprecedented turmoil over the past two years
as some of the world’s major financial institutions collapsed, were seized or
were forced into mergers as the credit markets tightened and the economy headed
into a recession and has eroded confidence in the world’s financial system.
Measures taken by the Government in an effort to stabilize the economy may have
unintended consequences and there can be no assurance that Salisbury will not be
impacted by current market uncertainty in a way it cannot currently predict or
mitigate.
|
Item 1B.
|
UNRESOLVED
SEC STAFF COMMENTS
|
None.
|
Item 2.
|
PROPERTIES
|
Salisbury
is not the owner or lessee of any properties. The properties described below are
properties owned or leased by the Bank.
The Bank
conducts its business at its main office, located at 5 Bissell Street,
Lakeville, Connecticut, and through 7 full service branch offices located in
Canaan, Salisbury and Sharon, Connecticut, Sheffield and South Egremont,
Massachusetts, and Dover Plains and Millerton, New York. The Bank’s trust and
wealth advisory services division is located in a separate building adjacent to
the main office of the Bank in Lakeville, Connecticut. The Bank owns its main
office and four of its branch offices and leases three branch
offices.
For
additional information, see Note 6, “Premises and Equipment,” and Note 18,
“Commitments and Contingent Liabilities” To the Consolidated Financial
Statements.
The
following table includes all property owned or leased by the Bank, but does not
include Other Real Estate Owned.
|
Offices
|
Location
|
Owned/Leased
|
Lease
expiration
|
|
Main
Office
|
5
Bissell Street, Lakeville, CT
|
Owned
|
-
|
|
Trust
and Wealth Advisory Services Division
|
19
Bissell Street, Lakeville, CT
|
Owned
|
-
|
|
Salisbury
Office
|
18
Main Street, Salisbury, CT
|
Owned
|
-
|
|
Sharon
Office
|
29
Low Road, Sharon, CT
|
Owned
|
-
|
|
Canaan
Operations
|
94
Main Street, Canaan, CT
|
Owned
|
-
|
|
Canaan
Office
|
100
Main Street, Canaan, CT
|
Owned
|
-
|
|
Millerton
Office
|
87
Main Street, Millerton, NY
|
Owned
|
-
|
|
South
Egremont Office
|
51
Main Street, South Egremont, MA
|
Leased
|
9/10/12
|
|
Sheffield
Office
|
73
Main Street, Sheffield, MA
|
Leased
|
Expired
|
|
Dover
Plains Office
|
5
Dover Village Plaza, Dover Plains, NY
|
Leased
|
3/26/17
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
The Bank
is involved in various claims and legal proceedings arising out of the ordinary
course of business.
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 instituted on June 16, 2008 and currently pending
in the Connecticut Superior Court within the Judicial District of
Stamford-Norwalk, CT. 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 in 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 that 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. The 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.
There are
no other material pending legal proceedings, other than ordinary routine
litigation incident to the registrant’s business, to which Salisbury is a party
or of which any of its property is subject.
|
Item 4.
|
RESERVED
|
PART
II
|
Item 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
For the
information required by this item see “Note 23 - Selected Quarterly Consolidated
Financial Data (Unaudited)” of Notes to Consolidated Financial
Statements.
Holders
There
were approximately 1,506 holders of record of the common stock of Salisbury as
of March 3, 2010. This number includes brokerage firms and other
financial institutions that hold stock in their name, but which is actually
beneficially owned by third parties.
Equity
Compensation Plan Information
For the
information required by this item see “Note 14 – Directors Stock Retainer Plan”
of Notes to Consolidated Financial Statements.
Recent
Sales of Unregistered Securities
None.
Dividends
For a
discussion of Salisbury's dividend policy and restrictions on dividends see
"Management Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Dividends”.
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
The
following tables contain certain information concerning the financial position
and results of operations of Salisbury at the dates and for the periods
indicated. This information should be read in conjunction with the Consolidated
Financial Statements and related notes.
SELECTED
CONSOLIDATED FINANCIAL DATA
(in
thousands, except ratios and per share amounts)
|
At
or for the years ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
Statement
of Income
|
||||||||||||||||||||
|
Interest
and dividend income
|
$ | 25,893 | $ | 26,557 | $ | 26,152 | $ | 23,730 | $ | 20,816 | ||||||||||
|
Interest
expense
|
9,032 | 10,825 | 12,432 | 10,459 | 7,352 | |||||||||||||||
|
Net
interest and dividend income
|
16,861 | 15,732 | 13,720 | 13,271 | 13,464 | |||||||||||||||
|
Provision
(credit) for loan losses
|
985 | 1,279 | - | (87 | ) | 210 | ||||||||||||||
|
Gains
on securities, net
|
473 | 600 | 295 | 517 | 1,210 | |||||||||||||||
|
Other-than-temporary
impairment losses, net
|
(1,128 | ) | (2,955 | ) | - | - | - | |||||||||||||
|
Trust
and wealth advisory
|
1,978 | 2,264 | 2,050 | 1,981 | 1,571 | |||||||||||||||
|
Service
charges and fees
|
1,818 | 1,930 | 1,606 | 1,478 | 1,354 | |||||||||||||||
|
Gains
on sales of mortgage loans, net
|
743 | 344 | 387 | 524 | 573 | |||||||||||||||
|
Mortgage
servicing, net
|
80 | (124 | ) | (50 | ) | (103 | ) | (35 | ) | |||||||||||
|
Other
|
468 | 182 | 177 | 186 | 192 | |||||||||||||||
|
Non-interest
income
|
4,432 | 2,241 | 4,465 | 4,583 | 4,865 | |||||||||||||||
|
Non-interest
expense
|
17,890 | 16,009 | 13,515 | 12,245 | 12,444 | |||||||||||||||
|
Income
before income taxes
|
2,418 | 685 | 4,670 | 5,696 | 5,675 | |||||||||||||||
|
Income
tax (benefit) provision
|
(49 | ) | (421 | ) | 870 | 1,442 | 1,114 | |||||||||||||
|
Net
income
|
2,467 | 1,106 | 3,800 | 4,254 | 4,561 | |||||||||||||||
|
Net
income available to common shareholders
|
2,102 | 1,106 | 3,800 | 4,254 | 4,561 | |||||||||||||||
|
Financial
Condition
|
||||||||||||||||||||
|
Total
assets
|
$ | 562,347 | $ | 495,754 | $ | 461,960 | $ | 450,340 | $ | 402,922 | ||||||||||
|
Loans
receivable, net
|
327,257 | 297,367 | 268,191 | 252,464 | 215,989 | |||||||||||||||
|
Allowance
for loan losses
|
3,473 | 2,724 | 2,475 | 2,474 | 2,626 | |||||||||||||||
|
Securities
|
151,125 | 155,916 | 152,624 | 161,232 | 151,168 | |||||||||||||||
|
Deposits
|
418,203 | 344,925 | 317,741 | 318,586 | 287,271 | |||||||||||||||
|
Federal
Home Loan Bank of Boston advances
|
76,364 | 87,914 | 95,011 | 87,093 | 71,016 | |||||||||||||||
|
Repurchase
agreements
|
11,415 | 11,203 | - | - | - | |||||||||||||||
|
Shareholders'
equity
|
52,355 | 38,939 | 45,564 | 44,349 | 41,442 | |||||||||||||||
|
Non-performing
assets
|
7,720 | 5,380 | 1,824 | 964 | 773 | |||||||||||||||
|
Per
Common Share Data
|
||||||||||||||||||||
|
Earnings,
diluted and basic
|
$ | 1.25 | $ | 0.66 | $ | 2.26 | $ | 2.53 | $ | 2.71 | ||||||||||
|
Cash
dividends paid
|
1.12 | 1.12 | 1.08 | 1.04 | 1.00 | |||||||||||||||
|
Book
value
|
25.81 | 23.10 | 27.04 | 26.33 | 24.61 | |||||||||||||||
|
Statistical
Data
|
||||||||||||||||||||
|
Net
interest margin (fully tax equivalent)
|
3.51 | % | 3.74 | % | 3.54 | % | 3.67 | % | 3.89 | % | ||||||||||
|
Efficiency
ratio (fully tax equivalent)
|
74.38 | 71.56 | 68.74 | 69.16 | 82.01 | |||||||||||||||
|
Effective
tax rate
|
(2.03 | ) | (61.45 | ) | 18.63 | 25.32 | 19.63 | |||||||||||||
|
Return
on average assets
|
0.39 | 0.23 | 0.85 | 1.02 | 1.12 | |||||||||||||||
|
Return
on average shareholders' equity
|
5.18 | 2.59 | 8.71 | 9.83 | 10.81 | |||||||||||||||
|
Dividend
payout ratio
|
89.60 | 169.70 | 47.79 | 41.11 | 36.90 | |||||||||||||||
|
Allowance
for loan losses to total loans
|
1.05 | 0.91 | 0.92 | 0.97 | 1.20 | |||||||||||||||
|
Non-performing
assets to total assets
|
1.37 | 1.09 | 0.39 | 0.21 | 0.19 | |||||||||||||||
|
Tier
1 leverage capital
|
8.39 | 7.74 | 8.24 | 8.43 | 8.27 | |||||||||||||||
|
Total
risk-based capital
|
12.86 | 11.59 | 15.00 | 15.28 | 15.76 | |||||||||||||||
|
Weighted
average equivalent shares outstanding, diluted
|
1,686 | 1,686 | 1,685 | 1,684 | 1,683 | |||||||||||||||
|
Common
shares outstanding at end of period
|
1,687 | 1,686 | 1,685 | 1,684 | 1,683 | |||||||||||||||
|
Item 7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
BUSINESS
Salisbury
Bancorp, Inc. ("Salisbury"), a Connecticut corporation, formed in 1998, is the
bank holding company for Salisbury Bank and Trust Company (the "Bank"), a
Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC")
insured commercial bank headquartered in Lakeville,
Connecticut. Salisbury's principal business consists of the business
of the Bank. The Bank, formed in 1848, is engaged in customary
banking activities, including general deposit taking and lending activities to
both retail and commercial markets, and trust and wealth advisory services. The
Bank conducts its banking business from eight full-service offices in the towns
of Canaan, Lakeville, Salisbury and Sharon, Connecticut, South Egremont and
Sheffield, Massachusetts, and, Dover Plains and Millerton, New York, and its
trust and wealth advisory services from offices in Lakeville,
Connecticut.
Critical Accounting Policies
and Estimates
Salisbury’s consolidated
financial statements follow generally accepted accounting principles (“GAAP”) in
the United States of America as applied to the banking industry in which it
operates. Application of these principles requires management to make estimates,
assumptions and judgments that affect the amounts reported in the
financial statements. These estimates, assumptions and judgments are based on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions and judgments and as such have a greater possibility of
producing results that could be materially different than originally reported.
Estimates, assumptions and judgments are necessary when assets and liabilities
are required to be recorded at fair value, when a decline in the value of an
asset not carried at fair value warrants an impairment write-down or valuation
reserve to be established, or when an asset or liability needs to be recorded
contingent upon a future event.
Salisbury’s
significant accounting policies are presented in Note 1 of Notes to Consolidated
Financial Statements and, along with this Management’s Discussion and Analysis,
provide information on how significant assets are valued in the financial
statements and how those values are determined. Management believes that the
following accounting estimates are the most critical to aid in fully
understanding and evaluating Salisbury’s reported financial results, and they
require management’s most difficult, subjective or complex judgments, resulting
from the need to make estimates about the effect of matters that are inherently
uncertain.
The
allowance for loan losses represents management’s estimate of credit losses
inherent in the loan portfolio. Determining the amount of the allowance for loan
losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the balance sheet. Note 1 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.
Management
evaluates goodwill and identifiable intangible assets for impairment annually
using valuation techniques that involve estimates for discount rates, projected
future cash flows and time period calculations, all of which are susceptible to
change based on changes in economic conditions and other
factors. Future events or changes in the estimates, which are used to
determine the carrying value of goodwill and identifiable intangible assets or
which otherwise adversely affects their value or estimated lives could have a
material adverse impact on the results of operations.
Management
evaluates securities for other-than-temporary impairment giving consideration to
the extent to which the fair value has been less than cost, estimates of future
cash flows, delinquencies and default severity, and the intent and ability of
Salisbury to retain its investment in the issuer for a period of time sufficient
to allow for any anticipated recovery in fair value. The consideration of the
above factors is subjective and involves estimates and assumptions about matters
that are inherently uncertain. Should actual factors and conditions differ
materially from those used by management, the actual realization of gains or
losses on investment securities could differ materially from the amounts
recorded in the financial statements.
The
determination of the obligation and expense for pension and other postretirement
benefits is dependent on certain assumptions used in calculating such amounts.
Key assumptions used in the actuarial valuations include the discount rate,
expected long-term rate of return on plan assets and rates of increase in
compensation and health care costs. Actual results could differ from the
assumptions and market driven rates may fluctuate. Significant differences in
actual experience or significant changes in the assumptions may materially
affect the future pension and other postretirement obligations and
expense.
OVERVIEW
Net
income available to common shareholders for the year ended December 31, 2009 was
$2,102,000, or $1.25 per common share, compared with $1,106,000, or $.66 per
common share, for the year ended December 31, 2008. Return on average common
shareholders’ equity was 5.18% for 2009 compared with 2.59% for 2008. Net
interest and dividend income increased $1,129,000 due primarily to a $60.5
million increase in average earning assets, made possible by significant deposit
growth, which more than offset a 23 basis point decrease in the net interest
margin to 3.51% from 3.74%. The decline in the net interest margin was mostly
due to carrying significantly larger balances of low yielding short term
investments. The provision for loan losses for 2009 was $985,000 compared with
$1,279,000 for 2008. Non-interest income increased $2,191,000 for 2009, of which
$1,700,000 resulted from lower securities losses in 2009 versus 2008.
Non-interest expense increased $1,881,000 due primarily to higher compensation
expenses, data processing, professional fees, FDIC insurance, and Other Real
Estate Owned (“OREO”) expenses, offset in part by the inclusion in 2008 of the
Federal Home Loan Bank of Boston advance prepayment fee, lower credit card
processing fees, and lower marketing expense.
During
2009, Salisbury’s assets grew $67 million to $562 million at December 31,
2009. Net loans receivable grew $30 million, or 10.05%, to $327
million. Non-performing assets increased $2.3 million to $7.7 million at
December 31, 2009. A single loan relationship accounts for $3.0 million of
non-performing assets. Reserve coverage, as measured by the ratio of the
allowance for loan losses to gross loans increased slightly to 1.05% at December
31, 2009 compared with 0.91% at December 31, 2008.
Deposits
grew $73 million to $418 million at December 31, 2009 from $345 million at
December 31, 2008. This significant growth in deposits stems from customer
preference for the safety of insured deposits during a year of heightened
uncertainty in the financial markets and a concerted effort by Salisbury to
expand deposit relationships with customers, and the assumption of $11 million
in deposits with the purchase of Webster Bank’s Canaan branch in December
2009.
In March
2009, Salisbury issued $8.8 million of preferred stock pursuant to the U.S.
Treasury’s TARP Capital Purchase Program.
At
December 31, 2009, book value per common share was $25.81 and tier 1 leverage
and total risk-based capital ratios were 8.39% and 12.86%, respectively.
Salisbury and the Bank are categorized as "well capitalized".
The
following discussion and analysis of Salisbury's consolidated results of
operations should be read in conjunction with the Consolidated Financial
Statements and footnotes.
RESULTS
OF OPERATIONS
Comparison
of the Years Ended December 31, 2009 and 2008
Net Interest and Dividend
Income
Net
interest and dividend income (presented on a tax-equivalent basis)
increased $1,077,000 in 2009 over 2008 due primarily to a $60.5 million, or
13.3%, increase in average earning assets, made possible by
significant deposit growth, which more than offset a 23 basis point decrease in
the net interest margin to 3.51% from 3.74%. The decrease in the net interest
margin was mostly due to the dilutive effect of carrying $33.3 million in low
yielding short term funds reflecting a more conservative liquidity management
strategy during a year of heightened risk in the financial markets. The net
interest margin was also affected by changes in the mix of earning assets and
funding liabilities, asset and liability growth, changes in market interest
rates, the suspension of dividends on Federal Home Loan Bank of Boston (“FHLBB”)
stock, and the impact of asset and liability re-pricing. 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.
|
Years
ended December 31,
|
Average
Balance
|
Income
/ Expense
|
Average
Yield / Rate
|
|||||||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||
|
Loans
(a)
|
$ | 308,027 | $ | 287,923 | $ | 258,714 | $ | 18,260 | $ | 18,449 | $ | 17,969 | 5.93 | % | 6.41 | % | 6.95 | % | ||||||||||||||||||
|
Securities
(c)(d)
|
166,608 | 154,253 | 155,189 | 8,673 | 8,900 | 8,871 | 5.21 | 5.77 | 5.72 | |||||||||||||||||||||||||||
|
FHLBB
stock
|
5,650 | 5,251 | 5,052 | - | 275 | 441 | - | 5.25 | 8.73 | |||||||||||||||||||||||||||
|
Short
term funds (b)
|
33,346 | 5,745 | 2,718 | 114 | 141 | 69 | 0.34 | 2.45 | 2.54 | |||||||||||||||||||||||||||
|
Total
earning assets
|
513,631 | 453,172 | 421,673 | 27,047 | 27,764 | 27,350 | 5.27 | 6.13 | 6.49 | |||||||||||||||||||||||||||
|
Other
assets
|
25,259 | 23,680 | 26,685 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 538,890 | $ | 476,852 | $ | 448,558 | ||||||||||||||||||||||||||||||
|
Interest-bearing
demand deposits
|
$ | 34,060 | $ | 24,517 | $ | 24,822 | 266 | 53 | 63 | 0.78 | 0.22 | 0.25 | ||||||||||||||||||||||||
|
Money
market accounts
|
65,970 | 63,914 | 55,358 | 565 | 1,217 | 1,790 | 0.86 | 1.90 | 3.23 | |||||||||||||||||||||||||||
|
Savings
and other
|
80,517 | 63,185 | 47,063 | 694 | 926 | 814 | 0.86 | 1.47 | 1.73 | |||||||||||||||||||||||||||
|
Certificates
of deposit
|
148,954 | 116,959 | 119,053 | 4,265 | 4,437 | 5,533 | 2.86 | 3.79 | 4.65 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
329,501 | 268,575 | 246,296 | 5,790 | 6,633 | 8,200 | 1.76 | 2.47 | 3.33 | |||||||||||||||||||||||||||
|
Repurchase
agreements
|
11,775 | 4,948 | - | 131 | 106 | - | 1.11 | 2.14 | - | |||||||||||||||||||||||||||
|
FHLBB
advances
|
78,063 | 89,750 | 87,649 | 3,111 | 4,086 | 4,232 | 3.99 | 4.55 | 4.83 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
419,339 | 363,273 | 333,945 | 9,032 | 10,825 | 12,432 | 2.15 | 2.98 | 3.72 | |||||||||||||||||||||||||||
|
Demand
deposits
|
66,202 | 67,680 | 66,304 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
5,378 | 3,198 | 4,672 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
47,971 | 42,701 | 43,637 | |||||||||||||||||||||||||||||||||
|
Total
liabilities & shareholders’ equity
|
$ | 538,890 | $ | 476,852 | $ | 448,558 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 18,015 | $ | 16,940 | $ | 14,918 | ||||||||||||||||||||||||||||||
|
Spread
on interest-bearing funds
|
3.12 | 3.15 | 2.77 | |||||||||||||||||||||||||||||||||
|
Net
interest margin (e)
|
3.51 | 3.74 | 3.54 | |||||||||||||||||||||||||||||||||
|
(a)
|
Includes
non-accrual loans.
|
|
(b)
|
Includes
interest-bearing deposits in other banks and federal funds
sold.
|
|
(c)
|
Average
balances of securities are based on historical
cost.
|
|
(d)
|
Includes
tax exempt income of $1,154,000, $1,208,000 and $1,198,000, respectively
for 2009, 2008 and 2007 on tax-exempt securities whose income and yields
are calculated on a tax-equivalent
basis.
|
|
(e)
|
Net
interest income divided by average interest-earning
assets.
|
The
following table sets forth the changes in net interest income (presented on a
tax-equivalent basis) due to volume and rate.
|
Years
ended December 31, (in thousands)
|
2009
versus 2008
|
2008
versus 2007
|
||||||||||||||||||||||
|
Change
in interest due to
|
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||
|
Loans
|
$ | 1,240 | $ | (1,429 | ) | $ | (189 | ) | $ | 1,950 | $ | (1,470 | ) | $ | 480 | |||||||||
|
Securities
|
677 | (904 | ) | (227 | ) | (54 | ) | 83 | 29 | |||||||||||||||
|
FHLBB
stock
|
- | (275 | ) | (275 | ) | 14 | (180 | ) | (166 | ) | ||||||||||||||
|
Short
term funds
|
384 | (411 | ) | (27 | ) | 76 | (4 | ) | 72 | |||||||||||||||
|
Total
|
2,301 | (3,019 | ) | (718 | ) | 1,986 | (1,571 | ) | 415 | |||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||
|
Deposits
|
1,344 | (2,187 | ) | (843 | ) | 388 | (1,955 | ) | (1,567 | ) | ||||||||||||||
|
Repurchase
agreements
|
111 | (86 | ) | 25 | 106 | - | 106 | |||||||||||||||||
|
FHLBB
advances
|
(500 | ) | (475 | ) | (975 | ) | 99 | (245 | ) | (146 | ) | |||||||||||||
|
Total
|
955 | (2,748 | ) | (1,793 | ) | 593 | (2,200 | ) | (1,607 | ) | ||||||||||||||
|
Net
change in net interest income
|
$ | 1,346 | $ | (271 | ) | $ | 1,075 | $ | 1,393 | $ | 629 | $ | 2,022 | |||||||||||
Net
interest and dividend income represents the difference between interest and
dividends earned on loans and securities and interest incurred on deposits and
borrowings. The level of net interest income is a function of volume,
rates and mix of both earning assets and interest-bearing
liabilities. Net interest income can be adversely affected by changes
in interest rate levels, changes in the volume of assets and liabilities that
are subject to re-pricing within different future time periods, and in the level
of non-performing assets.
Interest and Dividend
Income
On a tax
equivalent basis, interest and dividend income decreased $718,000, or 2.6%, to
$27.0 million in 2009. Loan income decreased $189,000, or 1.0%,
primarily due to lower average yields, down 48 basis points, the impact of which
was substantially offset by a $20.1 million increase in average
loans. The decline in the average loan yield was caused by lower
market interest rates in 2009 and their effect on loan re-pricing and loan
re-financing activity.
On a tax
equivalent basis, income from securities decreased $227,000, or 2.5%, in 2009,
as a result of lower yields due to portfolio re-pricing and changes in portfolio
mix versus 2008, offset in part by an 8.1% increase in average volume. In
February 2009, the FHLBB announced a suspension of quarterly dividends. In 2008
and 2007, Salisbury earned tax-equivalent FHLBB dividend income of $275,000 and
$441,000, respectively. At December 31, 2009, Salisbury held $6.0 million of
FHLBB stock pursuant to its membership requirements.
Income
from short term funds decreased $27,000 in 2009 as a result of significantly
lower yields, down 211 basis points, while the average balance increased $27.6
million. The increase in short term funds resulted from the Bank’s significant
deposit growth and management’s preference for increased liquidity during a year
of heightened risk in the financial markets.
Interest
Expense
Interest
expense decreased $1.8 million, or 16.6%, to $9.0 million in 2009 as a result of
decreases in interest rates paid, offset in part by higher average interest
bearing deposits. Interest on deposit accounts and retail repurchase agreements,
or sweep accounts, decreased $818,000, or 12.1%, as a result of lower interest
rates paid, offset in part by an increase in average balances and changes in
product mix. Average interest-bearing deposits and retail repurchase agreements
increased $67.8 million, or 24.8%, while their average rate decreased 73 basis
points to 1.73%. Interest expense on FHLBB borrowings decreased
$975,000 as a result of lower average borrowings, down $11.7 million, and lower
borrowing rates, down 56 basis points as compared with 2008, due mostly to the
early redemption of $19 million of FHLBB advances in late 2008.
Provision and Allowance for
Loan Losses
Salisbury
recorded a provision for loan losses of $985,000 in 2009, compared with
$1,279,000 in 2008, reflecting lower net loan charge-offs of $236,000 in 2009,
compared with $1,030,000 in 2008. The following table sets forth changes in the
allowance for loan losses and other selected statistics:
|
Years
ended December 31, (dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance,
beginning of period
|
$ | 2,724 | $ | 2,475 | $ | 2,474 | $ | 2,626 | $ | 2,512 | ||||||||||
|
Provision
(benefit) or loan losses
|
985 | 1,279 | - | (87 | ) | 210 | ||||||||||||||
|
Charge-offs
|
||||||||||||||||||||
|
Real
estate mortgages
|
(106 | ) | (429 | ) | - | - | - | |||||||||||||
|
Commercial
& industrial
|
(82 | ) | (495 | ) | (21 | ) | (25 | ) | (7 | ) | ||||||||||
|
Consumer
|
(78 | ) | (151 | ) | (82 | ) | (107 | ) | (128 | ) | ||||||||||
|
Total
charge-offs
|
(266 | ) | (1,075 | ) | (103 | ) | (132 | ) | (135 | ) | ||||||||||
|
Recoveries
|
||||||||||||||||||||
|
Real
estate mortgages
|
- | 3 | 39 | - | - | |||||||||||||||
|
Commercial
& industrial
|
4 | 15 | 15 | 6 | - | |||||||||||||||
|
Consumer
|
26 | 27 | 50 | 61 | 39 | |||||||||||||||
|
Total
recoveries
|
30 | 45 | 104 | 67 | 39 | |||||||||||||||
|
Net
(charge-offs) recoveries
|
(236 | ) | (1,030 | ) | 1 | (65 | ) | (96 | ) | |||||||||||
|
Balance,
end of period
|
$ | 3,473 | $ | 2,724 | $ | 2,475 | $ | 2,474 | $ | 2,626 | ||||||||||
|
Loans
receivable, gross
|
$ | 330,144 | $ | 299,698 | $ | 270,361 | $ | 254,773 | $ | 218,623 | ||||||||||
|
Non-performing
loans
|
7,445 | 5,175 | 1,824 | 964 | 773 | |||||||||||||||
|
Accruing
loans past due 30-89 days
|
4,098 | 4,277 | 4,075 | 1,397 | $ | 1,466 | ||||||||||||||
|
Ratio
of allowance for loan losses:
|
||||||||||||||||||||
|
to
loans receivable, gross
|
1.05 | % | 0.91 | % | 0.92 | % | 0.97 | % | 1.20 | % | ||||||||||
|
to
non-performing loans
|
46.65 | 52.63 | 135.69 | 256.64 | 339.72 | |||||||||||||||
|
Ratio
of non-performing loans to loans receivable, gross
|
2.25 | 1.73 | 0.67 | 0.38 | 0.35 | |||||||||||||||
|
Ratio
of accruing loans past due 30-89 days to loans receivable,
gross
|
1.24 | 1.43 | 1.51 | 0.55 | 0.67 | |||||||||||||||
Reserve
coverage at December 31, 2009, as measured by the ratio of allowance for loan
losses to gross loans was up slightly, at 1.05%, as compared with 0.91% at
December 31, 2008. Non-performing loans (non-accrual loans and accruing loans
past-due 90 days or more) increased $2.3 million during 2009 to $7.4 million, or
2.25% of gross loans receivable, while accruing loans past due 30-89 days
decreased $0.2 million to $4.1 million, or 1.24% of gross loans
receivable.
The
following table sets forth the allocation of the allowance for loan losses among
the broad categories of the loan portfolio and the percentage of loans in each
category to total loans. Although the allowance has been allocated
among loan categories for purposes of the table, it is important to recognize
that the allowance is applicable to the entire
portfolio. Furthermore, charge-offs in the future may not necessarily
occur in these amounts or proportions.
|
December
31
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
|
(dollars
in thousands)(a)
|
Allowance
|
Loans
|
Allowance
|
Loans
|
Allowance
|
Loans
|
Allowance
|
Loans
|
Allowance
|
Loans
|
||||||||||||||||||||||||||||||
|
Real
Estate Mortgages
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
|
$ | 488 | 49.63 | % | $ | 689 | 50.53 | % | $ | 515 | 48.94 | % | $ | 611 | 47.28 | % | $ | 661 | 49.44 | % | ||||||||||||||||||||
|
Commercial
|
1,428 | 21.22 | 1,274 | 20.95 | 1,024 | 19.91 | 803 | 19.96 | 677 | 18.71 | ||||||||||||||||||||||||||||||
|
Construction,
land & land development
|
233 | 9.39 | 281 | 11.13 | 118 | 10.70 | 248 | 8.31 | 197 | 8.61 | ||||||||||||||||||||||||||||||
|
Home
equity credit
|
397 | 10.03 | 73 | 8.54 | 76 | 9.72 | 255 | 9.79 | 321 | 12.59 | ||||||||||||||||||||||||||||||
|
Total
mortgage loans
|
2,546 | 90.27 | 2,317 | 91.15 | 1,733 | 89.27 | 1,917 | 85.34 | 1,856 | 89.35 | ||||||||||||||||||||||||||||||
|
Commercial
& industrial
|
630 | 8.00 | 272 | 6.94 | 505 | 7.63 | 342 | 6.46 | 495 | 7.02 | ||||||||||||||||||||||||||||||
|
Consumer
|
117 | 1.65 | 97 | 1.85 | 201 | 2.96 | 173 | 3.46 | 247 | 3.61 | ||||||||||||||||||||||||||||||
|
General
unallocated
|
180 | 0.08 | 38 | 0.06 | 36 | 0.14 | 42 | 4.74 | 28 | 0.02 | ||||||||||||||||||||||||||||||
|
Total
allowance
|
$ | 3,473 | 100.00 | $ | 2,724 | 100.00 | $ | 2,475 | 100.00 | $ | 2,474 | 100.00 | $ | 2,626 | 100.00 | |||||||||||||||||||||||||
(a)
Percent of loans in each category to total loans.
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. 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 estimates using
assumptions and information that are often subjective and changing
rapidly. The review of the loan portfolio is a continuing event in
light of a changing economy and the dynamics of the banking and regulatory
environment. Should the economic climate deteriorate, borrowers could
experience difficulty and the level of non-performing loans, charge-offs and
delinquencies could rise and require increased provisions. In
management's judgment, Salisbury remains adequately reserved both against total
loans and non-performing loans at December 31, 2009.
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.
Management’s
loan risk rating assignments, loss percentages and specific reserves are
subjected annually to an independent credit review by an external firm. In
addition, 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 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 requested as a result of these
examinations.
Non-Interest
Income
Non-interest
income increased $2,191,000, in 2009, of which $1,700,000 related to lower
securities losses. The principal categories of non-interest income
are as follows:
|
Years
ended December 31 (dollars in
thousands)
|
2009
|
2008
|
2007
|
2009
vs. 2008
|
2008
vs. 2007
|
|||||||||||||||||||||||
|
(Losses)
gains on securities, net
|
$ | 473 | $ | 600 | $ | 295 | $ | (127 | ) | (21.2 | )% | $ | 305 | 103.4 | % | |||||||||||||
|
Other-than-temporary
impairment losses
|
(1,128 | ) | (2,955 | ) | - | 1,827 | (61.8 | ) | (2,955 | ) | - | |||||||||||||||||
|
Trust
and wealth advisory
|
1,978 | 2,264 | 2,050 | (286 | ) | (12.6 | ) | 214 | 10.4 | |||||||||||||||||||
|
Service
charges and fees
|
1,818 | 1,930 | 1,606 | (112 | ) | (5.8 | ) | 324 | 20.2 | |||||||||||||||||||
|
Gains
on sales of mortgage loans, net
|
743 | 344 | 387 | 399 | 116.0 | (43 | ) | (11.1 | ) | |||||||||||||||||||
|
Mortgage
servicing, net
|
80 | (124 | ) | (50 | ) | 204 | 164.5 | (74 | ) | (148.0 | ) | |||||||||||||||||
|
Bank-owned
life insurance
|
394 | 166 | 160 | 228 | 137.3 | 6 | 3.8 | |||||||||||||||||||||
|
Other
|
74 | 16 | 17 | 58 | 362.5 | (1 | ) | (5.9 | ) | |||||||||||||||||||
|
Total
non-interest income
|
$ | 4,432 | $ | 2,241 | $ | 4,465 | $ | 2,191 | 97.8 | $ | (2,224 | ) | (49.8 | ) | ||||||||||||||
In June
2009, Salisbury recognized a $1,128,000 write-down for
Other-Than–Temporary-Impairment (“OTTI”) on five non-agency issued CMO
securities. In 2008, Salisbury recognized a $2,955,000 write-down on Freddie Mac
preferred stock following the U.S. Government placing FHLMC into
conservatorship. Absent these losses, Salisbury would have realized securities
gains of $473,000 and $600,000 in 2009 and 2008, respectively.
Excluding
securities losses, all other non-interest income increased $491,000. Trust and
wealth advisory fees declined in 2009, due mostly to a decline in the value of
managed assets during 2008. The decline in service charges and fees was due to a
$263,000 decrease in credit card fees, attributable to the sale of the credit
card portfolio in 2008. Absent this, service charges and fees would have grown
by $151,000 from increased transactional activity. Historically low borrowing
rates generated significant mortgage refinancing activity in 2009 that resulted
in increased mortgage loan sales and related income. Loan servicing is retained
on substantially all loans sold. The change in mortgage servicing income is
mostly due to the inclusion in 2008 of a mortgage servicing rights impairment
charge. Income from bank-owned life insurance (BOLI) for 2009 benefited from a
policy death settlement and a 1035 policy exchange, while income resulting from
the increase in BOLI cash surrender value was substantially
unchanged.
Non-Interest
Expense
Non-interest
expense increased $1,881,000, or 11.7%, in 2009. The principal categories of
non-interest expense are as follows:
|
Years
ended December 31 (dollars in
thousands)
|
2009
|
2008
|
2007
|
2009
vs. 2008
|
2008
vs. 2007
|
|||||||||||||||||||||||
|
Salaries
|
$ | 6,997 | $ | 6,472 | $ | 6,016 | $ | 525 | 8.1 | % | $ | 456 | 7.6 | % | ||||||||||||||
|
Employee
benefits
|
2,527 | 1,858 | 1,708 | 669 | 36.0 | 150 | 8.8 | |||||||||||||||||||||
|
Premises
and equipment
|
1,939 | 1,859 | 1,621 | 80 | 4.3 | 238 | 14.7 | |||||||||||||||||||||
|
Data
processing
|
1,473 | 1,339 | 1,194 | 134 | 10.0 | 145 | 12.2 | |||||||||||||||||||||
|
Professional
fees
|
1,508 | 1,269 | 931 | 239 | 18.8 | 338 | 36.3 | |||||||||||||||||||||
|
FDIC
assessment
|
914 | 60 | 45 | 854 | 1,423.3 | 15 | 33.3 | |||||||||||||||||||||
|
Marketing
and community contributions
|
342 | 457 | 349 | (115 | ) | (25.2 | ) | 108 | 30.9 | |||||||||||||||||||
|
Printing
and stationary
|
298 | 277 | 280 | 21 | 7.6 | (3 | ) | (1.1 | ) | |||||||||||||||||||
|
OREO
|
191 | 6 | 2 | 185 | 3,083.3 | 4 | 200.0 | |||||||||||||||||||||
|
Amortization
of intangible assets
|
164 | 164 | 164 | - | - | - | - | |||||||||||||||||||||
|
FHLBB
advance prepayment fee
|
- | 864 | - | (864 | ) | (100.0 | ) | 864 | - | |||||||||||||||||||
|
Other
|
1,537 | 1,384 | 1,205 | 153 | 11.0 | 179 | 14.9 | |||||||||||||||||||||
|
Non-interest
expense
|
$ | 17,890 | $ | 16,009 | $ | 13,515 | $ | 1,881 | 11.7 | $ | 2,494 | 18.5 | ||||||||||||||||
Salaries
increased in 2009 due to changes in staffing mix, merit increases and higher
mortgage loan origination commissions from increased loan originations. Employee
benefits expense included additional pension expense, up $561,000, due primarily
to the former CEO’s retirement. Data processing benefited from the sale of the
credit card portfolio in 2008, saving $139,000 in credit card processing
expense. The increase in other data processing expenses, up $134,000, related
mostly to the Bank’s core processing systems and related technology applications
and infrastructure. Professional fees for 2009 included, among other things,
services related to the Bank’s participation in TARP and the acquisition of a
branch office and related deposits and loans in Canaan,
Connecticut. The substantial increase in FDIC insurance expense, up
$854,000, was due to higher premium rates, a 2009 special assessment and a
higher assessment base from deposit growth. Salisbury also utilized $157,000 in
FDIC credits available to them in 2008. OREO expense for 2009 includes a
$125,000 write-down of the carrying value of a commercial property. In 2008, the
Bank prepaid $19 million of FHLBB advances to restructure its wholesale
borrowings and incurred a prepayment fee of $864,000. Other expense includes
postage, telephone, director fees, bank charges and various other deposit, loan
and administrative related operating expenses.
Income
Taxes
Net
income for 2009 included an income tax benefit of $49,000 compared with a 2008
income tax benefit of $421,000. Salisbury’s effective tax rate was
less than the 34% federal statutory rate due to tax-exempt income, primarily
from municipal bonds and bank-owned life insurance. For further information on
income taxes, see Note 11 of Notes to Consolidated Financial
Statements.
Salisbury
did not incur Connecticut income tax in 2009 or 2008, other than minimum state
income tax, as a result of its utilization of Connecticut tax legislation that
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, SBT Mortgage Service Corporation.
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.
Comparison
of the Years Ended December 31, 2008 and 2007
Net Interest and Dividend
Income
Net
interest and dividend income (presented on a tax-equivalent basis)
increased $2,076,000 in 2008 over 2007 due primarily to a $31.5 million, or
7.5%, increase in average earning assets and a 21 basis point
increase in the net interest margin to 3.74% from 3.54%. The increase in the net
interest margin was mostly due to loan growth, which more than offset the effect
of lower interest rates, and a significant decline in deposit
rates.
Interest
Income
Interest
and dividend income increased $415,000, or 1.5%, to $27.8 million in 2008. Loan
income increased $480,000, or 2.7%, primarily due to a $29.2 million, or 11.3%,
increase in average loans, which more than offset lower average yields, down 54
basis points. The decline in the average loan yield was caused by lower market
interest rates in 2008 and their effect on loan re-pricing and loan re-financing
activity. Income from securities increased $29,000 in 2008, as a 5 basis point
increase in average yield was substantially offset by $0.9 million decrease in
average volume. The decline in market interest rates was also reflected in lower
FHLBB dividend income. Income from short term funds increased $72,000 in 2008 as
a result of higher average balances, offset in part by lower average yields,
down 9 basis points.
Interest
Expense
Interest
expense decreased $1.6 million, or 12.9%, to $10.8 million in 2008, as a result
of decreases in interest rates paid, offset in part by higher average
interest-bearing deposits. Interest on deposit accounts decreased $1,567,000, or
19.1%, as a result of lower interest rates paid, offset in part by an increase
in average balances and changes in product mix. Average interest-bearing
deposits increased $22.3 million, or 9.0%, while their average rate decreased 86
basis points to 2.47%. Salisbury introduced retail repurchase agreements, or
sweep accounts, during the year and attracted $4.9 million in average balances
that grew to $11.2 million by December 31, 2008. Interest expense on FHLBB
borrowings decreased $146,000 as a result of higher average borrowings, up $2.1
million, offset in part by lower borrowing rates, down 28 basis points as
compared with 2008. Salisbury redeemed $19 million of FHLBB advances in late
2008.
Provision and Allowance for
Loan Losses
Salisbury
recorded a provision for loan losses of $1,279,000 in 2008, compared with no
provision in 2007, due to increases in loan delinquencies and net loan
charge-offs. During 2008, non-performing loans increased $3.4 million to $5.2
million at December 31, 2008, or 1.73% of gross loans receivable, from $1.8
million, or 0.67%, at December 31, 2007. Net loans charged-off during 2008
increased to $1,030,000 compared with net loan recoveries of $1,000 in 2007.
Reserve coverage at December 31, 2008, as measured by the ratio of allowance for
loan losses to gross loans was substantially unchanged, at 0.91%, as compared
with 0.92% at December 31, 2007.
Non-Interest
Income
Non-interest
income decreased $2,230,000 in 2009, of which $2,650,000 related to increased
securities losses. In 2008, Salisbury recognized a $2,955,000
write-down on FHLMC preferred stock following the U.S. Government placing FHLMC
into conservatorship. Absent these losses, Salisbury realized securities gains
of $600,000 and $295,000 in 2008 and 2007, respectively. Excluding securities
losses, all other non-interest income increased $731,000. Trust and wealth
advisory fees increased in 2008 due to business development efforts. The
increase in service charges and fees was due primarily to increased deposit
account transactional activity. Mortgage refinancing activity fell during 2008
and gains on sales of mortgage loans fell respectively. Loan servicing is
retained on substantially all loans sold. The change in mortgage servicing
income is mostly due to the inclusion in 2008 of a mortgage servicing rights
impairment charge.
Non-Interest
Expense
Non-interest
expense increased $2,495,000, or 18.5%, in 2008. Salaries and benefits increased
in 2008 due to increased staffing and merit increases and related health benefit
costs and payroll taxes. The increase in staff resulted from the opening of a
new branch in Dover Plains, New York, in August 2007. The increase in premises
and equipment, and data processing expense also relates to the additional branch
office and increased business activity. Professional fees for 2008 included,
among other things, increased audit expense resulting from additional services
required due to compliance requirements such as the Sarbanes-Oxley Act and other
regulations, and legal and consulting fees for various research and marketing
initiatives during the year. During the fourth quarter of 2008, Salisbury
prepaid a $19 million advance from the FHLBB at a cost of $864,000 to
restructure a portion of its borrowings. The borrowings, which had a rate of
5.97%, were replaced with new FHLBB advances with much lower interest rates and
a revised maturity schedule. While the prepayment resulted in a one time after
tax expense of $674,000 the re-financing was expected to reduce borrowing
expense in future years. The increase in other expense was primarily
attributable to normal operational expenses associated with growth.
Income
Taxes
Net
income for 2008 included an income tax benefit of $421,000 compared with a 2007
income tax provision of $870,000, representing an 18.6% effective tax
rate. The difference between the effective tax rate and the 34%
federal statutory rate was due to tax-exempt income and other related
matters.
FINANCIAL
CONDITION
Overview
During
2009, Salisbury’s assets grew $67 million to $562 million at December 31,
2009. Net loans receivable grew $30 million, or 10.10%, to $327
million. Non-performing assets increased $2.3 million to $7.7 million at
December 31, 2009, of which a single loan relationship accounts for $3.0
million. Reserve coverage, as measured by the ratio of the allowance for loan
losses to gross loans receivable increased slightly to 1.05% at December 31,
2009, compared with 0.91% at December 31, 2008.
Asset
growth was facilitated by significant deposit growth. Deposits grew $73 million
to $418 million at December 31, 2009 from $345 million at December 31, 2008.
This significant growth in deposits stems from customer preference for the
safety of insured deposits during a year of heightened uncertainty in the
financial markets, a concerted effort by Salisbury to expand deposit
relationships with customers, and the assumption of $11 million in deposits from
the purchase of Webster Bank’s Canaan branch in December
2009.
In March
2009, Salisbury issued $8.8 million of preferred stock pursuant to the U.S.
Treasury’s TARP Capital Purchase Program.
At
December 31, 2009, book value per common share was $25.81 and tier 1 leverage
and total risk-based capital ratios were 8.39% and 12.86%, respectively.
Salisbury and the Bank are categorized as "well capitalized".
Securities
During
2009, securities decreased $5 million to $151 million, while short-term funds
(interest-bearing deposits with other banks, money market funds and federal
funds sold) increased $34 million to $37 million as Salisbury increased its
liquidity position in light of historically low interest rates and growth in
volatile deposits. The carrying values of securities are as
follows:
|
December
31 (dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Available-for-Sale
|
||||||||||||
|
U.S.
Treasury bills
|
$ | 2,000 | $ | - | $ | - | ||||||
|
U.S.
Government agency notes
|
24,832 | 41,271 | 46,859 | |||||||||
|
Municipal
bonds
|
47,153 | 55,696 | 56,980 | |||||||||
|
Mortgage
backed securities
|
33,927 | 26,815 | 36,583 | |||||||||
|
Collateralized
mortgage obligations
|
29,267 | 23,938 | 4,970 | |||||||||
|
SBA
pools
|
6,640 | 2,787 | - | |||||||||
|
Other
|
1,212 | 20 | 1,985 | |||||||||
|
Held-to-Maturity
|
||||||||||||
|
Mortgage
backed security
|
62 | 66 | 71 | |||||||||
|
Non-Marketable
|
||||||||||||
|
FHLBB
stock
|
6,032 | 5,323 | 5,176 | |||||||||
|
Total
Securities
|
$ | 151,125 | $ | 155,916 | $ | 152,624 | ||||||
During
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. The carrying value of such securities judged to
be OTTI are as follows:
|
December
31, 2009 (dollars in thousands)
|
Par
value
|
Carrying
value
|
Fair
value
|
|||||||||
|
Available-for-Sale
|
||||||||||||
|
Non-agency
CMO
|
$ | 6,890 | $ | 5,583 | $ | 4,409 | ||||||
Salisbury
has determined that there are no other securities in an unrealized loss position
to be other-than-temporarily impaired at December 31, 2009. The decline in
market interest rates and tightening of credit spreads during 2009 favorably
impacted the valuation of the securities portfolio. The amount of securities in
a loss position as of December 31, 2009 as compared with December 31, 2008
declined by $21.4 million to $74 million, and the amount of the unrealized loss
declined by $4.1 million to $7.2 million. Salisbury has the ability and intent
to hold all securities in a loss position until a recovery of book value which
may be at maturity. It is possible that future changes in interest rates, credit
behaviors and other factors that determine the fair value of securities could
cause future OTTI losses and require Salisbury to recognize securities losses in
future periods.
Loans
During
2009, net loans receivable grew $29.9 million, or 10.1%, to $327.3 million at
December 31, 2009, despite soft loan demand and aggressive competition for loans
in Salisbury’s market area. 2009 loan growth compares with loan growth of $29.2
million, or 10.9% in 2008.
Salisbury’s
residential mortgage lending department originates residential mortgage and home
equity loans and lines of credit for the portfolio. During 2009, Salisbury
originated $92.9 million of residential mortgage loans and $13.1 million of home
equity loans for the portfolio, compared with $49.3 million and $9.9 million,
respectively, in 2008. During 2009, total residential mortgage and home equity
loans receivable grew by $19.9 million to $197.0 million at December 31, 2009,
and represent 60% of loans receivable, substantially unchanged from 2008. During
2009, Salisbury’s residential mortgage lending department also originated and
sold $35.0 million of residential mortgage loans, compared with $16.8 million
during 2008. Substantially all loans sold were sold through the FHLBB Mortgage
Partnership Finance Program with servicing retained by Salisbury.
Salisbury’s
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, such loans represent a very
small percent of the commercial loan portfolio. During 2009, total commercial
loans receivable grew by $12.9 million to $96.5 million at December 31, 2009,
and represent 29% of loans receivable, substantially unchanged from
2008.
Salisbury’s
consumer lending department offers consumer installment loans. During 2009,
consumer loans remained flat at $5.7 million at December 31, 2009, and represent
1.7% of loans receivable, substantially unchanged from 2008.
The
principal categories of loans receivable are as follows:
|
December
31, (in
thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Loans
receivable
|
||||||||||||||||||||
|
Real
Estate Mortgages
|
||||||||||||||||||||
|
Residential
|
$ | 163,863 | $ | 151,440 | $ | 132,312 | $ | 120,453 | $ | 108,102 | ||||||||||
|
Commercial
|
70,066 | 62,796 | 53,823 | 50,859 | 40,889 | |||||||||||||||
|
Construction,
land & land development
|
31,011 | 33,343 | 28,928 | 21,169 | 18,814 | |||||||||||||||
|
Home
equity credit
|
33,099 | 25,608 | 26,288 | 24,942 | 27,517 | |||||||||||||||
|
Total
mortgage loans
|
298,039 | 273,187 | 241,351 | 217,423 | 195,322 | |||||||||||||||
|
Commercial
and Industrial
|
26,400 | 20,785 | 20,629 | 16,465 | 15,354 | |||||||||||||||
|
Consumer
|
5,436 | 5,551 | 8,005 | 8,816 | 7,900 | |||||||||||||||
|
Other
|
269 | 175 | 376 | 12,069 | 47 | |||||||||||||||
|
Total
loans, gross
|
330,144 | 299,698 | 270,361 | 254,773 | 218,623 | |||||||||||||||
|
Deferred
loan origination costs, net
|
586 | 393 | 306 | 168 | - | |||||||||||||||
|
Unearned
income
|
- | - | (1 | ) | (3 | ) | (8 | ) | ||||||||||||
|
Allowance
for loan losses
|
(3,473 | ) | (2,724 | ) | (2,475 | ) | (2,474 | ) | (2,626 | ) | ||||||||||
|
Loans
receivable, net
|
$ | 327,257 | $ | 297,367 | $ | 268,191 | $ | 252,464 | $ | 215,989 | ||||||||||
|
Loans
held-for-sale
|
||||||||||||||||||||
|
Residential
mortgages
|
$ | 665 | $ | 2,314 | $ | 120 | $ | 304 | $ | - | ||||||||||
Loans
receivable forecasted maturity distribution is as follows:
|
December
31, 2009 (in
thousands)
|
Within
1 year
|
Within
1-5 years
|
After
5 years
|
Total
|
||||||||||||
|
Real
Estate Mortgages:
|
||||||||||||||||
|
Residential
|
$ | 2 | $ | 2,120 | $ | 161,741 | $ | 163,863 | ||||||||
|
Commercial
|
3,442 | 2,773 | 63,851 | 70,066 | ||||||||||||
|
Construction,
land & land development
|
28,580 | 2,431 | - | 31,011 | ||||||||||||
|
Home
equity credit
|
874 | 12 | 32,213 | 33,099 | ||||||||||||
|
Total
mortgage loans
|
32,898 | 7,336 | 257,805 | 298,039 | ||||||||||||
|
Commercial
and industrial
|
3,988 | 13,580 | 8,832 | 26,400 | ||||||||||||
|
Consumer
|
1,232 | 3,271 | 1,202 | 5,705 | ||||||||||||
|
Total
loans, gross
|
$ | 38,118 | $ | 24,187 | $ | 267,839 | $ | 330,144 | ||||||||
Loans
receivable due after one year with fixed and variable or adjustable interest
rates are as follows:
|
December
31, 2009 (in
thousands)
|
Fixed
interest rates
|
Adjustable
interest rates
|
||||||
|
Real
Estate Mortgages:
|
||||||||
|
Residential
|
$ | 61,928 | $ | 101,933 | ||||
|
Commercial
|
13,037 | 53,587 | ||||||
|
Construction,
land and & development
|
- | 2,431 | ||||||
|
Home
equity credit
|
- | 32,225 | ||||||
|
Commercial
and industrial
|
7,513 | 14,899 | ||||||
|
Consumer
|
3,863 | 610 | ||||||
|
Total
loans, gross
|
$ | 86,341 | $ | 205,685 | ||||
Non-Performing
Assets
During
2009, non-performing assets increased $2.3 million to $7.7 million at December
31, 2009, of which a single loan relationship accounts for $3.0 million. The
principal categories of non-performing assets are as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Non-accruing
loans
|
$ | 7,439 | $ | 5,075 | $ | 1,008 | $ | 887 | $ | 694 | ||||||||||
|
Accruing
loans past due 90 days or more
|
6 | 100 | 816 | 77 | 79 | |||||||||||||||
|
Total
non-performing loans
|
7,445 | 5,175 | 1,824 | 964 | 773 | |||||||||||||||
|
OREO,
net
|
275 | 205 | - | - | - | |||||||||||||||
|
Total
non-performing assets
|
$ | 7,720 | $ | 5,380 | $ | 1,824 | $ | 964 | $ | 773 | ||||||||||
The
reductions in interest income associated with non-accrual loans are as
follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
in accordance with original terms
|
$ | 414 | $ | 382 | $ | 77 | ||||||
|
Income
recognized
|
152 | 36 | 48 | |||||||||
|
Reduction
in interest income
|
$ | 262 | $ | 346 | $ | 29 | ||||||
Accruing
loans past due 90 days or more at December 31, 2009 consist primarily of
mortgage loans in the process of collection and where the collection of accrued
interest is probable. Salisbury pursues the resolution of all
non-performing assets through restructurings, credit enhancements or
collections. When all attempts to work with a customer to either
restructure and bring the loan back to performing, or to simply bring the loan
current are unsuccessful, Salisbury will initiate action to either foreclose the
property, to acquire it by deed in lieu of foreclosure, or to liquidate business
assets. Salisbury actively markets the sale of all OREO properties. During 2009,
one property was acquired as a result of Salisbury’s collection activities and
is currently under contract for sale. Non-interest expense for 2009 includes a
$125,000 write-down of the carrying value of this property. During 2008, one
property was acquired and sold in 2009.
Salisbury
classifies certain loans as “substandard,” “doubtful,” or “loss” based on
criteria consistent with guidelines prescribed by banking regulators. Potential
problem loans consist of classified accruing commercial loans that were less
than 90 days past due at December 31, 2009, but where known information about
possible credit problems of the related borrowers causes management to have
doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in disclosure of such loans as
nonperforming at some time in the future. These loans are not included in the
classification of nonaccrual or restructured loans above. Management cannot
predict the extent to which economic conditions may worsen or other factors
which may impact borrowers and the potential problem loans. Accordingly, there
can be no assurance that other loans will not become 90 days or more past due,
be placed on nonaccrual, restructured, or require increased allowance coverage
and provision for loan losses. Salisbury has identified approximately $9.7
million in potential problem commercial loans at December 31, 2009, of which
approximately 75% consisted of 6 commercial lending relationships.
Deposits
In 2009,
deposits grew $73.3 million, or 21.24%, to $418.2 million, compared with deposit
growth of $27.2 million, or 8.6%, in 2008. The 2009 deposit growth stems from
customer preference for the safety of insured deposits and a concerted effort by
Salisbury to expand deposit relationships with customers, and from the
assumption of $11.4 million in deposits with the purchase of Webster Bank’s
Canaan branch in December 2009.
Salisbury
has eight full-service offices located in Litchfield, Berkshire and Dutchess
Counties in Connecticut, Massachusetts and New York
respectively. Scheduled maturities of certificates of deposit with
balances in excess of $100,000 are as follows:
|
Within
|
Within
|
Within
|
Over
|
|||||||||||||||||
|
December
31, 2009 (in
thousands)
|
3
months
|
3-6
months
|
6-12
months
|
1
year
|
Total
|
|||||||||||||||
|
Certificates
of deposit over $100,000
|
$ | 17,440 | $ | 6,667 | $ | 8,141 | $ | 14,365 | $ | 46,613 | ||||||||||
Borrowings
During
2009, FHLBB advances decreased $11.6 million to $76.4 million. The large influx
of deposits negated the need to borrow funds from the FHLBB. FHLBB advances at
December 31, 2009 had remaining terms ranging from just over one month to 90
months and interest rates ranging from 3.44% to 4.76%. The weighted
average borrowing rate as of December 31, 2009 was 4.02%. Overnight retail
repurchase agreements, or sweep accounts, grew $.2 million to $11.4 million
during 2009.
OFF-BALANCE
SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
In the
normal course of business, Salisbury enters into various contractual obligations
that may require future cash payments. Contractual obligations at
December 31, 2009 include operating leases, contractual purchases and certain
pension and other benefit plans. For further discussion regarding
operating leases see Note 18.
The
accompanying table summarizes Salisbury’s off-balance sheet lending-related
financial instruments and significant cash obligations, by remaining maturity,
at December 31, 2009. Salisbury’s lending-related financial
instruments include commitments that have maturities over one year. Contractual
purchases include commitments for future cash expenditures, primarily for
services and contracts that reflect the minimum contractual obligation under
legally enforceable contracts with contract terms that are both fixed and
determinable. Excluded from the following table are a number of
obligations to be settled in cash, primarily in under one year. These
obligations are reflected in Salisbury’s Consolidated Balance Sheets and include
deposits, FHLBB advances and repurchase agreements that settle within standard
market timeframes.
|
December
31, 2009 (in
thousands)
|
Within
|
Within
|
Within
|
After
|
||||||||||||||||
|
By
Remaining Maturity
|
1
year
|
1-3
years
|
4-5
years
|
5
years
|
Total
|
|||||||||||||||
|
Off-balance
sheet lending-related Financial Instruments
|
||||||||||||||||||||
|
Residential
real estate and other consumer – related
|
$ | 3,452 | $ | 5 | $ | 2,109 | $ | 30,438 | $ | 36,004 | ||||||||||
|
Commercial
– related
|
||||||||||||||||||||
|
Other
unfunded commitments to extend credit
|
2,578 | 3,124 | 929 | 9,379 | 16,010 | |||||||||||||||
|
Letters
of credit
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 6,030 | $ | 3,129 | $ | 3,038 | $ | 39,817 | $ | 52,014 | ||||||||||
LIQUIDITY
Salisbury
manages its liquidity position to ensure it has 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 source of liquidity is deposits and
while the preferred funding strategy is to attract and retain low cost deposits,
its ability to do so is affected by competitive interest rates and terms in its
marketplace. Other sources of funding include cash flows from principal payments
and maturities of securities and loans, funds provided by operations, and
discretionary use of FHLBB advances. Liquidity can also be provided
through sales of securities available-for-sale and loans.
Salisbury
manages its liquidity in accordance with a liquidity funding policy, and also
maintains a contingency funding plan that provide for the prompt and
comprehensive response to unexpected demands for liquidity. During 2009,
Salisbury’s internal liquidity measures to manage liquidity exposure remained
within target ranges. At December 31, 2009, Salisbury's liquidity ratio, as
represented by cash, short term available-for-sale securities and marketable
assets to net deposit and short term unsecured liabilities, was 33.24% and
exceeded Salisbury's targeted minimum of 30%. Management believes Salisbury’s
funding sources will meet anticipated funding needs.
Operating
activities for 2009 provided net cash of $4.2 million. Investing
activities utilized net cash of $27.7 million, principally for securities purchases of $110.7 million,
net loan advances of $28.6 million, and capital expenditures of $3.6 million,
offset in part by securities repayments, maturities and
sales. Financing activities provided net cash of $57.2 million,
principally, from net deposit growth of $61.8 million and from the issuance of
Preferred Stock of $8.8 million, offset in part by a net decrease in FHLBB
advances of $11.5 million and cash dividends paid.
Operating
activities for 2008 provided net cash of $1.8 million. Investing
activities utilized net cash of $36.8 million, principally for securities
purchases of $111.6 million, net loan advances of $27.4 million and loan
purchases of $3.3 million, offset in part by security repayments, maturities and
sales. Financing activities provided net cash of $29.5 million,
principally from net deposit growth and repurchase agreements of $27.2 million
and $11.2 million, respectively, offset in part by a net decrease in FHLBB
advances of $8.0 million and cash dividends paid.
Operating
activities for 2007 provided net cash of $4.8 million. Investing
activities utilized net cash of $11.3 million, principally from securities
purchases of $69.6 million, net loan advances of $11.4 million, loan purchases
of $4.3 million, the sale of OREO and capital expenditures, offset in part by
security repayments and maturities. Financing activities provided net
cash of $9.9 million, principally from net deposit growth of $3.7 million and a
net increase in FHLBB advances of $8.0 million, offset in part by cash
dividends.
CAPITAL
RESOURCES
During
2009, shareholders' equity increased $13.4 million, or 34.5%, to $52.4 million
and book value per share increased $2.71 to $25.81. In March 2009, Salisbury
issued $8,816,000 of preferred stock to the U.S. Treasury pursuant to the
Treasury’s Capital Purchase Program. Also contributing to the increase was net
income of $2.5 million, or $1.25 per common share, and a decrease in accumulated
other comprehensive loss, net of $3.8 million, principally from a net decrease
in unrealized holding losses on securities available-for-sale, net of taxes.
Reducing shareholders’ equity was $1.4 million of dividends declared on common
stock and $0.3 million of dividends paid on preferred stock.
Capital
Requirements
Salisbury
and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Under current regulatory 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 are as follows:
|
Well
|
December
31, 2009
|
December
31, 2008
|
||||||||||||||||||
|
capitalized
|
Salisbury
|
Bank
|
Salisbury
|
Bank
|
||||||||||||||||
|
Total
Capital (to risk-weighted assets)
|
10.00 | % | 12.86 | % | 10.40 | % | 11.59 | % | 11.34 | % | ||||||||||
|
Tier
1 Capital (to risk-weighted assets)
|
6.00 | 11.95 | 9.48 | 10.78 | 10.53 | |||||||||||||||
|
Tier
1 Capital (to average assets)
|
5.00 | 8.39 | 6.70 | 7.74 | 7.52 | |||||||||||||||
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 FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a
Tier 1 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’s
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.
Preferred
Stock
In March
2009, Salisbury issued to the U.S. Treasury Department (“Treasury”) $8,816,000
of Preferred Stock under the CPP of the EESA.
The
Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks
senior to the Common Stock. The Preferred Stock pays a cumulative dividend of 5
percent per annum for the first five years it is outstanding and thereafter at a
rate of 9 percent per annum. The Preferred Stock is non-voting, other than
voting rights on matters that could adversely affect the shares. The Preferred
Stock is callable at one hundred percent of the issue price plus any accrued and
unpaid dividends.
As part
of the CPP, Salisbury issued to the Treasury a 10-year Warrant to purchase
57,671 shares of Common Stock at an exercise price of $22.93 per share. If the
Warrant were fully exercised, Salisbury estimates that the ownership percentage
of the current shareholders would be diluted by approximately 3.3%
percent.
Dividends
During
2009, Salisbury paid four quarterly common stock dividends of $0.28 each,
totaling $1,889,000. Salisbury also paid $296,000 in preferred stock dividends
to the U.S. Treasury.
On
November 11, 2009, Salisbury’s Board of Directors announced that in response to
changes in regulatory requirements it was changing the timing of future common
stock dividend declarations, to coincide with quarterly earnings announcements.
Dividends on its common stock, when declared, will generally be paid on or about
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.
Accordingly,
on February 4, 2010 Salisbury’s Board of Directors announced Salisbury’s
financial results for the fourth quarter ended December 31, 2009 and announced
the declaration of a common stock dividend of $.28 per common share payable on
February 26, 2010 to shareholders of record on February 12, 2010.
For the
corresponding prior year period Salisbury’s Board of Directors announced a
common stock dividend of $.28 per common share on November 26, 2008, payable on
January 30, 2009, to shareholders of record on December 31, 2008, and announced
Salisbury’s financial results for the fourth quarter ended December 31, 2008, on
March 19, 2009.
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.
FRB
Supervisory Letter SR 09-4, February 24, 2009, revised March 27, 2009, states
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 position.
Further
restrictions on cash dividends are imposed on Salisbury because of Salisbury’s
participation in the 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 CPP participant unless all CPP 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
other factors deemed relevant by the Board of Directors of
Salisbury.
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
See Note
1 to the Consolidated Financial Statements for details of recently issued
accounting pronouncements and their expected impact on the Corporation’s
financial statements.
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
Annual Report may contain forward-looking statements within the meaning of the
Securities Exchange Act of 1934, as amended, relating to such matters
as:
|
(a)
|
assumptions
concerning future economic and business conditions and their effect on the
economy in general and on the markets in which Salisbury and the Bank do
business; and
|
|
(b)
|
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.
Actual
results could differ materially from management expectations, projections and
estimates. Factors that could cause future results to vary from current
management expectations include, but are not limited to, 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 the 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 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
|
Salisbury
manages its exposure to interest rate risk through its Asset/Liability
Management Committee (“ALCO”) using risk limits and policy guidelines to manage
assets and funding liabilities to produce financial results that are consistent
with Salisbury’s liquidity, capital adequacy, growth, risk and profitability
targets. Interest rate risk is the risk of loss to future earnings due to
changes in interest rates.
The ALCO
manages interest rate risk using income simulation to measure interest rate risk
inherent in Salisbury’s financial instruments at a given point in time by
showing the effect of interest rate shifts on net interest income over a
24-month horizon. The simulations incorporate management’s growth assumptions
over the simulation horizons, with allowances made for loan, deposit and
security product mix shifts in selected interest rate scenarios, such as
movements between lower rate savings and money market deposit accounts and
higher rate time deposits, and changes in the reinvestment of loan and
securities cash flows. Additionally, the simulations take into account the
specific re-pricing, maturity and prepayment characteristics of differing
financial instruments that may vary under different interest rate
scenarios.
The ALCO
reviews the simulation results to determine whether Salisbury’s exposure to
change in net interest income remains within established tolerance levels over
the simulation horizons and to develop appropriate strategies to manage this
exposure. Salisbury’s tolerance levels for changes in net interest income in its
income simulations varies depending on the magnitude of interest rate changes
and level of risk-based capital. All changes are measured in comparison to the
projected net interest income that would result from an “unchanged” rate
scenario where interest rates remain stable over the forecast horizon. The ALCO
also evaluates the directional trends of net interest income, net interest
margin and other financial measures over the forecast horizon for consistency
with its liquidity, capital adequacy, growth, risk and profitability
targets.
The ALCO
uses four interest rate scenarios to evaluate interest risk exposure and may
vary these interest rate scenarios to show the effect of steepening or
flattening changes in yield curves as well as parallel changes in interest
rates. At December 31, 2009 the ALCO used the following interest rate scenarios:
(1) unchanged interest rates; (2) immediately rising interest rates – immediate
non-parallel upward shift in market interest rates ranging from 300 basis points
for short term rates to 150 basis points for the 10-year Treasury; (3)
immediately falling interest rates – immediate non-parallel downward shift in
market interest rates ranging from 0 basis points for short term rates to 100
basis points for the 10-year Treasury; and (4) gradually rising interest rates –
gradual non-parallel upward shift in market interest rates ranging from 300
basis points for short term rates to 125 basis points for the 10-year Treasury.
Deposit rates are assumed to shift by lesser amounts due to their relative
historical insensitivity to market interest rate movements. Further, deposits
are assumed to have certain minimum rate levels below which they will not fall.
Because income simulations assume that Salisbury’s balance sheet will remain
static over the simulation horizon, the results do not reflect adjustments in
strategy that the ALCO could implement in response to rate shifts.
As of
December 31, 2009 net interest income simulations indicated that Salisbury’s
exposure to changing interest rates over the simulation horizons remained within
its tolerance levels. The following table sets forth the estimated change in net
interest income from an unchanged interest rate scenario over the periods
indicated for changes in market interest rates using Salisbury’s financial
instruments as of December 31, 2009.
|
As
of December 31, (in thousands)
|
Months
1-12
|
Months
13-24
|
||||||
|
Immediately
rising interest rates
|
(8.60 | )% | (10.41 | )% | ||||
|
Immediately
falling interest rates
|
0.42 | (2.25 | ) | |||||
|
Gradually
rising interest rates
|
0.68 | (8.35 | ) | |||||
The
negative exposure of net interest income to immediately and gradually rising
rates as compared to the unchanged rate scenario results from a faster projected
rise in the cost of funds versus income from earning assets, as relatively
rate-sensitive money market and time deposits re-price faster than longer
duration earning assets. The negative exposure of net interest income
to immediately falling rates as compared to an unchanged rate scenario results
from a greater decline in earning asset yields compared to rates paid on funding
liabilities, as a result of faster prepayments on existing assets and lower
reinvestment rates on future loans originated and securities
purchased.
While the
ALCO reviews simulation assumptions and back-tests simulation results to ensure
that they are reasonable and current, income simulation may not always prove to
be an accurate indicator of interest rate risk or future net interest margin.
Over time, the re-pricing, maturity and prepayment characteristics of financial
instruments and the composition of Salisbury’s balance sheet may change to a
different degree than estimated. Simulation modeling assumes a relatively static
balance sheet that does not necessarily reflect Salisbury’s expectation for
future balance sheet growth, which is a function of the business environment and
customer behavior. Another significant simulation assumption is the sensitivity
of core savings deposits to fluctuations in interest rates. Income simulation
results assume that changes in both core savings deposit rates and balances are
related to changes in short-term interest rates. The assumed relationship
between short-term interest rate changes and core deposit rate and balance
changes used in income simulation may differ from the ALCO’s estimates. Lastly,
mortgage-backed securities and mortgage loans involve a level of risk that
unforeseen changes in prepayment speeds may cause related cash flows to vary
significantly in differing rate environments. Such changes could affect the
level of reinvestment risk associated with cash flow from these instruments, as
well as their market value. Changes in prepayment speeds could also increase or
decrease the amortization of premium or accretion of discounts related to such
instruments, thereby affecting interest income.
Salisbury
also monitors the potential change in market value of its available-for-sale
debt securities in changing interest rate environments. The purpose is to
determine market value exposure that may not be captured by income simulation,
but which might result in changes to Salisbury’s capital and liquidity position.
Results are calculated using industry-standard analytical techniques and
securities data. Available-for-sale equity securities are excluded from this
analysis because the market value of such securities cannot be directly
correlated with changes in interest rates. The following table summarizes the
potential change in market value of available-for-sale debt securities resulting
from immediate parallel rate shifts:
|
As
of December 31, (in thousands)
|
Rates
up 100bp
|
Rates
up 200bp
|
||||||
|
U.S.
Treasury bills
|
$ | - | $ | - | ||||
|
U.S.
Government agency notes
|
(1,092 | ) | (2,273 | ) | ||||
|
Municipal
bonds
|
(6,229 | ) | (11,635 | ) | ||||
|
Mortgage
backed securities
|
(825 | ) | (2,102 | ) | ||||
|
Collateralized
mortgage obligations
|
(2,710 | ) | (4,774 | ) | ||||
|
SBA
pools
|
(29 | ) | (47 | ) | ||||
|
Other
|
- | - | ||||||
|
Total
available-for-sale debt securities
|
$ | (10,885 | ) | $ | (20,831 | ) | ||
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index
to Consolidated Financial Statements
|
Page
|
||
|
Report
of Independent Registered Public Accounting Firm
|
34
|
|
|
Consolidated
Balance Sheets
|
35
|
|
|
Consolidated
Statements of Income
|
36
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
37
|
|
|
Consolidated
Statements of Cash Flows
|
38
|
|
|
Notes
to Consolidated Financial Statements
|
40
|
To The
Board of Directors
Salisbury
Bancorp, Inc.
Lakeville,
Connecticut
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We have
audited the accompanying consolidated balance sheets of Salisbury Bancorp, Inc.
and Subsidiary as of December 31, 2009 and 2008 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Salisbury
Bancorp, Inc. and Subsidiary as of December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
SHATSWELL, MacLEOD & COMPANY, P.C.
West
Peabody, Massachusetts
March 8,
2010
83 PINE
STREET ●
WEST PEABODY, MASSACHUSETTS 01960-3635 ● TELEPHONE (978)
535-0206 ● FACSIMILE (978)
535-9908
smc@shatswell.com www.shatswell.com
Salisbury
Bancorp, Inc. and Subsidiary
CONSOLIDATED
BALANCE SHEETS
|
December
31, (dollars in thousands, except par value)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and due from banks
|
$ | 6,248 | $ | 7,083 | ||||
|
Interest
bearing demand deposits with other banks
|
37,050 | 900 | ||||||
|
Money
market mutual funds
|
- | 1,477 | ||||||
|
Federal
funds sold
|
- | 200 | ||||||
|
Total
cash and cash equivalents
|
43,298 | 9,660 | ||||||
|
Interest
bearing time deposits with other banks
|
5,000 | - | ||||||
|
Securities
|
||||||||
|
Available-for-sale
at fair value
|
145,031 | 150,527 | ||||||
|
Held-to-maturity
at amortized cost (fair value: $62 and $67)
|
62 | 66 | ||||||
|
Federal
Home Loan Bank of Boston stock at cost
|
6,032 | 5,323 | ||||||
|
Loans
held-for-sale
|
665 | 2,314 | ||||||
|
Loans
receivable, net (allowance for loan losses: $3,473 and
$2,724)
|
327,257 | 297,367 | ||||||
|
Investment
in real estate
|
75 | 75 | ||||||
|
Other
real estate owned
|
275 | 205 | ||||||
|
Bank
premises and equipment, net
|
10,434 | 7,124 | ||||||
|
Goodwill
|
9,829 | 9,829 | ||||||
|
Intangible
assets (net of accumulated amortization: $1,079 and $915)
|
1,464 | 1,165 | ||||||
|
Accrued
interest receivable
|
2,177 | 2,704 | ||||||
|
Cash
surrender value of life insurance policies
|
3,685 | 3,825 | ||||||
|
Deferred
taxes
|
3,285 | 4,197 | ||||||
|
Other
assets
|
3,778 | 1,373 | ||||||
|
Total
Assets
|
$ | 562,347 | $ | 495,754 | ||||
|
LIABILITIES
and SHAREHOLDERS' EQUITY
|
||||||||
|
Deposits
|
||||||||
|
Demand
(non-interest bearing)
|
$ | 70,026 | $ | 65,479 | ||||
|
Demand
(interest bearing)
|
43,845 | 24,872 | ||||||
|
Money
market
|
64,477 | 57,648 | ||||||
|
Savings
and other
|
86,316 | 71,405 | ||||||
|
Certificates
of deposit
|
153,539 | 125,521 | ||||||
|
Total
deposits
|
418,203 | 344,925 | ||||||
|
Repurchase
agreements
|
11,415 | 11,203 | ||||||
|
Federal
Home Loan Bank of Boston advances
|
76,364 | 87,914 | ||||||
|
Due
to broker
|
- | 7,632 | ||||||
|
Accrued
interest and other liabilities
|
4,010 | 5,141 | ||||||
|
Total
Liabilities
|
509,992 | 456,815 | ||||||
|
Commitments
and contingencies
|
- | - | ||||||
|
Shareholders'
Equity
|
||||||||
|
Preferred
stock - $.01 per share par value
|
||||||||
|
Authorized:
25,000 and 0; Shares issued: 8,816 and 0;
|
||||||||
|
Liquidation
preference: $1,000 per share
|
- | - | ||||||
|
Common
stock - $.10 per share par value
|
||||||||
|
Authorized:
3,000,000 and 3,000,000;
|
||||||||
|
Issued:
1,686,701 and 1,685,861
|
168 | 168 | ||||||
|
Common
stock warrants outstanding
|
112 | - | ||||||
|
Paid-in
capital
|
21,894 | 13,158 | ||||||
|
Retained
earnings
|
35,259 | 34,518 | ||||||
|
Accumulated
other comprehensive loss, net
|
(5,078 | ) | (8,905 | ) | ||||
|
Total
Shareholders' Equity
|
52,355 | 38,939 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 562,347 | $ | 495,754 | ||||
The accompanying notes are an
integral part of the consolidated financial statements.
Salisbury
Bancorp, Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF INCOME
|
Years
Ended December 31, (in thousands except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
and dividend income
|
||||||||||||
|
Interest
and fees on loans
|
$ | 18,260 | $ | 18,449 | $ | 17,969 | ||||||
|
Interest
on debt securities
|
||||||||||||
|
Taxable
|
5,028 | 5,336 | 5,458 | |||||||||
|
Tax
exempt
|
2,491 | 2,446 | 2,332 | |||||||||
|
Dividends
on equity securities
|
- | 202 | 324 | |||||||||
|
Other
interest
|
114 | 124 | 69 | |||||||||
|
Total
interest and dividend income
|
25,893 | 26,557 | 26,152 | |||||||||
|
Interest
expense
|
||||||||||||
|
Deposits
|
5,790 | 6,633 | 8,200 | |||||||||
|
Repurchase
agreements
|
131 | 106 | - | |||||||||
|
Federal
Home Loan Bank of Boston advances
|
3,111 | 4,086 | 4,232 | |||||||||
|
Total
interest expense
|
9,032 | 10,825 | 12,432 | |||||||||
|
Net
interest and dividend income
|
16,861 | 15,732 | 13,720 | |||||||||
|
Provision
for loan losses
|
985 | 1,279 | - | |||||||||
|
Net
interest and dividend income after provision for loan
losses
|
15,876 | 14,453 | 13,720 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Gains
on securities, net
|
473 | 600 | 295 | |||||||||
|
Trust
and wealth advisory
|
1,978 | 2,264 | 2,050 | |||||||||
|
Service
charges and fees
|
1,818 | 1,930 | 1,606 | |||||||||
|
Gains
on sales of mortgage loans, net
|
743 | 344 | 387 | |||||||||
|
Mortgage
servicing, net
|
80 | (124 | ) | (50 | ) | |||||||
|
Other
|
468 | 182 | 177 | |||||||||
|
Total
non-interest income, excluding other-than-temporary impairment
losses
|
5,560 | 5,196 | 4,465 | |||||||||
|
Other-than-temporary
impairment losses on securities
|
(2,302 | ) | (2,955 | ) | - | |||||||
|
Portion
of loss recognized in other comprehensive income (before
tax)
|
1,174 | - | - | |||||||||
|
Net
other-than-temporary impairment losses recognized in
earnings
|
(1,128 | ) | (2,955 | ) | - | |||||||
|
Total
non-interest income
|
4,432 | 2,241 | 4,465 | |||||||||
|
Non-interest
expense
|
||||||||||||
|
Salaries
|
6,997 | 6,472 | 6,016 | |||||||||
|
Employee
benefits
|
2,527 | 1,858 | 1,708 | |||||||||
|
Premises
and equipment
|
1,939 | 1,859 | 1,621 | |||||||||
|
Data
processing
|
1,473 | 1,339 | 1,194 | |||||||||
|
Professional
fees
|
1,508 | 1,269 | 931 | |||||||||
|
FDIC
insurance
|
914 | 60 | 45 | |||||||||
|
Marketing
and community support
|
342 | 457 | 349 | |||||||||
|
Federal
Home Loan Bank of Boston advances prepayment fee
|
- | 864 | - | |||||||||
|
Amortization
of intangibles
|
164 | 164 | 164 | |||||||||
|
Other
|
2,026 | 1,667 | 1,487 | |||||||||
|
Total
non-interest expense
|
17,890 | 16,009 | 13,515 | |||||||||
|
Income
before income taxes
|
2,418 | 685 | 4,670 | |||||||||
|
Income
tax (benefit) provision
|
(49 | ) | (421 | ) | 870 | |||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Net
income available to common shareholders
|
$ | 2,102 | $ | 1,106 | $ | 3,800 | ||||||
|
Basic
and diluted earnings per share
|
$ | 1.25 | $ | 0.66 | $ | 2.26 | ||||||
|
Common
dividends per share
|
0.84 | 1.12 | 1.08 | |||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
Salisbury
Bancorp, Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Common Stock | Accumulated | share- | ||||||||||||||||||||||||||||||
| Preferred | Paid-in | Retained | other comp- | holders' | ||||||||||||||||||||||||||||
|
(dollars
in thousands)
|
Shares
|
Amount
|
Stock
|
Warrants
|
capital
|
earnings
|
rehensive
loss
|
equity
|
||||||||||||||||||||||||
|
Balances
at December 31, 2006
|
1,684,181 | $ | 168 | $ | - | $ | - | $ | 13,100 | $ | 33,603 | $ | (2,522 | ) | $ | 44,349 | ||||||||||||||||
|
Net
income for year
|
- | - | - | - | - | 3,800 | - | 3,800 | ||||||||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
- | - | - | - | - | - | (796 | ) | (796 | ) | ||||||||||||||||||||||
|
Total
comprehensive income
|
3,004 | |||||||||||||||||||||||||||||||
|
Common
stock dividends declared
|
- | - | - | - | - | (1,820 | ) | - | (1,820 | ) | ||||||||||||||||||||||
|
Issuance
of common stock for directors fees
|
840 | - | - | - | 30 | - | - | 30 | ||||||||||||||||||||||||
|
Balances
at December 31, 2007
|
1,685,021 | 168 | - | - | 13,130 | 35,583 | (3,318 | ) | 45,563 | |||||||||||||||||||||||
|
Net
income for year
|
- | - | - | - | - | 1,106 | - | 1,106 | ||||||||||||||||||||||||
|
Other
comprehensive loss, net of tax
|
- | - | - | - | - | - | (5,587 | ) | (5,587 | ) | ||||||||||||||||||||||
|
Total
comprehensive loss
|
(4,481 | ) | ||||||||||||||||||||||||||||||
|
Common
stock dividends declared
|
- | - | - | - | - | (1,888 | ) | - | (1,888 | ) | ||||||||||||||||||||||
|
Cumulative
effect of change in accounting principle: initial application of ASC
715-60
|
- | - | - | - | - | (283 | ) | - | (283 | ) | ||||||||||||||||||||||
|
Issuance
of common stock for directors fees
|
840 | - | - | - | 28 | - | - | 28 | ||||||||||||||||||||||||
|
Balances
at December 31, 2008
|
1,685,861 | 168 | - | - | 13,158 | 34,518 | (8,905 | ) | 38,939 | |||||||||||||||||||||||
|
Net
income for year
|
- | - | - | - | - | 2,467 | - | 2,467 | ||||||||||||||||||||||||
|
Other
comprehensive income, net of tax
|
- | - | - | - | - | - | 3,827 | 3,827 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
6,294 | |||||||||||||||||||||||||||||||
|
Issuance
of preferred stock and warrants
|
- | - | - | 112 | 8,704 | - | - | 8,816 | ||||||||||||||||||||||||
|
Amortization
(accretion) of preferred stock
|
- | - | - | - | 13 | (13 | ) | - | - | |||||||||||||||||||||||
|
Common
stock dividends declared
|
- | - | - | - | - | (1,417 | ) | - | (1,417 | ) | ||||||||||||||||||||||
|
Preferred
stock dividends paid
|
- | - | - | - | - | (296 | ) | - | (296 | ) | ||||||||||||||||||||||
|
Issuance
of common stock for directors fees
|
840 | - | - | - | 19 | - | - | 19 | ||||||||||||||||||||||||
|
Balances
at December 31, 2009
|
1,686,701 | $ | 168 | $ | - | $ | 112 | $ | 21,894 | $ | 35,259 | $ | (5,078 | ) | $ | 52,355 | ||||||||||||||||
The accompanying notes
are an integral part of the consolidated financial statements.
Salisbury
Bancorp, Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Operating
Activities
|
||||||||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
(Accretion),
amortization and depreciation
|
||||||||||||
|
Securities
|
652 | 149 | 75 | |||||||||
|
Bank
premises and equipment
|
709 | 687 | 565 | |||||||||
|
Core
deposit intangible
|
164 | 164 | 164 | |||||||||
|
Mortgage
servicing rights
|
167 | 132 | 171 | |||||||||
|
Fair
value adjustment on loans
|
47 | 48 | 71 | |||||||||
|
Fair
value adjustment on deposits and borrowings
|
(54 | ) | (130 | ) | (130 | ) | ||||||
|
(Gains)
and losses
|
||||||||||||
|
Sales
and calls of securities available-for-sale, net
|
(473 | ) | (600 | ) | (295 | ) | ||||||
|
Sale
of other real estate owned
|
(39 | ) | - | - | ||||||||
|
Life
insurance policies settlement
|
(129 | ) | - | - | ||||||||
|
Impairment
loss on securities recognized in earnings
|
1,128 | 2,955 | - | |||||||||
|
Loss
recognized on other real estate owned
|
125 | - | - | |||||||||
|
Provision
for loan losses
|
985 | 1,279 | - | |||||||||
|
Decrease
(increase) in loans held-for-sale
|
1,649 | (2,194 | ) | 184 | ||||||||
|
Increase
in deferred loan origination fees and costs, net
|
(193 | ) | (88 | ) | (140 | ) | ||||||
|
Mortgage
servicing rights originated
|
(367 | ) | (132 | ) | (60 | ) | ||||||
|
Increase
(decrease) in mortgage servicing rights impairment reserve
|
(88 | ) | 117 | - | ||||||||
|
Decrease
(increase) in interest receivable
|
503 | (135 | ) | (65 | ) | |||||||
|
Deferred
tax (benefit) expense
|
(1,060 | ) | (938 | ) | 35 | |||||||
|
(Increase)
decrease in prepaid expenses
|
(2,542 | ) | 138 | (5 | ) | |||||||
|
Increase
in cash surrender value of life insurance policies
|
(265 | ) | (137 | ) | (133 | ) | ||||||
|
Increase
(decrease) in income tax receivable
|
437 | (347 | ) | 90 | ||||||||
|
(Increase)
decrease in other assets
|
(63 | ) | (183 | ) | 91 | |||||||
|
Increase
(decrease) in accrued expenses
|
129 | (98 | ) | 102 | ||||||||
|
Increase
(decrease) in interest payable
|
25 | (240 | ) | 7 | ||||||||
|
Increase
in other liabilities
|
230 | 183 | 217 | |||||||||
|
Issuance
of shares for directors’ fees
|
19 | 28 | 30 | |||||||||
|
Net
cash provided by operating activities
|
4,163 | 1,764 | 4,774 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Purchase
of interest-bearing time deposits with other banks
|
(5,000 | ) | - | - | ||||||||
|
Purchases
of Federal Home Loan Bank of Boston stock
|
(709 | ) | (147 | ) | (512 | ) | ||||||
|
Purchases
of securities available-for-sale
|
(110,728 | ) | (111,560 | ) | (69,643 | ) | ||||||
|
Proceeds
from sales of securities available-for-sale
|
37,818 | 76,524 | 63,598 | |||||||||
|
Proceeds
from calls of securities available-for-sale
|
42,044 | 22,500 | 2,000 | |||||||||
|
Proceeds
from maturities of securities available-for-sale
|
32,207 | 7,370 | 10,170 | |||||||||
|
Proceeds
from maturities of securities held-to-maturity
|
4 | 4 | 4 | |||||||||
|
Loan
originations and principle collections, net
|
(28,554 | ) | (27,367 | ) | (11,449 | ) | ||||||
|
Purchases
of loans
|
- | (3,297 | ) | (4,313 | ) | |||||||
|
Recoveries
of loans previously charged-off
|
30 | 45 | 104 | |||||||||
|
Proceeds
from sales of other real estate owned
|
94 | - | - | |||||||||
|
Proceeds
from life insurance policies settlement
|
534 | - | - | |||||||||
|
Capital
expenditures
|
(3,565 | ) | (903 | ) | (1,397 | ) | ||||||
|
Cash
and cash equivalents acquired
|
||||||||||||
|
Webster
Bank N.A.
|
8,121 | - | - | |||||||||
|
New
York Community Bank (net of expenses paid $119)
|
- | - | 177 | |||||||||
|
Net
cash utilized by investing activities
|
(27,704 | ) | (36,831 | ) | (11,261 | ) | ||||||
Salisbury
Bancorp, Inc. and Subsidiary
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Financing
Activities
|
||||||||||||
|
Increase
in deposit transaction accounts, net
|
$ | 39,153 | $ | 17,713 | $ | 8,468 | ||||||
|
Increase
(decrease) in time deposits, net
|
22,679 | 9,471 | (4,805 | ) | ||||||||
|
Increase
in securities sold under agreements to repurchase, net
|
212 | 11,203 | - | |||||||||
|
Federal
Home Loan Bank of Boston advances
|
12,000 | 17,000 | 21,000 | |||||||||
|
Principle
payments on Federal Home Loan Bank of Boston advances
|
(2,618 | ) | (36,208 | ) | (16,589 | ) | ||||||
|
(Decrease)
increase in short term Federal Home Loan Bank of Boston advances,
net
|
(20,878 | ) | 12,241 | 3,637 | ||||||||
|
Proceeds
from issuance of preferred stock
|
8,816 | - | - | |||||||||
|
Common
stock dividends paid
|
(1,889 | ) | (1,871 | ) | (1,803 | ) | ||||||
|
Preferred
stock dividends paid
|
(296 | ) | - | - | ||||||||
|
Net
cash provided by financing activities
|
57,179 | 29,549 | 9,908 | |||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
33,638 | (5,518 | ) | 3,421 | ||||||||
|
Cash
and cash equivalents, beginning of year
|
9,660 | 15,178 | 11,757 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 43,298 | $ | 9,660 | $ | 15,178 | ||||||
|
Cash
paid during year
|
||||||||||||
|
Interest
|
$ | 9,064 | $ | 11,195 | $ | 12,559 | ||||||
|
Income
taxes
|
574 | 863 | 745 | |||||||||
|
Non-cash
transfers
|
||||||||||||
|
From
loans to other real estate owned
|
400 | 205 | - | |||||||||
|
From
other real estate owned to loans
|
150 | - | - | |||||||||
|
Webster
Bank, N.A. branch acquisition
|
||||||||||||
|
Cash
and cash equivalents acquired
|
8,121 | - | - | |||||||||
|
Net
loans acquired
|
2,455 | - | - | |||||||||
|
Fixed
assets acquired
|
403 | - | - | |||||||||
|
Accrued
interest receivable acquired
|
7 | - | - | |||||||||
|
Deposits
assumed
|
11,446 | - | - | |||||||||
|
Accrued
interest payable assumed
|
3 | - | - | |||||||||
|
Core
deposit intangible
|
463 | - | - | |||||||||
|
New
York Community Bank branch acquisition
|
||||||||||||
|
Cash
and cash equivalents acquired
|
- | - | 296 | |||||||||
|
Deposits
assumed
|
- | - | 492 | |||||||||
|
Accrued
interest payable assumed
|
- | - | 4 | |||||||||
|
Net
liabilities assumed
|
- | - | 200 | |||||||||
|
Acquisition
costs
|
- | - | 119 | |||||||||
|
Goodwill
|
- | - | 319 | |||||||||
Salisbury
Bancorp, Inc. and Subsidiary
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Salisbury
is the bank holding company for Salisbury Bank, a State chartered commercial
bank. Salisbury's activity is currently limited to the holding of the
Bank's outstanding capital stock and the Bank is Salisbury's only subsidiary and
its primary investment. The Bank is a Connecticut chartered and
Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank
headquartered in Lakeville, Connecticut. The Bank's principal
business consists of attracting deposits from the public and using such
deposits, with other funds, to make various types of loans and
investments. The Bank conducts its business through 8 full-service
offices located in Litchfield, Berkshire and Dutchess Counties in Connecticut,
Massachusetts and New York, respectively. The accompanying
consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. The following is a summary of
significant accounting policies:
Principles
of Consolidation
The
consolidated financial statements include those of Salisbury and its subsidiary
after elimination of all inter-company accounts and transactions.
Basis
of Financial Statement Presentation
The
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America. 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 statement of condition, 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. In connection with the determination of the
allowance for loan losses, management obtains independent appraisals for
significant properties.
Certain
reclassifications have been made to the 2008 and 2007 financial statements to
make them consistent with the 2009 presentation.
Salisbury's
loans are generally collateralized by real estate located principally in
Connecticut. In addition, all other real estate owned (“OREO”) is
located in Connecticut. Accordingly, the collectability of a
substantial portion of the loan portfolio and OREO through foreclosure is
particularly susceptible to changes in market conditions.
While
management uses available information to recognize losses on loans and OREO,
future additions to the allowance or write-downs of OREO may be necessary based
on changes in economic conditions, particularly in Connecticut. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review Salisbury's allowance for loan losses and valuation
of OREO. Such agencies may require Salisbury to recognize additions
to the allowance or write-downs based on their judgments of information
available to them at the time of their examination.
Securities
Securities
that may be sold as part of Salisbury's asset/liability or liquidity management
or in response to or in anticipation of changes in interest rates and resulting
prepayment risk, or for other similar factors, are classified as
available-for-sale and carried at their fair market value. Unrealized
holding gains and losses on such securities are reported net of related taxes,
if applicable, as a separate component of shareholders' equity. Securities that
Salisbury has the ability and positive intent to hold to maturity are classified
as held-to-maturity and carried at amortized cost. Realized gains and
losses on the sales of all securities are reported in earnings and computed
using the specific identification cost basis. Securities are reviewed regularly
for other-than-temporary impairment. If there was
other-than–temporary-impairment, the carrying value of the security would be
reduced to its estimated fair value, with the credit related impairment loss
recognized in the consolidated statements of income as other operating income,
net. Premiums and discounts are amortized or accreted utilizing the
interest method over the life or call of the term of the investment
security.
On
December 8, 2008, the Federal Home Loan Bank of Boston announced an indefinite
moratorium on the repurchase of excess stock held by its
members. Until the moratorium is lifted, the Bank is unable to redeem
any excess shares of Federal Home Loan Bank of Boston stock.
Loans
Loans are
reported at their principal outstanding balance net of charge-offs, deferred
loan origination fees and costs on originated loans and unamortized premiums or
unaccreted discounts on purchased loans. Loan origination and
commitment fees, certain direct origination costs and unamortized premiums or
unaccreted discounts on purchased loans are deferred and recognized over the
life of the related loan as an adjustment of yield under the interest method, or
recognized in earnings when the related loan is sold.
Mortgage
loans held-for-sale are valued at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield requirements
calculated on the aggregate loan basis. Changes in the carrying value
are reported in earnings as gains and losses on mortgage loans held for sale.
Realized gains and losses on sales of mortgage loans are reported in earnings as
gains and losses on sales of mortgage loans, net, when the proceeds are received
from investors.
The
accrual of interest on loans, including impaired loans, is generally
discontinued when principal or interest is past due by 90 days or more, or
earlier when, in the opinion of management, full collection of principal or
interest is unlikely unless such loans are well collateralized and in the
process of collection. When a loan is placed on non-accrual status,
interest previously accrued but not collected is charged against current
income. Income on such loans, including impaired loans, is then
recognized only to the extent that cash is received and future collection of
principal is probable.
Loans,
including impaired loans, are restored to accrual status when principal and
interest payments are brought current and future payments are reasonably
assured, following a sustained period of repayment performance by the borrower
in accordance with the loan's contractual terms.
Allowance
for Loan Losses
Salisbury
periodically reviews the allowance for loan losses in order to maintain the
allowance at a level sufficient to absorb probable credit
losses. Salisbury's review is based upon a detailed evaluation of the
loan portfolio through a process which considers numerous factors, including
probable 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. The allowance for loan losses is increased
through charges to earnings in the form of a provision for loan
losses. When a loan or portion of a loan is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the
allowance. While Salisbury uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in regional economic conditions and related factors.
Salisbury
measures impaired loans based on the present value of the expected future cash
flows discounted at the loan's effective interest rate, or the fair value of the
collateral, less estimated selling costs, if the loan is collateral dependent
and foreclosure is probable. Salisbury recognizes impairment by
creating a valuation allowance as a component of the allowance for loan
losses. A loan is impaired when, based on current information, it is
probable that Salisbury will be unable to collect all amounts due according to
the contractual terms of the loan. Smaller-balance homogeneous loans
consisting of residential mortgages and consumer loans are evaluated for
collectability by Salisbury based on historical loss experience rather than on
an individual loan-by-loan basis. Impaired loans are primarily
commercial mortgages collateralized by real estate and commercial and industrial
loans.
Other
Real Estate Owned (“OREO”)
Other
real estate owned includes properties acquired through foreclosure and
properties classified as in-substance foreclosures in accordance with ASC
310-40, “Receivables – Troubled Debt Restructuring by Creditors.” These
properties are carried at the lower of cost or estimated fair value less
estimated costs to sell. Any write-down from cost to estimated fair
value required at the time of foreclosure or classification as in-substance
foreclosure is charged to the allowance for loan losses. Expenses
incurred in connection with maintaining these assets and subsequent write-downs
are included in other expense.
In
accordance with ASC 310-10-35, “Receivables – Overall – Subsequent
Measurements,” the Bank classifies loans as in-substance, repossessed or
foreclosed if the Bank or its subsidiaries receives physical possession of the
debtor’s assets regardless of whether formal foreclosure proceedings take
place.
Income
Taxes
Deferred
income taxes are provided for differences arising in the timing of income and
expenses for financial reporting and for income tax purposes using the
asset/liability method of accounting for income taxes. Deferred
income taxes and tax benefits are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. Salisbury provides deferred taxes for the estimated future
tax effects attributable to temporary differences and carry-forwards when
realization is assured beyond a reasonable doubt.
Bank
Premises and Equipment
Bank
premises, furniture and equipment are carried at cost, less accumulated
depreciation and amortization computed on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are
amortized on the straight-line basis over the shorter of the estimated useful
lives of the improvements or the term of the related leases.
Intangible
Assets
Intangible
assets consist of core deposit intangibles and goodwill. Intangible assets equal
the excess of the purchase price over the fair value of the tangible net assets
acquired in acquisitions accounted for using the purchase method of accounting.
The Company’s assets as of December 31, 2009, and 2008, include goodwill of
$2,358,000 relating to the purchase of a branch of a bank in 2001, $7,152,000 of
additional goodwill from the 2004 merger with Canaan National Bancorp, Inc. and
$319,000 of additional goodwill from the 2007 purchase of a branch of a bank in
Mt. Vernon, NY. See Note 17.
On an
annual basis, management assesses intangible assets for impairment and at
December 31, 2009, concluded there was no impairment. If a permanent
loss in value is indicated, an impairment charge to income will be
recognized.
Statement
of Cash Flows
For the
purpose of the Consolidated Statements of Cash Flows, cash and cash equivalents
include cash and due from banks, interest-bearing demand deposits with other
financial institutions, money market funds and federal funds sold.
Computation
of Earnings per Share
Basic
earnings per share is computed using the weighted-average common shares
outstanding during the year. The computation of diluted earnings per
share is similar to the computation of basic earnings per share except the
denominator is increased to include the number of additional common shares that
would have been outstanding if dilutive potential common shares had been issued.
See Note 22.
Recent
Accounting Pronouncements
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.” This standard is effective for the first interim reporting
period of 2010. SFAS No. 166 amends the guidance in ASC 860 to modify
the criteria that must be met in order for a transfer of a financial asset to
qualify for sale accounting. Salisbury does not expect the adoption
of this standard to have a material impact 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 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 impact of the adoption of this guidance is included in Note
2, “Securities”.
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 or results of operations. The enhanced disclosures related
to this guidance are included in Note 20, “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 20, “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 non-forfeitable
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 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 ASC 815 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 Salisbury’s financial condition or results of operations.
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 non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. It clarifies
that a non-controlling 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 non-controlling 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 or results of operations.
NOTE
2 - SECURITIES
The
composition of securities is as follows:
|
Amortized
|
Gross
un-
|
Gross
un-
|
Fair
|
|||||||||||||
|
(in
thousands)
|
cost
(1)
|
realized
gains
|
realized
losses
|
value
|
||||||||||||
|
December
31, 2009
|
||||||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
U.S.
Treasury bills
|
$ | 1,999 | $ | 1 | $ | - | $ | 2,000 | ||||||||
|
U.S.
Government Agency notes
|
24,833 | 125 | (126 | ) | 24,832 | |||||||||||
|
Municipal
bonds
|
51,775 | 113 | (4,735 | ) | 47,153 | |||||||||||
|
Mortgage
backed securities
|
||||||||||||||||
|
U.S.
Government Agencies
|
33,535 | 535 | (143 | ) | 33,927 | |||||||||||
|
Collateralized
mortgage obligations
|
||||||||||||||||
|
U.S.
Government Agencies
|
5,696 | - | (58 | ) | 5,638 | |||||||||||
|
Non-agency
|
25,317 | 433 | (2,121 | ) | 23,629 | |||||||||||
|
SBA
bonds
|
6,581 | 59 | - | 6,640 | ||||||||||||
|
Corporate
bonds
|
1,079 | 49 | - | 1,128 | ||||||||||||
|
Preferred
Stock
|
20 | 64 | - | 84 | ||||||||||||
|
Total
securities available-for-sale
|
$ | 150,835 | $ | 1,379 | $ | (7,183 | ) | $ | 145,031 | |||||||
|
Held-to-maturity
|
||||||||||||||||
|
Mortgage
backed security
|
$ | 62 | $ | - | $ | - | $ | 62 | ||||||||
|
Non-marketable
securities
|
||||||||||||||||
|
Federal
Home Loan Bank of Boston stock
|
$ | 6,032 | $ | - | $ | - | $ | 6,032 | ||||||||
|
December
31, 2008
|
||||||||||||||||
|
Available-for-sale
|
||||||||||||||||
|
U.S.
Government Agency notes
|
$ | 41,460 | $ | 110 | $ | (299 | ) | $ | 41,271 | |||||||
|
Municipal
bonds
|
63,514 | 135 | (7,953 | ) | 55,696 | |||||||||||
|
Mortgage
backed securities
|
||||||||||||||||
|
U.S.
Government Agencies
|
26,873 | 120 | (178 | ) | 26,815 | |||||||||||
|
Collateralized
mortgage obligations
|
||||||||||||||||
|
U.S.
Government Agencies
|
2,540 | 56 | - | 2,596 | ||||||||||||
|
Non-agency
|
23,920 | 295 | (2,873 | ) | 21,342 | |||||||||||
|
SBA
bonds
|
2,757 | 30 | - | 2,787 | ||||||||||||
|
Preferred
Stock
|
20 | - | - | 20 | ||||||||||||
|
Total
securities available-for-sale
|
$ | 161,084 | $ | 746 | $ | (11,303 | ) | $ | 150,527 | |||||||
|
Held-to-maturity
|
||||||||||||||||
|
Mortgage
backed security
|
$ | 66 | $ | 1 | $ | - | $ | 67 | ||||||||
|
Non-marketable
securities
|
||||||||||||||||
|
Federal
Home Loan Bank of Boston stock
|
$ | 5,323 | $ | - | $ | - | $ | 5,323 | ||||||||
|
(1)
|
Net
of other-than-temporary impairment write-down recognized in
earnings.
|
Sales of
securities available-for-sale and gains realized are as follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Proceeds
|
$ | 37,818 | $ | 76,524 | $ | 63,598 | ||||||
|
Gains
realized
|
600 | 572 | 306 | |||||||||
|
Losses
realized
|
(135 | ) | - | (11 | ) | |||||||
|
Net
gains realized
|
465 | 572 | 295 | |||||||||
|
Income
tax provision
|
158 | 194 | 100 | |||||||||
Included
in non-agency Collateralized Mortgage Obligations (“CMOs”) are seven securities
issued by Wells Fargo with an aggregate amortized cost basis and fair value of
$8,710,000 and $7,979,000, respectively, that exceeded 10% of shareholders’
equity as of December 31, 2009.
The
following table summarizes, for all securities, including debt securities for
which a portion of other-than-temporary impairment has been recognized in other
comprehensive income, in an unrealized loss position, the aggregate fair value
and gross unrealized loss of securities that have been in a continuous
unrealized loss position as of the dates presented:
|
Less
than 12 Months
|
12
Months or Longer
|
Total
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
(in
thousands)
|
value
|
losses
|
value
|
losses
|
value
|
losses
|
||||||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||
|
U.S.
Government Agency notes
|
$ | 7,997 | $ | 126 | $ | - | $ | - | $ | 7,997 | $ | 126 | ||||||||||||
|
Municipal
Bonds
|
12,171 | 438 | 30,249 | 4,297 | 42,420 | 4,735 | ||||||||||||||||||
|
Mortgage
backed securities
|
2,704 | 135 | 641 | 8 | 3,345 | 143 | ||||||||||||||||||
|
Collateralized
mortgage obligations
|
||||||||||||||||||||||||
|
U.S.
Government Agencies
|
5,638 | 58 | - | - | 5,638 | 58 | ||||||||||||||||||
|
Non-agency
|
4,387 | 327 | 5,768 | 563 | 10,155 | 890 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
32,897 | 1,084 | 36,658 | 4,868 | 69,555 | 5,952 | ||||||||||||||||||
|
Other-than-temporarily
impaired securities
|
||||||||||||||||||||||||
|
Collateralized
mortgage obligations
|
||||||||||||||||||||||||
|
Non-agency
|
- | - | 4,237 | 1,231 | 4,237 | 1,231 | ||||||||||||||||||
|
Total
temporarily impaired and other-than-temporarily impaired
securities
|
$ | 32,897 | $ | 1,084 | $ | 40,895 | $ | 6,099 | $ | 73,792 | $ | 7,183 | ||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||
|
U.S.
Government Agency notes
|
$ | 15,701 | $ | 299 | $ | - | $ | - | $ | 15,701 | $ | 299 | ||||||||||||
|
Municipal
Bonds
|
43,327 | 6,032 | 6,382 | 1,921 | 49,709 | 7,953 | ||||||||||||||||||
|
Mortgage
backed securities
|
6,195 | 77 | 5,351 | 101 | 11,546 | 178 | ||||||||||||||||||
|
Collateralized
mortgage obligations
Non-agency |
18,001 | 2,436 | 220 | 437 | 18,221 | 2,873 | ||||||||||||||||||
|
Total
temporarily impaired securities
|
83,224 | 8,844 | 11,953 | 2,459 | 95,177 | 11,303 | ||||||||||||||||||
|
Other-than-temporarily
impaired securities
|
- | - | - | - | - | - | ||||||||||||||||||
|
Total
temporarily impaired and other-than-temporarily impaired
securities
|
$ | 83,224 | $ | 8,844 | $ | 11,953 | $ | 2,459 | $ | 95,177 | $ | 11,303 | ||||||||||||
Securities
amortized cost, fair value and tax equivalent yield by maturity are as
follows:
|
December
31, 2009 (dollars in thousands)
|
Amortized
cost
|
Fair
value
|
Yield(1)
|
|||||||||
|
Available-for-sale
|
||||||||||||
|
U.S.
Treasury bills
|
||||||||||||
|
Within
1 year
|
$ | 1,999 | $ | 2,000 | 0.03 | % | ||||||
|
U.S.
Government Agency notes
|
||||||||||||
|
Within
1 year
|
2,001 | 2,002 | 0.97 | |||||||||
|
After
1 year but within 5 years
|
12,624 | 12,706 | 3.09 | |||||||||
|
After
10 years but within 15 years
|
7,672 | 7,547 | 4.56 | |||||||||
|
After
15 years
|
2,536 | 2,577 | 5.03 | |||||||||
|
Total
|
24,833 | 24,832 | 3.57 | |||||||||
|
Municipal
bonds
|
||||||||||||
|
After
10 years but within 15 years
|
3,785 | 3,620 | 6.04 | |||||||||
|
After
15 years
|
47,990 | 43,533 | 6.38 | |||||||||
|
Total
|
51,775 | 47,153 | 6.35 | |||||||||
|
Mortgage
backed securities
|
||||||||||||
|
U.S.
Government Agency
|
33,535 | 33,927 | 3.23 | |||||||||
|
Collateralized
mortgage obligations
|
||||||||||||
|
U.S.
Government Agency
|
5,696 | 5,638 | 5.77 | |||||||||
|
Non-agency
|
25,316 | 23,629 | 0.57 | |||||||||
|
SBA
bonds
|
6,581 | 6,640 | 1.40 | |||||||||
|
Corporate
bonds
|
||||||||||||
|
After
1 year but within 5 years
|
1,079 | 1,128 | 4.00 | |||||||||
|
Preferred
Stock
|
20 | 84 | 0.00 | |||||||||
|
Total
securities available-for-sale
|
$ | 150,834 | $ | 145,031 | 4.57 | |||||||
|
Held-to-maturity
|
||||||||||||
|
Mortgage
backed security
|
$ | 62 | $ | 62 | 4.33 | % | ||||||
(1) Yield
is based on amortized cost.
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.
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
performed a detailed cash flow analysis of its non-agency CMOs at December 31,
2009 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.
During
2009, Salisbury determined that five non-agency CMO securities reflected OTTI
and recognized credit losses of $1,128,000. Salisbury judged all other CMO
securities not to be OTTI as of December 31, 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
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.
Securities
for which an OTTI has been recognized are as follows:
|
Year
ended December 31, (in thousands)
|
2009
|
|||||||
|
Non-Agency
CMOs
|
||||||||
|
Total
OTTI losses (unrealized and realized)
|
$ | 2,302 | ||||||
|
Less:
unrealized OTTI recognized in other comprehensive loss
|
1,174 | |||||||
|
Net
impairment losses recognized in earnings
|
$ | 1,128 | ||||||
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:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
||||||
|
Balance,
beginning of period
|
$ | - | $ | - | ||||
|
Amounts
related to the credit component on debt securities in which OTTI was not
previously recognized
|
1,128 | - | ||||||
|
Balance,
end of period
|
$ | 1,128 | $ | - | ||||
NOTE
3 - LOANS
The
composition of the loan portfolio is as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Loans
receivable, net
|
||||||||
|
Real
estate mortgages:
|
||||||||
|
Residential
|
$ | 163,863 | $ | 151,440 | ||||
|
Commercial
|
70,066 | 62,796 | ||||||
|
Construction,
land & land development
|
31,011 | 33,343 | ||||||
|
Home
equity credit
|
33,099 | 25,608 | ||||||
|
Total
mortgage loans
|
298,039 | 273,187 | ||||||
|
Commercial
and industrial
|
26,400 | 20,785 | ||||||
|
Consumer
|
5,436 | 5,551 | ||||||
|
Other
|
269 | 175 | ||||||
|
Total
loans, gross
|
330,144 | 299,698 | ||||||
|
Deferred
loan origination fees and costs, net
|
586 | 393 | ||||||
|
Allowance
for loan losses
|
(3,473 | ) | (2,724 | ) | ||||
|
Total
loans, net
|
$ | 327,257 | $ | 297,367 | ||||
|
Loans
held-for-sale
|
||||||||
|
Residential
mortgages
|
$ | 665 | $ | 2,314 | ||||
Allowance
for Loan Losses
Changes
in the allowance for loan losses are as follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance,
beginning of period
|
$ | 2,724 | $ | 2,475 | $ | 2,474 | ||||||
|
Provision
for losses
|
985 | 1,279 | - | |||||||||
|
Charge-offs
|
(266 | ) | (1,075 | ) | (103 | ) | ||||||
|
Recoveries
|
30 | 45 | 104 | |||||||||
|
Balance,
end of period
|
$ | 3,473 | $ | 2,724 | $ | 2,475 | ||||||
Concentrations
of Credit Risk
Salisbury's
loans consist primarily of residential and commercial real estate loans located
principally in northwestern Connecticut and nearby New York and Massachusetts
towns, 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 of single family residential and consumer borrowers to honor their
repayment commitments is generally dependent on the level of overall economic
activity within the market area and real estate values. The ability of
commercial borrowers to honor their repayment commitments is dependent on the
general economy as well as the health of the real estate economic sector in
Salisbury’s market area.
Mortgage
Servicing Rights
Loans
serviced for others are not included in the Consolidated Balance Sheets. Balance
of loans serviced for others and the fair value of mortgage servicing rights are
as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Residential
mortgage loans serviced for others
|
$ | 72,962 | $ | 54,073 | ||||
|
Fair
value of mortgage servicing rights
|
473 | 135 | ||||||
Changes
in mortgage servicing rights are as follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Loan
Servicing Rights
|
||||||||||||
|
Balance,
beginning of period
|
$ | 227 | $ | 227 | $ | 338 | ||||||
|
Originated
|
367 | 132 | 60 | |||||||||
|
Amortization
(1)
|
(167 | ) | (132 | ) | (171 | ) | ||||||
|
Balance,
end of period
|
427 | 227 | 227 | |||||||||
|
Valuation
Allowance
|
||||||||||||
|
Balance,
beginning of period
|
(118 | ) | (1 | ) | - | |||||||
|
Decrease
(increase) in impairment reserve (1)
|
88 | (117 | ) | (1 | ) | |||||||
|
Balance,
end of period
|
(30 | ) | (118 | ) | (1 | ) | ||||||
|
Loan
servicing rights, net
|
$ | 397 | $ | 109 | $ | 226 | ||||||
|
|
(1)
|
Amortization
expense and changes in the impairment reserve are recorded in loan
servicing fee income.
|
NOTE
4 - NON-PERFORMING ASSETS AND IMPAIRED LOANS
The
components of non-performing assets are as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Non-accrual
loans
|
$ | 7,439 | $ | 5,075 | ||||
|
Accruing
loans past due 90 days or more
|
6 | 100 | ||||||
|
Accruing
restructured loans
|
- | - | ||||||
|
Total
non-performing loans
|
7,445 | 5,175 | ||||||
|
Real
estate acquired in settlement of loans
|
275 | 205 | ||||||
|
Total
non-performing assets
|
$ | 7,720 | $ | 5,380 | ||||
The
components of impaired loans are as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
With
no valuation allowance
|
$ | 9,379 | $ | 3,709 | ||||
|
With
valuation allowance
|
3,388 | 797 | ||||||
|
Total
impaired loans
|
$ | 12,767 | $ | 4,506 | ||||
|
Average
impaired loans
|
$ | 9,443 | $ | 3,674 | ||||
|
Valuation
allowance
|
388 | 83 | ||||||
|
Commitments
to lend additional amounts to impaired borrowers
|
- | - | ||||||
|
Interest
income recognized
|
398 | 16 | ||||||
Included
in certain loan categories in the impaired loans are troubled debt
restructurings that were classified as impaired. At December 31,
2009, Salisbury had $8,140,000 in loans that were modified in troubled debt
restructurings and impaired, of which $5,799,000 was performing in accordance
with the modified terms.
NOTE
5 - PLEDGED ASSETS
The
following securities and loans were pledged to secure public and trust deposits,
securities sold under agreements to repurchase, FHLBB advances and credit
facilities available.
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Securities
available-for-sale (at fair value)
|
$ | 63,097 | $ | 91,120 | ||||
|
Loans
receivable
|
104,960 | 99,619 | ||||||
|
Total
pledged assets
|
$ | 168,057 | $ | 190,739 | ||||
At
December 31, 2009 securities were pledged as follows: $41.2 million to secure
public deposits and Treasury Tax and Loan deposits, $12.6 million to secure
repurchase agreements and $9.3 million to secure FHLBB advances. Loans
receivable were pledged to secure FHLBB advances and credit
facilities.
NOTE
6 - BANK PREMISES AND EQUIPMENT
The
components of premises and equipment are as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Land
|
$ | 843 | $ | 776 | ||||
|
Buildings
and improvements
|
6,951 | 6,619 | ||||||
|
Furniture,
fixtures and equipment
|
3,436 | 3,823 | ||||||
|
Construction
in progress, including land acquisition and development
|
3,864 | - | ||||||
|
Total
cost
|
15,094 | 11,218 | ||||||
|
Accumulated
depreciation and amortization
|
(4,660 | ) | (4,094 | ) | ||||
|
Bank
premises and equipment, net
|
$ | 10,434 | $ | 7,124 | ||||
NOTE
7 - GOODWILL AND INTANGIBLE ASSETS
Changes
in the carrying values of goodwill and intangible assets were as
follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Goodwill
(1)
|
||||||||||||
|
Balance,
beginning of period
|
$ | 9,829 | $ | 9,829 | $ | 9,829 | ||||||
|
Additions
|
- | - | - | |||||||||
|
Impairment
|
- | - | - | |||||||||
|
Balance,
end of period
|
$ | 9,829 | $ | 9,829 | $ | 9,829 | ||||||
|
Core
Deposit Intangibles
|
||||||||||||
|
Cost,
beginning of period
|
$ | 2,080 | $ | 2,080 | $ | 2,080 | ||||||
|
Additions
|
463 | - | - | |||||||||
|
Impairment
|
- | - | - | |||||||||
|
Cost,
end of period
|
2,543 | 2,080 | 2,080 | |||||||||
|
Amortization,
beginning of period
|
(915 | ) | (751 | ) | (587 | ) | ||||||
|
Amortization
|
(164 | ) | (164 | ) | (164 | ) | ||||||
|
Amortization,
end of period
|
(1,079 | ) | (915 | ) | (751 | ) | ||||||
|
Core
deposit intangibles, net
|
$ | 1,464 | $ | 1,165 | $ | 1,329 | ||||||
|
(1)
|
Not
subject to amortization.
|
In
December 2009, Salisbury acquired the Canaan branch office of Webster Bank,
National Association and assumed approximately $11 million in deposits and
acquired approximately $2.5 million in loans and the property located at 10
Granite Ave., Canaan, Connecticut. Salisbury assigned a core deposit intangible
of $463,000 to their acquisition.
Salisbury
evaluated its goodwill and intangible assets as of December 31, 2009, and 2008,
and found no impairment. Estimated annual amortization expense of core deposit
intangibles is as follows:
|
Years
ended December 31, (in thousands)
|
CDI
amortization
|
|||||||
|
2010
|
$ | 222 | ||||||
|
2011
|
222 | |||||||
|
2012
|
222 | |||||||
|
2013
|
222 | |||||||
|
2014
|
203 | |||||||
|
2015
– 2017
|
373 | |||||||
NOTE
8 - DEPOSITS
Scheduled
maturities of time certificates of deposit were as follows:
|
December
31, 2009 (in thousands)
|
CD
maturities
|
|||||||
|
2010
|
$ | 113,760 | ||||||
|
2011
|
21,123 | |||||||
|
2012
|
3,780 | |||||||
|
2013
|
8,637 | |||||||
|
2014
|
6,239 | |||||||
|
Total
|
$ | 153,539 | ||||||
The total
amount and scheduled maturities of time certificates of deposit in denominations
of $100,000 or more were as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Less
than three months
|
$ | 17,440 | $ | 3,784 | ||||
|
Within
three-to-six months
|
6,667 | 3,982 | ||||||
|
Within
six-to-twelve months
|
8,141 | 13,063 | ||||||
|
Over
one year
|
14,365 | 18,505 | ||||||
|
Total
|
$ | 46,613 | $ | 39,334 | ||||
NOTE
9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Salisbury
enters into overnight and short-term repurchase agreements with its
customers. Securities sold under repurchase agreements are as
follows:
|
As
of or for the years ended December 31, (dollars in
thousands)
|
2009
|
2008
|
||||||
|
Repurchase
agreements, ending balance
|
$ | 11,415 | $ | 11,203 | ||||
|
Repurchase
agreements, average balance during period
|
11,775 | 4,948 | ||||||
|
Book
value of collateral
|
12,628 | 13,824 | ||||||
|
Market
value of collateral
|
12,655 | 13,751 | ||||||
|
Weighted
average rate during period
|
1.11 | % | 2.14 | % | ||||
|
Weighted
average maturity
|
1
day
|
1
day
|
||||||
NOTE
10 – FEDERAL HOME LOAN BANK OF BOSTON ADVANCES
Federal
Home Loan Bank of Boston (“FHLBB”) advances are as follows:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||||||||||
|
(dollars
in thousands)
|
Total
|
Callable
(1)
|
Rate
(2)
|
Total
|
Callable
(1)
|
Rate
(2)
|
||||||||||||||||||
|
Overnight
|
$ | - | $ | - | 0.00 | % | $ | 20,878 | $ | - | 0.06 | % | ||||||||||||
|
2009
|
- | - | 0.00 | 2,618 | 1,000 | 4.54 | ||||||||||||||||||
|
2010
|
3,552 | 1,900 | 4.76 | 3,552 | 1,900 | 4.74 | ||||||||||||||||||
|
2011
|
18,197 | 10,500 | 3.97 | 12,197 | 10,500 | 4.93 | ||||||||||||||||||
|
2012
|
12,636 | 5,000 | 3.44 | 6,636 | 5,000 | 4.35 | ||||||||||||||||||
|
2013
|
11,569 | 10,000 | 4.75 | 11,569 | 10,000 | 4.74 | ||||||||||||||||||
|
2014
|
1,598 | - | 3.87 | 1,598 | - | 3.87 | ||||||||||||||||||
|
2015
|
791 | - | 3.88 | 791 | - | 3.89 | ||||||||||||||||||
|
2016
|
15,021 | 15,000 | 4.08 | 15,021 | 15,000 | 4.05 | ||||||||||||||||||
|
2017
|
6,000 | 6,000 | 3.99 | 6,000 | 6,000 | 3.99 | ||||||||||||||||||
|
2018
|
7,000 | 7,000 | 3.69 | 7,000 | 7,000 | 3.69 | ||||||||||||||||||
|
Unamortized
premium
|
- | - | 0.00 | 54 | - | 0.00 | ||||||||||||||||||
|
Total
|
$ | 76,364 | $ | 55,400 | 4.02 | $ | 87,914 | $ | 56,400 | 3.34 | ||||||||||||||
|
(1)
|
Represents
the portion of advances that are callable. Callable advances are presented
by scheduled maturity. All callable advances are callable quarterly by the
FHLBB.
|
|
(2)
|
Weighted
average rate based on scheduled maturity
dates.
|
During
2008, the Bank prepaid $19 million of FHLBB advances to restructure its
wholesale borrowings and incurred a prepayment fee of $864,000 included in
non-interest expense.
In
addition to outstanding advances, Salisbury has access to an unused FHLBB line
of credit of $3.5 million at December 31, 2009. Advances from the FHLBB are
secured by a blanket lien on qualified collateral, consisting primarily of loans
with first mortgages secured by one-to-four family properties, certain
unencumbered investment securities and other qualified assets.
The
following table sets forth certain information concerning short-term FHLBB
advances:
|
As
of or for the years ended December 31, (dollars in
thousands)
|
2009
|
2008
|
||||||
|
Highest
month-end balance during period
|
$ | 10,333 | $ | 20,878 | ||||
|
Ending
balance
|
- | 20,878 | ||||||
|
Average
balance during period
|
760 | 4,233 | ||||||
|
Weighted
average rate during period
|
0.34 | % | 1.38 | % | ||||
|
Weighted
average rate at end of period
|
- | 0.06 | ||||||
NOTE
11 – NET DEFERRED TAX ASSET AND INCOME TAXES
Salisbury
provides deferred taxes for the estimated future tax effects attributable to
temporary differences and carry-forwards when realization is more likely than
not. The components of the income tax provision were as
follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Current
provision
|
||||||||||||
|
Federal
|
$ | 897 | $ | 399 | $ | 775 | ||||||
|
State
|
114 | 118 | 60 | |||||||||
|
Total
|
1,011 | 517 | 835 | |||||||||
|
Deferred
benefit
|
||||||||||||
|
Federal
|
(1,060 | ) | (1,017 | ) | 25 | |||||||
|
State
|
- | - | - | |||||||||
|
Change
in valuation allowance
|
- | 79 | 10 | |||||||||
|
Total
|
(1,060 | ) | (938 | ) | 35 | |||||||
|
Income
tax (benefit) provision
|
$ | (49 | ) | $ | (421 | ) | $ | 870 | ||||
The
following is a reconciliation of the expected federal statutory tax to the
income tax provision:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
tax at statutory federal tax rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
Connecticut
Corporation tax net of federal tax benefit
|
3.1 | 11.4 | 0.9 | |||||||||
|
Tax
exempt income and dividends received deduction
|
(40.3 | ) | (135.4 | ) | (19.1 | ) | ||||||
|
Other
|
1.2 | 16.9 | 2.6 | |||||||||
|
Change
in valuation allowance
|
- | 11.6 | 0.2 | |||||||||
|
Effective
income tax rates
|
(2.0 | ) | (61.5 | ) | 18.6 | |||||||
The
components of Salisbury's net deferred tax assets are as follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
||||||
|
Deferred
tax assets
|
||||||||
|
Allowance
for loan losses
|
$ | 958 | $ | 704 | ||||
|
Interest
on non-performing loans
|
154 | 135 | ||||||
|
Accrued
deferred compensation
|
57 | 55 | ||||||
|
Post-retirement
benefits
|
21 | 21 | ||||||
|
Other
real estate owned property write-down
|
65 | 22 | ||||||
|
Capital
loss carry forward
|
349 | 349 | ||||||
|
Unrecognized
pension expense
|
643 | 998 | ||||||
|
Write-down
of securities
|
1,388 | 1,005 | ||||||
|
Alternative
minimum tax
|
466 | - | ||||||
|
Net
unrealized holding loss on available-for-sale securities
|
1,973 | 3,590 | ||||||
|
Gross
deferred tax assets
|
6,074 | 6,879 | ||||||
|
Valuation
allowance
|
(349 | ) | (349 | ) | ||||
| 5,725 | 6,530 | |||||||
|
Deferred
tax liabilities
|
||||||||
|
Deferred
loan costs, net
|
(199 | ) | (134 | ) | ||||
|
Goodwill
and core deposit intangible asset
|
(702 | ) | (682 | ) | ||||
|
Accelerated
depreciation
|
(1,029 | ) | (1,039 | ) | ||||
|
Mark-to-market
purchase accounting adjustments
|
(57 | ) | (54 | ) | ||||
|
Mortgage
servicing rights
|
(135 | ) | (37 | ) | ||||
|
Prepaid
pension
|
(318 | ) | (387 | ) | ||||
|
Gross
deferred tax liabilities
|
(2,440 | ) | (2,333 | ) | ||||
|
Net
deferred tax asset
|
$ | 3,285 | $ | 4,197 | ||||
Salisbury
will only recognize a deferred tax asset when, based upon available evidence,
realization is more likely than not.
At
December 31, 2009 and 2008, a valuation allowance was established for the entire
amount of the state deferred tax assets as a result of Connecticut legislation
that 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, SBT Mortgage Service Corporation.
Salisbury does not expect to pay state income tax in the foreseeable future
unless there is a change in State of Connecticut corporate tax
law. Accordingly, Salisbury does not expect to be able to utilize the
net operation losses generated by the PIC and has established a valuation
allowance.
Salisbury
adopted ASC 740-20, “Income Taxes – Intraperiod Tax Allocation,” as of December
31, 2008. Salisbury’s policy is to provide for uncertain tax
positions and the related interest and penalties based upon management’s
assessment of whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. There was no effect on Salisbury’s
balance sheet or income statement from adoption of ASC 740-20.
NOTE
12 – SHAREHOLDERS’ EQUITY
Capital
Requirements
Salisbury
and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional and
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on Salisbury and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, Salisbury and the Bank must meet
specific guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Salisbury and the Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require Salisbury
and the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital (as defined) to average assets (as defined) and total
and Tier 1 capital (as defined) to risk-weighted assets (as
defined). Management believes, as of December 31, 2009, that
Salisbury and the Bank meet all of their capital adequacy
requirements.
The Bank
was classified, as of its most recent notification, as "well
capitalized". The Bank's actual regulatory capital position and
minimum capital requirements as defined "To Be Well Capitalized Under Prompt
Corrective Action Provisions" and "For Capital Adequacy Purposes" are as
follows:
|
Actual
|
For
Capital Adequacy
Purposes
|
To
be Well Capitalized
Under
Prompt Corrective
Action
Provisions
|
||||||||||||||||||||||
|
(dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||||||
|
Total
Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Salisbury
|
$ | 49,674 | 12.86 | % | $ | 30,897 | 8.0 | % | n/a | - | ||||||||||||||
|
Bank
|
40,064 | 10.40 | 30,820 | 8.0 | $ | 38,526 | 10.0 | % | ||||||||||||||||
|
Tier
1 Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Salisbury
|
46,140 | 11.95 | 15,448 | 4.0 | n/a | - | ||||||||||||||||||
|
Bank
|
36,531 | 9.48 | 15,410 | 4.0 | 23,115 | 6.0 | ||||||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Salisbury
|
46,140 | 8.39 | 22,003 | 4.0 | n/a | - | ||||||||||||||||||
|
Bank
|
36,531 | 6.70 | 21,809 | 4.0 | 27,261 | 5.0 | ||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||
|
Total
Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Salisbury
|
39,610 | 11.59 | 27,336 | 8.0 | n/a | - | ||||||||||||||||||
|
Bank
|
38,593 | 11.34 | 27,233 | 8.0 | 34,042 | 10.0 | ||||||||||||||||||
|
Tier
1 Capital (to risk-weighted assets)
|
||||||||||||||||||||||||
|
Salisbury
|
36,851 | 10.78 | 13,668 | 4.0 | n/a | - | ||||||||||||||||||
|
Bank
|
35,835 | 10.53 | 13,617 | 4.0 | 20,425 | 6.0 | ||||||||||||||||||
|
Tier
1 Capital (to average assets)
|
||||||||||||||||||||||||
|
Salisbury
|
36,851 | 7.74 | 19,049 | 4.0 | n/a | - | ||||||||||||||||||
|
Bank
|
35,835 | 7.52 | 19,049 | 4.0 | 23,811 | 5.0 | ||||||||||||||||||
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 Banking Commissioner, exceed the total of its net
profits of that year combined with its retained net profits of the preceding two
years.
FRB
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 United States Treasury’s Troubled Asset Relief Program’s
Capital Purchase Program (the “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 CPP participant unless all CPP preferred shares are redeemed or
transferred to third parties.
Preferred
Stock
In March
2009, Salisbury issued to the U.S. Treasury Department (“Treasury”) $8,816,000
of Preferred Stock under the CPP of the Emergency Economic Stabilization Act of
2008.
The
Preferred Stock qualifies as Tier 1 capital for regulatory purposes and ranks
senior to the Common Stock. The Preferred Stock pays a cumulative dividend of 5
percent per annum for the first five years it is outstanding and thereafter at a
rate of 9 percent per annum. The Preferred Stock is non-voting, other than
voting rights on matters that could adversely affect the Preferred Stock. The
Preferred Stock is redeemable at one hundred percent of the issue price plus any
accrued and unpaid dividends.
As part
of the CPP, Salisbury issued to the Treasury a 10-year Warrant to purchase
57,671 shares of Common Stock at an exercise price of $22.93 per share. If the
Warrant were fully exercised, Salisbury estimates that the ownership percentage
of the current shareholders would be diluted by approximately 3.3%
percent.
NOTE
13 – PENSION AND OTHER BENEFITS
Salisbury
has an insured noncontributory defined benefit retirement plan available to
employees eligible as to age and length of service. Benefits are
based on a covered employee's final average compensation, primary social
security benefit and credited service. The Bank makes annual
contributions which meet the Employee Retirement Income Security Act minimum
funding requirements.
In 2006,
the 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 tables set forth information about the plan:
|
December
31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Change
in projected benefit obligation
|
||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 6,676 | $ | 6,359 | $ | 6,028 | ||||||
|
Actuarial
gain
|
(50 | ) | (267 | ) | (230 | ) | ||||||
|
Service
cost
|
378 | 404 | 438 | |||||||||
|
Interest
cost
|
373 | 367 | 342 | |||||||||
|
Curtailments
and settlements
|
49 | - | - | |||||||||
|
Benefits
paid
|
(1,175 | ) | (187 | ) | (219 | ) | ||||||
|
Benefit
obligation at end of year
|
6,251 | 6,676 | 6,359 | |||||||||
|
Change
in plan assets
|
||||||||||||
|
Plan
assets at estimated fair value at beginning of year
|
4,877 | 5,801 | 5,017 | |||||||||
|
Actual
return on plan assets
|
846 | (1,237 | ) | 503 | ||||||||
|
Contributions
by employer
|
750 | 500 | 500 | |||||||||
|
Benefits
paid
|
(1,175 | ) | (187 | ) | (219 | ) | ||||||
|
Fair
value of plan assets at end of year
|
5,298 | 4,877 | 5,801 | |||||||||
|
Funded
status and recognized liability
|
||||||||||||
|
included
in other liabilities on the balance sheet
|
$ | (953 | ) | $ | (1,799 | ) | $ | (558 | ) | |||
Amounts
recognized in accumulated other comprehensive loss, before tax effect, consist
of:
|
December
31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
loss
|
$ | 1,890 | $ | 2,936 | $ | 1,584 | ||||||
|
Prior
service cost
|
- | - | 1 | |||||||||
| $ | 1,890 | $ | 2,936 | $ | 1,585 | |||||||
The
accumulated benefit obligation for the plan was $4,708,000 and $4,959,000 at
December 31, 2009 and 2008, respectively. The discount rate used in determining
the actuarial present value of the projected benefit obligation was 6.0% for
2009 and 2008. The rate of increase in future compensation levels was
based on the following graded table for 2009 and 2008:
|
Age
|
Rate
|
|||||||||||
| 25 | 4.75% | |||||||||||
| 35 | 4.25 | |||||||||||
| 45 | 3.75 | |||||||||||
| 55 | 3.25 | |||||||||||
| 65 | 3.00 | |||||||||||
Components
of net periodic cost are as follows for the years ended December
31:
|
Year
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Service
cost
|
$ | 378 | $ | 404 | $ | 438 | ||||||
|
Interest
cost on benefit obligation
|
373 | 367 | 342 | |||||||||
|
Expected
return on plan assets
|
(353 | ) | (427 | ) | (369 | ) | ||||||
|
Amortization
of prior service cost
|
- | 1 | 1 | |||||||||
|
Amortization
of net loss
|
115 | 45 | 68 | |||||||||
|
Net
periodic benefit cost
|
513 | 390 | 480 | |||||||||
|
Additional
amount recognized due to settlement or curtailment
|
437 | - | - | |||||||||
| 950 | 390 | 480 | ||||||||||
|
Other
changes in plan assets and benefit obligations recognized
|
||||||||||||
|
in
other comprehensive loss (income):
|
||||||||||||
|
Net
actuarial (gain) loss
|
(931 | ) | 1,397 | (364 | ) | |||||||
|
Amortization
of net loss
|
(115 | ) | (45 | ) | (68 | ) | ||||||
|
Prior
service cost
|
- | (1 | ) | (1 | ) | |||||||
|
Total
recognized in other comprehensive (loss) income
|
(1,046 | ) | 1,351 | (433 | ) | |||||||
|
Total
recognized in net periodic cost and other comprehensive (loss)
income
|
$ | (96 | ) | $ | 1,741 | $ | 47 | |||||
The
estimated net loss that will be amortized from accumulated other comprehensive
loss into net periodic benefit cost over the year ended December 31, 2010 is
$71,000.
The
discount rate used to determine the net periodic benefit cost was 6.00% for
2009, 2008 and 2007; and the expected return on plan assets was 7.50% for 2009,
2008 and 2007.
The
graded table above was also used for the rate of compensation increase in
determining the net periodic benefit cost in 2009 and 2008.
Pension
expense is calculated based upon a number of actuarial assumptions, including an
expected long-term rate of return on pension plan assets of 7.50% for
2009. In developing the expected long-term rate of return assumption,
asset class return expectations were evaluated as well as long-term inflation
assumptions, and historical returns based on the current target asset
allocations of 55% equity and 40% fixed income and 5% cash
equivalents. The Bank regularly reviews the asset allocations and
periodically rebalances investments when considered
appropriate. While all future forecasting contains some level of
estimation error, the Bank believes that 7.50% falls within a range of
reasonable long-term rate of return expectations for pension plan
assets. The Bank will continue to evaluate the actuarial assumptions,
including expected rate of return, at least annually, and will adjust as
necessary.
Plan
Assets
The
pension plan investments are co-managed by Salisbury’s Trust and Wealth Advisory
Services division and Bradley, Foster and Sargent, Inc. The
investments in the plan are reviewed and approved by Salisbury’s Trust
Committee. The asset allocation of the plan is a balanced
allocation. Debt securities are timed to mature when employees are
due to retire. Debt securities are laddered for coupon and
maturity. Equities are put in the plan to achieve a balanced
allocation and to provide growth of the principal portion of the plan and to
provide diversification. The Trust Committee reviews the policies of
the plan. The prudent investor rule and applicable ERISA regulations
apply to the management of the funds and investment selections.
The fair
values of Salisbury’s pension plan assets at December 31, 2009, by asset
category, are as follows:
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
(in
thousands)
|
Quoted
prices in
Active
markets for
Identical
assets
|
Significant
other
observable
inputs
|
Significant
unobservable
inputs
|
|||||||||||||
|
Asset
Category
|
December
31, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Fixed
Income
|
||||||||||||||||
|
US
Government
|
$ | 288 | $ | - | $ | 288 | $ | - | ||||||||
|
Corporate
Debt
|
923 | - | 923 | - | ||||||||||||
|
Preferred
Stock
|
56 | 56 | - | - | ||||||||||||
|
Equities
|
3,479 | 3,479 | - | - | ||||||||||||
|
Mutual
Funds
|
316 | 316 | - | - | ||||||||||||
|
Money
Fund
|
236 | 236 | - | - | ||||||||||||
|
Totals
|
$ | 5,298 | $ | 4,087 | $ | 1,211 | $ | - | ||||||||
Salisbury’s
pension plan assets are generally all classified within level 1 and level 2 of
the fair value hierarchy (see Note 20 for a description of the fair value
hierarchy) because they are valued using quoted market prices, pricing service,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency.
There
were no securities of Salisbury or related parties included in plan assets as of
December 31, 2009 and 2008. Salisbury expects to make a contribution of $311,000
in 2010. Based on current data and assumptions, future expected benefit payments
are as follows:
|
Future
expected benefit payments (in thousands)
|
|||||||||
|
2010
|
$ | 209 | |||||||
|
2011
|
112 | ||||||||
|
2012
|
318 | ||||||||
|
2013
|
303 | ||||||||
|
2014
|
230 | ||||||||
|
2015
-to- 2019
|
2,659 | ||||||||
401(k)
Plan
Salisbury
offers a 401(k) Plan to eligible employees. Under the Plan, eligible
participants may contribute a percentage of their pay subject to IRS
limitations. Salisbury may make discretionary contributions to the
Plan. Discretionary contributions vest in full after five years.
Effective
September 1, 2006, the 401(k) Plan was amended to provide that employees hired
or rehired after September 1, 2006 are not eligible to participate in the plan.
Salisbury has established a second 401(k) Plan to provide a discretionary match
to employees hired or rehired on or after September 1, 2006 who satisfy certain
eligibility requirements.
Salisbury’s
401(k) Plan contribution expense for 2009, 2008 and 2007 was $120,000, $105,000
and $100,000, respectively.
Other
Retirement Plans
The Bank
entered into a Supplemental Retirement Plan Agreement with its former Chief
Executive Officer that provides for supplemental post retirement payments for a
ten year period as described in the agreement. The related liability was
$168,000 and $163,000 at December 31, 2009, and 2008, respectively. The related
expense amounted to $4,000, $73,000 and $13,000 for 2009, 2008 and 2007,
respectively.
In 2008,
Salisbury adopted ASC 715-60, “Compensation - Retirement Benefits - Defined
Benefit Plans - Other Postretirement" and recognized a liability for Salisbury’s
future postretirement benefit obligations under endorsement split-dollar life
insurance arrangements. Salisbury recognized this change in
accounting principle as a cumulative effect adjustment to retained earnings of
$283,000. The total liability for the arrangements included in other
liabilities was $334,000 and $325,000 at December 31, 2009, and 2008,
respectively. Expense under this arrangement was $9,000 for 2009 and
$42,000 for 2008.
NOTE
14 - DIRECTORS STOCK RETAINER PLAN
The 2001
Directors Stock Retainer Plan of Salisbury Bancorp, Inc. (“Directors Plan”)
provides Salisbury’s non-employee directors with shares of restricted stock as a
component of their compensation for services as directors. The
maximum number of shares of stock that may be issued pursuant to the Directors
Plan is 15,000. The first grant date under the Directors Plan
preceded the 2002 annual meeting of Shareholders. Each director whose
term of office begins with or continues after the date the Directors Plan was
approved by the Shareholders is issued an annual stock retainer consisting of
120 shares of fully vested restricted common stock of Salisbury. In
2009, 2008 and 2007, 840 shares were issued each year under the Directors Plan
and the related compensation expense was $19,000, $28,000 and $30,000,
respectively.
NOTE
15 - RELATED PARTY TRANSACTIONS
In the
normal course of business the Bank has granted loans to executive officers,
directors, principal shareholders and associates of the foregoing persons
considered to be related parties. Changes in loans to executive
officers, directors and their related associates are as follows (there are no
loans to principal shareholders):
|
Year
ended December 31, (in thousands)
|
2009
|
2008
|
||||||
|
Balance,
beginning of period
|
$ | 1,147 | $ | 744 | ||||
|
Change
in related party status (1)
|
(2 | ) | - | |||||
|
Advances
|
1,614 | 697 | ||||||
|
Repayments
|
(840 | ) | (294 | ) | ||||
|
Balance,
end of period
|
$ | 1,919 | $ | 1,147 | ||||
|
(1)
|
Persons
that either became or were no longer considered related
parties.
|
NOTE
16 - COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) includes net income and any changes in equity from non-owner
sources that are not recorded in the income statement (such as changes in net
unrealized gains (losses) on securities). The purpose of reporting
comprehensive income is to report a measure of all changes in equity of an
enterprise that result from recognized transactions and other economic events of
the period other than transactions with owners in their capacity as
owners.
The
components of comprehensive income are as follows:
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Other
comprehensive income (loss)
|
||||||||||||
|
Net
unrealized gains (losses) on securities available-for-sale
|
4,098 | (9,469 | ) | (1,345 | ) | |||||||
|
Reclassification
of net realized losses (gains) in net income
|
655 | 2,355 | (295 | ) | ||||||||
|
Unrealized
gains (losses) on securities available-for-sale
|
4,753 | (7,114 | ) | (1,640 | ) | |||||||
|
Income
tax (expense) benefit
|
(1,617 | ) | 2,419 | 558 | ||||||||
|
Unrealized
gains (losses) on securities available-for-sale, net of
tax
|
3,136 | (4,695 | ) | (1,082 | ) | |||||||
|
Pension
plan income (loss)
|
1,046 | (1,351 | ) | 433 | ||||||||
|
Income
tax (expense) benefit
|
(355 | ) | 459 | (147 | ) | |||||||
|
Pension
plan income (loss), net of tax
|
691 | (892 | ) | 286 | ||||||||
|
Other
comprehensive income (loss), net of tax
|
3,827 | (5,587 | ) | (796 | ) | |||||||
|
Comprehensive
income (loss)
|
$ | 6,294 | $ | (4,481 | ) | $ | 3,004 | |||||
The
components of accumulated other comprehensive loss are as follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Unrealized
losses on securities available-for-sale, net of tax
|
$ | (3,831 | ) | $ | (6,967 | ) | ||
|
Unrecognized
pension plan expense, net of tax
|
(1,247 | ) | (1,938 | ) | ||||
|
Accumulated
other comprehensive loss, net
|
$ | (5,078 | ) | $ | (8,905 | ) | ||
NOTE
17 - ACQUISITIONS
On
December 4, 2009, Salisbury assumed approximately $11 million in deposits and
acquired approximately $2.5 million in loans and the branch office located at 10
Granite Ave., Canaan, Connecticut from Webster Bank, National Association, as of
the close of business on December 4, 2009. Salisbury recorded a core deposit
intangible of $463,000 for deposits assumed.
On August
1, 2007, the Bank opened a branch office in Dover Plains, New York, following
the July 31, 2007 purchase of a branch office in Mt. Vernon, New York, from New
York Community Bank and its relocation to Dover Plains, New York. Salisbury
recorded the assets acquired and liabilities assumed at fair value and recorded
goodwill of $319,000. Financial statement amounts for the transaction are
included in Salisbury’s consolidated financial statements beginning on the
acquisition date. A summary is included in the supplemental disclosure in the
cash flow statement.
NOTE
18 - COMMITMENTS AND CONTINGENT LIABILITIES
Commitments
The Bank
has entered into an agreement with a third party in which the third party is to
provide the Bank with account processing services and other miscellaneous
services. Under the agreement, the Bank is obligated to pay monthly
processing fees through August 5, 2010. In the event the Bank chooses
to cancel the agreement prior to the end of the contract term a lump sum
termination fee will have to be paid. The fee shall be calculated as
the average monthly billing, exclusive of pass through costs for the past twelve
months, multiplied by the number of months and any portion of a month remaining
in the contract term.
Salisbury
leases facilities under operating leases that expire at various dates through
2017. The leases have varying renewal options, generally require a
fixed annual rent, and provide that real estate taxes, insurance, and
maintenance are to be paid by Salisbury. Rent expense totaled
$97,000, $92,000 and $65,000 for 2009, 2008 and 2007,
respectively. Future minimum lease payments at December 31, 2009 are
as follows:
|
Future
minimum lease payments (in thousands)
|
|||||||||
|
2010
|
$ | 73 | |||||||
|
2011
|
75 | ||||||||
|
2012
|
66 | ||||||||
|
2013
|
48 | ||||||||
|
2014
|
48 | ||||||||
|
2015
and after
|
124 | ||||||||
| $ | 434 | ||||||||
Contingent
Liabilities
The Bank
individually, and in its capacity as a former Co-trustee of a Revocable Trust
(the “Trust”), has been named as a defendant in litigation currently pending in
Connecticut Complex Litigation Docket in Judicial District of Stamford-Norwalk,
CT (the “Action”).
The
Action involves a dispute over title to certain real property located in
Westport, Connecticut that was conveyed by the grantor to the Trust on or about
August 8, 2007. Subsequent to this conveyance, the Bank granted a loan of
$3,386,609 to the Trust, which was secured by an open-end commercial mortgage in
favor of the Bank on the Westport property. The underlying loan is outstanding
as of December 31, 2009.
The
gravamen of the plaintiff’s claim in the Action is that he had an interest in
the Westport real property transferred to the Trust of which he was wrongfully
divested on account of the actions of the defendants. In the Action,
the plaintiff seeks to quiet title to the property and to recover money damages
from the defendants for the alleged wrongful divestiture of his claimed interest
in the property.
In
addition to the mortgage on the property, the Bank, at the time of the financing
referenced above, acquired a lender’s title insurance policy from the Chicago
Title and Insurance Company, which is providing a defense to the Bank under a
reservation of rights. The Bank denies any wrongdoing and is actively defending
the case. The Bank has filed a motion to dismiss and/or stay the lawsuit pending
resolution of a parallel action pending in New York Surrogate’s Court to which
the Bank is not a party. No discovery has been taken to date. At this time,
Salisbury is unable to reasonably evaluate the likely outcome of the Action, or
to reasonably estimate the amount of any potential loss, if any.
NOTE
19 - FINANCIAL INSTRUMENTS
The Bank
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans, standby letters of credit and unadvanced funds on
loans. The instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance
sheets. The contract amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial
instruments.
The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for loan commitments and standby letters of credit
is represented by the contractual amounts of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
Commitments
to originate loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include secured interests
in mortgages, accounts receivable, inventory, property, plant and equipment and
income producing properties.
Standby
letters of credit are conditional commitments issued by the Bank to guarantee
the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. As of December 31, 2009
and 2008, the maximum potential amount of the Bank’s obligation was $0 and
$3,000, respectively, for financial and standby letters of
credit. The Bank’s outstanding letters of credit generally have a
term of less than one year. If a letter of credit is drawn upon, the
Bank may seek recourse through the customer’s underlying line of
credit. If the customer’s line of credit is also in default, the Bank
may take possession of the collateral, if any, securing the line of
credit.
Financial
instrument liabilities with off-balance sheet credit risk are as
follows:
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Commitments
to originate loans
|
$ | 3,158 | $ | 5,451 | ||||
|
Standby
letters of credit
|
- | 3 | ||||||
|
Unadvanced
portions of loans
|
||||||||
|
Home
equity
|
28,513 | 25,496 | ||||||
|
Commercial
lines of credit
|
14,039 | 10,423 | ||||||
|
Construction
|
5,858 | 4,740 | ||||||
|
Consumer
|
446 | 1,746 | ||||||
|
Balance,
end of period
|
$ | 52,014 | $ | 47,859 | ||||
There is
no material difference between the notional amounts and the estimated fair
values of the off-balance sheet liabilities.
NOTE
20 - FAIR VALUE MEASUREMENTS
During
2008, Salisbury adopted ASC 820-10, “Fair Value Measurements and Disclosures,”
which provides a framework for measuring fair value under generally accepted
accounting principles. This guidance also allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis. Salisbury did not elect fair value
treatment for any financial assets or liabilities upon adoption.
In
accordance with ASC 820-10, Salisbury groups its financial assets and financial
liabilities measured 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.
Level 1 -
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange. Level 1 also includes U.S. Treasury,
other U.S. Government and agency mortgage-backed securities that are traded by
dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 -
Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services
for identical or comparable assets or liabilities.
Level 3 -
Valuations for assets and liabilities that are derived from other methodologies,
including option pricing models, discounted cash flow models and similar
techniques, are not based on market exchange, dealer, or broker traded
transactions. Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets and
liabilities.
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below. These valuation
methodologies were applied to all of Salisbury’s financial assets and financial
liabilities carried at fair value for December 31, 2009.
Salisbury’s
cash instruments are generally classified within level 1 or level 2 of the fair
value hierarchy because they are valued using quoted market prices, broker or
dealer quotations, or alternative pricing sources with reasonable levels of
price transparency.
Salisbury’s
investments in debt securities and mortgage-backed securities available-for-sale
are generally classified within level 2 of the fair value
hierarchy. For these securities, Salisbury obtains fair value
measurements from independent pricing services. The fair value
measurements consider observable data that may include dealer quotes, market
spreads, cash flows, the U.S. treasury yield curve, trading levels, market
consensus prepayment speeds, credit information and the instrument’s terms and
conditions.
Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best
estimate is used. Subsequent to inception, management only changes level 3
inputs and assumptions when corroborated by evidence such as transactions in
similar instruments, completed or pending third-party transactions in the
underlying investment or comparable entities, subsequent rounds of financing,
recapitalization and other transactions across the capital structure, offerings
in the equity or debt markets, and changes in financial ratios or cash
flows.
Salisbury’s
impaired loans are reported at the fair value of the underlying collateral if
repayment is expected solely from the collateral. Collateral values
are estimated using level 2 inputs based upon appraisals of similar properties
obtained from a third party. For level 3 inputs, fair values are based upon
management’s estimates.
|
Fair
Value Measurements at Reporting Date Using
|
||||||||||||||||
|
(in
thousands)
|
Quoted
prices in
Active
markets for
Identical
assets
|
Significant
other
observable
inputs
|
Significant
unobservable
inputs
|
|||||||||||||
|
|
December
31, 2009
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||
|
Items
Measured at Fair Value
|
||||||||||||||||
|
Recurring
basis
|
||||||||||||||||
|
Securities
available-for-sale
|
$ | 145,031 | $ | 84 | $ | 144,947 | $ | - | ||||||||
|
Non-recurring
basis
|
||||||||||||||||
|
Impaired
loans
|
3,000 | - | 2,884 | 116 | ||||||||||||
|
Fair
Value Measurements using significant
unobservable
inputs
|
||||||||||||
|
Level
3
|
||||||||||||
|
Year
ended December 31, (in thousands)
|
Securities
available-
for-sale
|
Impaired
Loans
|
Total
|
|||||||||
|
Balance,
beginning of period
|
$ | 1,759 | $ | - | $ | 1,759 | ||||||
|
Total
gains or losses (realized/unrealized)
|
||||||||||||
|
Included
in earnings
|
(609 | ) | - | (609 | ) | |||||||
|
Included
in other comprehensive income
|
540 | - | 540 | |||||||||
|
Principal
paydowns of securities, net of accretion
|
(405 | ) | - | (405 | ) | |||||||
|
Transfers
in and/or out of Level 3
|
(1,285 | ) | 116 | (1,169 | ) | |||||||
|
Balance,
end of period
|
$ | - | $ | 116 | $ | 116 | ||||||
| Amount of total gains or losses for the period | ||||||||||||
| included in earnings attributable to the change | ||||||||||||
| in unrealized gains or losses relating to assets | ||||||||||||
|
still
held at the reporting date
|
$ | - | $ | - | $ | - | ||||||
Carrying
values and estimated fair values of financial instruments are as
follows:
|
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
(in
thousands)
|
value
|
fair
value
|
value
|
fair
value
|
||||||||||||
|
Financial
Assets
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 43,298 | $ | 43,298 | $ | 9,660 | $ | 9,660 | ||||||||
|
Interest
bearing time deposits with other banks
|
5,000 | 5,000 | - | - | ||||||||||||
|
Securities
available-for-sale
|
145,031 | 145,031 | 150,527 | 150,527 | ||||||||||||
|
Security
held-to-maturity
|
62 | 62 | 66 | 67 | ||||||||||||
|
Federal
Home Loan Bank stock
|
6,032 | 6,032 | 5,323 | 5,323 | ||||||||||||
|
Loans
held-for-sale
|
665 | 670 | 2,314 | 2,330 | ||||||||||||
|
Loans
receivable net
|
327,257 | 321,882 | 297,367 | 287,063 | ||||||||||||
|
Accrued
interest receivable
|
2,177 | 2,177 | 2,704 | 2,704 | ||||||||||||
|
Financial
Liabilities
|
||||||||||||||||
|
Demand
(non-interest-bearing)
|
$ | 70,026 | $ | 70,026 | $ | 65,479 | $ | 65,479 | ||||||||
|
Demand
(interest-bearing)
|
43,845 | 43,845 | 24,872 | 24,872 | ||||||||||||
|
Money
market
|
64,477 | 64,477 | 57,648 | 57,648 | ||||||||||||
|
Savings
and other
|
86,316 | 86,316 | 71,405 | 71,405 | ||||||||||||
|
Certificates
of deposit
|
153,539 | 155,441 | 125,521 | 126,631 | ||||||||||||
|
Total
deposits
|
418,203 | 420,105 | 344,925 | 346,035 | ||||||||||||
|
FHLBB
advances
|
76,364 | 80,830 | 87,914 | 90,206 | ||||||||||||
|
Repurchase
agreements
|
11,415 | 11,415 | 11,203 | 11,203 | ||||||||||||
|
Due
to broker
|
- | - | 7,632 | 7,632 | ||||||||||||
|
Accrued
interest payable
|
523 | 523 | 495 | 495 | ||||||||||||
NOTE
21 – SALISBURY BANCORP (PARENT ONLY) CONDENSED FINANCIAL
INFORMATION
The
unconsolidated balance sheets, and statements of income and cash flows of
Salisbury Bancorp, Inc. are presented as follows:
|
Balance
Sheets
|
||||||||
|
December
31, (in thousands)
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and due from banks
|
$ | 6,499 | $ | 1,478 | ||||
|
Securities
available-for-sale
|
3,128 | - | ||||||
|
Investment
in bank subsidiary
|
42,714 | 37,924 | ||||||
|
Other
assets
|
31 | 9 | ||||||
|
Total
Assets
|
$ | 52,372 | $ | 39,411 | ||||
|
Liabilities
and Shareholders' Equity
|
||||||||
|
Liabilities
|
$ | 17 | $ | 472 | ||||
|
Shareholders'
equity
|
52,355 | 38,939 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 52,372 | $ | 39,411 | ||||
|
Statements
of Income
|
||||||||||||
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Dividends
from subsidiary
|
$ | 1,500 | $ | 2,000 | $ | 1,920 | ||||||
|
Interest
on securities (taxable)
|
101 | 16 | 48 | |||||||||
|
Expenses
|
145 | 46 | 57 | |||||||||
|
Income
before taxes and undistributed net income (loss) of
subsidiary
|
1,456 | 1,970 | 1,911 | |||||||||
|
Income
tax benefit
|
(15 | ) | (10 | ) | (3 | ) | ||||||
|
Income
before equity in undistributed net income (loss) of
subsidiary
|
1,471 | 1,980 | 1,914 | |||||||||
|
Equity
in undistributed net income (loss) of subsidiary
|
996 | (874 | ) | 1,886 | ||||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Statements
of Cash Flows
|
||||||||||||
|
Years
ended December 31, (in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Adjustments
to reconcile net income to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Equity
in undistributed net (income) loss of subsidiary
|
(996 | ) | 874 | (1,886 | ) | |||||||
|
Accretion
of securities
|
(10 | ) | - | - | ||||||||
|
Other
|
(3 | ) | 21 | 33 | ||||||||
|
Net
cash provided by operating activities
|
1,458 | 2,001 | 1,947 | |||||||||
|
Investing
Activities
|
||||||||||||
|
Purchases
of securities available-for-sale
|
(8,068 | ) | - | - | ||||||||
|
Maturities
of securities available-for-sale
|
5,000 | - | - | |||||||||
|
Net
cash utilized by investing activities
|
(3,068 | ) | - | - | ||||||||
|
Financing
Activities
|
||||||||||||
|
Common
stock dividends paid
|
(1,889 | ) | (1,870 | ) | (1,802 | ) | ||||||
|
Preferred
stock dividends paid
|
(296 | ) | - | - | ||||||||
|
Proceeds
from issuance of Preferred Stock
|
8,816 | - | - | |||||||||
|
Net
cash provided (utilized) by financing activities
|
6,631 | (1,870 | ) | (1,802 | ) | |||||||
|
Increase
in cash and cash equivalents
|
5,021 | 131 | 145 | |||||||||
|
Cash
and cash equivalents, beginning of period
|
1,478 | 1,347 | 1,202 | |||||||||
|
Cash
and cash equivalents, end of period
|
$ | 6,499 | $ | 1,478 | $ | 1,347 | ||||||
NOTE
22 – EARNINGS PER SHARE
The
calculation of earnings per share is as follows:
|
Years
ended December 31, (in thousands, except per share
amounts)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income
|
$ | 2,467 | $ | 1,106 | $ | 3,800 | ||||||
|
Preferred
stock net accretion
|
(13 | ) | - | - | ||||||||
|
Preferred
stock dividends paid
|
(296 | ) | - | - | ||||||||
|
Cumulative
preferred stock dividends earned
|
(56 | ) | - | - | ||||||||
|
Net
income available to common shareholders
|
$ | 2,102 | $ | 1,106 | $ | 3,800 | ||||||
|
Weighted
average common stock outstanding - basic
|
1,686 | 1,686 | 1,685 | |||||||||
|
Weighted
average common and common equivalent stock outstanding-
diluted
|
1,686 | 1,686 | 1,685 | |||||||||
|
Earnings
per common and common equivalent share
|
||||||||||||
|
Basic
|
$ | 1.25 | $ | 0.66 | $ | 2.26 | ||||||
|
Diluted
|
1.25 | 0.66 | 2.26 | |||||||||
NOTE
23 - SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
(Unaudited)
Selected
quarterly consolidated financial data for the years ended December 31, 2009 and
2008 is as follows:
|
(in
thousands, except ratios and per share amounts)
|
Q1 2009 | Q2 2009 | Q3 2009 | Q4 2009 | ||||||||||||
|
Statement
of Income
|
||||||||||||||||
|
Interest
and dividend income
|
$ | 6,487 | $ | 6,386 | $ | 6,703 | $ | 6,317 | ||||||||
|
Interest
expense
|
2,284 | 2,308 | 2,257 | 2,183 | ||||||||||||
|
Net
interest and dividend income
|
4,203 | 4,078 | 4,446 | 4,134 | ||||||||||||
|
Provision
(credit) for loan losses
|
430 | 315 | 180 | 60 | ||||||||||||
|
Trust
and Wealth Advisory
|
540 | 430 | 463 | 545 | ||||||||||||
|
Service
charges and fees
|
398 | 452 | 492 | 476 | ||||||||||||
|
Gains
on sales of mortgage loans, net
|
129 | 355 | 118 | 141 | ||||||||||||
|
Securities
gains (losses)
|
427 | (1,119 | ) | - | 37 | |||||||||||
|
Other
|
211 | 78 | 185 | 74 | ||||||||||||
|
Non-interest
income
|
1,705 | 196 | 1,258 | 1,273 | ||||||||||||
|
Non-interest
expense
|
4,134 | 4,490 | 4,802 | 4,464 | ||||||||||||
|
Income
(loss) before income taxes
|
1,344 | (531 | ) | 722 | 883 | |||||||||||
|
Income
tax provision (benefit)
|
263 | (348 | ) | 2 | 34 | |||||||||||
|
Net
income (loss)
|
1,081 | (183 | ) | 720 | 849 | |||||||||||
|
Net
income (loss) available to common shareholders
|
1,081 | (318 | ) | 549 | 790 | |||||||||||
|
Financial
Condition
|
||||||||||||||||
|
Total
assets
|
$ | 506,140 | $ | 542,181 | $ | 564,287 | $ | 562,347 | ||||||||
|
Loans,
net
|
298,333 | 294,364 | 311,251 | 327,257 | ||||||||||||
|
Allowance
for loan losses
|
3,005 | 3,309 | 3,429 | 3,473 | ||||||||||||
|
Securities
|
155,009 | 164,709 | 180,721 | 151,125 | ||||||||||||
|
Deposits
|
366,764 | 402,033 | 414,799 | 418,203 | ||||||||||||
|
Repurchase
agreements
|
9,081 | 10,326 | 15,462 | 11,415 | ||||||||||||
|
FHLBB
advances
|
78,598 | 77,174 | 76,767 | 76,364 | ||||||||||||
|
Shareholders'
equity
|
46,258 | 47,995 | 52,478 | 52,355 | ||||||||||||
|
Non-performing
assets
|
6,693 | 7,125 | 7,168 | 7,720 | ||||||||||||
|
Per
Common Share Data
|
||||||||||||||||
|
Earnings,
diluted and basic
|
$ | 0.63 | $ | (0.19 | ) | $ | 0.33 | $ | 0.43 | |||||||
|
Cash
dividends declared
|
0.28 | - | 0.28 | 0.28 | ||||||||||||
|
Cash
dividends paid
|
0.28 | 0.28 | 0.28 | 0.28 | ||||||||||||
|
Book
value
|
22.21 | 23.23 | 25.89 | 25.81 | ||||||||||||
|
Market
price: (a)
|
||||||||||||||||
|
High
|
25.25 | 25.90 | 27.00 | 25.35 | ||||||||||||
|
Low
|
18.70 | 21.00 | 22.25 | 20.94 | ||||||||||||
|
Statistical
Data
|
||||||||||||||||
|
Net
interest margin (fully tax equivalent)
|
3.80 | % | 3.44 | % | 3.53 | % | 3.29 | % | ||||||||
|
Efficiency
ratio (fully tax equivalent)
|
65.78 | 78.03 | 79.25 | 74.98 | ||||||||||||
|
Return
on average assets
|
0.87 | (0.24 | ) | 0.39 | 0.52 | |||||||||||
|
Return
on average shareholders' equity
|
11.07 | (3.19 | ) | 5.44 | 6.85 | |||||||||||
|
Weighted
average equivalent shares outstanding, diluted
|
1,686 | 1,687 | 1,686 | 1,687 |
|
(a)
|
The
above market prices reflect inter-dealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual
transactions.
|
Salisbury
Bancorp, Inc.'s Common Stock, par value $.10 per share ("Common Stock") trades
on the NYSE Amex Equities under the symbol: SAL. As of March 1, 2010,
there were 1,506 shareholders of record of Salisbury's Common
Stock.
Selected
quarterly consolidated financial data (unaudited) continued:
|
(in
thousands, except ratios and per share amounts)
|
Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | ||||||||||||
|
Statement
of Income
|
||||||||||||||||
|
Interest
and dividend income
|
$ | 6,668 | $ | 6,591 | $ | 6,712 | $ | 6,586 | ||||||||
|
Interest
expense
|
3,008 | 2,710 | 2,587 | 2,520 | ||||||||||||
|
Net
interest and dividend income
|
3,660 | 3,881 | 4,125 | 4,066 | ||||||||||||
|
Provision
for loan losses
|
60 | 110 | 520 | 589 | ||||||||||||
|
Trust
and Wealth Advisory
|
600 | 541 | 543 | 580 | ||||||||||||
|
Service
charges and fees
|
402 | 454 | 638 | 436 | ||||||||||||
|
Gains
on sales of mortgage loans, net
|
85 | 99 | 90 | 70 | ||||||||||||
|
Securities
gains (losses)
|
318 | 36 | (2,671 | ) | (38 | ) | ||||||||||
|
Other
|
28 | 23 | 56 | (49 | ) | |||||||||||
|
Non-interest
income
|
1,433 | 1,153 | (1,345 | ) | 999 | |||||||||||
|
Non-interest
expense
|
3,651 | 3,696 | 3,836 | 4,826 | ||||||||||||
|
Income
(loss) before income taxes
|
1,382 | 1,228 | (1,575 | ) | (350 | ) | ||||||||||
|
Income
tax provision (benefit)
|
301 | 245 | 337 | (1,304 | ) | |||||||||||
|
Net
income (loss)
|
1,081 | 983 | (1,912 | ) | 954 | |||||||||||
|
Financial
Condition
|
||||||||||||||||
|
Total
assets
|
$ | 472,795 | $ | 479,705 | $ | 485,650 | $ | 495,754 | ||||||||
|
Loans,
net
|
276,074 | 288,941 | 293,740 | 297,367 | ||||||||||||
|
Allowance
for loan losses
|
2,535 | 2,625 | 3,105 | 2,724 | ||||||||||||
|
Securities
|
153,480 | 151,081 | 149,873 | 155,916 | ||||||||||||
|
Deposits
|
336,595 | 332,787 | 344,609 | 344,925 | ||||||||||||
|
Repurchase
agreements
|
- | - | 12,370 | 11,203 | ||||||||||||
|
FHLBB
advances
|
86,166 | 99,246 | 86,490 | 87,914 | ||||||||||||
|
Shareholders'
equity
|
44,943 | 43,507 | 38,720 | 38,939 | ||||||||||||
|
Non-performing
assets
|
1,040 | 3,694 | 6,818 | 5,380 | ||||||||||||
|
Per
Common Share Data
|
||||||||||||||||
|
Earnings,
diluted and basic
|
$ | 0.64 | $ | 0.58 | $ | (1.13 | ) | $ | 0.57 | |||||||
|
Cash
dividends declared
|
0.28 | 0.28 | 0.28 | 0.28 | ||||||||||||
|
Cash
dividends paid
|
0.27 | 0.28 | 0.28 | 0.28 | ||||||||||||
|
Book
value
|
26.67 | 25.81 | 22.97 | 23.10 | ||||||||||||
|
Market
price: (a)
|
||||||||||||||||
|
High
|
34.10 | 34.45 | 31.10 | 29.25 | ||||||||||||
|
Low
|
19.90 | 28.65 | 26.80 | 21.50 | ||||||||||||
|
Statistical
Data
|
||||||||||||||||
|
Net
interest margin (fully tax equivalent)
|
3.57 | % | 3.72 | % | 3.85 | % | 3.75 | % | ||||||||
|
Efficiency
ratio (fully tax equivalent)
|
66.99 | 68.69 | 62.84 | 88.73 | ||||||||||||
|
Return
on average assets
|
0.92 | 0.83 | (1.59 | ) | 0.78 | |||||||||||
|
Return
on average shareholders' equity
|
9.38 | 8.56 | (17.74 | ) | 9.67 | |||||||||||
|
Weighted
average equivalent shares outstanding, diluted
|
1,685 | 1,685 | 1,686 | 1,686 |
|
(a)
|
The
above market prices reflect inter-dealer prices, without retail markup,
markdown or commissions, and may not necessarily represent actual
transactions.
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
Item 9A(T).
|
CONTROLS
AND PROCEDURES
|
Controls
and Procedures
Salisbury
carried out an evaluation under the supervision and with the participation of
Salisbury’s management, including Salisbury’s principal executive officer and
principal financial officer, of the effectiveness of Salisbury’s disclosure
controls and procedures as of the end of the period ended December 31, 2009.
Based upon that evaluation, the principal executive officer and principal
financial officer concluded that Salisbury’s disclosure controls and procedures
were effective as of the end of the period covered by this report and designed
to ensure that information required to be disclosed by Salisbury in the reports
it files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and
forms.
Management’s
Annual Report on Internal Control Over Financial Reporting
Management
of Salisbury and its subsidiaries, is responsible for establishing and
maintaining effective internal control over financial reporting. Pursuant to the
rules and regulations of the SEC, internal control over financial reporting is a
process designed by, or under the supervision of, Salisbury’s principal
executive and principal financial officers, or persons performing similar
functions, and effected by Salisbury’s board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles, and
includes those policies and procedures that:
Pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of
Salisbury;
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally accepted
accounting principles and that receipts and expenditures of Salisbury are being
made only in accordance with authorizations of management and directors of
Salisbury; and
Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Salisbury’s assets that could have a material
effect on the financial statements.
Management
has evaluated the effectiveness of Salisbury’s internal control over financial
reporting as of December 31, 2009 based on [the control criteria established in
a report entitled Internal Control – Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission]. Based on such
evaluation, Management has concluded that Salisbury’s internal control over
financial reporting is effective as of December 31, 2009.
This
annual report does not include an attestation report of Salisbury’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by
Salisbury’s registered public accounting firm pursuant to temporary rules of the
SEC that permit Salisbury to provide only Management’s report in this annual
report.
Changes
in internal controls over financial reporting
There
were no significant changes in internal controls evaluation over financial
reporting during the fourth quarter of 2009 that materially affected or are
reasonably likely to materially affect Salisbury’s’ internal controls over
financial reporting.
|
Item 9B.
|
OTHER
INFORMATION
|
Not
Applicable.
PART
III
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
information required by this item will appear in Salisbury's Proxy Statement
dated April 9, 2010 for the 2010 Annual Meeting of Shareholders, under the
captions "Director Nominees for Election for a Three Year Term", "Directors
Continuing in Office" and "Committees of the Board of
Directors." Such information is incorporated herein by reference and
made a part hereof. In addition, the following information is
provided.
Additional Executive
Officers
|
Name
|
Age
|
Position
with Salisbury Bank
|
Officer
Since
|
|||
|
Todd
M. Clinton
|
48
|
Senior
Vice President, Technology and Compliance
|
1997
|
|||
|
Diane
E.R Johnstone
|
53
|
Senior
Vice President, Trust
|
1991
|
|||
|
Elizabeth
A. Summerville
|
50
|
Senior
Vice President, Retail Banking Administrator
|
2003
|
|||
|
Geoffrey
A. Talcott
|
60
|
Senior
Vice President, Chief Lending Officer
|
2001
|
Salisbury
maintains a Code of Ethics and Conflicts of Interest Policy that applies to all
of Salisbury’s directors, officers and employees, including Salisbury’s
principal executive officer, principal financial officer and principal
accounting officer. This Code of Ethics and Conflicts of Interest Policy is
available upon request, without charge, by writing to Shelly L. Humeston,
Secretary, Salisbury Bank and Trust Company, 5 Bissell Street, P. O. Box 1868,
Lakeville, Connecticut 06039.
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item appears in Salisbury's Proxy Statement dated
April 9, 2010 for the 2010 Annual Meeting of Shareholders, under the captions:
"Executive Officer Compensation" and "Employee Benefit Plans". Such
information is incorporated herein by reference and made a part
hereof.
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
|
The
information required by this item appears in Salisbury's Proxy Statement dated
April 9, 2010 for the 2010 Annual Meeting of Shareholders, under the captions
"Principal Shareholders," "Director Nominees for Election for a Three Year Term"
and "Directors Continuing in Office," and "Executive
Compensation." Such information is incorporated herein by reference
and made a part hereof.
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Item 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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The
information required by this item appears in Salisbury's Proxy Statement dated
April 9, 2010 for the 2010 Annual Meeting of Shareholders, under the caption
"Transactions with Management and Others". Such information is
incorporated herein by reference and made a part hereof.
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Item 14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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The
information required by this item appears in Salisbury's Proxy Statement dated
April 9, 2010 for the 2010 Annual Meeting of Shareholders, under the caption
"Relationship With Independent Public Accountants". Such information
is incorporated herein by reference and made a part hereof.
PART
IV
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Item 15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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(a)(1)
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Financial
Statements. The Consolidated Financial Statements of Registrant and its
subsidiary are included within Item 7 of Part II of this
report.
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(a)(2)
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Financial
Statement schedules. All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission have been omitted because they are either not applicable or the
required information is included in the Consolidated Financial Statements
or Notes thereto included within Item 7.
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(b)
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Exhibits.
The following exhibits are included as part of this Form
10-K.
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Exhibit
No.
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Description
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3.1
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Certificate
of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to
Exhibit 3.1 of Registrant’s 1998 Registration Statement on Form S-4 filed
April 23, 1998, File No.: 33-50857).
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3.1.1
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Amendment
to Article Third of Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1
of
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Registrant’s
Form 8-K filed March 11, 2009).
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3.1.2
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Certificate
Amendment to Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 19,
2009).
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3.2
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Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Form 8-K
filed March 19, 2009).
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4.1
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Warrant
to purchase Common Stock dated March 13, 2009 (incorporated by reference
to Exhibit 4.1 of Registrant’s Form 8-K filed March 19,
2009).
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10
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Amended
and Restated Supplemental Retirement Plan Agreement with John F. Perotti
dated January 25, 2008 (incorporated by reference to Exhibit 10.1 of
Registrant’s Form 8-K filed January 30, 2008).
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10.2
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Form
of First Amendment to Change in Control Agreement with Executive Officers
dated as of March 13, 2009 (incorporated by reference to Exhibit 10.3 of
Registrant’s Form 8-K filed March 19, 2009).
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10.3
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Form
of Change in Control Agreement (incorporated by reference to Exhibit 10.1
of Registrant’s Form 8-K filed March 28, 2008).
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10.4
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2001
Director’s Stock Retainer Plan (incorporated by reference to Exhibit 10.1
of Registrant’s 2002 Annual Report on Form 10-KSB).
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Subsidiaries
of the Registrant.
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Consent
of Shatswell MacLeod & Company P.C.
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Chief
Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
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Chief
Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of
2002.
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Chief
Executive Officer and Chief Financial Officer Certification Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
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CEO
Certification pursuant to EESA Section 111(b)(4).
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CFO
Certification pursuant to EESA Section 111(b)(4).
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(c)
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Financial Statement
Schedules
|
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No
financial statement schedules are required to be filed as Exhibits
pursuant to Item 15(c).
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SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
/s/ Richard J. Cantele,
Jr.
Richard J. Cantele, Jr.,
President and Chief Executive
Officer
March 22, 2010
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the dates indicated
below.
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/s/ Louis E. Allyn, II
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/s/ John F. Perotti
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Louis
E. Allyn, II
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John
F. Perotti
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Director
|
Director
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March
22, 2010
|
March
22, 2010
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/s/ John R. H. Blum
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/s/ Michael A. Varet
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John
R. H. Blum
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Michael
A. Varet
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Director
|
Director
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March
22, 2010
|
March
22, 2010
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/s/ Louise F. Brown
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/s/ B. Ian McMahon
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Louise
F. Brown
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B.
Ian McMahon
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Director
|
Chief
Financial Officer
|
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March
22, 2010
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and
Chief Accounting Officer
|
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March
22, 2010
|
||
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/s/ Richard J. Cantele, Jr.
|
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Richard
J. Cantele, Jr.
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||
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President
and Chief Executive Officer
|
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|
March
22, 2010
|
||
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/s/ Robert S.
Drucker
|
||
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Robert
S. Drucker
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||
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Director
|
||
|
March
22, 2010
|
||
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/s/ Nancy F. Humphreys
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||
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Nancy
F. Humphreys
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||
|
Director
|
||
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March
22, 2010
|
||
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/s/ Holly J. Nelson
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||
|
Holly
J. Nelson
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||
|
Director
|
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|
March
22, 2010
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66