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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended September 30, 2020

OR

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(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)

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, Par Value $0.10 per share SAL NASDAQ

 

 

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.

YesNo

 

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 such files).

YesNo

 

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

Large accelerated filer ☐

Accelerated filer

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesNo ☑

 

The number of shares of Common Stock outstanding as of November 4, 2020 is 2,843,292.

 
 

 

TABLE OF CONTENTS

 

  PART 1 FINANCIAL INFORMATION Page
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020 (unaudited) and DECEMBER 31, 2019 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019 (unaudited) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 and 2019 (unaudited) 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
Item 4. CONTROLS AND PROCEDURES 50
     
  PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 51
Item 1A. RISK FACTORS 51
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 51
Item 3. DEFAULTS UPON SENIOR SECURITIES 51
Item 4. MINE SAFETY DISCLOSURES 51
Item 5. OTHER INFORMATION 51
Item 6. EXHIBITS 52
SIGNATURES 52

 

 2 
Table of Contents 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except share data)     September 30, 2020       December 31, 2019  
ASSETS     (unaudited)          
Cash and due from banks   $ 6,828     $ 7,406  
Interest bearing demand deposits with other banks     88,513       19,479  
Total cash and cash equivalents     95,341       26,885  
Interest bearing Time Deposits with Financial Institutions     750       750  
Securities                
Available-for-sale at fair value     95,720       91,801  
CRA mutual fund at fair value     916       882  
Federal Home Loan Bank of Boston stock at cost     3,158       3,242  
Loans held-for-sale     2,761       332  
Loans receivable, net (allowance for loan losses: $13,001 and $8,895)     1,031,593       927,413  
Other real estate owned           314  
Bank premises and equipment, net     18,727       17,385  
Goodwill     13,815       13,815  
Intangible assets (net of accumulated amortization: $5,132 and $4,884)     748       995  
Accrued interest receivable     6,055       3,415  
Cash surrender value of life insurance policies     17,572       20,580  
Deferred taxes     2,252       1,249  
Other assets     3,352       3,390  
Total Assets   $ 1,292,760     $ 1,112,448  
LIABILITIES and SHAREHOLDERS' EQUITY                
Deposits                
Demand (non-interest bearing)   $ 313,742     $ 237,852  
Demand (interest bearing)     201,760       153,314  
Money market     270,097       239,504  
Savings and other     181,691       161,112  
Certificates of deposit     127,851       127,724  
Total deposits     1,095,141       919,506  
Repurchase agreements     10,885       8,530  
Federal Home Loan Bank of Boston advances     43,880       50,887  
Subordinated debt     9,877       9,859  
Note payable     218       246  
Finance lease obligations     1,685       1,718  
Accrued interest and other liabilities     8,834       8,047  
Total Liabilities     1,170,520       998,793  
Shareholders' Equity                
Common stock - $0.10 per share par value                
Authorized: 5,000,000                
Issued: 2,843,292 and 2,825,912                
Outstanding: 2,843,292 and 2,825,912     284       283  
Unearned compensation - restricted stock awards     (906 )     (795 )
Paid-in capital     45,171       44,490  
Retained earnings     74,995       68,320  
Accumulated other comprehensive income, net     2,696       1,357  
Total Shareholders' Equity     122,240       113,655  
Total Liabilities and Shareholders' Equity   $ 1,292,760     $ 1,112,448  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 3 
Table of Contents 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

                   
      Three months ended       Nine months ended  
Periods ended September 30, (in thousands, except per share amounts) 2020       2019       2020       2019  
Interest and dividend income                                
Interest and fees on loans   $ 10,362     $ 10,045     $ 30,662     $ 29,859  
Interest on debt securities                                
Taxable     396       530       1,260       1,734  
Tax exempt     157       166       513       355  
Other interest and dividends     87       282       229       761  
Total interest and dividend income     11,002       11,023       32,664       32,709  
Interest expense                                
Deposits     764       1,879       3,261       5,674  
Repurchase agreements     6       9       16       16  
Finance lease     35       43       106       135  
Note payable     3       4       11       12  
Subordinated debt     156       156       468       468  
Federal Home Loan Bank of Boston advances     113       265       472       956  
Total interest expense     1,077       2,356       4,334       7,261  
Net interest and dividend income     9,925       8,667       28,330       25,448  
Provision for loan losses     686       94       4,198       539  
Net interest and dividend income after provision for loan losses     9,239       8,573       24,132       24,909  
Non-interest income                                
Trust and wealth advisory     1,068       1,023       3,129       2,973  
Service charges and fees     711       1,003       2,214       2,935  
Gains on sales of mortgage loans, net     707       42       1,020       50  
Mortgage servicing, net     29       76       162       232  
Gains on CRA mutual fund           6       22       29  
Gains (losses) on available-for-sale securities, net     34       (9 )     216       263  
BOLI income and gains     719       86       986       253  
Other     18       29       97       96  
Total non-interest income     3,286       2,256       7,846       6,831  
Non-interest expense                                
Salaries     3,114       3,042       8,375       8,994  
Employee benefits     1,061       1,181       3,244       3,408  
Premises and equipment     1,005       974       2,897       2,950  
Data processing     569       534       1,666       1,620  
Professional fees     635       572       2,020       1,690  
OREO gains, losses and write-downs, net           84             406  
Collections and other real estate owned     108       119       212       328  
FDIC insurance     123       (9 )     331       294  
Marketing and community support     126       141       419       448  
Amortization of intangibles     78       93       247       297  
Other     440       453       1,572       1,398  
Total non-interest expense     7,259       7,184       20,983       21,833  
Income before income taxes     5,266       3,645       10,995       9,907  
Income tax provision     910       657       1,858       1,781  
Net income   $ 4,356     $ 2,988     $ 9,137     $ 8,126  
Net income available to common stock   $ 4,288     $ 2,940     $ 9,006     $ 8,016  
                                 
Basic earnings per common share   $ 1.53     $ 1.06     $ 3.22     $ 2.88  
Diluted earnings per common share   $ 1.53     $ 1.05     $ 3.21     $ 2.87  
Common dividends per share   $ 0.29     $ 0.28     $ 0.87     $ 0.84  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 4 
Table of Contents 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

                       
      Three months ended       Nine months ended  
Periods ended September 30, (in thousands)     2020       2019       2020       2019  
Net income   $ 4,356     $ 2,988     $ 9,137     $ 8,126  
Other comprehensive income (loss)                                
Net unrealized gains  on securities available-for-sale     113       313       1,912       2,704  
Reclassification of net realized losses (gains) and write-downs in net income (1)     (34 )     9       (216 )     (263 )
Unrealized gains on securities available-for-sale     79       322       1,696       2,441  
Income tax (expense)     (17 )     (67 )     (357 )     (512 )
Other comprehensive income     62       255       1,339       1,929  
Comprehensive income   $ 4,418     $ 3,243     $ 10,477     $ 10,055  

 

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains (losses) on available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending September 30, 2020 and 2019 are $(7) thousand and $2 thousand, respectively. The net tax effect for the nine months ending September 30, 2020 and 2019 were ($45) thousand and ($55) thousand, respectively.

 

 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

               

Three months ended September 30,
(dollars in thousands)

  Common Stock   Paid-in   Retained   Unearned compensation restricted stock   Accumulated other comprehensive   Total shareholders'
    Shares   Amount   Capital   Earnings   awards   (loss) income   equity
Balances at June 30, 2019     2,823,476     $ 282     $ 44,382     $ 63,905     $ (1,075 )   $ 1,454     $ 108,948  
Net income                       2,988                   2,988  
Other comprehensive loss, net of tax                                   255       255  
Common stock dividends declared ($0.28 per share)                       (789 )                 (789 )
Stock options exercised                                          
Forfeiture of stock awards     (250 )           (10 )           10              
Retired common stock     (14 )                                    
Stock based compensation-restricted stock  awards                             178             178  
Balances at September 30, 2019     2,823,212     $ 282     $ 44,372     $ 66,104     $ (887 )   $ 1,709     $ 111,580  
Balances at June 30, 2020     2,843,292     $ 284     $ 45,096     $ 71,461     $ (1,031 )   $ 2,634     $ 118,444  
Net income                       4,356                   4,356  
Other comprehensive loss, net of tax                                   62       62  
Common stock dividends declared ($0.29 per share)                       (822 )                 (822 )
Issuance of restricted common stock     500             18             (18 )            
Forfeiture of stock awards
    (500 )           (21 )           21              
Stock based compensation-restricted stock awards                 78             122             200  
Balances at September 30, 2020     2,843,292     $ 284     $ 45,171     $ 74,995     $ (906 )   $ 2,696     $ 122,240  
 5 
Table of Contents 

               

Nine months ended September 30,
(dollars in thousands)

  Common Stock   Paid-in   Retained   Unearned compensation restricted stock   Accumulated other comprehensive   Total shareholders'
    Shares   Amount   Capital   Earnings   awards   (loss) income   equity
Balances at December 31, 2018     2,806,781     $ 281     $ 43,770     $ 60,339     $ (711 )   $ (220 )   $ 103,459  
Net income for period                       8,126                   8,126  
Other comprehensive income, net of tax                                   1,929       1,929  
Common stock dividends declared ($0.84 per share)                       (2,361 )                 (2,361 )
Stock options exercised     2,025             34                         34  
Issuance of restricted common stock     11,530       1       457             (458 )            
Forfeiture of stock awards     (710 )           (31 )           31              
Issuance of director's restricted stock awards     3,600             142             (142 )            
Retired Common Stock     (14 )                                    
Stock based compensation-restricted stock awards                             393             393  
Balances at September 30, 2019     2,823,212     $ 282     $ 44,372     $ 66,104     $ (887 )   $ 1,709     $ 111,580  
Balances at December 31, 2019     2,825,912     $ 283     $ 44,490     $ 68,320     $ (795 )   $ 1,357     $ 113,655  
Net income for period                       9,137                   9,137  
Other comprehensive income, net of tax                                   1,339       1,339  
Common stock dividends declared ($0.87 per share)                       (2,462 )                 (2,462 )
Stock options exercised     3,105             53                         53  
Issuance of restricted common stock     12,275       1       439             (440 )            
Forfeiture of stock awards
    (1,200 )           (50 )           50              
Issuance of director's restricted stock awards     3,200             114             (114 )            
Stock based compensation-restricted stock awards                 125             393             518  
Balances at September 30, 2020     2,843,292     $ 284     $ 45,171     $ 74,995     $ (906 )   $ 2,696     $ 122,240  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 6 
Table of Contents 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)     2020       2019  
Operating Activities                
Net income   $ 9,137     $ 8,126  
Adjustments to reconcile net income to net cash provided by operating activities                
(Accretion), amortization and depreciation                
Securities     388       238  
Bank premises and equipment     1,071       1,210  
Core deposit intangible     247       297  
Modification fees on Federal Home Loan Bank of Boston advances     64       174  
Subordinated debt issuance costs     18       18  
Mortgage servicing rights     84       36  
Fair value adjustment on loans           (64 )
Fair value adjustment on deposits     (4 )     (6 )
(Gains) and losses, including write-downs                
Sales and calls of securities available-for-sale, net     (216 )     (263 )
CRA Mutual Fund     (22 )     (29 )
Sales of loans, excluding capitalized servicing rights     (843 )     (50 )
Other real estate owned           406  
Provision for loan losses     4,198       539  
Proceeds from loans sold     45,246       6,107  
Loans originated for sale     (46,832 )     (6,563 )
Increase in deferred loan origination fees and costs, net     2,321       62  
Mortgage servicing rights originated     (413 )     (25 )
Increase in interest receivable     (2,640 )     (277 )
Deferred tax benefit     (1,359 )     (176 )
Decrease (increase) in prepaid expenses     295       (147 )
Increase in cash surrender value of life insurance policies     (986 )     (253 )
Decrease in income tax receivable           137  
Increase in income tax payable     1,412        
Decrease in other assets     42       728  
Decrease in accrued expenses     (584 )     (348 )
Increase in interest payable     132       270  
Decrease in other liabilities     (144 )     (147 )
Stock based compensation-restricted stock awards     518       393  
Net cash provided by operating activities     11,130       10,393  
Investing Activities                
Redemption (purchase) of Federal Home Loan Bank of Boston stock, net of redemptions     84       1,921  
Purchases of securities available-for-sale     (27,802 )     (51,931 )
Purchases of interest-bearing time deposits with financial institutions           (786 )
Proceeds from sales of securities available-for-sale     12,526       41,802  
Proceeds from calls of securities available-for-sale     655       75  
Proceeds from principal payments and maturities of securities available-for-sale     12,226       9,523  
Reinvestment of CRA Mutual Fund     (12 )     (16 )
Loan originations and principal collections, net     (110,743 )     (6,405 )
Recoveries of loans previously charged off     44       64  
Proceeds from sales of other real estate owned     314       1,086  
Capital expenditures     (2,384 )     (1,760 )
Purchase of life insurance policies           (5,750 )
Proceeds from life insurance policy     3,994        
Net cash used by investing activities   $ (111,098 )   $ (12,177 )

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)     2020       2019  
Financing Activities                
Increase in deposit transaction accounts, net   $ 175,508     $ 47,642  
Increase (decrease) in time deposits, net     131       (23,193 )
Increase in securities sold under agreements to repurchase, net     2,355       4,484  
Federal Home Loan Bank of Boston long term advances     46,001        
Federal Home Loan Bank of Boston long-term maturities/payments     (21,000 )     (35,000 )
Federal Home Loan Bank of Boston short-term advances, net change     (30,000 )     5,500  
Principal payments on Amortizing FHLB Advance     (2,072 )      
Principal payments on note payable     (28 )     (25 )
Decrease in finance lease obligation     (62 )     (194 )
Stock options exercised     53       34  
Common stock dividends paid     (2,462 )     (2,361 )
Net cash provided by (applied to) by financing activities     168,424       (3,113 )
Net increase (decrease) in cash and cash equivalents     68,456       (4,897 )
Cash and cash equivalents, beginning of period     26,885       58,445  
Cash and cash equivalents, end of period   $ 95,341     $ 53,548  

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Supplemental Cash Flow Information:                
Cash paid for interest   $ 4,124     $ 6,805  
Cash paid for income taxes     1,805       1,593  
Non-cash transfers:                
Finance Lease obligations                
Adoption of ASU 2016-02 - Other assets           1,552  
Adoption of ASU 2016-02 - Other liabilities           (1,552 )

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

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Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). 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, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

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 interim period ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

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 provides 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.

Risks and Uncertainties

The outbreak of the COVID-19 pandemic ("virus” or "COVID-19”) has adversely impacted a broad range of industries in which the Bank's customers operate and could impair their ability to fulfill their financial obligations to the Bank. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bank operates. Salisbury proactively implemented many operational changes in March 2020 to protect its employees and customers, which included the closing of the lobbies of its branches to customers, implementing banking by appointment and requiring employees to work remotely or from different locations. Salisbury has experienced neither a significant interruption in service provided to its customers nor a material decline in business activity as a result of the virus. On July 8, 2020, Salisbury reopened its branches to customers.

The Coronavirus Aid, Relief and Economic Security("CARES”) Act was signed into law on March 27, 2020 as a legislative economic stimulus package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to small businesses. While the states in the Bank's market area have begun a phased reopening, economic conditions have not returned to pre-COVID-19 levels and many businesses remain closed or are operating at reduced capacity. A resurgence of the virus may cause the states in the Bank's market area to close businesses again. If this were to happen, the Bank could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact that the virus and an economic shutdown will have on Salisbury's operations, Salisbury is disclosing the material items of which it is currently aware.

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Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses” which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Entities should apply the guidance prospectively. On January 1, 2020, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.

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In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting or Income Taxes.” The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years; early adoption is permitted. Salisbury is currently evaluating the provisions of ASU 2019-12 to determine the potential impact the new standard will have on Salisbury's Consolidated Financial Statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. Under current generally accepted accounting principles, entities amortize the premium on purchased callable debt securities to the earliest call date. If a callable debt security contains additional future call dates, entities should consider whether the amortized cost basis exceeded the amount repayable by the issuer at the next call date. If so, the excess or premium should be amortized to the next call date. This ASU clarifies that the next call date is the first date when a call option at a specified price becomes exercisable. Once that date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020; early adoption is not permitted. ASU 2020-08 is not expected to have a material impact on Salisbury's Consolidated Financial Statements.

Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of "accelerated” and "large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and were effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a "smaller reporting company” and an "accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of "accelerated filer” and expands the category of "non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a "smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of "accelerated” or "large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

 

 

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NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)     Amortized cost basis       Gross un-realized gains       Gross un-realized losses       Fair value  
September 30, 2020                                
Available-for-sale                                
U.S. Government Agency notes   $ 5,643     $ 176     $ 32     $ 5,787  
Municipal bonds     25,219       1,348       9       26,558  
Mortgage-backed securities:                                
U.S. Government agencies and U.S. Government- sponsored enterprises     35,256       1,288       36       36,508  
Collateralized mortgage obligations:                                
U.S. Government agencies     18,439       598             19,037  
Corporate bonds     7,750       101       21       7,830  
Total securities available-for-sale   $ 92,307     $ 3,511     $ 98     $ 95,720  
CRA mutual fund                                          $ 916  
Non-marketable securities                                
Federal Home Loan Bank of Boston stock   $ 3,158     $     $     $ 3,158  
(in thousands)     Amortized cost basis       Gross un-realized gains       Gross un-realized losses       Fair value  
December 31, 2019                                
Available-for-sale                                
U.S. Government Agency notes   $ 4,520     $ 125     $ 1     $ 4,644  
Municipal bonds     26,562       704       73       27,193  
Mortgage-backed securities:                                
U.S. Government agencies and U.S. Government-
sponsored enterprises
    28,961       420       24       29,357  
Collateralized mortgage obligations:                                
U.S. Government agencies     25,041       468       10       25,499  
Corporate bonds     5,000       108             5,108  
Total securities available-for-sale   $ 90,084     $ 1,825     $ 108     $ 91,801  
CRA mutual fund                           $ 882  
Non-marketable securities                                
Federal Home Loan Bank of Boston stock   $ 3,242     $     $     $ 3,242  

Salisbury sold $1.9 million in securities available-for-sale during the three month period ended September 30, 2020 realizing a pre-tax gain of $34 thousand and related tax expense of $7 thousand. Salisbury sold $12.5 million of available-for-sale securities during the nine month period ended September 30, 2020 realizing a pre-tax gain of $216 thousand and a related tax expense of $45 thousand. Salisbury sold $13.7 million in securities available-for-sale during the three month period ended September 30, 2019 realizing a pre-tax loss of $9 thousand and related tax benefit of $2 thousand. Salisbury sold $41.8 million of available-for-sale securities during the nine month period ended September 30, 2019 realizing a pre-tax gain of $263 thousand and a related tax expense of $55 thousand.

The amortized cost, fair value and tax equivalent yield of securities, by maturity, are as follows:

September 30, 2020 (in thousands)   Maturity   Amortized cost     Fair value     Yield(1)  
U.S. Government Agency notes   After 1 year but within 5 years   $ 2,496     $ 2,567       3.48 %
                             
Municipal bonds   After 5 year but within 10 years     2,224       2,379       2.85  
    After 10 years     22,995       24,179       3.05  
    Total     25,219       26,558       3.03  
Mortgage-backed securities and Collateralized mortgage obligations   Securities not due at a single maturity date     56,842       58,765       2.15  
Corporate bonds   After 5 years but within 10 years     7,750       7,830       5.20  
Securities available-for-sale       $ 92,307     $ 95,720       2.68 %

(1) Yield is based on amortized cost.

 

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The following table summarizes 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   Total
September 30, 2020 (in thousands)   Fair value   Unrealized losses   Fair value   Unrealized losses   Fair value   Unrealized losses
Available-for-sale                        
U.S. Government Agency notes   $ 1,561     $ 31     $ 75     $ 1     $ 1,636     $ 32  
Municipal bonds     2,194       9                   2,194       9  
Mortgage- backed securities:                                                
U.S. Government agencies and U.S. Government - sponsored enterprises     6,729       35       65       1       6,794       36  
Corporate bonds     1,479       21                   1,479       21  
Total temporarily impaired securities   $ 11,963     $ 96     $ 140     $ 2     $ 12,103     $ 98  
                                                 
           
    Less than 12 Months   12 Months or Longer   Total
December 31, 2019 (in thousands)   Fair value   Unrealized losses   Fair value   Unrealized losses   Fair value   Unrealized losses
Available-for-sale                                                
U.S. Government Agency notes   $     $     $ 195     $ 1     $ 195     $ 1  
Municipal bonds     6,273       73                   6,273       73  
Mortgage- backed securities:                                                
U.S. Government agencies and U.S. Government - sponsored enterprises     5,781       22       704       2       6,485       24  
Collateralized mortgage obligations:                                                
U.S. Government Agencies     1,438       10                   1,438       10  
Total temporarily impaired securities   $ 13,492     $ 105     $ 899     $ 3     $ 14,391     $ 108  

Salisbury evaluates securities for other-than-temporary impairment ("OTTI”) where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the 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.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Six securities had unrealized losses at September 30, 2020, which approximated 1.94% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Three securities had unrealized losses at September 30, 2020, which approximated 0.43% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Nine securities had unrealized losses at September 30, 2020, which approximated 0.53% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2020.

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Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Two securities had unrealized losses at September 30, 2020, which approximated 1.38% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2020. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

 

NOTE 3 - LOANS

The composition of loans receivable and loans held-for-sale is as follows:

(In thousands)     September 30, 2020     December 31, 2019  
Residential 1-4 family   $ 352,547     $ 346,299  
Residential 5+ multifamily     35,880       35,455  
Construction of residential 1-4 family     11,899       11,889  
Home equity lines of credit     28,895       33,798  
Residential real estate     429,221       427,441  
Commercial     308,725       289,795  
Construction of commercial     24,687       8,466  
Commercial real estate     333,412       298,261  
Farm land     3,295       3,641  
Vacant land     13,694       7,893  
Real estate secured     779,622       737,236  
Commercial and industrial (1)     237,448       169,411  
Municipal     20,797       21,914  
Consumer     7,686       6,385  
Loans receivable, gross     1,045,553       934,946  
Deferred loan origination (fees) and costs, net     (959 )     1,362  
Loans receivable, gross   $ 1,044,594     $ 936,308  
Allowance for loan losses     (13,001 )     (8,895 )
Loans receivable, net   $ 1,031,593     $ 927,413  
Loans held-for-sale                
Residential 1-4 family   $ 2,761     $ 332  
(1) Commercial and industrial balance as of September 30, 2020 includes $99.9 million of Paycheck Protection Program loans.

Salisbury has entered into loan participation agreements with other banks and transferred a portion of its originated loans to the participating banks. Transferred amounts are accounted for as sales and excluded from Salisbury's loans receivable. Salisbury and its participating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. Salisbury services the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.

Salisbury also has entered into loan participation agreements with other banks and purchased a portion of the other banks' originated loans. Purchased amounts are accounted for as loans without recourse to the originating bank. Salisbury and its originating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. The originating banks service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.

At September 30, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $62.7 million and $67.0 million, respectively.

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Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, installment loans 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.

Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic ("virus”). Approximately 38% of the Bank's commercial gross loans receivable are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15% of the Bank's gross commercial loan receivables is to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of gross commercial loan receivables is to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables is to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration ("SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

Credit Quality

Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

Loans rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management's close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.

Loans rated as "substandard" (6) are loans where the Bank's position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.

Loans rated "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.

Loans classified as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio is examined periodically by its regulatory agencies, the Federal Deposit Insurance Corporation ("FDIC”) and the Connecticut Department of Banking ("CTDOB”).

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The composition of loans receivable by risk rating grade is as follows:

(in thousands)   Pass   Special mention   Substandard   Doubtful   Loss   Total
September 30, 2020                                                
Residential 1-4 family   $ 342,812     $ 5,846     $ 3,889     $     $     $ 352,547  
Residential 5+ multifamily     34,082       93       1,705                   35,880  
Construction of residential 1-4 family     11,899                               11,899  
Home equity lines of credit     28,304       358       233                   28,895  
Residential real estate     417,097       6,297       5,827                   429,221  
Commercial     292,298       2,207       14,149       71             308,725  
Construction of commercial     24,455             232                   24,687  
Commercial real estate     316,753       2,207       14,381       71             333,412  
Farm land     1,624             1,671                   3,295  
Vacant land     13,604       52       38                   13,694  
Real estate secured     749,078       8,556       21,917       71             779,622  
Commercial and industrial     235,135       1,259       694       360             237,448  
Municipal     20,797                               20,797  
Consumer     7,655       1       30                   7,686  
Loans receivable, gross   $ 1,012,665     $ 9,816     $ 22,641     $ 431     $     $ 1,045,553  
(in thousands)   Pass   Special mention   Substandard   Doubtful   Loss   Total
December 31 , 2019                                                
Residential 1-4 family   $ 337,302     $ 4,278     $ 4,719     $     $     $ 346,299  
Residential 5+ multifamily     33,619       99       1,737                   35,455  
Construction of residential 1-4 family     11,889                             11,889  
Home equity lines of credit     33,381       312       105                 33,798  
Residential real estate     416,191       4,689       6,561                 427,441  
Commercial     271,708       10,964       7,052     71             289,795  
Construction of commercial     8,225             241                 8,466  
Commercial real estate     279,933       10,964       7,293     71             298,261  
Farm land     1,934             1,707                 3,641  
Vacant land     7,834       59                       7,893  
Real estate secured     705,892       15,712       15,561     71             737,236  
Commercial and industrial     167,458       443       1,510                 169,411  
Municipal     21,914                             21,914  
Consumer     6,344       3       38                 6,385  
Loans receivable, gross   $   901,608     $ 16,158     $ 17,109     $ 71     $     $   934,946  

 

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The composition of loans receivable by delinquency status is as follows:

                                 
        Past due    
                                 
                    180   30   Accruing    
(in thousands)           days   days   90 days  
        30-59   60-89   90-179   and   and   and   Non-
     Current   days   days   days   over   over   over   accrual
September 30, 2020                                
Residential 1-4 family   $ 351,642     $ 122     $ 440     $ 257     $ 86     $ 905     $     $ 1,353  
Residential 5+ multifamily     35,019                         861       861             861  
Construction of residential 1-4 family     11,899                                            
Home equity lines of credit     28,611       29       46       71       138       284             233  
Residential real estate     427,171       151       486       328       1,085       2,050             2,447  
Commercial     307,209       864       147             505       1,516             1,262  
Construction of commercial     24,687                                            
Commercial real estate     331,896       864       147             505       1,516             1,262  
Farm land     3,134       161                         161             166  
Vacant land     13,694                                           38  
Real estate secured     775,895       1,176       633       328       1,590       3,727             3,913  
Commercial and industrial     236,790       250             300       108       658       11       757  
Municipal     20,797                                            
Consumer     7,637       49                         49              
Loans receivable, gross   $ 1,041,119     $ 1,475     $ 633     $ 628     $ 1,698     $ 4,434     $ 11     $ 4,670  

 

                                 
        Past due    
                                 
                    180   30   Accruing    
(in thousands)           days   days   90 days  
        30-59   60-89   90-179   and   and   and   Non-
     Current   days   days   days   over   over   over   accrual
December 31, 2019                                
Residential 1-4 family   $ 344,085     $ 971     $ 351     $ 200     $ 692     $ 2,214     $     $ 1,551  
Residential 5+ multifamily     34,594                         861       861             861  
Construction of residential 1-4 family     11,889                                            
Home equity lines of credit     33,522       152       46             78       276             105  
Residential real estate     424,090       1,123       397       200       1,631       3,351             2,517  
Commercial     289,103       336       141       71       144       692             914  
Construction of commercial     8,466                                            
Commercial real estate     297,569       336       141       71       144       692             914  
Farm land     3,461       180                         180             186  
Vacant land     7,852             41                   41              
Real estate secured     732,972       1,639       579       271       1,775       4,264             3,617  
Commercial and industrial     169,262       2       146       1             149       1        
Municipal     21,914                                            
Consumer     6,382             1       2             3       2        
Loans receivable, gross   $ 930,530     $ 1,641     $ 726     $ 274     $ 1,775     $ 4,416     $ 3     $ 3,617  

 

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Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

   

For the three months ending September 30, 2020

  For the three months ending September 30, 2019
(in thousands)   Quantity   Pre-modification balance   Post-modification balance   Quantity   Pre-modification balance   Post-modification balance
Residential real estate     1     $ 180     $ 180       1     $ 791     $ 791  
Commercial real estate                       1       274       274  
Consumer                                    
Troubled debt restructurings     1     $ 180     $ 180       2     $ 1,065     $ 1,065  
Interest only payments to sell property         $     $       1     $ 791     $ 791  
Rate reduction                                    
Modification and Rate reduction                                    
Workout refinance. Extension of new funds to pay outstanding taxes                                    
Modification and term extension     1       180       180       1       274       274  
Troubled debt restructurings     1     $ 180     $ 180       2     $ 1,065     $ 1,065  

 

    For the nine months ending September 30, 2020   For the nine months ending September 30, 2019
(in thousands)   Quantity   Pre-modification balance   Post-modification balance   Quantity   Pre-modification balance   Post-modification balance
Residential real estate     1     $ 180     $ 180       3     $ 1,400     $ 1,400  
Commercial real estate     1       133       133       1       274       274  
Consumer                       1       42       42  
Troubled debt restructurings     2     $ 313     $ 313       5     $ 1,716     $ 1,716  
Interest only payments to sell property         $     $       1     $ 791     $ 791  
Rate reduction                                    
Modification and Rate reduction                       3       651       651  
Workout refinance. Extension of new funds to pay outstanding taxes     1       133       133                    
Modification and term extension     1       180       180       1       274       274  
Troubled debt restructurings     2     $ 313     $ 313       5     $ 1,716     $ 1,716  

 

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Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

                   
  Three months ended September 30, 2020   Three months ended September 30, 2019
(in thousands)   Beginning balance   Provision (Benefit)   Charge- offs   Reco- veries   Ending balance   Beginning balance   Provision (Benefit)   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 3,048     $ 69     $ (11 )   $ 1     $ 3,107     $ 2,074     $ 175     $ (31 )   $ 1     $ 2,219  
Residential 5+ multifamily     589       14                   603       495       (5 )                 490  
Construction of residential 1-4 family     87       10                   97       79       4                   83  
Home equity lines of credit     283       (8 )                 275       224       (11 )                 213  
Residential real estate     4,007       85       (11 )     1       4,082       2,872       163       (31 )     1       3,005  
Commercial     5,160       317       (14 )     1       5,464       3,777       (149 )     (20 )           3,608  
Construction of commercial     205       195                   400       127       23                   150  
Commercial real estate     5,365       512       (14 )     1       5,864       3,904       (126 )     (20 )           3,758  
Farm land     60       5                   65       47                         47  
Vacant land     182       (11 )                 171       89       (14 )                 75  
Real estate secured     9,614       591       (25 )     2       10,182       6,912       23       (51 )     1       6,885  
Commercial and industrial     1,515       (44 )           1       1,472       1,176       74       (97 )     14       1,167  
Municipal     36       5                   41       30       17                   47  
Consumer     74       40       (41 )     7       80       81       (26 )     (5 )     3       53  
Unallocated     1,132       94                   1,226       688       6                   694  
Totals   $ 12,371     $ 686     $ (66 )   $ 10     $ 13,001     $ 8,887     $ 94     $ (153 )   $ 18     $ 8,846  

 

 

                     
    Nine months ended September 30, 2020   Nine months ended September 30, 2019
(in thousands)   Beginning balance   Provision   Charge- offs   Reco- veries   Ending balance   Beginning balance   Acquisition Discount Transfer   Provision   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,393     $ 716     $ (11 )   $ 9     $ 3,107     $ 2,149     $ 10     $ 90     $ (32 )   $ 2     $ 2,219  
Residential 5+ multifamily     446       199       (42 )           603       413             77                   490  
Construction of residential 1-4 family     75       22                   97       83                               83  
Home equity lines of credit     197       78                   275       219       1       (7 )                 213  
Residential real estate     3,111       1,015       (53 )     9     4,082       2,864       11       160       (32 )     2     3,005  
Commercial     3,742       1,719       (17 )     20       5,464       3,048       488       114       (44 )     2       3,608  
Construction of commercial     104       296                   400       122             28                   150  
Commercial real estate     3,846       2,015       (17 )     20       5,864       3,170       488       142       (44 )     2       3,758  
Farm land     47       18                   65       33             14                   47  
Vacant land     71       100                   171       100             (25 )                 75  
Real estate secured     7,075       3,148       (70 )     29       10,182       6,167       499       291       (76 )     4       6,885  
Commercial and industrial     1,145       326             1       1,472       1,158       164       (54 )     (146 )     45       1,167  
Municipal     46       (5 )                 41       12             35                   47  
Consumer     60       72       (66 )     14       80       56             11       (29 )     15       53  
Unallocated     569       657                   1,226       438             256                   694  
Totals   $ 8,895     $ 4,198     $ (136 )   $ 44     $ 13,001     $ 7,831     $ 663     $ 539     $ (251 )   $ 64     $ 8,846  

 

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The composition of loans receivable and the allowance for loan losses is as follows:

                                     
  (in thousands)   Collectively evaluated   Individually evaluated   Total portfolio
      Loans       Allowance       Loans       Allowance       Loans       Allowance  
September 30, 2020                                                
Residential 1-4 family   $ 347,701     $ 2,724     $ 4,846     $ 383     $ 352,547     $ 3,107  
Residential 5+ multifamily     34,913       603       967             35,880       603  
Construction of residential 1-4 family     11,899       97                   11,899       97  
Home equity lines of credit     28,662       261       233       14       28,895       275  
Residential real estate     423,175       3,685       6,046       397       429,221       4,082  
Commercial     304,328       5,194       4,397       270       308,725       5,464  
Construction of commercial     24,687       400                   24,687       400  
Commercial real estate     329,015       5,594       4,397       270       333,412       5,864  
Farm land     3,129       65       166             3,295       65  
Vacant land     13,524       168       170       3       13,694       171  
Real estate secured     768,843       9,512       10,779       670       779,622       10,182  
Commercial and industrial     236,572       1,092       876       380       237,448       1,472  
Municipal     20,797       41                   20,797       41  
Consumer     7,656       62       30       18       7,686       80  
Unallocated allowance           1,226                         1,226  
Totals   $ 1,033,868     $ 11,933     $ 11,685     $ 1,068     $ 1,045,553     $ 13,001  

 

                                     
  (in thousands)   Collectively evaluated   Individually evaluated   Total portfolio
      Loans       Allowance       Loans       Allowance       Loans       Allowance  
December 31, 2019                                                
Residential 1-4 family   $ 340,847     $ 2,117     $ 5,452     $ 276     $ 346,299     $ 2,393  
Residential 5+ multifamily     34,478       446       977             35,455       446  
Construction of residential 1-4 family     11,889       75                   11,889       75  
Home equity lines of credit     33,693       197       105             33,798       197  
Residential real estate     420,907       2,835       6,534       276       427,441       3,111  
Commercial     285,462       3,333       4,333       409       289,795       3,742  
Construction of commercial     8,466       104                   8,466       104  
Commercial real estate     293,928       3,437       4,333       409       298,261       3,846  
Farm land     3,455       47       186             3,641       47  
Vacant land     7,713       66       180       5       7,893       71  
Real estate secured     726,003       6,385       11,233       690       737,236       7,075  
Commercial and industrial     169,285       1,143       126       2       169,411       1,145  
Municipal     21,914       46                   21,914       46  
Consumer     6,349       59       36       1       6,385       60  
Unallocated allowance           569                         569  
Totals   $ 923,551     $ 8,202     $ 11,395     $ 693     $ 934,946     $ 8,895  

 

The credit quality segments of loans receivable and the allowance for loan losses are as follows:

                                   
September 30, 2020 (in thousands) Collectively evaluated   Individually evaluated   Total portfolio
      Loans       Allowance       Loans       Allowance       Loans     Allowance  
Performing loans   $ 1,018,802     $ 9,702     $     $     $ 1,018,802     $ 9,702  
Potential problem loans 1     15,066       1,005                   15,066       1,005  
Impaired loans                 11,685       1,068       11,685       1,068  
Unallocated allowance           1,226                         1,226  
Totals   $ 1,033,868     $ 11,933     $ 11,685     $ 1,068     $ 1,045,553     $ 13,001  

 

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December 31, 2019 (in thousands) Collectively evaluated   Individually evaluated   Total portfolio
      Loans       Allowance       Loans       Allowance       Loans     Allowance  
Performing loans   $ 913,648     $ 7,251     $     $     $ 913,648     $ 7,251  
Potential problem loans 1     9,903       382                   9,903       382  
Impaired loans                 11,395       693       11,395       693  
Unallocated allowance           569                         569  
Totals   $ 923,551     $ 8,202     $ 11,395     $ 693     $ 934,946     $ 8,895  

1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or fair value of collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows:

                                                       
    Impaired loans with specific allowance     Impaired loans with no specific allowance
(in thousands)   Loan balance                 Loan balance        
      Book       Note       Average       Specific allowance       Income recognized       Book       Note       Average       Income recognized  
September 30, 2020                                    
Residential   $ 3,854     $ 3,972     $ 4,034     $ 383     $ 67     $ 1,959     $ 2,335     $ 1,912     $ 20  
Home equity lines of credit     75       75       77       14             158       507       111       1  
Residential real estate     3,929       4,047       4,111       397       67       2,117       2,842       2,023       21  
Commercial     3,099       3,148       3,401       270       104       1,298       1,940       978       31  
Construction of commercial                                                      
Farm land                                   166       322       177        
Vacant land     38       40       40       3             132       148       136       7  
Real estate secured     7,066       7,235       7,552       670       171       3,713       5,252       3,314       59  
Commercial and industrial     824       827       422       380       3       52       205       59       2  
Consumer     30       30       33       18       1                          
Totals   $ 7,920     $ 8,092     $ 8,007     $ 1,068     $ 175     $ 3,765     $ 5,457     $ 3,373     $ 61  

Note: The income recognized is for the nine month period ended September 30, 2020.

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2019:

                                                       
    Impaired loans with specific allowance     Impaired loans with no specific allowance
(in thousands)   Loan balance                 Loan balance        
      Book       Note       Average       Specific allowance       Income recognized       Book       Note       Average       Income recognized  
December 31, 2019                                    
Residential   $ 4,111     $ 4,190     $ 3,725     $ 276     $ 162     $ 2,318     $ 3,081     $ 2,940     $ 52  
Home equity lines of credit                 52                   105       450       391        
Residential real estate     4,111       4,190       3,777       276       162       2,423       3,531       3,331       52  
Commercial     3,309       3,335       2,574       409       90       1,024       1,733       1,747       54  
Construction of commercial                 77                               39        
Farm land                                   186       329       203        
Vacant land     41       41       42       5       3       139       157       143       10  
Real estate secured     7,461       7,566       6,470       690       255       3,772       5,750       5,463       116  
Commercial and industrial     93       97       16       2       4       33       188       265       4  
Consumer     36       36       21       1                         3        
Totals   $ 7,590     $ 7,699     $ 6,507     $ 693     $ 259     $ 3,805     $ 5,938     $ 5,731     $ 120  

 

 

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NOTE 4 - LEASES

The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of September 30, 2020 and December 31, 2019 and consolidated income statements for the nine months and three months ended September 30, 2020 and 2019.

($ in thousands, except lease term and discount rate)   Classification     September 30, 2020       December 31, 2019  
Assets            
Operating   Other assets   $ 1,235     $ 1,360  
Finance   Bank premises and equipment 1   1,427       1,503  
Total Leased Assets       $ 2,662     $ 2,863  
Liabilities                    
Operating   Other liabilities   $ 1,213     $ 1,360  
Finance   Finance lease     1,685       1,718  
Total lease liabilities       $ 2,898     $ 3,078  
1 Net of accumulated depreciation of $370 thousand and $294 thousand, respectively.
                     
Lease cost   Classification     Nine months ended September 30, 2020       Three months ended September 30, 2020  
Operating leases   Premises and equipment   $ 188     $ 64  
Finance leases:                    
Amortization of leased assets   Premises and equipment     76       25  
Interest on finance leases   Interest expense     107       36  
Total lease cost       $ 371     $ 125  
                     
Lease cost   Classification     Nine months ended September 30, 2019       Three months ended September 30, 2019  
Operating leases   Premises and equipment   $ 193     $ 70  
Finance leases:                    
Amortization of leased assets   Premises and equipment     174       54  
Interest on finance leases   Interest expense     135       43  
Total lease cost       $ 502     $ 167  
                     
Weighted Average Remaining Lease Term     September 30, 2020       December 31, 2019  
Operating leases         8.0 years       8.2 years  
Financing leases         14.7 years       15.1 years  
Weighted Average Discount Rate1                  
Operating leases         3.73%     3.70%
Financing leases         8.38%     8.41%
1 Salisbury uses the FHLB five-year Advance rate as the discount rate, as our leases do not provide an implicit rate.

 

The following is a schedule by years of the present value of the net minimum lease payments as of September 30, 2020.

  Future minimum lease payments (in thousands)     Operating Leases       Finance Leases  
  2020     $ 64     $ 47  
  2021       250       192  
  2022       199       195  
  2023       148       197  
  2024       129       200  
  Thereafter       623       1,980  
  Total future minimum lease payments       1,413       2,811  
  Less amount representing interest       (200 )     (1,126 )
  Total present value of net future minimum lease payments     $ 1,213     $ 1,685  

 

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NOTE 5 - MORTGAGE SERVICING RIGHTS

 

(in thousands)     September 30, 2020       December 31, 2019  
Residential mortgage loans serviced for others   $ 130,304     $ 106,255  
Fair value of mortgage servicing rights     714       813  

 

Changes in mortgage servicing rights are as follows:

                       
      Three months ended       Nine months ended  
Periods ended September 30, (in thousands)     2020       2019       2020       2019  
Mortgage Servicing Rights                                
Balance, beginning of period   $ 353     $ 209     $ 238     $ 228  
Originated     270       21       413       25  
Amortization (1)     (56 )     (13 )     (84 )     (36 )
Balance, end of period   $ 567     $ 217     $ 567     $ 217  
(1) Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

 

 

NOTE 6 - PLEDGED ASSETS

 

(in thousands)     September 30, 2020       December 31, 2019  
Securities available-for-sale (at fair value)   $ 61,542     $ 52,845  
Loans receivable (at book value)     427,828       434,329  
Total pledged assets   $ 489,370     $ 487,174  

At September 30, 2020, securities were pledged as follows: $46.86 million to secure public deposits, $14.66 million to secure repurchase agreements and $0.02 million to secure FHLBB advances. In addition to securities, loans receivable were pledged to secure FHLBB advances and credit facilities.

 

NOTE 7 - DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives

 

Salisbury is exposed to certain risk arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank uses derivative financial instruments to manage differences in the amount, timing, and duration of the Bank's known or expected cash receipts and its known or expected cash payments principally related to its portfolio of loans to first-time home buyers.

 

Fair Value Hedges of Interest Rate Risk

 

The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

 

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

 

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As of September 30, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

 

       
Line Item in the Statement of Financial Position in Which the Hedged Item is Included   Carrying Amount of the
Hedged Assets/(Liabilities)
  Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands) September 30, 2020   December 31, 2019   September 30, 2020   December 31, 2019  
Loans receivable(1)   $ 10,003     $     $ 3     $  
Total   $ 10,003     $     $ 3     $  

(1) These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2020, the amortized cost basis of the closed portfolios used in these hedging relationships was $52.8 million; the cumulative basis adjustment associated with these hedging relationships was $3 thousand; and the amount of the designated hedged item was $10.0 million. Salisbury did not use derivatives as a fair value hedge prior to third quarter 2020.

 

The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30, 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

 

     
    As of September 30, 2020
(in thousands)   Notional Amount   Balance Sheet Location   Fair Value
Derivatives designated as hedge instruments            
Interest Rate Products   $ 10,000     Other liabilities   $ 3  
Total Derivatives designated as hedge instruments               $ 3  

 

The table below presents the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

 

   
    Three months ended September 30, 2020
(in thousands)   Interest
Income
  Interest Expense
Total amounts of income and expense line items presented in the        
statement of financial performance in which the effects of fair value or        
cash flow hedges are recorded   $     $  
                 
Gain or (loss) on fair value hedging relationships in Subtopic 815-20                
Interest contracts                
Hedged items     3        
Derivatives designated as hedging instruments   $ (3 )   $  

 

Credit-Risk Related Contingent Features

Salisbury has an agreement with its derivative counterparty that contains a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.

 

The agreement also contains a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then Salisbury could be required to post cash or certain marketable securities issued by the U.S. Treasury or U.S. Government-sponsored enterprises as collateral. The minimum amount that Salisbury would have to post as collateral is $250 thousand.

 

As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3 thousand. As of September 30, 2020, Salisbury has not posted any collateral related to these agreements. If Salisbury had breached any of these provisions at September 30, 2020, the Bank could have been required to settle its obligations under the agreements at their termination value of $3 thousand.

 

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NOTE 8 - EARNINGS PER SHARE

Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.

The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:

                       
      Three months ended       Nine months ended  
Periods ended September 30, (in thousands, except per share data)     2020       2019       2020       2019  
Net income   $ 4,356     $ 2,988     $ 9,137     $ 8,126  
Less: Undistributed earnings allocated to participating securities     (67 )     (48 )     (131 )     (110 )
Net income allocated to common stock   $ 4,288     $ 2,940     $ 9,006     $ 8,016  
Weighted-average common shares issued     2,843       2,823       2,835       2,815  
Less: Unvested restricted stock awards     (44 )     (40 )     (41 )     (34 )
Weighted average common shares outstanding used to calculate basic earnings per common share     2,799       2,783       2,794       2,781  
Add: Dilutive effect of stock options     8       12       8       12  
Weighted-average common shares outstanding used to calculate diluted earnings per common share     2,807       2,795       2,802       2,793  
Earnings per common share (basic)   $ 1.53     $ 1.06     $ 3.22     $ 2.88  
Earnings per common share (diluted)   $ 1.53     $ 1.05     $ 3.21     $ 2.87  

 

 

NOTE 9 - SHAREHOLDERS' EQUITY

Capital Requirements

The Bank is 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 the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The requirements of the final rules approved by the Federal Reserve Board ("FRB”) and FDIC, include a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. As of September 30, 2020, the Bank exceeded the regulatory requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. A bank can be considered "well-capitalized” even if it does not maintain the capital conservation buffer as long as it meets the "well-capitalized” levels set forth below (and provided it is not subject to any written order, agreement, capital directive, etc.). A bank with a capital conservation buffer of at least 2.5% means that it generally will not be subject to certain limitations regarding capital distributions, such as dividend payments, discretionary payments on tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers.

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The Bank's risk-weighted assets at September 30, 2020 and December 31, 2019 were $916.3 million and $891.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

               
    Actual   Minimum Capital Required For Capital Adequacy   Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer   Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)   Amount   Ratio   Amount   Ratio   Amount   Ratio   Amount   Ratio

September 30, 2020 

                                                               
Total Capital (to risk-weighted assets)   $ 124,616       13.60 %   $ 73,307       8.0 %   $ 96,216       10.5 %   $ 91,634       10.0 %
                                                                 
Tier 1 Capital (to risk-weighted assets)     113,142       12.35       54,980       6.0       77,889       8.5       73,307       8.0  
                                                                 
Common Equity Tier 1 Capital (to risk-weighted assets)     113,142       12.35       41,235       4.5       64,144       7.0       59,562       6.5  
                                                                 
Tier 1 Capital (to average assets)   $ 113,142       8.93       50,704       4.0       50,704       4.0       63,380       5.0  
   December 31, 2019                                                                
Total Capital (to risk-weighted assets)   $ 114,421       12.84 %   $ 71,278       8.0 %   $ 93,553       10.5 %   $ 89,098       10.0 %
                                                                 
Tier 1 Capital (to risk-weighted assets)     105,430       11.83       53,459       6.0       75,733       8.5       71,278       8.0  
                                                                 
Common Equity Tier 1 Capital (to risk-weighted assets)     105,430       11.83       40,094       4.5       62,368       7.0       57,914       6.5  
                                                                 
Tier 1 Capital (to average assets)   $ 105,430       9.60       43,944       4.0     $ 43,944       4.0     $ 54,930       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.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 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.

 

NOTE 10 - BENEFITS

Salisbury's 401(k) Plan expense was $229 thousand and $231 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $667 thousand and $662 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019. Other post-retirement benefit obligation (credit) expense for endorsement split-dollar life insurance arrangements was $(32) thousand and $21 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $7 thousand and $69 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019. A credit was recognized in third quarter 2020 to reflect the payout of insurance proceeds and the corresponding reduction in liability due to the death of a covered former employee.

ESOP

Salisbury offers an ESOP to eligible employees.  Under the ESOP, Salisbury may make discretionary contributions to the ESOP. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $56 thousand and $105 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $170 thousand and $207 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019.

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Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $33 thousand and $29 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $100 thousand and $87 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019.

Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense was $122 thousand and $131 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $393 thousand and $348 thousand, respectively for the nine month periods ended September 30, 2020 and 2019. The tax benefit from restricted stock expense was $22 thousand and $24 thousand, respectively for the three month periods ended September 30, 2020 and 2019; and $71 thousand and $63 thousand, respectively for the nine month periods ended September 30, 2020 and 2019. In second quarter 2020, Salisbury granted a total of 14,975 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $536 thousand. In third quarter 2020, Salisbury granted 500 restricted shares with a fair value of approximately $18 thousand at grant date. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of September 30, 2020 and 2019 totaled $906 thousand and $887 thousand, respectively. There were forfeitures of $21 thousand or 500 shares in the third quarter of 2020 and forfeitures of $50 thousand or 1,200 shares for year to date 2020. There were forfeitures of $10 thousand or 250 shares in the third quarter of 2019 and forfeitures of $31 thousand or 710 shares for year to date 2019.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted 6,800 performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan (Phantom). Salisbury will continue to record an expense for the Phantom plan until the final tranche of awards is paid out in January 2021. Salisbury's expense for the Phantom plan was $18 thousand and $84 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $101 thousand and $203 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019.

The performance goal for the March 2019 grant under the RSU plan is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and if the performance goals are achieved. In July 2020, the Compensation Committee granted an additional 7,250 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank's tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is achieved. Compensation expense of $80 and $23 thousand was recorded with respect to both tranches of RSUs in the three months ended September 30, 2020 and 2019, respectively, and $127 and $46 thousand for the nine months ended September 30, 2020 and 2019. No performance-based restricted stock units were awarded prior to March 29, 2019.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the second and third quarters 2020, there were no stock options exercised and year to date 2020, 1,755 stock options were exercised at $17.04 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury. Also, in the first quarter of 2020, a former Riverside employee exercised 1,350 stock options at $17.04 per share. In the first and third quarters of 2019 there were no stock options exercised. In the second quarter 2019, there were 2,025 stock options exercised at $17.04, by one employee. In the first quarter 2018, 1,350 stock options were exercised at $31.11 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury.

 

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NOTE 11 - FAIR VALUE OF ASSETS AND LIABILITIES

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Salisbury adopted ASC 820-10, "Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. 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. GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury's market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include 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. Significant other observable inputs. 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. Currently, Salisbury uses an interest rate swap to manage its interest rate risk. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Salisbury incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Level 3. Significant unobservable inputs. 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. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the nine-month period ended September 30, 2020.

 

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Assets and liabilities measured at fair value are as follows:

               
    Fair Value Measurements Using   Assets and
(in thousands)   Level 1   Level 2   Level 3   liabilities at
                fair value
September 30, 2020                                
Assets at fair value on a recurring basis                                
U.S. Government Agency notes   $     $ 5,787     $     $ 5,787  
Municipal bonds           26,558             26,558  
Mortgage-backed securities:                                
U.S. Government agencies and U.S. Government-sponsored enterprises           36,508             36,508  
Collateralized mortgage obligations:                                
U.S. Government agencies           19,037             19,037  
Corporate bonds           7,830             7,830  
Securities available-for-sale   $     $ 95,720     $     $ 95,720  
CRA mutual funds     916                   916  
Assets at fair value on a non-recurring basis                                
Collateral dependent impaired loans   $     $     $ 2,010     $ 2,010  
Other real estate owned   $     $     $     $  
Liabilities at fair value on a recurring basis                                
Derivative financial instruments   $     $ 3     $     $ 3  
December 31, 2019                                
Assets at fair value on a recurring basis                                
U.S. Government Agency notes   $     $ 4,644     $     $ 4,644  
Municipal bonds           27,193             27,193  
Mortgage-backed securities:                                
U.S. Government agencies and U.S. Government-sponsored enterprises           29,357             29,357  
Collateralized mortgage obligations:                                
U.S. Government agencies           25,499             25,499  
Corporate bonds           5,108             5,108  
Securities available-for-sale   $     $ 91,801     $     $ 91,801  
CRA mutual funds     882                   882  
Assets at fair value on a non-recurring basis                                
Collateral dependent impaired loans   $     $     $ 1,593     $ 1,593  
Other real estate owned   $     $     $ 314     $ 314  

 

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Carrying values and estimated fair values of financial instruments are as follows:

           
(in thousands)   Carrying   Estimated   Fair value measurements using
    value   fair value   Level 1   Level 2   Level 3
September 30, 2020                                        
Financial Assets                                        
Cash and cash equivalents   $ 95,341     $ 95,341     $ 95,341     $     $  
Interest bearing time deposits with financial institutions     750       750       750              
Securities available-for-sale     95,720       95,720             95,720        
CRA mutual fund     916       916       916              
Federal Home Loan Bank of Boston stock     3,158       3,158       3,158              
Loans held-for-sale     2,761       2,802                   2,802  
Loans receivable, net     1,031,593       1,058,564                   1,058,564  
Accrued interest receivable     6,055       6,055       6,055              
Cash surrender value of life insurance policies     17,572       17,572       17,572              
Financial Liabilities                                        
Demand (non-interest-bearing)   $ 313,742     $ 313,742     $     $ 313,742     $  
Demand (interest-bearing)     201,760       201,760             201,760        
Money market     270,097       270,097             270,097        
Savings and other     181,691       181,691             181,691        
Certificates of deposit     127,851       129,311             129,311        
Deposits     1,095,141       1,096,601             1,096,601        
Repurchase agreements     10,885       10,885             10,885        
FHLBB advances     43,880       44,099             44,099        
Subordinated debt     9,877       9,965       9,965              
Note payable     218       222             222        
Finance lease liability     1,685       1,868                   1,868  
Accrued interest payable     210       210       210              
Derivative financial instruments     3       3             3        
December 31, 2019                                        
Financial Assets                                        
Cash and cash equivalents   $ 26,885     $ 26,885     $ 26,885     $     $  
Interest bearing time deposits with financial institutions     750       750       750              
Securities available-for-sale     91,801       91,801             91,801        
CRA mutual fund     882       882       882              
Federal Home Loan Bank of Boston stock     3,242       3,242       3,242              
Loans held-for-sale     332       334                   334  
Loans receivable, net     927,413       933,287                   933,287  
Accrued interest receivable     3,415       3,415       3,415              
Cash surrender value of life insurance policies     20,580       20,580       20,580              
Financial Liabilities                                        
Demand (non-interest-bearing)   $ 237,852     $ 237,852     $     $ 237,852     $  
Demand (interest-bearing)     153,314       153,314             153,314        
Money market     239,504       239,504             239,504        
Savings and other     161,112       161,112             161,112        
Certificates of deposit     127,724       128,629             128,629        
Deposits     919,506       920,411             920,411        
Repurchase agreements     8,530       8,530             8,530        
FHLBB advances     50,887       51,028             51,028        
Subordinated debt     9,859       10,113       10,113              
Note payable     246       251             251        
Finance lease liability     1,718       1,967                   1,967  
Accrued interest payable     78       78       78              

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in accrued interest and other liabilities.

 

NOTE 12 - SUBSEQUENT EVENTS

On October 30, 2020 the Board of Directors declared a dividend of $0.29 per common share payable on November 27, 2020 to shareholders of record as of November 13, 2020.

 

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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. ("Salisbury” or the "Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the "SEC”).

BUSINESS

Salisbury Bancorp, Inc., 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 common stock is traded on the NASDAQ Capital Market under the symbol "SAL.” Salisbury's principal business consists of its operation and control of the business of the Bank.

The Bank, formed in 1848, currently provides commercial banking, consumer financing, retail banking and trust and wealth advisory services through a network of fourteen banking offices and ten ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).

On June 29, 2020, Salisbury Bank was added to the Russell 3000 stock index.

Critical Accounting Policies and Estimates

Salisbury's consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Salisbury's significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements, which, 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.

Allowance for Loan Losses

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. 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.

Goodwill and Intangible Assets

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives, could have a material adverse impact on the results of operations.

Available-For-Sale Securities

Management evaluates securities for OTTI 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.

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Derivative Instruments and Hedging Activities

 

Salisbury records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Bank has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. Salisbury may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Bank elects not to apply hedge accounting.

 

In accordance with the FASB's fair value measurement guidance, Salisbury made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

FINANCIAL CONDITION

Impact of COVID-19 Virus

COVID-19 has placed significant health and economic pressure on the communities the Bank serves, the State of Connecticut, the United States and other countries. In response, the Bank has proactively implemented several steps such as those set forth below to support the safety and well-being of its employees and customers, which procedures continue through the date of this Report:

· The Bank is practicing social distancing following the guidelines of the Center for Disease Control and requires or encourages many of its employees to work from home or from alternate locations.
· On July 8, 2020, the lobbies to the Bank's branches reopened to customers, and banking is also available to customers by appointment.
· The Bank continues to leverage the drive-up windows in twelve of its fourteen branches as well as its electronic banking platform to continue to serve customers.

Salisbury will continue to adjust its operating model as the circumstances surrounding the pandemic continue to evolve.

Securities and Short Term Funds

During the first nine months of 2020, securities available-for-sale increased $3.9 million to $95.7 million at September 30, 2020. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $68.5 million to $95.3 million at September 30, 2020.

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. 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 evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at September 30, 2020.

Loans

Net loans receivable of $1,031.6 million at September 30, 2020, increased $104.2 million compared from $927.4 million at December 31, 2019. The increase primarily reflected PPP loan balances of $97.6 million, net of deferred fees as well as growth in commercial real estate loans. Salisbury’s residential loans receivable balance increased approximately $1.8 million from year end 2019. The overall increase in net loans receivable was partly offset by a $4.2 million increase in the allowance for loan losses, which primarily reflected the uncertainty surrounding the impact of COVID-19, as well as loan growth during the period.

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Despite the minimal growth in the residential loan balance from year end 2019, Salisbury experienced significant residential mortgage activity both as purchasers relocated from the New York metropolitan area to less populated communities in response to COVID-19, and as a result of the attractive mortgage interest rate environment, which precipitated refinance activity. During the third quarter 2020, Salisbury originated $45.5 million of residential mortgage loans, including refinance activity, compared to $14.5 million of loans during third quarter 2019. For the nine month period ended September 30, 2020, Salisbury originated $106.6 million of residential mortgage loans, including refinance activity, compared with $38.7 million of loans during the comparable period of 2019. Salisbury manages the Bank’s interest rate risk in part by selling fixed rate residential loans to FHLB Boston. During the third quarter 2020, Salisbury sold approximately $26.6 million of residential mortgage loans to FHLB Boston compared with $5.6 million in third quarter 2019. For the nine month period ended September 30, 2020 and September 30, 2019, Salisbury sold approximately $44.4 million and $6.1 million of residential mortgage loans, respectively, to FHLB Boston.

Asset Quality

During the first nine months of 2020, non-performing assets increased $0.8 million to $4.7 million, or 0.36% of gross loans receivable, at September 30, 2020 from $3.9 million, or 0.35% of gross loans receivable, at December 31, 2019. During the first nine months of 2020, total impaired and potential problem loans increased by $5.5 million to $26.8 million, or 2.56% of gross loans receivable, at September 30, 2020, from $21.3 million, or 2.28% of gross loans receivable, at December 31, 2019.

Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

On March 22, 2020, the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the virus. The guidance goes on to explain that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of the relief program are not Troubled Debt Restructurings ("TDRs”).  CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied this guidance and implemented a loan payment deferral program which allows residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. Borrowers may apply to the Bank for additional deferments, which will be evaluated on a case-by-case basis.

As of September 30, 2020, 21 residential and consumer loans ($7 million loan balances) and 37 commercial loans ($56 million loan balances) were granted payment deferrals. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment along with the deferred principal. The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program ("PPP”).  As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. Salisbury processed 932 PPP loans for a principal balance of approximately $100 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020 the Paycheck Protection Program Flexibility Act ("PPPFA”) was signed into law. The PPPFA increased the covered period from eight weeks to twenty four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two year term. Management funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank ("FHLB”) advances, and brokered deposits. Salisbury did not participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF”). As of September 30, 2020, Salisbury submitted twenty PPP loan forgiveness applications (loan balance of $0.4 million) to the SBA. Upon receipt of a forgiveness application, the SBA will have ninety days to review the application. Thus, the duration of the SBA's review process will impact the amount of fee income that Salisbury will recognize in fiscal year 2020. The Bank is permitted to accelerate the recognition of deferred fee income on forgiven loans.

Past Due Loans

Loans past due 30 days or more increased $18 thousand for the nine months ended September 30, 2020 to $4.4 million, or 0.42% of gross loans receivable compared with $4.4 million, or 0.47% of gross loans receivable at December 31, 2019.

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The components of loans past due 30 days or greater are as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Past due 30-59 days   $ 1,100     $ 1,351  
Past due 60-89 days     538       726  
Past due 90-179 days           3  
Past due 180 days and over     11        
Accruing loans     1,649       2,080  
Past due 30-59 days     375       290  
Past due 60-89 days     95        
Past due 90-179 days     628       271  
Past due 180 days and over     1,687       1,775  
Non-accrual loans     2,785       2,336  
Total loans past due 30 days or greater   $ 4,434     $ 4,416  

Credit Risk Ratings

Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury's rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings (special mention, substandard, doubtful, and loss) defined by the bank's regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

· Loans risk rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management's close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.
· Loans risk rated as "substandard" (6) are loans where the Bank's position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.
· Loans risk rated as "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.
· Loans risk rated as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, the FDIC and CTDOB.

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

· Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.
· Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.
· Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.
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· Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower's financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.
· Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

Impaired Loans

Impaired loans include all modified loans classified as troubled debt restructurings (TDRs) and loans on non-accrual status. The components of impaired loans are as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Non-accrual loans, excluding troubled debt restructured loans   $ 2,996     $ 2,604  
Non-accrual troubled debt restructured loans     1,674       1,013  
Accruing troubled debt restructured loans     7,015       7,778  
Total impaired loans   $ 11,685     $ 11,395  

Non-Performing Assets

Non-performing assets increased $0.8 million to $4.7 million, or 0.36% of assets for the nine months ended September 30, 2020, from $3.9 million, or 0.35% of assets at December 31, 2019 and decreased $1.0 million from $5.7 million, or 0.50% of assets at September 30, 2019.

The 19.0% increase in non-performing assets in the first nine months 2020 resulted primarily from: $2.2 million of loans placed on non-accrual, offset by the sale of $0.8 million of loans, $0.3 million of loans returned to accrual status, $0.1 million of loan payoffs and the sale of $0.3 million of OREO.

The components of non-performing assets are as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Residential 1-4 family   $ 1,353     $ 1,551  
Residential 5+ multifamily     861       861  
Home equity lines of credit     233       105  
Commercial     1,262       914  
Farm land     166       186  
Vacant land     38        
Real estate secured     3,913       3,617  
Commercial and industrial     757        
Non-accruing loans     4,670       3,617  
Accruing loans past due 90 days and over     11       3  
Non-performing loans     4,681       3,620  
Other Real Estate Owned (OREO)           314  
Non-performing assets   $ 4,681     $ 3,934  

The past due status of non-performing loans is as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Current   $ 1,885     $ 1,281  
Past due 30-59 days     375       290  
Past due 60-89 days     95        
Past due 90-179 days     628       274  
Past due 180 days and over     1,698       1,775  
Total non-performing loans   $ 4,681     $ 3,620  

At September 30, 2020, 40.26% of non-performing loans were current with respect to loan payments, compared with 35.39% at December 31, 2019.

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Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans decreased slightly during first nine months of 2020 to $8.7 million, or 0.83% of gross loans receivable at September 30, 2020, compared to $8.8 million, or 0.94% of gross loans receivable at December 31, 2019.

The components of troubled debt restructured loans are as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Residential 1-4 family   $ 3,494     $ 3,901  
Residential 5+ multifamily     105       116  
Personal     30       36  
Vacant land     132       180  
Commercial     3,135       3,419  
Real estate secured     6,896       7,652  
Commercial and industrial     119       126  
Accruing troubled debt restructured loans     7,015       7,778  
Residential 1-4 family     506       152  
Residential 5+ multifamily     861       861  
Vacant land     38        
Commercial     269        
Real estate secured     1,674       1,013  
Non-accrual troubled debt restructured loans     1,674       1,013  
Troubled debt restructured loans   $ 8,689     $ 8,791  

The past due status of troubled debt restructured loans is as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Current   $ 6,728     $ 7,227  
Past due 30-59 days     248       470  
Past due 60-89 days     39       81  
Accruing troubled debt restructured loans     7,015       7,778  
Current     543       19  
Past due 90-179 days           133  
Past due 180 days and over     1,131       861  
Non-accrual troubled debt restructured loans     1,674       1,013  
Total troubled debt restructured loans   $ 8,689     $ 8,791  

At September 30, 2020, 83.68% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.43% at December 31, 2019.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $5.2 million during the first nine months of 2020 to $15.1 million, or 1.44% of gross loans receivable at September 30, 2020, compared with $9.9 million, or 1.06% of gross loans receivable at December 31, 2019. The increase primarily reflected the downgrade of $6.9 million and $0.3 million of commercial and residential 1-4 family loans, respectively, partly offset by the paydown of a commercial line of credit of $0.8 million, the payoff of $0.4 million in residential 1-4 family loans, the upgrade of $0.4 million of residential 1-4 family loans and $0.4 million of commercial and industrial loans placed on non-accrual.

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The components of potential problem loans are as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Residential 1-4 family   $ 1,634     $ 2,109  
Residential 5+ multifamily     738       760  
Home equity lines of credit            
Residential real estate     2,372       2,869  
Commercial     10,778       3,886  
Construction of commercial     232       241  
Commercial real estate     11,010       4,127  
Farm land     1,505       1,521  
Real estate secured     14,887       8,517  
Commercial and industrial     178       1,384  
Consumer     1       2  
Total potential problem loans   $ 15,066     $ 9,903  

The past due status of potential problem loans is as follows:

(in thousands)     September 30, 2020       December 31, 2019  
Current   $ 14,457     $ 9,654  
Past due 30-59 days     452       108  
Past due 60-89 days     157       138  
Past due 90-179 days           3  
Total potential problem loans   $ 15,066     $ 9,903  

At September 30, 2020, 95.96% of potential problem loans were current with respect to loan payments, as compared with 97.49% at December 31, 2019. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Goodwill

Management evaluates goodwill and identifiable intangible assets for impairment at least 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. The virus triggered significant volatility in the global financial markets. On September 30, 2020, Salisbury's closing stock price was $31.61 per share compared with its book value of $42.99 per share. Salisbury's stock price has declined approximately 31% from December 31, 2019 whereas financial stocks, as measured by the SNL US Bank $1 billion - $5 billion index, declined approximately 38% over the same period. As a result of the stock market volatility, the Bank was required to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired. Management evaluated several qualitative factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price. Management performed a qualitative analysis as of September 30, 2020 and concluded that it was not more likely than not that goodwill was impaired. As a result, the Bank did not record an impairment charge for goodwill for third quarter 2020.

Deposits and Borrowings

Deposits increased $175.6 million during the first nine months of 2020, or 19.1%, to $1.1 billion at September 30, 2020, compared with $919.5 million at December 31, 2019. The increase partly reflected the funding of nearly $100.0 million of PPP loans, an increase in brokered certificate of deposit balances of $18.0 million as well as an increase in retail and business customer balances due to the uncertainty surrounding COVID-19. Retail repurchase agreements increased $2.4 million during 2020 to $10.9 million at September 30, 2020, compared with $8.5 million at December 31, 2019.

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The distribution of average total deposits by account type is as follows:

    September 30, 2020   December 31, 2019
(in thousands)   Average Balance   Percent   Weighted
Interest Rate
  Average Balance   Percent   Weighted
Interest Rate
Demand deposits   $ 286,496       27.23 %     0.00 %   $ 231,169       24.50 %     0.00 %
Interest-bearing checking accounts     195,253       18.56       0.22       155,463       16.48       0.39  
Regular savings accounts     176,963       16.82       0.15       175,011       18.55       0.87  
Money market savings     258,257       24.54       0.30       222,090       23.54       1.05  
Certificates of deposit (CD's)1     135,238       12.85       1.15 %     159,863       16.94       1.80  
Total deposits   $ 1,052,207       100.00 %     0.29 %   $ 943,596       100.00 %     0.78 %

1CD's included Certificate of Deposit Account Registry Service ("CDARS”) one-way buys of $2.9 million at December 31, 2019. The Bank did not have a CDARS one-way buy balance as of September 30, 2020. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. CD's also include brokered certificates of deposits of $18.0 million at September 30, 2020. Salisbury did not have any brokered certificates of deposit outstanding at December 31, 2019.

The classification of certificates of deposit by interest rates is as follows:

Interest rates (in thousands)     September 30, 2020       December 31, 2019  
Less than 1.00%   $ 58,456     $ 34,261  
1.00% to 1.99%     36,047       46,502  
2.00% to 2.99%     32,850       46,463  
3.00% to 3.99%     498       498  
Total   $ 127,851     $ 127,724  

The distribution of certificates of deposit by interest rate and maturity is as follows:

    At September 30, 2020
  Interest rates (in thousands)   Less Than or Equal to One Year   More Than One to Two Years   More Than Two to Three Years   More Than Three Years   Total   Percent of Total
Less than 1.00%   $ 43,812     $ 10,790     $ 968     $ 2,886     $ 58,456       45.72 %
1.00% to 1.99%     16,967       8,646       4,413       6,021       36,047       28.19 %
2.00% to 2.99%     24,217       2,902       1,011       4,720       32,850       25.69 %
3.00% to 3.99%           498                   498       0.39 %
Total   $ 84,996     $ 22,836     $ 6,392     $ 13,627     $ 127,851       100.00 %

Scheduled maturities of time certificates of deposit in denominations of $100,000 or more are as follows:

September 30, 2020 (in thousands)   Within
3 months
 
3-6 months
 
6-12 months
  Over
1 year
  Total
Certificates of deposit $100,000 and over   $ 15,568     $ 9,274     $ 23,829     $ 31,482     $ 80,153  

FHLBB advances decreased $7.0 million during the first nine months of 2020 to $43.9 million at September 30, 2020, compared with $50.9 million at December 31, 2019. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts.  These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding.  At September 30, 2020, $15 million of letters of credit were outstanding.

The following table sets forth certain information concerning short-term FHLBB advances:

(dollars in thousands)     September 30, 2020       December 31, 2019  
Highest month-end balance during period   $ 35,000     $ 47,000  
Ending balance           30,000  
Average balance during period     8,704       5,670  

 

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Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At September 30, 2020, Salisbury's excess borrowing capacity at FHLBB was approximately $233.9 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. Management believes Salisbury's funding sources will meet anticipated funding needs.

Operating activities for the nine-month period ended September 30, 2020 provided net cash of $11.1 million. Investing activities utilized net cash of $111.1 million principally from $110.7 million of net loan originations and principal collections, $27.8 million of purchases of securities available-for-sale and $2.4 million of capital expenditures, partly offset by proceeds of $12.9 million from calls and maturities of securities available-for-sale, $12.5 million from the sale of available-for-sale-securities, $4.0 million of proceeds received on life insurance policy and $0.3 million from the sale of other real estate owned. Financing activities provided net cash of $168.4 million principally due to an increase in deposits of $175.6 million and an increase of $46.0 million in long-term FHLBB advances, partially offset by the repayment of FHLBB short term advances of $30.0 million, FHLBB long-term advances maturities/payments of $21.0 million, FHLBB amortizing payment of $2.1 million and the payment of common stock dividends of $2.5 million.

At September 30, 2020, Salisbury had outstanding commitments to fund new loan originations of $30.5 million and unused lines of credit of $144.0 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

RESULTS OF OPERATIONS

For the three-month periods ended September 30, 2020 and 2019

OVERVIEW

Net income allocated to common stock was $4.3 million, or $1.53 per basic common share, for the third quarter ended September 30, 2020 (third quarter 2020), compared with $2.9 million, or $1.06 per basic common share, for the third quarter ended September 30, 2019 (third quarter 2019), and $2.7 million, or $0.96 per basic common share, for the second quarter ended June 30, 2020 (second quarter 2020).

Net Interest Income

Tax equivalent net interest income for the third quarter 2020 increased $1.3 million, or 14.4%, versus third quarter 2019. Average earning assets increased $151.0 million versus third quarter 2019. Average total interest bearing deposits increased $48.8 million, or 6.8%, versus third quarter 2019. The tax equivalent net interest margin 3.29% for both third quarter 2020 and third quarter 2019.

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The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE”) net interest income and yields on average interest-earning assets and interest-bearing liabilities.

Three months ended September 30,   Average Balance   Income / Expense   Average Yield / Rate
(dollars in thousands)     2020       2019       2020       2019       2020       2019  
Loans (a)(d)   $ 1,049,313     $ 920,946     $ 10,485     $ 10,158       3.97 %     4.41 %
Securities (c)(d)     89,220       96,317       606       747       2.72       3.10  
FHLBB stock     3,440       3,024       34       46       3.96       6.08  
Short term funds (b)     78,306       49,057       52       236       0.27       1.92  
Total earning assets     1,220,279       1,069,344       11,177       11,187       3.64       4.18  
Other assets     64,943       57,196                                  
Total assets   $ 1,285,222     $ 1,126,540                                  
Interest-bearing demand deposits   $ 195,253     $ 156,803       110       160       0.22       0.41  
Money market accounts     258,257       242,310       195       700       0.30       1.16  
Savings and other     176,963       165,297       69       323       0.15       0.78  
Certificates of deposit     135,238       152,475       391       697       1.15       1.83  
Total interest-bearing deposits     765,711       716,885       765       1,880       0.40       1.05  
Repurchase agreements     12,218       7,266       6       9       0.20       0.50  
Capital lease     2,928       4,356       35       42       4.80       3.86  
Note payable     221       258       3       4       6.08       6.20  
Subordinated debt (net of issuance costs)     9,872       9,849       156       156       6.32       6.34  
FHLBB advances     44,522       31,983       113       266       0.99       3.33  
Total interest-bearing liabilities     835,472       770,597       1,078       2,357       0.51       1.22  
Demand deposits     321,392       238,689                                  
Other liabilities     7,592       6,669                                  
Shareholders' equity     120,766       110,585                                  
Total liabilities & shareholders' equity   $ 1,285,222     $ 1,126,540                                  
Net interest income                   $ 10,099     $ 8,830                  
Spread on interest-bearing funds                                     3.13       2.96  
Net interest margin (e)                                     3.29       3.29  

(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds sold.
(c) Average balances of securities are based on historical cost.
(d) Includes tax exempt income benefit of $176,000 and $164,000, respectively, for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e) Net interest income divided by average interest-earning assets.

The following table sets forth the changes in FTE interest due to volume and rate.

Three months ended September 30, (in thousands) 2020 versus 2019
Change in interest due to     Volume       Rate       Net  
Loans   $ 1,349     $ (1,022 )   $ 327  
Securities     (52 )     (89 )     (141 )
FHLBB stock     5       (17 )     (12 )
Short term funds     80       (264 )     (184 )
Interest-earning assets     1,382       (1,392 )     (10 )
Deposits     88       (1,203 )     (1,115 )
Repurchase agreements     4       (7 )     (3 )
Capital lease     (15 )     8       (7 )
Note Payable     (1 )           (1 )
FHLBB advances     68       (221 )     (153 )
Interest-bearing liabilities     144       (1,423 )     (1,279 )
Net change in net interest income   $ 1,238     $ 31     $ 1,269  

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Interest Income

Tax equivalent interest income of $11.2 million for third quarter 2020 was essentially unchanged from third quarter 2019. Loan income increased $0.3 million, or 3.2%, compared to third quarter 2019 due to a $128.4 million, or 13.9%, increase in average loan balances, partially offset by a 44 basis point decline in average yield. Tax equivalent securities income decreased $141 thousand, or 18.9%, compared to third quarter 2019 due to a $7.1 million, or 7.4%, decrease in average balances and a 38 basis point decline in average yield. Income on short-term funds decreased $184 thousand, or 80.0%, compared with third quarter 2019 primarily due to a 165 basis point decrease in the average yield partly offset by a $29.2 million, or 59.5%, increase in average short-term funds.

Interest Expense

Interest expense of $1.1 million for third quarter 2020 decreased $1.3 million, or 54.3%, compared with third quarter 2019. Interest on deposit accounts decreased $1.1 million, or 59.3%, from third quarter 2019 as a result of a 65 basis points decrease in average deposit rates, partly offset by a $48.9 million, or 6.8%, increase in average balances. Interest expense on FHLBB borrowings decreased $153 thousand, or 57.5%, from third quarter 2019 primarily as a result of a decrease in the average borrowing rate of 234 basis points, partly offset by an increase in the average balance of $12.5 million, or 39.2%. Interest expense on subordinated debt totaled $156 thousand for both third quarter 2020 and 2019.

Provision and Allowance for Loan Losses

The provision for loan losses was $686 thousand for third quarter 2020, compared with $94 thousand for third quarter 2019. Net loan charge-offs were $56 thousand and $135 thousand for the respective quarters. The increase in the provision from third quarter 2019 primarily reflected management's assessment of the impact of COVID-19 on certain qualitative and environmental factors and impaired loans as well as loan growth. Management will continue to monitor the impact of the virus on its borrowers and adjust the allowance as appropriate. The length of time required for the economy to substantially recover from the virus will have a direct impact on Salisbury's provision and allowance for loan losses. A longer recovery or another forced shutdown that leads to sustained levels of unemployment will likely result in an increase in Salisbury's provision and allowance for loan losses.

The following table details the principal categories of credit quality ratios:

Three months ended September 30,     2020       2019  
Net charge-offs to average loans receivable, gross     0.01 %     0.01 %
Non-performing loans to loans receivable, gross     0.45       0.58  
Accruing loans past due 30-89 days to loans receivable, gross     0.16       0.19  
Allowance for loan losses to loans receivable, gross     1.24       0.96  
Allowance for loan losses to non-performing loans     277.76       164.73  
Non-performing assets to total assets     0.36       0.50  

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 1.24% at September 30, 2020 compared to 0.96% at September 30, 2019 and the ratio of the allowance for loan losses to non-performing loans increased to 277.76% at September 30, 2020 from 164.73% at September 30, 2019.

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $4.7 million, or 0.45% of gross loans receivable at September 30, 2020 as compared to $5.4 million, or 0.58%, at September 30, 2019. Accruing loans past due 30-89 days increased $0.8 million to $1.6 million, or 0.16% of gross loans receivable from $0.8 million, or 0.09% of gross loans receivable, at September 30, 2019. See "Financial Condition - Asset Quality” above for further discussion and analysis.

The allowance for loan losses represents management's estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan, or portion of a loan, to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower's aggregate loan exposure, using either the fair value of the collateral, less estimated costs to sell if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate. A specific allowance is generally established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

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The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors.  The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.  In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19. This new loan pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, management increased the risk weights for loans with an internal risk rating of "4” (Watch), "5” (Special Mention) and "6” (Substandard”) to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. Management will actively monitor the population of loans in the new loan pool and evaluate the risk weightings to determine if further adjustments are warranted based on the impact of COVID-19.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management's estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Additionally, reserves are established for off balance sheet exposures.

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans 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, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2020.

Management's loan risk rating assignments, loss percentages and specific reserves are subjected annually to an independent credit review by an external firm. In addition, the Bank is examined annually on a rotational basis by one of its two primary regulatory agencies, the FDIC and CTDOB. As an integral part of their examination process, the FDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.

Non-Interest Income

The following table details the principal categories of non-interest income.

Three months ended September 30, (dollars in thousands) 2020       2019       2020 vs. 2019  
Trust and wealth advisory   $ 1,068     $ 1,023     $ 45       4 %
Service charges and fees     711       1,003       (292 )     (29 )
Gains on sales of mortgage loans, net     707       42       665       1,583  
Mortgage servicing, net     29       76       (47 )     (62 )
Gain on CRA mutual fund           6       (6 )     (100 )
Gains (loss) on available-for-sale securities, net     34       (9 )     43       (478 )
BOLI income and gains     719       86       633       736  
Other     18       29       (11 )     (38 )
Total non-interest income   $ 3,286     $ 2,256     $ 1,030       46 %

Non-interest income for third quarter 2020 increased $1.0 million versus third quarter 2019. Trust and Wealth Advisory income increased $45 thousand versus third quarter 2019. The increase primarily reflected higher asset management fees. Assets under administration were $748.2 million as of September 30, 2020 compared with $704.1 million at June 30, 2020 and $752.5 million as of September 30, 2019. Discretionary assets under administration of $515.0 million at September 30, 2020 increased from $480.5 million at June 30, 2020 and $475.5 million at September 30, 2019. The increase from second quarter 2020 primarily reflected higher valuations, whereas the increase from third quarter 2019 was primarily due to new business activity. Non-discretionary assets under administration of $233.2 million for third quarter 2020 increased from $223.6 million at second quarter 2020 and declined from $277.0 million at third quarter 2019. The decline versus third quarter 2019 reflected a lower valuation of shares in a partnership for one significant client relationship. The trust and wealth business recorded only a nominal annual fee on this relationship. Historically, trust and wealth advisory income correlates with the value of assets under management. Accordingly, trust and wealth advisory income is likely to be impacted by high levels of market volatility that may result from business disruptions caused by COVID-19.

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Service charges and fees decreased $292 thousand versus third quarter 2019. During the third quarter 2020, Salisbury waived approximately $289 thousand in various deposit fees, including overdraft and ATM fees. Second quarter 2020 gains on mortgage loans, net increased $665 thousand due to an increase in sales volume. Third quarter 2020 mortgage loan sales totaled $26.6 million versus $5.6 million for third quarter 2019. Mortgage servicing fees decreased $47 thousand compared with third quarter 2019. Third quarter 2020 and third quarter 2019 included mortgage servicing amortization and periodic impairment charges (net) of $56 thousand and $13 thousand, respectively. During the third quarter 2020, the Bank recorded a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Other income primarily includes rental property income.

Non-Interest Expense

The following table details the principal categories of non-interest expense.

Three months ended September 30, (dollars in thousands) 2020       2019       2020 vs. 2019  
Salaries   $ 3,114     $ 3,042     $ 72       2 %
Employee benefits     1,061       1,181       (120 )     (10 )
Premises and equipment     1,005       974       31       3  
Data processing     569       534       35       7  
Professional fees     635       572       63       11  
OREO gains, losses and write-downs           84       (84 )     (100 )
Collections and other real estate owned     108       119       (11 )     (9 )
FDIC insurance     123       (9 )     132       (1,467 )
Marketing and community support     126       141       (15 )     (11 )
Amortization of core deposit intangibles     78       93       (15 )     (16 )
Other     440       453       (13 )     (3 )
Total non-interest expense   $ 7,259     $ 7,184     $ 75       1 %

Non-interest expense for third quarter 2020 increased $75 thousand versus third quarter 2020. Salaries increased $72 thousand versus third quarter 2019 reflecting higher overtime costs and production accruals, due to an increase in loan volume, and severance expense, partly offset by an increase in deferred compensation costs due to higher levels of loan originations. Employee benefits expense decreased $120 thousand from third quarter 2019 due to lower medical insurance costs as well as lower ESOP and deferred compensation accruals. Premises and equipment expense increased $31 thousand versus third quarter 2019. The year-over-year increase primarily reflected increased software and machine maintenance partially offset by lower depreciation expense and lower building maintenance and repair costs. Data processing expense increased $35 thousand versus third quarter 2019 mainly due to ATM fees and data processing costs partially offset by lower data communications. Professional fees increased $63 thousand versus third quarter 2019 as higher consultation fees were partly offset by lower investment management fees. OREO gains, losses and write-downs decreased $84 thousand versus third quarter 2019. OREO and loan related expenses decreased $11 thousand versus third quarter 2019 as lower OREO carrying costs and litigation expense were partially offset by higher appraisal costs. The increase in FDIC insurance reflected an assessment credit of $120 thousand received during third quarter 2019. Marketing and community support costs decreased $15 thousand compared to the prior year third quarter primarily due to the timing of marketing spend.

Income Taxes

The effective income tax rates for third quarter 2020 and third quarter 2019 were 17.28% and 18.02%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, the lower tax rate in third quarter 2020 reflected the non-taxable BOLI gain of $601 thousand recorded during the quarter.

Salisbury did not incur Connecticut income tax in 2020 (to date) or 2019, other than minimum state income tax, as a result of a Connecticut law 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 or PIC. In 2004, Salisbury availed itself of this benefit by forming 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 Connecticut tax law.

For the nine month periods ended September 30, 2020 and 2019

Overview

Net income allocated to common shareholders was $9.0 million, or $3.22 per basic common share, for the nine month period ended September 30, 2020 (nine month period 2020), compared with $8.0 million, or $2.88 per basic common share, for the nine month period ended September 30, 2019 (nine month period 2019).

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Net Interest Income

Tax equivalent net interest income of $28.8 million for the nine months of 2020 increased $2.9 million, or 11.5%, versus the nine months of 2019. Average earning assets increased $93.9 million, or 8.9%, versus the nine months of 2019. Average total interest bearing deposits increased $24.8 million, or 3.5%, versus the nine months of 2019. The net interest margin of 3.32% increased 8 basis points versus 3.24% for the nine months of 2019.

The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE”) net interest and dividend income and yields on average interest-earning assets and interest-bearing liabilities.

Nine months ended September 30,   Average Balance   Income / Expense   Average Yield / Rate
(dollars in thousands)     2020       2019       2020       2019       2020       2019  
Loans (a)(d)   $ 1,012,070     $ 920,925     $ 31,010     $ 30,179       4.07 %     4.36 %
Securities (c)(d)     88,603       97,337       1,939       2,201       2.92       3.02  
FHLBB stock     3,354       3,487       106       183       4.24       7.03  
Short term funds (b)     50,312       38,682       123       577       0.33       2.00  
Total earning assets     1,154,339       1,060,431       33,178       33,140       3.82       4.16  
Other assets     63,265       56,769                                  
Total assets   $ 1,217,604     $ 1,117,200                                  
Interest-bearing demand deposits   $ 174,299     $ 154,885       331       458       0.25       0.40  
Money market accounts     245,581       217,290       994       1,732       0.54       1.07  
Savings and other     170,880       177,873       405       1,229       0.32       0.92  
Certificates of deposit     149,080       164,979       1,530       2,255       1.37       1.83  
Total interest-bearing deposits     739,840       715,027       3,260       5,674       0.59       1.06  
Repurchase agreements     7,572       4,463       16       16       0.29       0.48  
Capital lease     2,988       4,314       106       135       4.74       4.16  
Note payable     231       266       11       12       6.08       6.06  
Subordinated debt (net of issuance costs)     9,867       9,844       468       468       6.32       6.34  
FHLBB advances     45,667       42,938       473       957       1.36       2.94  
Total interest-bearing liabilities     806,165       776,852       4,334       7,262       0.72       1.25  
Demand deposits     286,608       226,182                                  
Other liabilities     6,847       6,560                                  
Shareholders' equity     117,984       107,606                                  
Total liabilities & shareholders' equity   $ 1,217,604     $ 1,117,200                                  
Net interest income                   $ 28,844     $ 25,878                  
Spread on interest-bearing funds                                     3.11       2.93  
Net interest margin (e)                                     3.32       3.24  
(a) Includes non-accrual loans.
(b) Includes interest-bearing deposits in other banks and federal funds sold.
(c) Average balances of securities are based on historical cost.
(d) Includes tax exempt income benefit of $514,000 and $432,000, respectively for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e) Net interest income divided by average interest-earning assets.

 

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The following table sets forth the changes in FTE interest due to volume and rate.

Nine months ended September 30, (in thousands) 2020 versus 2019
Change in interest due to     Volume       Rate       Net  
Loans   $ 2,890     $ (2,059 )   $ 831  
Securities     (194 )     (68 )     (262 )
FHLBB stock     (6 )     (71 )     (77 )
Short term funds     101       (555 )     (454 )
Interest-earning assets     2,791       (2,753 )     38  
Deposits     153       (2,567 )     (2,414 )
Repurchase agreements     9       (9 )      
Capital lease     (44 )     15       (29 )
Note payable     (2 )     1       (1 )
Subordinated Debt     1       (1 )      
FHLBB advances     45       (529 )     (484 )
Interest-bearing liabilities     162       (3,090 )     (2,928 )
Net change in net interest income   $ 2,629     $ 337     $ 2,966  

Interest Income

Tax equivalent interest income of $33.2 million for the nine month period 2020 was essentially unchanged compared with the nine month period 2019. Loan income increased $831 thousand, or 2.8%, compared with the nine months of 2019 primarily due to a $91.1 million, or 9.9%, increase in average loans, partly offset by a 29 basis point decrease in the average yield. Tax equivalent securities income for the nine month period 2020 decreased $262 thousand, or 11.9%, compared with the nine month period 2019, primarily due to a $8.7 million, or 9.0%, decrease in average volume and a 10 basis point decrease in average yield. Income on short-term funds for the nine month period 2020 decreased $454 thousand, or 78.7%, compared with the nine months of 2019 primarily due to a 167 basis point decrease in the average short-term funds yields, partly offset by a $11.6 million, or 30.1%, increase in average short-term funds.

Interest Expense

Interest expense of $4.3 million for the nine month period 2020 decreased $2.9 million compared with the nine month period 2019. Interest on deposit accounts decreased $2.4 million, or 42.5%, as a result of a 47 basis point decrease in average deposit rates, partly offset by a $24.8 million, or 3.5%, increase in the average balances. Interest expense on FHLBB borrowings decreased $484 thousand, or 50.5%, as a result of a 158 basis point decrease in the average borrowing rate and a $2.7 million, or 6.3%, decrease in average balances. Interest expense on subordinated debt totaled $468 thousand for the nine month periods 2020 and 2019.

Provision and Allowance for Loan Losses

The provision for loan losses was $4.2 million or the nine month period ended September 30, 2020 as compared to $539 thousand for the nine month period ended September 30, 2019. Net loan charge-offs were $92 thousand and $187 thousand for the respective nine month periods.

Reserve coverage at September 30, 2020, as measured by the ratio of allowance for loan losses to gross loans, at 1.24%, compared with 0.96% a year ago at September 30, 2019. Excluding PPP loans, the reserve coverage ratio was 1.37% for third quarter 2020. The increase in the coverage ratio primarily reflected higher reserves due to management's assessment of the impact of COVID-19 as well as loan growth. During the first nine months of 2020, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $1.1 million to $4.7 million. Non-performing loans represent 0.45% of gross loans receivable, compared with 0.39% at December 31, 2019. At September 30, 2020, accruing loans past due 30-89 days were $1.6 million or 0.16% of gross loans receivable compared with $2.1 million or 0.22% of gross loans receivable at December 31, 2019. See "Financial Condition - Loan Credit Quality” for further discussion and analysis.

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Non-interest income

The following table details the principal categories of non-interest income.

Nine months ended September 30, (dollars in thousands) 2020       2019       2020 vs. 2019  
Trust and wealth advisory   $ 3,129     $ 2,973     $ 156       5.2 %
Service charges and fees     2,214       2,935       (721 )     (25 )
Gains on sales of mortgage loans, net     1,020       50       970       1940  
Mortgage servicing, net     162       232       (70 )     (30 )
Losses on CRA mutual fund     22       29       (7 )     24 )
Gains on available-for-sale securities, net     216       263       (47 )     (18 )
BOLI income and gains     986       252       734       291  
Other     97       97             n/a  
Total non-interest income   $ 7,846     $ 6,831     $ 1,015       15 %

Non-interest income for the nine month period ended September 30, 2020 increased $1.0 million versus the same period in 2019. Trust and wealth advisory revenues increased $156 thousand mainly due to growth in asset based fees. Service charges and fees decreased $721 thousand. During the nine month period 2020, Salisbury waived approximately $558 thousand in various deposit fees, including overdraft and ATM fees. Income from sales of mortgage loans increased $970 thousand due to an increase in the volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $44.4 million for the nine month period ended September 30, 2020 compared with $6.1 million for the nine month period ended September 30, 2019. The nine month periods ended September 30, 2020 and 2019 included mortgage servicing amortization of $84 thousand and $36 thousand, respectively. During the nine month period 2020, the Bank recorded a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Other income primarily includes rental property income.

Non-interest expense

The following table details the principal categories of non-interest expense.

Nine months ended September 30, (dollars in thousands) 2020       2019       2020 vs. 2019  
Salaries   $ 8,375     $ 8,994     ($ 619 )     (7 %)
Employee benefits     3,244       3,408       (164 )     (5 )
Premises and equipment     2,897       2,950       (53 )     (2 )
Data processing     1,666       1,620       46       3  
Professional fees     2,020       1,690       330       20  
OREO gains, losses and write-downs           406       (406 )     (100 )
Collections and other real estate owned     212       328       (116 )     (35 )
FDIC insurance     331       294       37       13  
Marketing and community support     419       448       (29 )     (6 )
Amortization of core deposit intangible assets     247       297       (50 )     (17 )
Other     1,572       1,398       174       12  
Non-interest expense   $ 20,983     $ 21,833     ($ 850 )     (4 %)

Non-interest expense for the nine month period ended September 30, 2020 decreased $850 thousand versus the same period in 2019. Salaries decreased $619 thousand primarily reflecting the deferral of compensation costs associated with originating loans, including PPP loans. Benefits decreased $164 thousand primarily due to lower medical premiums and lower deferred compensation accruals. Premises and equipment decreased $53 thousand mainly due to lower depreciation, building maintenance and utilities costs, partially offset by increased software expense. Data processing increased $46 thousand mainly due to ATM fees and core data processing costs partially offset by lower Trust and Wealth data processing expense. The increase in professional fees of $330 thousand versus the nine month period 2019 primarily reflected higher consulting and investment management expenses. Collections, OREO and loan related expense decreased $406 thousand due to OREO losses in the nine month period 2019. The increase in FDIC related expense primarily reflected an assessment credit of $120 thousand received in third quarter 2019. Marketing and community support costs decreased $29 thousand compared to the same period in 2019 primarily due to the timing of marketing expenditures. Amortization of intangible assets decreased $50 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $174 thousand and primarily reflected litigation related accruals.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2020 and September 30, 2019 were 16.90% and 17.98%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets. The lower effective tax rate for the nine month period ended September 30, 2020 also reflected the non-taxable BOLI gain of $601 thousand recorded in third quarter 2020.

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Salisbury did not incur Connecticut income tax in 2020 (to date) or 2019, other than minimum state income tax, as a result of a Connecticut law 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 or PIC. In 2004, Salisbury availed itself of this benefit by forming 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 Connecticut tax law.

CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity was $122.2 million at September 30, 2020, up $8.6 million from December 31, 2019. Book value and tangible book value per common share were $42.99 and $37.87, respectively, compared with $40.22 and $34.98, respectively, at December 31, 2019. Contributing to the increase in shareholders' equity for year-to-date 2020 was net income of $9.1 million, unrealized gains on securities available-for-sale, net of tax, of $1.3 million and issued stock of $0.5 million partially offset by common stock dividends of $2.5 million.

Capital Requirements

Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not "well-capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:

    September 30, 2020   December 31, 2019
Total Capital (to risk-weighted assets)     13.60 %     12.84 %
Tier 1 Capital (to risk-weighted assets)     12.35       11.83  
Common Equity Tier 1 Capital (to risk-weighted assets)     12.35       11.83  
Tier 1 Capital (to average assets)     8.93       9.60  

 

A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action 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 8% or above, a Common Equity Tier 1 ratio of 6.5% 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. While Salisbury believes that the subsidiary Bank has sufficient capital to withstand an economic shutdown as a result of the virus, the Bank's regulatory capital ratios could be adversely impacted by further credit losses.

The FRB's final rules implementing the Basel Committee on Banking Supervision's capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of September 30, 2020, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as "well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank's category.

On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a "Community Bank Leverage Ratio” ("CBLR”) that simplifies capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) ("qualifying community banking organizations”) will be required to report the components of its tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that "elects to use the CBLR framework” will not be subject to other risk-based and leverage capital requirements and will be considered to have met the well-capitalized ratio requirements for purposes of the agencies' Prompt Corrective Action ("PCA”) framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria, but continues to report a leverage ratio of greater than 8%, the bank may continue to use the framework and will be deemed "well capitalized” for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period( including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be well capitalized if it elected to utilize such methodology.

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On April 6, 2020, the regulators announced that the CBLR will be modified so that: (1) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (2) community banks will have until January 1, 2022 before the CBLR requirement is re-established at greater than 9%. Under the interim final rules, the CBLR will be 8% beginning in the second quarter 2020 and for the remainder of the calendar year, 8.5% for calendar year 2021 and 9% thereafter. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy.

Dividends

Salisbury paid $2.5 million in common stock dividends during the nine month period ended September 30, 2020.

On October 30, 2020, the Board of Directors of Salisbury declared a common stock dividend of $0.29 per common share payable on November 27, 2020 to shareholders of record on November 13, 2020. Common stock dividends, when declared, are generally paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the 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 December 31, 2015, 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.

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.

IMPACT OF INFLATION AND CHANGING PRICES

Salisbury's consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury's consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on Salisbury's consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.

FORWARD-LOOKING STATEMENTS

This Form 10-Q and future filings made by Salisbury with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by Salisbury and the Bank, and oral statements made by executive officers of Salisbury and the Bank, may include forward-looking statements relating to such matters as:

(a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and
(b) expectations for revenues and earnings for Salisbury and the 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 Reform Act of 1995.

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Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of Salisbury's and the Bank's business include the following:

(a) the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances and cybersecurity matters;
(e) interest rate fluctuations; and
(f) the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the State of Connecticut and the United States, related to the economy and overall financial stability;
(g) government and regulatory responses to the COVID-19 pandemic; and
(h) other risks identified from time to time in Salisbury's filings with the Securities and Exchange Commission.

Such developments could have an adverse impact on Salisbury's and the Bank's financial position and results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 a negative impact 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. In management's September 30, 2020 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are 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.

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 September 30, 2020, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates - immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates - immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declines in interest rates - little to no change in rates through the end of the first quarter of 2021 with the yield curve rise beginning in the second quarter 2021 and a gradual rise through 2021 with the treasury yield curve ultimately ending up higher as of September 30, 2022. The two year, five year and 10 year treasury rates as of September 30, 2022 are ultimately 0.57%, 0.80% and 0.73% higher than actual rates as of September 30, 2020 and the Fed Funds rate does not increase over this horizon. The yield curve is ultimately positive sloping as treasury yields are projected to increase while the fed funds rate is not projected to increase. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

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As of September 30, 2020, 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 September 30, 2020.

As of September 30, 2020   Months 1-12     Months 13-24  
Immediately rising interest rates + 300bp (static growth assumptions)     (3.80 )%     2.50 %
Immediately falling interest rates - 100bp (static growth assumptions)     (1.80 )     (2.90 )
Immediately rising interest rates + 400bp (static growth assumptions)     (4.90 )     3.10  

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 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 September 30, 2020 (in thousands)     Rates up 100bp       Rates up 200bp  
U.S. Government agency notes   $ 78     $ (10 )
Municipal bonds     (737 )     (2,615 )
Mortgage backed securities                
U.S. Government agencies and U.S. Government- sponsored enterprises     243       (1,064 )
Collateralized mortgage obligations                
U.S. Government agencies     737       456  
Corporate bonds     (86 )     (244 )
Total available-for-sale debt securities   $ 235     $ (3,477 )

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of September 30, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of September 30, 2020.

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Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, Salisbury's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Bank is involved in various claims and legal proceedings arising in the ordinary course of business, which management currently believes are not material, individually or in the aggregate, to the business, financial condition or operating results of Salisbury or any of its subsidiaries. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the registrant's business, to which Salisbury is a party or of which any of its property is subject.

Item 1A. RISK FACTORS

Except as stated below, during the nine months ended September 30, 2020, there were no material changes to the risk factors previously disclosed in Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019.

The virus has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and significant effects on national and local economies. The ultimate effect of the virus on Salisbury's and the Bank's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with certainty.  At this time, it is unknown how long the pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities.  Further, additional information may emerge regarding the severity of the virus and additional actions may be taken by federal, state, and local governments to contain it or treat its impact.  Changes in the behavior of customers, businesses and their employees as a result of the pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown.  As a result of the pandemic and the actions taken to contain it or reduce its impact, Salisbury may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms.  These and similar factors and events may have substantial negative effects on the business, financial condition, ability to pay dividends and results of operations of Salisbury, the Bank and its customers.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. MINE SAFETY DISCLOSURES

Not Applicable

Item 5. OTHER INFORMATION

None

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Item 6. EXHIBITS

Exhibit No. Description
3.1 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).
3.1.1 Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).
3.1.2 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).
3.1.3 Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).
3.1.4 Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
4.1 Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed December 10, 2015).
10.1 Amendment One (the "Amendment”) to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan, effective as of March 9, 2020 (incorporated by reference to Exhibit 10.16 of Form 10-K filed on March 13, 2020).
10.2 Change in Control Agreement with Carla L. Balesano dated July 29, 2020.
31.1 Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SALISBURY BANCORP, INC.
     
November 6, 2020 By:   /s/ Richard J. Cantele, Jr.  
    Richard J. Cantele, Jr.,
    President and Chief Executive Officer
     
November 6, 2020 By:   /s/ Peter Albero  
    Peter Albero,
    Executive Vice President and Chief Financial Officer

 

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