form10q-109633_sal.htm
 
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-24751
SALISBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)

Connecticut
06-1514263
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
5 Bissell Street, Lakeville, CT
06039
(Address of principal executive offices)
(Zip code)

(860) 435-9801
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]  No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes_________ No_________

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange Act).  (Check one):

Large accelerated filer 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 Rule 12b-2 of the Exchange Act).
Yes [  ] No [X]
The number of shares of Common Stock outstanding as of August 06, 2010, is 1,687,661.
 

 
 
1
 

TABLE OF CONTENTS

   
Page
     
  PART I FINANCIAL INFORMATION
     
Item 1.
Financial Statements:
  
     
 
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
3
     
 
Consolidated Statements of Income for the three and six month periods ended June 30, 2010 and June 30, 2009
4
     
 
Consolidated Statements of Changes in Shareholders' Equity for the six month  periods ended June 30, 2010 and June 30, 2009
5
     
 
Consolidated Statements of Cash Flows for the six month periods ended June 30, 2010 and June 30, 2009
6
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 3.
Quantitative and Qualitative Disclosure of Market Risk
31
     
Item 4T.
Controls and Procedures
33
     
  PART II Other Information
 
Item 1.
Legal Proceedings
33
Item 1A.
Risk Factors
34
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
Item 3.
Defaults upon Senior Securities
34
Item 4.
Reserved
34
Item 5.
Other information
34
Item 6.
Exhibits
34




 
2
 

PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS

 (in thousands, except per share amounts) unaudited
  
June 30,
2010
    
December 31,
2009
  
ASSETS
            
Cash and due from banks
   $ 6,241     $ 6,248  
Interest bearing demand deposits with other banks
     15,373       37,050  
Total cash and cash equivalents
     21,614       43,298  
Interest bearing time deposits with other banks
     5,000       5,000  
Securities
                
Available-for-sale at fair value
     155,423       145,031  
Held-to-maturity at amortized cost (fair value: $61 and $62)
     59       62  
Federal Home Loan Bank of Boston stock at cost
     6,032       6,032  
Loans held-for-sale
     513       665  
Loans receivable, net (allowance for loan losses: $3,768 and $3,473)
     342,130       327,257  
Investment in real estate
     75       75  
Other real estate owned
     -       275  
Bank premises and equipment, net
     11,543       10,434  
Goodwill
     9,829       9,829  
Intangible assets (net of accumulated amortization: $1,190 and $1,079)
     1,353       1,464  
Accrued interest receivable
     2,251       2,177  
Cash surrender value of life insurance policies
     3,769       3,685  
Deferred taxes
     2,432       3,285  
Other assets
     3,499       3,778  
Total Assets
   $ 565,522     $ 562,347  
LIABILITIES and SHAREHOLDERS' EQUITY
                
Deposits
                
Demand (non-interest bearing)
   $ 71,255     $ 70,026  
Demand (interest bearing)
     57,588       43,845  
Money market
     74,942       64,477  
Savings and other
     88,438       86,316  
Certificates of deposit
     131,767       153,539  
Total deposits
     423,990       418,203  
Repurchase agreements
     8,120       11,415  
Federal Home Loan Bank of Boston advances
     74,946       76,364  
Accrued interest and other liabilities
     4,077       4,010  
Total Liabilities
     511,133       509,992  
Commitments and contingencies
     -       -  
Shareholders' Equity
                
Preferred stock - $.01 per share par value
                
Authorized: 25,000; Shares issued: 8,816;
                
Liquidation preference: $1,000 per share
     -       -  
Common stock - $.10 per share par value
                
Authorized: 3,000,000 and 3,000,000;
                
Issued: 1,687,661 and 1,686,701
     168       168  
Common stock warrants outstanding
     112       112  
Paid-in capital
     21,927       21,894  
Retained earnings
     35,557       35,259  
Accumulated other comprehensive loss, net
     (3,375 )     (5,078 )
Total Shareholders' Equity
     54,389       52,355  
Total Liabilities and Shareholders' Equity
   $ 565,522     $ 562,347  

 
3
 

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME

   
Three months ended
    
Six months ended
  
Periods ended June 30, (in thousands except per share amounts) unaudited
  
2010
    
2009
    
2010
    
2009
  
Interest income
                        
Interest and fees on loans
   $ 4,601     $ 4,480     $ 9,088     $ 8,962  
Interest on debt securities
                                
Taxable
     1,033       1,264       1,959       2,596  
Tax exempt
     559       633       1,119       1,277  
Other interest
     38       9       84       11  
Total interest income
     6,231       6,386       12,250       12,846  
Interest expense
                                
Deposits
     1,125       1,511       2,324       2,995  
Repurchase agreements
     19       28       46       67  
Federal Home Loan Bank of Boston advances
     761       769       1,518       1,530  
Total interest expense
     1,905       2,308       3,888       4,592  
Net interest income
     4,326       4,078       8,362       8,254  
Provision for loan losses
     260       315       440       745  
Net interest income after provision for loan losses
     4,066       3,763       7,922       7,509  
Non-interest income
                                
Trust and wealth advisory
     491       430       1,036       970  
Service charges and fees
     525       453       994       851  
Gains (losses) on securities, net
     1       9       1       436  
Gains on sales of mortgage loans, net
     141       221       201       304  
Mortgage servicing, net
     9       30       24       72  
Other
     89       55       146       192  
Total non-interest income, excluding other-than-temporary impairment losses
     1,256       1,198       2,402       2,825  
Other-than-temporary impairment losses on securities
     -       (2,302 )     -       (2,302 )
Portion of loss recognized in other comprehensive income (before tax)
     -       1,174       -       1,174  
Net other-than-temporary impairment losses recognized in earnings
     -       (1,128 )     -       (1,128 )
Total non-interest income
     1,256       70       2,402       1,697  
Non-interest expense
                                
Salaries
     1,694       1,596       3,282       3,207  
Employee benefits
     586       552       1,216       1,132  
Premises and equipment
     495       466       1,011       957  
Data processing
     363       330       772       714  
Professional fees
     455       376       857       733  
FDIC insurance
     182       420       354       533  
Marketing and community support
     59       88       121       164  
Amortization of intangibles
     56       41       111       82  
Other
     382       495       876       871  
Total non-interest expense
     4,272       4,364       8,600       8,393  
Income (loss) before income taxes
     1,050       (531 )     1,724       813  
Income tax provision (benefit)
     172       (348 )     251       (85 )
Net income (loss)
   $ 878     $ (183 )   $ 1,473     $ 898  
Net income (loss) available to common shareholders
   $ 763     $ (318 )   $ 1,243     $ 764  
                                 
Basic and diluted earnings (loss) per share
   $ 0.45     $ (0.19 )   $ 0.74     $ 0.45  
Common dividends per share
     0.28       0.28       0.56       0.28  

See accompanying notes to consolidated financial statements.

 
4
 

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

   
Common Stock
                                      
(dollars in thousands)
  
Shares
    
Amount
    
Preferred
Stock
    
Warrants
    
Paid-in
capital
    
Retained
earnings
    
Accumulated
other comp-
rehensive
loss
    
Total
share-
holders'
equity
  
Balances at December 31, 2009
     1,686,701     $ 168     $ -     $ 112     $ 21,894     $ 35,259     $ (5,078 )   $ 52,355  
Net income for year
     -       -       -       -       -       1,473       -       1,473  
Other comprehensive income, net of tax
     -       -       -       -       -       -       1,703       1,703  
Total comprehensive income
                                                             3,176  
Issuance of preferred stock and warrants
     -       -       -       -       -       -       -       -  
Amortization (accretion) of preferred stock
     -       -       -       -       10       (10 )     -       -  
Common stock dividends declared
     -       -       -       -       -       (945 )     -       (945 )
Preferred stock dividends paid
     -       -       -       -       -       (220 )     -       (220 )
Issuance of common stock for
                                                                
directors fees
     960       -       -       -       23       -       -       23  
Balances at June 30, 2010
     1,687,661     $  168     $  -     $  112     $  21,927     $ 35,557     $ (3,375 )   $  54,389  
                                                                 
Balances at December 31, 2008
     1,685,861       168       -       -       13,158       34,518       (8,905 )     38,939  
Net income for year
     -       -       -       -       -       898       -       898  
Other comprehensive income, net of tax
     -       -       -       -       -       -       (129 )     (129 )
Total comprehensive income
                                                             769  
Issuance of preferred stock and warrants
     -       -       -       112       8,704       -       -       8,816  
Amortization (accretion) of preferred stock
     -       -       -       -       3       (3 )     -       -  
Common stock dividends declared
     -       -       -       -       -       (472 )     -       (472 )
Preferred stock dividends paid
     -       -       -       -       -       (76 )     -       (76 )
Issuance of common stock for
                                                                
directors fees
     840       -       -       -       19       -       -       19  
Balances at June 30, 2009
     1,686,701     $ 168     $ -     $ 112     $ 21,884     $ 34,865     $ (9,034 )   $ 47,995  

See accompanying notes to consolidated financial statements.


 
5
 

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended June 30, (in thousands)
  
2010
    
2009
  
Operating Activities
            
Net income
   $ 1,473     $ 898  
Adjustments to reconcile net income to net cash provided by operating activities:
                
(Accretion), amortization and depreciation
                
Securities
     305       268  
Bank premises and equipment
     396       351  
Core deposit intangible
     111       82  
Mortgage servicing rights
     74       88  
Fair value adjustment on loans
     22       24  
Fair value adjustment on deposits and borrowings
     -       (54 )
(Gains) and losses
                
Sales and calls of securities available-for-sale, net
     (1 )     (436 )
        Write down of available-for-sale securities
     -       1,128  
Provision for loan losses
     440       745  
Decrease in loans held-for-sale
     152       2,103  
Increase in deferred loan origination fees and costs, net
     (44 )     (7 )
Mortgage servicing rights originated
     (112 )     (236 )
Decrease in mortgage servicing rights impairment reserve
     (5 )     (89 )
Increase in unearned income on loans
     -       6  
(Increase) decrease in interest receivable
     (74 )     332  
Deferred tax (benefit) expense
     (42 )     105  
Decrease in prepaid expenses
     415       65  
Increase in cash surrender value of life insurance policies
     (84 )     (170 )
Increase in income tax receivable
     (194 )     (373 )
Decrease (increase) in other assets
     40       (59 )
Increase (decrease) in accrued expenses
     46       (326 )
(Decrease) increase in interest payable
     (85 )     38  
Increase in other liabilities
     130       226  
Issuance of shares for directors’ fee
     23       19  
Net cash provided by operating activities
     2,986       4,728  
Investing Activities
                
Purchase of interest-bearing time deposits with other banks
     -       (5,000 )
Purchase of Federal Home Loan Bank stock
     -       (420 )
Purchases of securities available-for-sale
     (37,987 )     (78,868 )
Proceeds from sales of securities available-for-sale
     -       33,679  
Proceeds from calls of securities available-for-sale
     12,190       27,991  
Proceeds from maturities of securities available-for-sale
     17,645       -  
Proceeds from maturities of securities held-to-maturity
     3       2  
Loan originations and principle collections, net
     (15,029 )     2,083  
Purchases of loans
     -       (76 )
Recoveries of loans previously charged-off
     14       16  
Capital expenditures
     (1,416 )     (1,477 )
Net cash utilized by investing activities
   $ (24,580 )   $ (22,070 )


 
6
 

Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)
  
2010
    
2009
  
Financing Activities
            
Increase in deposit transaction accounts, net
   $ 27,560     $ 28,693  
(Decrease) increase in time deposits, net
     (21,772 )     28,415  
Decrease in securities sold under agreements to repurchase, net
     (3,295 )     (877 )
Federal Home Loan Bank of Boston advances
     -       12,000  
Principle payments on Federal Home Loan Bank of Boston advances
     (1,418 )     (1,807 )
Decrease in short term Federal Home Loan Bank of Boston advances, net
     -       (20,878 )
Proceeds from issuance of preferred and common stock
     -       8,819  
Common stock dividends paid
     (945 )     (944 )
Preferred stock dividends paid
     (220 )     (79 )
Net cash (utilized) provided by financing activities
     (90 )     53,342  
Net (decrease) increase in cash and cash equivalents
     (21,684 )     36,000  
Cash and cash equivalents, beginning of period
     43,298       9,659  
Cash and cash equivalents, end of period
   $ 21,614     $ 45,659  
Cash paid during period
                
Interest
   $ 3,973     $ 4,555  
Income taxes
     79       183  
See accompanying notes to consolidated financial statements.

 
7
 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

NOTE 1 - BASIS OF PRESENTATION
 
The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of Salisbury and the statements of income, shareholder’s equity and cash flows for the interim periods presented.
 
The financial statements have been prepared in accordance with generally accepted accounting principles.  In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period.  Actual results could differ significantly from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.  In connection with the determination of the allowance for loan losses and valuation of real estate, management obtains independent appraisals for significant properties.
 
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the three month period ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.  The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2009 Annual Report on Form 10-K for the period ended December 31, 2009.
 
The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management’s Discussion and Analysis, which provide information on how significant assets are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.
 
Impact of New Accounting Pronouncements Issued
 
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets,” and SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).”  These standards are effective for the first interim reporting period of 2010.  SFAS No. 166 amends the guidance in ASC 860 to eliminate the concept of a qualifying special-purpose entity (“QSPE”) and changes some of the requirements for derecognizing financial assets. SFAS No. 167 amends the consolidation guidance in ASC 810-10.  Specifically, the amendments will (a) eliminate the exemption for QSPEs from the new guidance, (b) shift the determination of which enterprise should consolidate a variable interest entity (“VIE”) to a current control approach, such that an entity that has both the power to make decisions and right to receive benefits or absorb losses that could potentially be significant, will consolidate a VIE, and (c) change when it is necessary to reassess who should consolidate a VIE. These standards did not have a significant impact on the Company’s financial statements.
 
In March 2010, the FASB issued ASU 2010-11, “Scope Exception Related to Embedded Credit Derivatives.”  The ASU clarifies that certain embedded derivatives, such as those contained in certain securitizations, CDOs and structured notes, should be considered embedded credit derivatives subject to potential bifurcation and separate fair value accounting.  The ASU allows any beneficial interest issued by a securitization vehicle to be accounted for under the fair value option at transition.  At transition, the Company may elect to reclassify various debt securities (on an instrument-by-instrument basis) from held-to-maturity (HTM) or available-for-sale (AFS) to trading.  The new rules are effective July 1, 2010.  The Company is currently analyzing the impact of the changes to determine the population of instruments that may be reclassified to trading upon adoption.
 
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements.”  The ASU requires disclosing the amounts of significant transfers in and out of Level 1 and 2 of the fair value hierarchy and describing the reasons for the transfers.  The disclosures are effective for reporting periods beginning after December 15, 2009.  The Company adopted ASU 2010-06 as of January 1, 2010.  The required disclosures are included in Note 16.  Additionally, disclosures of the gross purchases, sales, issuances and settlements activity in the Level 3 of the fair value measurement hierarchy will be required for fiscal years beginning after December 15, 2010.
 

 
8
 


 
In April 2010, the FASB issued ASU 2010-18, “Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset.” As a result of this ASU, modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The amendments are to be applied prospectively. Early application is permitted.
 
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” This ASU is created to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. This ASU is intended to provide additional information to assist financial statement users in assessing the entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in this ASU are effective as of the end of a reporting period for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.
 
Acquisition
 
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.
 
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
  
June 30, 2010
                        
Available-for-sale
                        
U.S. Treasury notes
   $ 4,999     $ 180     $ -     $ 5,179  
U.S. Government Agency notes
     43,603       609       -       44,212  
Municipal bonds
     51,830       129       (4,098 )     47,861  
Mortgage backed securities
                                
U.S. Government Agencies
     24,106       693       (110 )     24,689  
Collateralized mortgage obligations
                                
U.S. Government Agencies
     5,082       5       (13 )     5,074  
Non-agency
     22,276       812       (1,585 )     21,503  
SBA bonds
     5,682       44       -       5,726  
Corporate bonds
     1,084       49       -       1,133  
Preferred Stock
     20       26       -       46  
Total securities available-for-sale
   $ 158,682     $ 2,547     $ (5,806 )   $ 155,423  
Held-to-maturity
                                
Mortgage backed security
   $ 59     $ 2     $ -     $ 61  
Non-marketable securities
                                
Federal Home Loan Bank of Boston stock
   $ 6,032     $ -     $ -     $ 6,032  
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  
(1)
Net of other-than-temporary impairment write-down recognized in earnings.
 

 
9
 


 
Sales of securities available-for-sale and gains realized are as follows:
 
   
Three months
    
Six months
  
Period ended June 30, (in thousands)
  
2010
    
2009
    
2010
    
2009
  
Proceeds
   $ -     $ 1,314     $ -     $ 22,233  
Gains realized
     -       1       -       416  
Losses realized
     -       -       -       8  
Net gains (losses)  realized
     -       (1,119 )     1       408  
Income tax (benefit) / provision
     -       (380 )     -       139  
 
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 $5,870,000 and $5,044,000, respectively, that exceeded 10% of shareholders’ equity as of June 30, 2010.
 
The following table summarizes, for all securities in an unrealized loss position, including debt securities for which a portion of other-than-temporary impairment has been recognized in other comprehensive income, the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:
 
   
Less than 12 Months
    
12 Months or Longer
    
Totals
  
   
Fair
    
Unrealized
    
Fair
    
Unrealized
    
Fair
    
Unrealized
  
(in thousands)
  
Value
    
losses
    
value
    
losses
    
value
    
losses
  
June 30, 2010
                                    
Available-for-sale
                                    
U.S. Government Agency notes
   $ -     $ -     $ -     $ -     $ -     $ -  
Municipal Bonds
     10,357       279       30,785       3,820       41,142       4,099  
Mortgage backed securities
     1,314       1       1,292       108       2,606       109  
Collateralized mortgage obligations
                                                
U.S. Government Agencies
     2,505       13       -       -       2,505       13  
Non-agency
     1,665       26       5,442       402       7,107       428  
Total temporarily impaired securities
     15,841       319       37,519       4,330       53,360       4,649  
Other-than-temporarily impaired securities
                                                
Collateralized mortgage obligations
                                                
Non-agency
     -       -       3,940       1,157       3,940       1,157  
Total temporarily impaired and other-than-
                                                
temporarily impaired securities
   $ 15,841     $ 319     $ 41,459     $ 5,487     $ 57,300     $ 5,806  
 
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 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.
 

 
10
 

Salisbury performed a detailed cash flow analysis of its non-agency CMOs at June 30, 2010 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 June 30, 2010. 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:
 
 (in thousands)
  
June 30,
 2010
    
December 31,
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:
 
Six months ended June  (in thousands)
  
2010
    
2009
  
Balance, beginning of period
   $ 1,128     $ -  
Amounts related to the credit component on debt securities in which OTTI was not previously recognized
     -       1,128  
Balance, end of period
   $ 1,128     $ 1,128  

 
NOTE 3 - LOANS
 
The composition of the loan portfolio is as follows:
 
(in thousands)
  
June 30, 2010
    
December 31, 2009
  
Loans receivable, net
            
Real estate mortgages:
            
Residential
   $ 169,088     $ 163,863  
Commercial
     80,347       70,066  
Construction, land & land development
     28,874       31,011  
Home equity credit
     33,193       33,099  
Total mortgage loans
     311,502       298,039  
Commercial and industrial
     28,255       26,400  
Consumer
     5,078       5,436  
Other
     370       269  
Total loans, gross
     345,205       330,144  
Deferred loan origination fees and costs, net
     693       586  
Allowance for loan losses
     (3,768 )     (3,473 )
Total loans, net
   $ 342,130     $ 327,257  
Loans held-for-sale
                
Residential mortgages
   $ 513     $ 665  

 

 
11
 

Allowance for Loan Losses
 
Changes in the allowance for loan losses are as follows:
 
   
Three months
    
Six months
  
Periods ended June 30, (in thousands)
  
2010
    
2009
    
2010
    
2009
  
Balance, beginning of period
   $ 3,649     $ 3,005     $ 3,473     $ 2,724  
Provision for losses
     260       315       440       745  
Charge-offs
     (149 )     (16 )     (159 )     (176 )
Recoveries
     8       5       14       16  
Balance, end of period
   $ 3,768     $ 3,309     $ 3,768     $ 3,309  

 
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. The balance of loans serviced for others and the fair value of mortgage servicing rights are as follows:
 
(in thousands)
  
June 30, 2010
    
December 31, 2009
  
Residential mortgage loans serviced for others
   $ 78,119     $ 72,962  
Fair value of mortgage servicing rights
     517       473  
Changes in mortgage servicing rights are as follows:
 
   
Three months
    
Six months
  
Periods ended June 30, (in thousands)
  
2010
    
2009
    
2010
    
2009
  
Loan Servicing Rights
                        
Balance, beginning of period
   $ 424     $ 255     $ 427     $ 227  
Originated
     84       175       112       236  
Amortization (1)
     (43 )     (55 )     (74 )     (88 )
Balance, end of period
     465       375       465       375  
Valuation Allowance
                                
Balance, beginning of period
     (28 )     (77 )     (30 )     (118 )
Decrease (increase) in impairment reserve (1)
     4       48       6       89  
Balance, end of period
     (24 )     (29 )     (24 )     (29 )
Loan servicing rights, net
   $ 441     $ 346     $ 441     $ 346  
(1)
Amortization expense and changes in the impairment reserve are recorded in loan servicing fee income.
 
NOTE 4 - IMPAIRED LOANS
 
Impaired loans are loans for which it is probable that Salisbury will not be able to collect all amounts due according to the contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogenous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. The components of impaired loans are as follows:
 
(in thousands)
  
June 30, 2010
    
December 31, 2009
  
Non-accrual loans, excluding troubled debt restructured loans
   $ 5,326     $ 5,098  
Non-accrual troubled debt restructured loans
     5,868       2,341  
Accruing troubled debt restructured loans
     5,514       4,566  
Total impaired loans
   $ 16,708     $ 12,005  
Requiring valuation allowance
   $ 5,050     $ 3,388  
Not requiring valuation allowance
     11,658       8,617  
Total impaired loans
   $ 16,708     $ 12,005  
Valuation allowance
   $ 527     $ 388  
Commitments to lend additional amounts to impaired borrowers
     -       -  

 

 
12
 

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.
 
 (in thousands)
  
June 30, 2010
    
December 31, 2009
  
Securities available-for-sale (at fair value)
   $ 56,162     $ 63,097  
Loans receivable
     109,960       104,960  
Total pledged assets
   $ 166,122     $ 168,057  
 
At June 30, 2010, securities were pledged as follows: $43.9 million to secure public deposits and Treasury Tax and Loan deposits, $8.4 million to secure repurchase agreements and $3.8 million to secure FHLBB advances. Loans receivable were pledged to secure FHLBB advances and credit facilities.
 
NOTE 6 – EARNINGS (LOSS) PER SHARE
 
The calculation of earnings per share is as follows:
 
   
Three months
    
Six months
  
Periods ended June 30, (in thousands, except per share amounts)
  
2010
    
2009
    
2010
    
2009
  
Net income (loss)
   $ 878     $ (183 )   $ 1,473     $ 898  
Preferred stock net accretion
     5       -       10       3  
Preferred stock dividends paid
     110       135       220       131  
Net income (loss) available to common shareholders
   $ 763     $ (318 )   $ 1,243     $ 764  
Weighted average common stock outstanding - basic
     1,687       1,686       1,687       1,686  
Weighted average common and common equivalent stock outstanding- diluted
     1,687       1,686       1,687       1,686  
Earnings (loss) per common and common equivalent share
                                
Basic
   $ 0.43     $ (0.19 )   $ 0.74     $ 0.45  
Diluted
     0.43       (0.19 )     0.74       0.45  
 
NOTE 7 – 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 June 30, 2010, 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:
 

 
13
 


 
   
Actual
    
For Capital Adequacy
Purposes
    
To be Well Capitalized
Under Prompt
Corrective Action
Provisions
  
(dollars in thousands)
  
Amount
    
Ratio
    
Amount
    
Ratio
    
Amount
    
Ratio
  
June 30, 2010
                                    
Total Capital (to risk-weighted assets)
                                    
Salisbury
   $ 50,393       13.39 %   $ 30,108       8.0 %     n/a       -  
Bank
     40,817       10.88       30,042       8.0     $ 37,553       10.0 %
Tier 1 Capital (to risk-weighted assets)
                                                
Salisbury
     46,582       12.38       15,054       4.0       n/a       -  
Bank
     36,712       9.86       15,613       4.0       23,420       6.0  
Tier 1 Capital (to average assets)
                                                
Salisbury
     46,582       8.35       22,318       4.0       n/a       -  
Bank
     37,006       6.63       22,318       4.0       27,898       5.0  
June 30, 2009
                                                
Total Capital (to risk-weighted assets)
                                                
Salisbury
     49,467       14.27       27,733       8.0       n/a       -  
Bank
     39,776       10.92       26,150       8.0       36,437       10.0  
Tier 1 Capital (to risk-weighted assets)
                                                
Salisbury
     46,118       13.30       13,867       4.0       n/a       -  
Bank
     36,427       10.00       14,575       4.0       21,862       6.0  
Tier 1 Capital (to average assets)
                                                
Salisbury
     46,118       9.02       20,452       4.0       n/a       -  
Bank
     36,427       7.12       20,452       4.0       25,565       5.0  
 
Restrictions on Cash Dividends to Common Shareholders
 
Salisbury's ability to pay cash dividends is substantially 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.
 
Federal Reserve Board (“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 FRB 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 FRB 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 issuance of Preferred Stock on March 13, 2009 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.
 

 
14
 

 
 
NOTE 8 – PENSION AND OTHER BENEFITS
 
The components of net periodic cost for Salisbury’s insured noncontributory defined benefit retirement plan were as follows:
 
   
Three months
    
Six months
  
Periods ended June 30, (in thousands)
  
2010
    
2009
    
2010
    
2009
  
Service cost
   $ 74     $ 107     $ 174     $ 214  
Interest cost on benefit obligation
     89       101       180       202  
Expected return on plan assets
     (98