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SAL Salisbury Bancorp

Filed: 5 Nov 21, 11:15am

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, 2021

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)

Connecticut06-1514263
(State or other jurisdiction(I.R.S. Employer
of incorporation or organization)Identification No.)
  
5 Bissell Street, Lakeville, CT06039
(Address of principal executive offices)(Zip code)

(860) 435-9801

(Registrant's telephone number, including area code) 

Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, Par Value $0.10 per shareSALNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

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

Yes No

 

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 filerSmaller 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).

Yes ☐ No

The number of shares of Common Stock outstanding as of November 2, 2021 is 2,861,697.

 
 

 

 

TABLE OF CONTENTS

 

PART 1 FINANCIAL INFORMATIONPage
Item 1.Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2021 (unaudited) AND DECEMBER 31, 20203
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS9
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS31
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK47
Item 4.CONTROLS AND PROCEDURES48
   
PART II. OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS48
Item 1A.RISK FACTORS48
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS48
Item 3.DEFAULTS UPON SENIOR SECURITIES48
Item 4.MINE SAFETY DISCLOSURES48
Item 5.OTHER INFORMATION48
Item 6.EXHIBITS49
SIGNATURES49

 

 

 2 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)  

September 30, 2021

(unaudited)

   December 31, 2020 
ASSETS        
Cash and due from banks $7,874  $10,599 
Interest bearing demand deposits with other banks  158,421   82,563 
Total cash and cash equivalents  166,295   93,162 
Interest bearing Time Deposits with Financial Institutions  750   750 
Securities        
Available-for-sale at fair value  175,568   98,411 
CRA mutual fund at fair value  907   917 
Federal Home Loan Bank of Boston stock at cost  1,504   1,713 
Loans held-for-sale  639   2,735 
Loans receivable, net (allowance for loan losses: $13,168 and $13,754)  1,057,451   1,027,738 
Bank premises and equipment, net  20,056   20,355 
Goodwill  13,815   13,815 
Intangible assets (net of accumulated amortization: $5,405 and $5,207)  476   674 
Accrued interest receivable  5,932   6,373 
Cash surrender value of life insurance policies  25,067   21,182 
Deferred taxes  2,776   2,412 
Other assets  5,613   3,423 
Total Assets $1,476,849  $1,293,660 
LIABILITIES and SHAREHOLDERS' EQUITY        
Deposits        
Demand (non-interest bearing) $392,322  $310,769 
Demand (interest bearing)  220,533   218,869 
Money market  328,392   278,146 
Savings and other  224,286   189,776 
Certificates of deposit  124,095   131,514 
Total deposits  1,289,628   1,129,074 
Repurchase agreements  10,450   7,116 
Federal Home Loan Bank of Boston advances  8,905   12,639 
Subordinated debt  24,460   9,883 
Note payable  180   208 
Finance lease obligations  1,631   1,673 
Accrued interest and other liabilities  8,062   8,315 
Total Liabilities  1,343,316   1,168,908 
Shareholders' Equity        
Common stock - $0.10 per share par value        
Authorized: 5,000,000;        
Issued: 2,861,697 and 2,843,292        
Outstanding: 2,861,697 and 2,843,292  286   284 
Unearned compensation - restricted stock awards  (1,075)  (774)
Paid-in capital  46,278   45,264 
Retained earnings  86,740   76,974 
Accumulated other comprehensive income, net  1,304   3,004 
Total Shareholders' Equity  133,533   124,752 
Total Liabilities and Shareholders' Equity $1,476,849  $1,293,660 

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

 

 3 

 

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)2021   2020   2021   2020 
Interest and dividend income                
Interest and fees on loans $10,264  $10,362  $30,642  $30,662 
Interest on debt securities                
Taxable  486   396   1,398   1,260 
Tax exempt  172   157   506   513 
Other interest and dividends  79   87   174   229 
Total interest and dividend income  11,001   11,002   32,720   32,664 
Interest expense                
Deposits  532   764   1,652   3,261 
Repurchase agreements  5   6   13   16 
Finance lease  33   35   102   106 
Note payable  3   3   9   11 
Subordinated debt  233   156   767   468 
Federal Home Loan Bank of Boston advances  30   113   96   472 
Total interest expense  836   1,077   2,639   4,334 
Net interest and dividend income  10,165   9,925   30,081   28,330 
Provision (release) for loan losses  400   686   (517)  4,198 
Net interest and dividend income after provision (release) for loan losses  9,765   9,239   30,598   24,132 
Non-interest income                
Trust and wealth advisory  1,286   1,068   3,685   3,129 
Service charges and fees  1,211   711   3,536   2,214 
Mortgage banking activities, net  108   736   912   1,182 
(Losses) gains on CRA mutual fund  (4)  -   (18)  22 
Gains (losses) on securities, net  7   34   (2)  216 
Bank-owned life insurance ("BOLI") income  135   719   386   986 
Gain on sale of assets  73   -   73   - 
Other  24   18   81   97 
Total non-interest income  2,840   3,286   8,653   7,846 
Non-interest expense                
Salaries  3,361   3,114   9,664   8,375 
Employee benefits  1,322   1,061   3,990   3,244 
Premises and equipment  1,060   1,005   3,034   2,897 
Write-down of assets  144   -   144   - 
Data processing  632   569   1,824   1,666 
Professional fees  735   635   2,090   2,020 
Collections, OREO, and loan related  120   108   317   212 
FDIC insurance  146   123   370   331 
Marketing and community support  256   126   552   419 
Amortization of intangibles  61   78   198   247 
Other  447   440   1,448   1,572 
Total non-interest expense  8,284   7,259   23,631   20,983 
Income before income taxes  4,321   5,266   15,620   10,995 
Income tax provision  868   910   3,288   1,858 
Net income $3,453  $4,356  $12,332  $9,137 
Net income available to common shareholders $3,400  $4,288  $12,148  $9,006 
                 
Basic earnings per common share $1.21  $1.53  $4.32  $3.22 
Diluted earnings per common share $1.20  $1.53  $4.30  $3.21 
Common dividends per share $0.31  $0.29  $0.90  $0.87 

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

 4 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

            
   Three months ended   Nine months ended 
Periods ended September 30, (in thousands)  2021   2020   2021   2020 
Net income $3,453  $4,356  $12,332  $9,137 
Other comprehensive income                
Net unrealized (losses) gains on securities available-for-sale  (1,199)  113   (2,153)  1,912 
Reclassification of net realized (gains) losses in net income (1)  (7)  (34)  2   (216)
Unrealized (losses) gains on securities available-for-sale  (1,206)  79   (2,151)  1,696 
Income tax benefit (expense)  254   (17)  451   (357)
Unrealized (losses) gains on securities available-for-sale, net of tax  (952)  62   (1,700)  1,339 
Comprehensive income $2,501  $4,418  $10,632  $10,477 

 

(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 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, 2021 and 2020 are $(1) thousand and $(7) thousand, respectively. The net tax effect for the nine months ending September 30, 2021 and 2020 were $1 thousand and ($45) 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 income equity
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 income, 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 
Balances at June 30, 2021  2,861,697  $286  $46,217  $84,174  $(1,224) $2,256  $131,709 
Net income  -   -   -   3,453   -   -   3,453 
Other comprehensive loss, net of tax  -   -   -   -   -   (952)  (952)
Common stock dividends declared ($0.31 per share)  -   -   -   (887)  -   -   (887)
Stock based compensation-restricted stock awards  -   -   61   -   149   -   210 
Balances at September 30, 2021  2,861,697  $286  $46,278  $86,740  $(1,075) $1,304  $133,533 

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

 5 

 

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 income (loss) equity
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 
Balances at December 31, 2020  2,843,292  $284  $45,264  $76,974  $(774) $3,004  $124,752 
Net income for period  -   -   -   12,332   -   -   12,332 
Other comprehensive loss, net of tax  -   -   -   -   -   (1,700)  (1,700)
Common stock dividends declared ($0.90 per share)  -   -   -   (2,566)  -   -   (2,566)
Stock options exercised  1,755   1   30   -   -   -   31 
Issuance of restricted common stock  13,850   1   623   -   (624)  -   - 
Issuance of director's restricted stock awards  2,800   -   126   -   (126)  -   - 
Stock based compensation-restricted stock awards  -   -   235   -   449   -   684 
Balances at September 30, 2021  2,861,697  $286  $46,278  $86,740  $(1,075) $1,304  $133,533 

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

 6 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)  2021   2020 
Operating Activities        
Net income $12,332  $9,137 
Adjustments to reconcile net income to net cash provided by operating activities        
(Accretion), amortization and depreciation        
Securities  807   388 
Bank premises and equipment  1,142   1,071 
Core deposit intangible  198   247 
Modification fees on Federal Home Loan Bank of Boston advances  17   64 
Subordinated debt issuance costs  159   18 
Mortgage servicing rights  167   84 
Fair value adjustment on deposits  -   (4)
(Gains) and losses, including write-downs        
Sales and calls of securities available-for-sale, net  2   (216)
CRA Mutual Fund  18   (22)
Sales of loans, excluding capitalized servicing rights  (653)  (843)
Loss on write-down of asset  144   - 
Gain on sale of premises and equipment  (73)  - 
(Release) provision for loan losses  (517)  4,198 
Proceeds from loans sold  30,364   45,246 
Loans originated for sale  (27,615)  (46,832)
(Decrease) increase in deferred loan origination fees and costs, net  (58)  2,321 
Mortgage servicing rights originated  (276)  (413)
Decrease (increase) in interest receivable  441   (2,640)
Decrease (increase) in deferred tax benefit  87   (1,359)
(Increase) decrease in prepaid expenses  (416)  295 
Increase in cash surrender value of life insurance policies  (386)  (986)
Increase in income tax receivable  (429)  - 
(Decrease) increase in income tax payable  (320)  1,412 
(Increase) decrease in other assets  (509)  42 
Decrease in accrued expenses  (290)  (584)
(Decrease) increase in interest payable  (9)  132 
Increase (decrease) in other liabilities  366   (144)
Stock based compensation-restricted stock awards  684   518 
Net cash provided by operating activities  15,378   11,130 
Investing Activities        
Net redemption of Federal Home Loan Bank of Boston stock  209   84 
Purchases of securities available-for-sale  (107,811)  (27,802)
Proceeds from sales of securities available-for-sale  3,311   12,526 
Proceeds from calls of securities available-for-sale  8,500   655 
Proceeds from principal payments and maturities of securities available-for-sale  15,883   12,226 
Reinvestment of CRA Mutual Fund  (8)  (12)
Loan originations and principal collections, net  (29,323)  (110,743)
Recoveries of loans previously charged off  185   44 
Proceeds from sale/ disposal of premises and equipment  248   314 
Capital expenditures  (1,889)  (2,384)
Purchase of life insurance policies  (3,500)  - 
Proceeds from life insurance policy  -   3,994 
Net cash used by investing activities $(114,195) $(111,098)

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

 

 7 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands)  2021   2020 
Financing Activities        
Increase in deposit transaction accounts, net $167,973  $175,508 
(Decrease) increase in time deposits, net  (7,419)  131 
Increase in securities sold under agreements to repurchase, net  3,334   2,355 
Federal Home Loan Bank of Boston long term advances  -   46,001 
Federal Home Loan Bank of Boston long-term maturities/payments  -   (21,000)
Federal Home Loan Bank of Boston short-term advances, net change  -   (30,000)
Principal payments on Amortizing Federal Home Loan Bank of Boston advance  (3,751)  (2,072)
Issuance of Sub Debt, net of issuance costs  24,418   - 
Repayment of Sub Debt  (10,000)  - 
Principal payments on note payable  (28)  (28)
Decrease in finance lease obligation  (42)  (62)
Stock options exercised  31   53 
Common stock dividends paid  (2,566)  (2,462)
Net cash provided by financing activities  171,950   168,424 
Net increase in cash and cash equivalents  73,133   68,456 
Cash and cash equivalents, beginning of period  93,162   26,885 
Cash and cash equivalents, end of period $166,295  $95,341 

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 $2,472  $4,124 
Cash paid for income taxes  3,948   1,805 
 Non cash investing and financing activities:        
Transfers from Fixed Assets to Other Assets $727  $- 

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

 8 

 

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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2020 Annual Report on Form 10-K for the year ended December 31, 2020.

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.

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 (ACL) 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.

 9 

 

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.

The Bank is working towards the completion of its ACL methodology. To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, the Bank will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.

Based on the credit quality of Salisbury's existing available for sale debt securities portfolio, which primarily consists of obligations of U.S. government agency and U.S. government-sponsored enterprise securities, including mortgage-backed securities, Salisbury does not expect the adoption of ASU 2016-13, as it relates to debt securities, to be significant. For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.

The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury expects to complete independent model validation and to finalize its documentation of ACL processes and controls by the first quarter of 2023.

In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for 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. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact 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. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that the financial statements are available to be issued. Salisbury is currently evaluating the impact of the transition from LIBOR to a new reference rate.

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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, 2021                
Available-for-sale                
U.S. Treasury $10,397  $-  $95  $10,302 
U.S. Government Agency notes  32,093   280   99   32,274 
Municipal bonds  38,525   1,331   251   39,605 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government- sponsored enterprises  67,059   818   698   67,179 
Collateralized mortgage obligations:                
U.S. Government agencies  14,844   208   41   15,011 
Corporate bonds  11,000   197   -   11,197 
Total securities available-for-sale $173,918  $2,834  $1,184  $175,568 
CRA mutual fund                            $907 
Non-marketable securities                
Federal Home Loan Bank of Boston stock $1,504  $-  $-  $1,504 
(in thousands)  Amortized cost basis   Gross un-realized gains   Gross un-realized losses   Fair value 
December 31, 2020                
Available-for-sale                
U.S. Government Agency notes $7,735  $153  $37  $7,851 
Municipal bonds  25,831   1,787   1   27,617 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government - sponsored enterprises  35,240   1,376   43   36,573 
Collateralized mortgage obligations:                
U.S. Government agencies  17,054   400   -   17,454 
Corporate bonds  8,750   166   -   8,916 
Total securities available-for-sale $94,610  $3,882  $81  $98,411 
CRA mutual fund             $917 
Non-marketable securities                
Federal Home Loan Bank of Boston stock $1,713  $-  $-  $1,713 

 

In third quarter 2021, $7.0 million of available-for-sale securities were called, resulting in a pre-tax gain of $7 thousand and a related tax expense of $1.4 thousand. Salisbury did not sell any available-for-sale securities during the three month period ended September 30, 2021. Salisbury sold $3.3 million of available-for-sale securities during the nine month period ended September 30, 2021 realizing a pre-tax loss of $2 thousand and a related tax benefit of $0.4 thousand. Salisbury sold $1.9 million of available-for-sale securities 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.

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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, 2021 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale            
U.S. Treasury $10,302  $95  $-  $-  $10,302  $95 
U.S. Government Agency notes  20,550   80   1,125   19   21,675   99 
Municipal bonds  13,980   251   -   -   13,980   251 
Mortgage- backed securities:                        
U.S. Government agencies and U.S. Government - sponsored enterprises  42,471   647   1,398   26   43,869   698 
Collateralized mortgage obligations  4,625   66   -   -   4,625   41 
Corporate bonds  -   -   -   -   -   - 
Total temporarily impaired securities $91,928  $1,139  $2,523  $45  $94,451  $1,184 
                         
             
  Less than 12 Months 12 Months or Longer Total
December 31, 2020 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale            
U.S. Government Agency notes $2,553  $36  $20  $1  $2,573  $37 
Municipal bonds  558   1   -   -   558   1 
Mortgage- backed securities:                        
U.S. Government agencies and U.S. Government - sponsored enterprises  3,761   42   45   1   3,806   43 
Total temporarily impaired securities $6,872  $79  $65  $2  $6,937  $81 

 

The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.

September 30, 2021 (in thousands)MaturityAmortized costFair valueYield(1)
U.S. TreasuryAfter 5 year but within 10 years$10,397$10,3021.15%
U.S. Government Agency notesAfter 5 year but within 10 years15,90215,8481.23
Total26,29926,1501.20
Municipal bondsAfter 5 year but within 10 years3,5943,8202.80
After 10 years34,93135,7852.61
Total38,52539,6052.63
Mortgage-backed securities, Collateralized mortgage obligations,Securities not due at a single maturity date98,09498,6161.64
Corporate bondsAfter 5 years but within 10 years11,00011,1974.61
Securities available-for-sale$173,918$175,5682.04%

(1) Yield is based on amortized cost.

Salisbury evaluates debt 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 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, 2021.

U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at September 30, 2021, which approximated 0.91% 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, 2021.

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U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Nineteen securities had unrealized losses at September 30, 2021, which approximated 0.45% 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, 2021.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixteen securities had unrealized losses at September 30, 2021, which approximated 1.77% 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, 2021.

U.S. Government agency and U.S. Government-sponsored enterprise securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Forty nine securities had unrealized losses at September 30, 2021, which approximated 1.51% 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, 2021.

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, 2021. 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.

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NOTE 3 - LOANS

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

(In thousands)  September 30, 2021  December 31, 2020 
Residential 1-4 family $368,801  $352,001 
Residential 5+ multifamily  46,237   37,058 
Construction of residential 1-4 family  15,429   8,814 
Home equity lines of credit  24,001   27,804 
Residential real estate  454,468   425,677 
Commercial  314,820   310,841 
Construction of commercial  47,145   31,722 
Commercial real estate  361,965   342,563 
Farm land  3,409   3,198 
Vacant land  13,698   14,079 
Real estate secured  833,540   785,517 
Commercial and industrial ex PPP Loans  167,528   140,516 
PPP Loans  40,652   86,632 
Total Commercial and industrial  208,180   227,148 
Municipal  18,061   21,512 
Consumer  11,152   7,687 
Loans receivable, gross  1,070,933   1,041,864 
Deferred loan origination fees, net  (314)  (372)
Allowance for loan losses  (13,168)  (13,754)
Loans receivable, net $1,057,451  $1,027,738 
Loans held-for-sale        
Residential 1-4 family $639  $2,735 

 

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, 2021 and December 31, 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $79.6 million and $65.3 million, respectively.

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.

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Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges due to the COVID-19 virus pandemic ("virus"). Approximately 41% of the Bank's commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 13% of the Bank's commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank's commercial loans are to educational institutions and approximately 6% of Salisbury's commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury's commercial real estate exposure as a percentage of the Bank's total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 173% as of September 30, 2021 and 182% at December 31, 2020 compared to the regulatory monitoring guideline of 300%.

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. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

In 2021 Salisbury processed 472 applications for loans of approximately $48.2 million under the SBA's Paycheck Protection Program (PPP). Interest income is accrued on the unpaid principal balance of these loans. Deferred loan origination fees and costs on PPP loans are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three and nine months ended September 30, 2021, Salisbury recorded interest income of $0.1 million and $0.6 million, respectively, and net fee income of approximately $0.7 million and $2.3 million, respectively, on PPP loans. Total net fees on PPP loans originated in 2020 and 2021, that will be recognized over the life of the loans, were estimated at $3.1 million and $2.0 million, respectively. In 2020 and the nine-month period ended September 30, 2021, Salisbury recognized essentially all of the net fees on PPP loans originated in 2020. In the nine-month period ended September 30, 2021, Salisbury recognized approximately $0.6 million of the net fees on PPP loans originated in 2021. Salisbury had gross PPP loan balances of $40.7 million on its consolidated balance sheet at September 30, 2021 compared with $86.6 million at December 31, 2020. Approximately $2.9 million of the September 30, 2021 balance related to PPP loans originated in 2020 and $37.8 million related to PPP loans originated in 2021.

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)PassSpecial mentionSubstandardDoubtfulLossTotal
September 30, 2021                        
Residential 1-4 family $361,116  $4,139  $3,546  $-  $-  $368,801 
Residential 5+ multifamily  44,484   83   1,670   -   -   46,237 
Construction of residential 1-4 family  15,301   128   -   -   -   15,429 
Home equity lines of credit  23,706   209   86   -   -   24,001 
Residential real estate  444,607   4,559   5,302   -   -   454,468 
Commercial  274,004   5,654   35,162   -   -   314,820 
Construction of commercial  47,145   -   -   -   -   47,145 
Commercial real estate  321,149   5,654   35,162   -   -   361,965 
Farm land  1,610   1,223   576   -   -   3,409 
Vacant land  13,621   42   35   -   -   13,698 
Real estate secured  780,987   11,478   41,075   -   -   833,540 
Commercial and industrial  205,140   500   2,540   -   -   208,180 
Municipal  18,061   -   -   -   -   18,061 
Consumer  11,132   1   19   -   -   11,152 
Loans receivable, gross $1,015,320  $11,979  $43,634  $-  $-  $1,070,933 
(in thousands)PassSpecial mentionSubstandardDoubtfulLossTotal
December 31, 2020                        
Residential 1-4 family $342,243  $5,615  $4,143  $-  $-  $352,001 
Residential 5+ multifamily  35,272   90   1,696   -   -   37,058 
Construction of residential 1-4 family  8,814   -   -   -   -   8,814 
Home equity lines of credit  27,393   257   154   -   -   27,804 
Residential real estate  413,722   5,962   5,993   -   -   425,677 
Commercial  276,866   15,565   18,410   -   -   310,841 
Construction of commercial  31,493   -   229   -   -   31,722 
Commercial real estate  308,359   15,565   18,639   -   -   342,563 
Farm land  1,612   -   1,586   -   -   3,198 
Vacant land  13,992   50   37   -   -   14,079 
Real estate secured  737,685   21,577   26,255   -   -   785,517 
Commercial and industrial  224,906   1,271   632   339   -   227,148 
Municipal  21,512   -   -   -   -   21,512 
Consumer  7,660   -   27   -   -   7,687 
Loans receivable, gross $991,763  $22,848  $26,914  $339  $-  $1,041,864 

 

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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, 2021                
Residential 1-4 family $368,034  $167  $84  $442  $74  $767  $-  $1,235 
Residential 5+ multifamily  45,376   -   -   -   861   861   -   861 
Construction of residential 1-4 family  15,429   -   -   -   -   -   -   - 
Home equity lines of credit  23,831   105   14   -   51   170   -   86 
Residential real estate  452,670   272   98   442   986   1,798   -   2,182 
Commercial  314,342   200   24   -   254   478   -   1,954 
Construction of commercial  47,145   -   -   -   -   -   -   - 
Commercial real estate  361,487   200   24   -   254   478   -   1,954 
Farm land  3,279   130   -   -   -   130   -   576 
Vacant land  13,663   35   -   -   -   35   -   35 
Real estate secured  831,099   637   122   442   1,240   2,441   -   4,747 
Commercial and industrial  207,792   289   53   -   46   388   11   243 
Municipal  18,061   -   -   -   -   -   -   - 
Consumer  11,108   4   40   -   -   44   -   - 
Loans receivable, gross $1,068,060  $930  $215  $442  $1,286  $2,873  $11  $4,990 

 

    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, 2020                
Residential 1-4 family $349,382  $1,419  $308  $673  $219  $2,619  $-  $1,508 
Residential 5+ multifamily  36,197   -   -   -   861   861   -   861 
Construction of residential 1-4 family  8,814   -   -   -   -   -   -   - 
Home equity lines of credit  27,522   157   9   -   116   282   -   154 
Residential real estate  421,915   1,576   317   673   1,196   3,762   -   2,523 
Commercial  307,927   1,855   530   95   434   2,914   -   2,544 
Construction of commercial  31,722   -   -   -   -   -   -   - 
Commercial real estate  339,649   1,855   530   95   434   2,914   -   2,544 
Farm land  2,594   154   450   -   -   604   -   158 
Vacant land  14,079   -   -   -   -   -   -   37 
Real estate secured  778,237   3,585   1,297   768   1,630   7,280   -   5,262 
Commercial and industrial  224,496   2,148   457   1   46   2,652   12   374 
Municipal  21,512   -   -   -   -   -   -   - 
Consumer  7,677   10   -   -   -   10   -   - 
Loans receivable, gross $1,031,922  $5,743  $1,754  $769  $1,676  $9,942  $12  $5,636 

 

 17 

 

Troubled Debt Restructurings (TDRs)

For the three and nine month periods ended September 30, 2021, one residential loan with a loan balance of $74 thousand was modified in a troubled debt restructuring for term extension. For third quarter 2020 one residential loan with a loan balance of $180 thousand was modified in a troubled debt restructuring for term extension. For the nine month period ended September 2020, there were two troubled debt restructurings: one residential loan with a loan balance of $180 thousand was modified for term extension and one CRE loan of $133 thousand was modified for workout refinance, which required an extension of new funds to pay outstanding taxes.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

 

           
  Three months ended September 30, 2021 Three months ended September 30, 2020
(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 $2,377  $393  $(35) $5  $2,740  $3,048   $69  $(11) $1  $3,107 
Residential 5+ multifamily  545   156   -  -   701   589    14   -   -   603 
Construction of residential 1-4 family  95   41   -   -   136   87    10   -   -   97 
Home equity lines of credit  190   26   (20  -   196   283    (8)  -   -   275 
Residential real estate  3,207   616   (55)  5  3,773   4,007    85   (11)  1  4,082 
Commercial  6,212   (165  -  119   6,166   5,160    317   (14)  1   5,464 
Construction of commercial  668   118   -   -   786   205    195   -   -   400 
Commercial real estate  6,880   (47  -  119   6,952   5,365    512   (14)  1   5,864 
Farm land  32   (1  -   -   31   60    5   -   -   65 
Vacant land  87   (1  -   1   87   182    (11)  -   -   171 
Real estate secured  10,206   567   (55)  125   10,843   9,614    591   (25)  2   10,182 
Commercial and industrial  1,256   73  -   3   1,332   1,515    (44)  -  1   1,472 
Municipal  32   (1)  -   -   31   36    5   -   -   41 
Consumer  66   62   (19)  6   115   74    40   (41)  7   80 
Unallocated  1,148   (301  -   -   847   1,132    94   -   -   1,226 
Totals $12,708  $400  $(74) $134  $13,168  $12,371   $686  $(66) $10  $13,001 

 

           
  Nine months ended September 30, 2021 Nine months ended September 30, 2020
(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 $2,646  $129  $(44) $9  $2,740  $2,393   $716  $(11) $9  $3,107 
Residential 5+ multifamily  686   15   -  -   701   446    199   (42  -   603 
Construction of residential 1-4 family  65   71   -   -   136   75    22   -   -   97 
Home equity lines of credit  252   (36)   (20  -   196   197    78  -   -   275 
Residential real estate  3,649   179   (64)  9  3,773   3,111    1,015   (53)  9  4,082 
Commercial  6,546   (509  (7)  136   6,166   3,742    1,719   (17)  20   5,464 
Construction of commercial  596   208   (18  -   786   104    296   -   -   400 
Commercial real estate  7,142   (301  (25)  136   6,952   3,846    2,015   (17)  20   5,864 
Farm land  59   (28  -   -   31   47    18   -   -   65 
Vacant land  180   (94  -   1   87   71    100  -   -   171 
Real estate secured  11,030   (244  (89)  146   10,843   7,075    3,148   (70)  29   10,182 
Commercial and industrial  1,397   17  (131  49   1,332   1,145    326  -  1   1,472 
Municipal  43   (12)  -   -   31   46    (5  -   -   41 
Consumer  77   82   (34)  (10  115   60    72   (66)  14   80 
Unallocated  1,207   (360)   -   -   847   569    657   -   -   1,226 
Totals $13,754  $(517 $(254) $185  $13,168  $8,895   $4,198  $(136) $44  $13,001 

 

 

 18 

 

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, 2021                        
Residential 1-4 family $365,721  $2,737  $3,080  $3  $368,801  $2,740 
Residential 5+ multifamily  45,283   701   954   -   46,237   701 
Construction of residential 1-4 family  15,429   136   -   -   15,429   136 
Home equity lines of credit  23,915   196   86   -   24,001   196 
Residential real estate  450,348   3,770   4,120   3   454,468   3,773 
Commercial  310,947   6,123   3,873   43   314,820   6,166 
Construction of commercial  47,145   786   -   -   47,145   786 
Commercial real estate  358,092   6,909   3,873   43   361,965   6,952 
Farm land  2,833   31   576   -   3,409   31 
Vacant land  13,663   87   35   -   13,698   87 
Real estate secured  824,936   10,797   8,604   46   833,540   10,843 
Commercial and industrial  207,859   1,288   321   44   208,180   1,332 
Municipal  18,061   31   -   -   18,061   31 
Consumer  11,134   115   18   -   11,152   115 
Unallocated allowance  -   847   -   -   -   847 
Totals $1,061,990  $13,078  $8,943  $90  $1,070,933  $13,168 

 

  (in thousands) Collectively evaluated Individually evaluated Total portfolio
   Loans   Allowance   Loans   Allowance   Loans   Allowance 
December 31, 2020                        
Residential 1-4 family $347,695  $2,445  $4,306  $201  $352,001  $2,646 
Residential 5+ multifamily  36,094   686   964   -   37,058   686 
Construction of residential 1-4 family  8,814   65   -   -   8,814   65 
Home equity lines of credit  27,650   232   154   20   27,804   252 
Residential real estate  420,253   3,428   5,424   221   425,677   3,649 
Commercial  305,193   6,298   5,648   248   310,841   6,546 
Construction of commercial  31,722   596   -   -   31,722   596 
Commercial real estate  336,915   6,894   5,648   248   342,563   7,142 
Farm land  3,040   59   158   -   3,198   59 
Vacant land  13,912   178   167   2   14,079   180 
Real estate secured  774,120   10,559   11,397   471   785,517   11,030 
Commercial and industrial  226,662   1,223   486   174   227,148   1,397 
Municipal  21,512   43   -   -   21,512   43 
Consumer  7,661   59   26   18   7,687   77 
Unallocated allowance  -   1,207   -   -   -   1,207 
Totals $1,029,955  $13,091  $11,909  $663  $1,041,864  $13,754 

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

September 30, 2021 (in thousands)Collectively evaluated Individually evaluated Total portfolio
   Loans   Allowance   Loans   Allowance   Loans  Allowance 
Performing loans $1,025,195  $9,490  $-  $-  $1,025,195  $9,490 
Potential problem loans 1  36,795   2,741   -   -   36,795   2,741 
Impaired loans  -   -   8,943   90   8,943   90 
Unallocated allowance  -   847   -   -   -   847 
Totals $1,061,990  $13,078  $8,943  $90  $1,070,933  $13,168 

 

December 31, 2020 (in thousands)Collectively evaluated Individually evaluated Total portfolio
   Loans   Allowance   Loans   Allowance   Loans  Allowance 
Performing loans $1,011,757  $10,424  $-  $-  $1,011,757  $10,424 
Potential problem loans 1  18,198   1,460   -   -   18,198   1,460 
Impaired loans  -   -   11,909   663   11,909   663 
Unallocated allowance  -   1,207   -   -   -   1,207 
Totals $1,029,955  $13,091  $11,909  $663  $1,041,864  $13,754 

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

 19 

 

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   Specific   Income  Loan balance   Income 
   Book   Note   Average   allowance   recognized   Book   Note   Average   recognized 
September 30, 2021                  
Residential $45  $47  $1,120  $3  $2  $3,989  $4,404  $3,642  $52 
Home equity lines of credit  -   -   22   -   -   86   127   156   - 
Residential real estate  45   47   1,142   3   2   4,075   4,531   3,798   52 
Commercial  1,007   1,033   1,921   43   33   2,866   3,377   3,002   47 
Construction of commercial  -   -   -   -   -   -   -   -   - 
Farm land  -   -   -   -   -   576   756   415   - 
Vacant land  -   -   73   -   -   35   39   52   - 
Real estate secured  1,052   1,080   3,136   46   35   7,552   8,703   7,267   99 
Commercial and industrial  221   228   336   44   3   100   270   91   - 
Consumer  -   -   8   -   -   18   18   15   1 
Totals $1,273  $1,308  $3,480  $90  $38  $7,670  $8,991  $7,373  $100 

Note: The income recognized is for the nine month period ended September 30, 2021.

  Impaired loans with specific allowance  Impaired loans with no specific allowance
(in thousands) Loan balance   Specific   Income  Loan balance   Income 
   Book   Note   Average   allowance   recognized   Book   Note   Average   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.

  Impaired loans with specific allowance  Impaired loans with no specific allowance
(in thousands) Loan balance        Loan balance    
   Recorded Investment   Note   Average   Specific allowance   Income recognized   Recorded Investment   Note   Average   Income recognized 
December 31, 2020                  
Residential $2,971  $3,040  $3,862  $201  $72  $2,299  $2,676  $1,993  $27 
Home equity lines of credit  75   75   76   20   -   79   117   103   - 
Residential real estate  3,046   3,115   3,938   221   72   2,378   2,793   2,096   27 
Commercial  3,058   3,117   3,325   248   132   2,590   3,203   1,139   91 
Construction of commercial  -   -   -   -   -   -   -   -   - 
Farm land  -   -   -   -   -   158   319   173   - 
Vacant land  37   40   39   2   -   130   145   134   9 
Real estate secured  6,141   6,272   7,302   471   204   5,256   6,460   3,542   127 
Commercial and industrial  416   424   482   174   4   70   283   58   2 
Consumer  26   26   31   18   2   -   -   -   - 
Totals $6,583  $6,722  $7,815  $663  $210  $5,326  $6,743  $3,600  $129 
 20 

 

 

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, 2021 and December 31, 2020 and consolidated income statements for the nine months and three months ended September 30, 2021 and 2020.

($ in thousands, except lease term and discount rate) Classification  September 30, 2021   December 31, 2020 
Assets      
Operating Other assets $1,076  $1,182 
Finance Bank premises and equipment 1  1,326   1,402 
Total Leased Assets   $2,402  $2,584 
Liabilities          
Operating Other liabilities $1,076  $1,182 
Finance Finance lease  1,631   1,673 
Total Lease Liabilities   $2,707  $2,855 
1 Net of accumulated depreciation of $471 thousand and $396 thousand, respectively.
           
Lease Cost Classification  Nine months ended September 30, 2021   Three months ended September 30, 2021 
Operating leases Premises and equipment $221  $74 
Finance leases:          
Amortization of leased assets Premises and equipment  76   25 
Interest on finance leases Interest expense  103   36 
Total lease cost   $400  $135 
           
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 
           
Weighted Average Remaining Lease Term  September 30, 2021   December 31, 2020 
Operating leases    7.0 years   7.6 years 
Financing leases    13.7 years   14.2 years 
Weighted Average Discount Rate 1        
Operating leases    3.6%  3.7%
Financing leases    8.3%  8.4%
1 Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its 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, 2021.

 Future minimum lease payments (in thousands)  Operating Leases   Finance Leases 
 2021  $64  $48 
 2022   227   195 
 2023   167   198 
 2024   130   200 
 2025   137   203 
 Thereafter   437   1,752 
 Total future minimum lease payments   1,162   2,596 
 Less amount representing interest   (86)  (965)
 Total present value of net future minimum lease payments  $1,076  $1,631 

 

 21 

 

NOTE 5 - ASSETS HELD FOR SALE

The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation process, the Bank has entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. As of September 30, 2021, the current branch location met the accounting guidance criteria to be classified as assets held for sale. There are no liabilities held for sale associated with this location.

 

Following is a summary of the assets held for sale, which are recorded in other assets within the consolidated balance sheet as of September 30, 2021:

Buildings and leasehold improvements$700,000

 

An impairment expense of $144 thousand was recorded in third quarter 2021 as a result of the net book value exceeding the agreed upon sale price. This impairment expense was recorded within the consolidated statement of income within non-interest expense and within write-down of assets on the consolidated statement of cash flows.

 

NOTE 6 - MORTGAGE SERVICING RIGHTS

(in thousands)  September 30, 2021   December 31, 2020 
Residential mortgage loans serviced for others $142,873  $134,428 
Fair value of mortgage servicing rights  999   762 

 

Changes in mortgage servicing rights are as follows:

            
   Three months ended   Nine months ended 
Periods ended September 30, (in thousands)  2021   2020   2021   2020 
Mortgage Servicing Rights                
Balance, beginning of period $748  $353  $621  $238 
Originated  18   270   276   413 
Amortization (1)  (36)  (56)  (167)  (84)
Balance, end of period $730  $567  $730  $567 

Valuation Allowance

                
Balance, beginning of period  -   -   (9)  - 
Decrease in impairment reserve (1)  -   -   9   - 
Balance, end of period  -   -   -   - 
Mortgage servicing rights, net $730  $567  $730  $567 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

 

 

NOTE 7 - PLEDGED ASSETS

The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

(in thousands)  September 30, 2021   December 31, 2020 
Securities available-for-sale (at fair value) $66,877  $54,581 
Loans receivable (at book value)  382,840   420,415 
Total pledged assets $449,717  $474,996 

 

At September 30, 2021, securities were pledged as follows: $56.41 million to secure public deposits, $10.45 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 8 - 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.

 22 

 

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.

 

As of September 30, 2021 and December 31, 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
 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(in thousands) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
Loans receivable(1) $9,996  $9,996  $(4) $(4)
Total $9,996  $9,996  $(4) $(4)

(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, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $39.7 million; the cumulative basis adjustment associated with these hedging relationships was $4 thousand; and the amount of the designated hedged item was $10.0 million.

 

The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30, 2021 and December 31, 2020.

  As of September 30, 2021 As of December 31, 2020
(in thousands) Notional Amount Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as hedge instruments          
Interest Rate Products $10,000  Other assets $4  Other Assets $4 
Total Derivatives designated as hedge instruments       $4    $4 

 

The tables below present the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2021 and 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

       
 
   

Three months ended

September 30, 2021

   

Nine months ended

September 30, 2021

 
(in thousands)  Interest
Income
   Interest
Expense
   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 $1  $-  $-  $- 
                 
Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts                
Hedged items  4   -   3   - 
Derivatives designated as hedging instruments $(3) $-  $(3) $- 

       
 
   

Three months ended

September 30, 2020

   

Nine months ended

September 30, 2020

 
(in thousands)  Interest
Income
   Interest
Expense
   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   -   -   3 
Derivatives designated as hedging instruments $(3) $-  $-  $(3)

 

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Credit-Risk Related Contingent Features

Salisbury has an agreement with its derivative counterparty that contains a provision that provides that 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, 2021, the fair value of derivative was $4 thousand in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. As of September 30, 2021, Salisbury has not posted any collateral related to these agreements.

 

NOTE 9 - 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)  2021   2020   2021   2020 
Net income $3,453  $4,356  $12,332  $9,137 
Less: Undistributed earnings allocated to participating securities  (53)  (67)  (184)  (131)
Net income allocated to common stock $3,400  $4,288  $12,148  $9,006 
Weighted-average common shares issued  2,862   2,843   2,853   2,835 
Less: Unvested restricted stock awards  (45)  (44)  (43)  (41)
Weighted average common shares outstanding used to calculate basic earnings per common share  2,817   2,799   2,810   2,794 
Add: Dilutive effect of stock options  26   8   20   8 
Weighted-average common shares outstanding used to calculate diluted earnings per common share  2,843   2,807   2,830   2,802 
Earnings per common share (basic) $1.21  $1.53  $4.32  $3.22 
Earnings per common share (diluted) $1.20  $1.53  $4.30  $3.21 

 

 

NOTE 10 - SHAREHOLDERS' EQUITY

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on 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. As of September 30, 2021, the Company and the Bank met each of their capital requirements.

The Company and the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as "well capitalized" under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At September 30, 2021, the Bank exceeded the minimum requirement for the capital conservation buffer. As of September 30,2021, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

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On March 31, 2021, Salisbury issued $25 million of subordinated debt that matures in 2031. During the first five years, the debt is non-callable, and the coupon is fixed at 3.50%. After year five, the coupon will float at the then three-month Secured Overnight Financing Rate plus 280 basis points. At March 31, 2021, $15 million of the net proceeds was retained at the holding company level and the remainder was allocated to the Bank. On May 28, 2021, Salisbury redeemed in full the $10 million of subordinated debt that was issued in 2015 and retained at the holding company.

As of September 30, 2021, Salisbury did not repurchase any of its common shares pursuant to the Common Stock Repurchase Plan approved by the Board of Directors in March 2021.

The Bank's risk-weighted assets at September 30, 2021 and December 31, 2020 were $1.05 billion and $938.0 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, 2021

                                
Total Capital (to risk-weighted assets) $149,213   14.20% $84,080   8.0% $110,355   10.5% $105,100   10.0%
                                 
Tier 1 Capital (to risk-weighted assets)  136,074   12.95   63,060   6.0   89,335   8.5   84,080   8.0 
                                 
Common Equity Tier 1 Capital (to risk-weighted assets)  136,074   12.95   47,295   4.5   73,570   7.0   68,315   6.5 
                                 
Tier 1 Capital (to average assets) $136,074   9.31  $58,451   4.0  $58,451   4.0  $73,063   5.0 
December 31, 2020                                
Total Capital (to risk-weighted assets) $127,254   13.57% $75,037   8.0% $98,486   10.5% $93,796   10.0%
                                 
Tier 1 Capital (to risk-weighted assets)  115,503   12.31   56,278   6.0   79,727   8.5   75,037   8.0 
                                 
Common Equity Tier 1 Capital (to risk-weighted assets)  115,503   12.31   42,208   4.5   66,657   7.0   60,967   6.5 
                                 
Tier 1 Capital (to average assets) $115,503   8.90  $51,907   4.0  $51,907   4.0  $64,884   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.

 

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NOTE 11 - BENEFITS

401(k)

Salisbury's 401(k) Plan expense was $253 thousand and $229 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $847 thousand and $667 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

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 $55 thousand and $56 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $184 thousand and $170 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Other Retirement Plans

Salisbury adopted ASC 715-60, "Compensation - Retirement Benefits - Defined Benefit Plans - Other Post-retirement" and recognized a liability for Salisbury's future post-retirement benefit obligations under endorsement split dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $1,031 thousand and $771 thousand at September 30, 2021, and December 31, 2020, respectively. Other post-retirement benefit obligation expense (credit) for endorsement split dollar life insurance arrangements was $86 thousand and $(32) thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $259 thousand and $7 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. 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.

On September 1, 2021, the Bank and Richard Cantele, President and Chief Executive Officer of the Bank and of the Company, entered into an updated split dollar agreement which superseded and replaced a prior split dollar agreement between the parties. In addition, the Bank and named executive officers Peter Albero and John Davies (together with Mr. Cantele, the "executive(s)"), entered into updated split dollar agreements which superseded and replaced their existing split dollar agreements (collectively with the split dollar agreement for Richard Cantele, the "Updated Agreements"). The Updated Agreements for Messrs. Albero and Davies are identical and substantially similar to the split dollar agreement for Mr. Cantele, except as discussed below. The Updated Agreements provide for a death benefit during employment of each executive equal to the lesser of (i) three times the executive's base salary, not to exceed $800,000, less $50,000 or (ii) the net amount at risk, defined as the difference between the death benefit payable on death and the accrued cash value of the life insurance policy at the time of death. Mr. Cantele's post-retirement death benefit will be 1.5 times his final base salary, not to exceed $800,000. If Messrs. Albero and Davies retire after reaching age 65, the executives will be entitled to a post-retirement death benefit equal to 1.5 times final base salary at age 65 through age 71, 1.0 times final base salary at age 72 through 79, and 0.5 times final base salary at age 80 and later, provided that the death benefit shall not exceed $800,000. In the event of a change in control of the Bank, the executive will become fully vested in the death benefit under the policy, including the post-retirement death benefit, and the policy cannot be terminated or amended without the express written consent of the executive. The Bank is the sole beneficiary of any death proceeds remaining after the aforementioned death proceeds have been paid to the designated beneficiaries.

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 $29 thousand and $33 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $86 thousand and $100 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers, including a severance agreement with Mr. Cantele, President and Chief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the New York Region and Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with eleven other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and other benefits. Such agreements, and their subsequent amendments, are designed to allow Salisbury to retain the services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury's operations.

 

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NOTE 12 - LONG TERM INCENTIVE PLANS

Restricted stock

Restricted stock expense was $149 thousand and $122 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $449 thousand and $393 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. The tax benefit from restricted stock expense was $27 thousand and $22 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $81 thousand and $71 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. In second quarter 2021, Salisbury granted a total of 16,650 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 $746 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of September 30, 2021 and 2020 totaled $1,075 thousand and $906 thousand, respectively. There were no forfeitures in the third quarter or year to date for 2021. 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.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted 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 paid out the final tranche of these awards in January 2021. The performance goal for awards granted under the RSU plan in 2019 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, vesting will occur no later than March 29, 2022. No performance-based restricted stock units were awarded prior to 2019.

On July 29, 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, vesting will occur no later than March 15, 2023.

On June 23, 2021, the Compensation Committee granted an additional 7,400 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank's tangible book value by $7.00 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 ($9.00 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, vesting will occur no later than March 15, 2024.

The fair value of the awards granted under the RSU plan at the grant date was $354 thousand, $264 thousand, and $280 thousand, respectively, for those grants awarded in 2021, 2020 and 2019. Compensation expense of $61 thousand and $80 thousand was recorded with respect to these RSUs for the three months ended September 2021 and 2020, and $236 thousand and $127 thousand for the nine months ended September 30, 2021 and 2020, respectively. The shares noted above are contingently issuable only upon attainment of the minimum performance goal. The tax benefit from performance restricted stock expense was $11 thousand and $14 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $42 thousand and $23 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Short Term Incentive Plan (STIP)

Salisbury offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP expense, which is included in compensation expenses, totaled $210 thousand and $189 thousand for the three months ended September 30, 2021 and 2020, and expenses of $757 thousand and $530 thousand for the first nine months of 2021 and 2020, respectively. The tax benefit from (STIP) expense was $38 thousand and $34 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $136 thousand and $95 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In third quarter 2021 and third quarter 2020, no stock options were exercised. In first quarter 2021 and first quarter 2020, a former Riverside Bank executive exercised 1,755 stock options at $17.04 per share. Also, in first quarter 2020, a former Riverside employee exercised 1,350 stock options at $17.04 per share.

 

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NOTE 13 - 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 and the CRA mutual fund 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 assets and 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. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

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 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.
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.

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
Derivative financial instruments. 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.
Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.
Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.
Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.

 

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Assets measured at fair value are as follows:

  Fair Value Measurements Using Assets and Liabilities at
(in thousands) Level 1 Level 2 Level 3 fair
        value
September 30, 2021                
Assets at fair value on a recurring basis                
U.S. Treasury $-  $10,302  $-  $10,302 
U.S. Government Agency notes  -   32,274   -   32,274 
Municipal bonds  -   39,605   -   39,605 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government-sponsored enterprises  -   67,179   -   67,179 
Collateralized mortgage obligations:                
U.S. Government agencies  -   15,011   -   15,011 
Corporate bonds  -   11,197   -   11,197 
Securities available-for-sale $-  $175,568  $-  $175,568 
CRA mutual funds $907  $-  $-  $907 
Derivative financial instruments $-  $4  $-  $4 
Assets at fair value on a non-recurring basis                
Assets held for sale 1 $700  $-  $-  $700 
December 31, 2020                
Assets at fair value on a recurring basis                
U.S. Government Agency notes $