10-Q 1 sal0808form10q.htm FORM 10-Q

 

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 June 30, 2019

OR

 

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

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

(860) 435-9801

(Registrant's telephone number, including area code)

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, $0.10 par value per share SAL NASDAQ Capital Market

 

 

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 and post such files).

Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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). (Check one):

Large accelerated filer ☐ Accelerated filer ☑
Non-accelerated filer ☐ Smaller reporting company ☑
Emerging growth company ☐ 

 

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

 

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

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of August 8, 2019 is 2,823,812.

 
 

 

TABLE OF CONTENTS

 

  PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements (unaudited)  
  CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2019 (unaudited) and DECEMBER 31, 2018 3
  CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2019 and 2018 (unaudited) 4
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2019 and 2018 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2019 and 2018 (unaudited) 5
  CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2019 and 2018 (unaudited) 7
  NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 27
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 43
Item 4. CONTROLS AND PROCEDURES 44
     
  PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 44
Item 1A. RISK FACTORS 44
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 45
Item 3. DEFAULTS UPON SENIOR SECURITIES 45
Item 4. MINE SAFETY DISCLOSURES 45
Item 5. OTHER INFORMATION 45
Item 6. EXHIBITS 45
SIGNATURES 46
 

 2 

 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)    June 30, 2019      December 31, 2018  
ASSETS   (unaudited)      
Cash and due from banks  $8,010   $7,238 
Interest bearing demand deposits with other banks   40,503    51,207 
Total cash and cash equivalents  $48,513   $58,445 
Securities          
Available-for-sale at fair value   100,149    91,818 
CRA mutual fund   869    836 
Federal Home Loan Bank of Boston stock at cost   2,839    4,496 
Loans held-for-sale   403    — 
Loans receivable, net (allowance for loan losses: $8,887 and $7,831)   910,573    909,279 
Other real estate owned   401    1,810 
Bank premises and equipment, net   17,609    18,175 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $4,700 and $4,497)   1,180    1,383 
Accrued interest receivable   3,439    3,148 
Cash surrender value of life insurance policies   15,355    14,438 
Deferred taxes   707    1,276 
Other assets   3,360    2,635 
Total Assets  $1,119,212   $1,121,554 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $231,019   $228,448 
Demand (interest bearing)   156,687    153,586 
Money market   231,987    204,219 
Savings and other   158,809    178,807 
Certificates of deposit   172,221    161,679 
Total deposits   950,723    926,739 
Repurchase agreements   6,308    4,104 
Federal Home Loan Bank of Boston advances   32,769    67,154 
Subordinated debt   9,847    9,835 
Note payable   263    280 
Finance lease obligations   3,011    3,081 
Accrued interest and other liabilities   7,343    6,902 
Total Liabilities  $1,010,264   $1,018,095 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,899,658 and 2,884,988          
Outstanding: 2,823,476 and 2,806,781   282    281 
Unearned compensation - restricted stock awards   (1,075)   (711)
Paid-in capital   44,382    43,770 
Retained earnings   63,905    60,339 
Accumulated other comprehensive income (loss), net   1,454    (220)
Total Shareholders' Equity   108,948    103,459 
Total Liabilities and Shareholders' Equity  $1,119,212   $1,121,554 

 

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      Six months ended  
Periods ended June 30, (in thousands, except per share amounts)    2019      2018      2019      2018  
Interest and dividend income                    
Interest and fees on loans  $9,880   $9,007   $19,814   $17,656 
Interest on debt securities:                    
Taxable   583    532    1,204    992 
Tax exempt   117    29    189    61 
Other interest and dividends   252    181    479    340 
Total interest and dividend income   10,832    9,749    21,686    19,049 
Interest expense                    
Deposits   1,999    997    3,795    1,774 
Repurchase agreements   4    1    7    3 
Finance lease   46    48    92    83 
Note payable   4    4    8    9 
Subordinated debt   156    156    312    312 
Federal Home Loan Bank of Boston advances   279    500    691    833 
Total interest expense   2,488    1,706    4,905    3,014 
Net interest and dividend income   8,344    8,043    16,781    16,035 
Provision for loan losses   151    467    445    793 
Net interest and dividend income after provision for loan losses   8,193    7,576    16,336    15,242 
Non-interest income                    
Trust and wealth advisory   1,044    949    1,950    1,843 
Service charges and fees   1,012    892    1,932    1,760 
Gains (losses) on sales of mortgage loans, net   1    (1)   8    17 
Mortgage servicing, net   80    84    156    167 
Gains (losses) on CRA mutual fund   12    (7)   23    (20)
Gains on available-for-sale securities, net   281    17    272    16 
Other   118    124    234    249 
Total non-interest income   2,548    2,058    4,575    4,032 
Non-interest expense                    
Salaries   2,959    2,939    5,952    5,785 
Employee benefits   1,042    969    2,227    2,128 
Premises and equipment   1,004    1,101    1,976    2,125 
Data processing   577    556    1,086    1,042 
Professional fees   583    611    1,118    1,230 
OREO losses and write-downs   270    1    322    53 
Collections and other real estate owned   79    235    209    316 
FDIC insurance   140    123    303    253 
Marketing and community support   151    222    307    463 
Amortization of core deposit intangibles   99    116    203    236 
Other   535    544    947    965 
Total non-interest expense   7,439    7,417    14,650    14,596 
Income before income taxes   3,302    2,217    6,261    4,678 
Income tax provision   599    318    1,124    763 
Net income  $2,703   $1,899   $5,137   $3,915 
Net income allocated to common stock  $2,671   $1,877   $5,079   $3,873 
Basic earnings per common share  $0.96   $0.68   $1.83   $1.40 
Weighted average common shares outstanding, to calculate basic earnings per share   2,780    2,762    2,779    2,760 
Diluted earnings per common share  $0.95   $0.68   $1.82   $1.39 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,800    2,779    2,795    2,780 
Common dividends per share  $0.28   $0.28   $0.56   $0.56 

 

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      Six months ended  
Periods ended June 30, (in thousands)    2019      2018      2019      2018  
Net income  $2,703   $1,899   $5,137   $3,915 
Other comprehensive income(loss)                    
Net unrealized gains (losses) on securities available-for-sale   1,261    (279)   2,390    (1,297)
Reclassification of net realized gains in net income (1)   (281)   (17)   (272)   (16)
Unrealized gains (losses) on securities available-for-sale   980    (296)   2,118    (1,313)
Income tax (expense) benefit   (206)   62    (444)   272 
Unrealized gains (losses) on securities available-for-sale, net of tax   774    (234)   1,674    (1,041)
Comprehensive income  $3,477   $1,665   $6,811   $2,874 

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending June 30, 2019 and 2018 are $0 thousand and $5 thousand respectively. The net tax effect for the six month periods ending June 30, 2019 and 2018 are $0 thousand and $3 thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended June 30,

(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at March 31, 2018   2,786,566   $279   $43,040   $55,883   $(493)  $(612)  $98,097 
Net income   —    —    —    1,899    —    —    1,899 
Other comprehensive loss, net of tax   —    —    —    —    —    (234)   (234)
Common stock dividends declared   —    —    —    (780)   —    —    (780)
Issuance of restricted stock awards   9,250    —    410    —    (410)   —    — 
Stock options exercised   3,350    1    102    —    —    —    103 
Issuance of director's restricted stock awards   3,960    —    175    —    (175)   —    — 
Stock based compensation-restricted stock awards   —    —    —    —    95    —    95 
Balances at June 30, 2018   2,803,126   $280   $43,727   $57,002   $(983)  $(846)  $99,180 
Balances at March 31, 2019   2,806,681   $281   $43,765   $61,989   $(606)  $680   $106,109 
Net income   —    —    —    2,703    —    —    2,703 
Other comprehensive loss, net of tax   —    —    —    —    —    774    774 
Common stock dividends declared   —    —    —    (787)   —    —    (787)
Issuance of restricted stock awards   11,530    1    457    —    (458)   —    — 
Stock options exercised   2,025    —    34    —    —    —    34 
Forfeiture of stock awards
   (360)   —    (16)   —    16    —    — 
Issuance of director's restricted stock awards
   3,600    —    142    —    (142)   —    — 
Stock based compensation-restricted stock awards   —    —    —    —    115    —    115 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905    $(1,075)  $1,454   $108,948 

 5 

 

Six months ended June 30,

(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at December 31, 2017   2,785,216   $279   $42,998   $54,664   $(606)  $179   $97,514 
Net income   —    —    —    3,915    —    —    3,915 
Adoption of ASU 2016-01   —    —    —    (16)   —    16    — 
Other comprehensive loss, net of tax   —    —    —    —    —    (1,041)   (1,041)
Common stock dividends declared   —    —    —    (1,561)   —    —    (1,561)
Issuance of restricted stock awards   9,250    —    410    —    (410)   —    — 
Stock options exercised   4,700    1    144    —    —    —    145 
Issuance of director's restricted stock awards   3,960    —    175    —    (175)   —    — 
Stock based compensation-restricted stock awards   —    —    —    —    208    —    208 
Balances at June 30, 2018   2,803,126   $280   $43,727   $57,002   $(983)  $(846)  $99,180 
Balances at December 31, 2018   2,806,781   $281   $43,770   $60,339   $(711)  $(220)  $103,459 
Net income   —    —    —    5,137    —    —    5,137 
Other comprehensive loss, net of tax   —    —    —    —    —    1,674    1,674 
Common stock dividends declared   —    —    —    (1,571)   —    —    (1,571)
Issuance of restricted stock awards   11,530    1    457    —    (458)   —    — 
Stock options exercised   2,025    —    34    —    —    —    34 
Forfeiture of restricted stock awards   (460)   —    (21)   —    21    —    — 
Issuance of director's restricted stock awards   3,600    —    142    —    (142)   —    — 
Stock based compensation-restricted stock awards   —    —    —    —    215    —    215 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905   $(1,075)  $1,454   $108,948 

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)

Six months ended June 30, (in thousands)    2019      2018  
Operating Activities          
Net income  $5,137   $3,915 
Adjustments to reconcile net income to net cash provided by operating activities          
Amortization(accretion) and depreciation          
Securities   137    29 
Bank premises and equipment   813    820 
Core deposit intangible   203    236 
Modification fees on Federal Home Loan Bank of Boston advances   115    116 
Subordinated debt issuance costs   12    12 
Mortgage servicing rights   24    23 
Fair value adjustment on loans   (64)   (462)
Fair value adjustment on deposits   (4)   (21)
Gain on sales and calls of securities available-for-sale, net   (272)   (16)
(Gain) losses on CRA mutual fund   (23)   20 
Gain on sales of loans, excluding capitalized servicing rights   (7)   (10)
OREO losses and write-downs   322    53 
Loss on sale/disposals of premises and equipment   —    1 
Provision for loan losses   445    793 
Proceeds from loans sold   458    679 
Loans originated for sale   (854)   (206)
Decrease (increase) in deferred loan origination fees and costs, net   92    (161)
Mortgage servicing rights originated   (5)   (7)
Increase in interest receivable   (291)   (355)
Decrease (increase) in deferred tax benefit   125    (152)
Decrease in prepaid expenses   101    129 
Increase in cash surrender value of life insurance policies   (167)   (163)
Decrease in income tax receivable   13    606 
Decrease (increase) in other assets   694    (17)
Decrease in accrued expenses   (1,072)   (317)
Increase in interest payable   339    123 
Decrease in other liabilities   (378)   (109)
Stock based compensation-restricted stock awards   215    208 
Net cash provided by operating activities  $6,108   $5,767 
Investing Activities          
Purchase of Federal Home Loan Bank of Boston stock, net of redemptions   1,657    (1,175)
Purchases of securities available-for-sale   (41,255)   (26,248)
Proceeds from sales of securities available-for-sale   28,170    8,410 
Proceeds from calls of securities available-for-sale   25    945 
Proceeds from maturities of securities available-for-sale   6,982    8,706 
Reinvestment of CRA mutual fund   (10)   (10)
Loan originations and principal collections, net   (1,813)   (63,442)
Recoveries of loans previously charged off   46    27 
Proceeds from sales of other real estate owned   1,087    188 
Capital expenditures   (247)   (1,097)
Purchase of life insurance policies   (750)   — 
Cash and cash equivalents (paid) acquired from acquisition   —    (298)
Net cash utilized by investing activities  $(6,108)  $(73,994)

 

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)

Six months ended June 30, (in thousands)    2019      2018  
Financing Activities          
Increase in deposit transaction accounts, net  $13,442   $56,901 
Increase in time deposits, net   10,546    16,783 
Increase in securities sold under agreements to repurchase, net   2,204    23 
Federal Home Loan Bank of Boston short-term advances, net change   (9,500)   52,000 
Principal payments on Federal Home Loan Bank of Boston advances   (25,000)   (27,000)
Principal payments on note payable   (17)   (16)
Decrease in capital lease obligation   (70)   (61)
Stock options exercised   34    145 
Common stock dividends paid   (1,571)   (1,561)
Net cash (utilized) provided by financing activities   (9,932)   97,214 
Net (decrease) increase in cash and cash equivalents   (9,932)   28,987 
Cash and cash equivalents, beginning of period   58,445    48,486 
Cash and cash equivalents, end of period  $48,513   $77,473 
Cash paid during period          
Interest  $4,443   $2,784 
Income taxes   986    516 
Non-cash transfers          
Finance lease obligation   —    1,373 
Adoption of ASU 2016-02 - Other assets   1,552    — 
Adoption of ASU 2016-02 – Other  Liabilities   (1,552)   — 
Adoption of ASU 2016-01   —    16 
Branch Acquisitions (1)          
Cash and cash equivalents paid   —    (298)
Net loans acquired   —    7,849 
Fixed assets acquired   —    761 
Accrued interest receivable acquired   —    5 
Other assets acquired   —    6 
Deposits assumed   —    8,323 

(1) Acquisition of the Fishkill Branch of Orange Bank & Trust Company in 2018.

 

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 June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2018 Annual Report on Form 10-K for the year ended December 31, 2018.

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 February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)”. Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities. In July 2018, the FASB issued ASU 2018-10 which provided technical corrections to the new lease standard. In August 2018, the FASB issued ASU 2018-11 Leases – Targeted Improvements, to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new lease standard. ASU 2018-11 has the same effective date as ASU 2016-02 (January 1, 2019 for the Company). Salisbury adopted ASU 2018-11 and elected the transition option. In March 2019, the FASB issued ASU 2019-01, the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of AU 2016-02, Salisbury elected to early adopt ASU 2019-01 on January 1, 2019. Salisbury's consolidated assets and liabilities increased by approximately $1.6 million due to the recording of operating leases as a result of adopting ASU 2016-02 effective January 1, 2019. See also note 4 for further information.

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In June 2016, the FASB issued 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. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. 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. On July 17, 2019 the FASB proposed to delay the implementation of this standard for smaller reporting companies to years beginning after December 15, 2022. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. FASB's proposal will undergo a 30-day public comment period in August 2019. If the implementation is delayed as proposed, Salisbury will evaluate when it will adopt this standard. Early adoption is permitted. Upon adoption, however, Salisbury will apply the standard's provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury has been working with a third-party vendor and is in the process of finalizing its methodology. Salisbury anticipates that adoption of ASU 2016-13 will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses and the Bank continues to evaluate the extent of potential impact.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments." This ASU is intended to reduce diversity in how eight particular transactions are classified in the statement of cash flows. Salisbury adopted ASU 2016-15 on January 1, 2018. ASU 2016-15 did not have a material impact on Salisbury's Consolidated Financial Statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Entities should apply the guidance prospectively. Salisbury is currently evaluating the provisions of ASU 2017-04 to determine the potential impact the new standard will have on Salisbury's Consolidated Financial Statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This ASU will amend the amortization period for certain purchased callable debt securities held at a premium. The Board is shortening the amortization period for the premium to the earliest call date. Under previous generally accepted accounting principles, entities generally amortized the premium as an adjustment of yield over the contractual life of the instrument. On January 1, 2019, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-03, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-03 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on Salisbury's Consolidated Financial Statements.

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NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
June 30, 2019                    
Available-for-sale                    
U.S. Government Agency notes  $4,771   $163   $2   $4,932 
Municipal bonds   20,205    430    12    20,623 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   39,158    585    20    39,723 
Collateralized mortgage obligations:                    
U.S. Government agencies   29,925    606    1    30,530 
Corporate bonds   4,250    91    —    4,341 
Total securities available-for-sale  $98,309   $1,875   $35   $100,149 
CRA mutual fund  $869   $—   $—   $869 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $2,839   $—   $—   $2,839 
(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
December 31, 2018                    
Available-for-sale                    
U.S. Government Agency notes  $7,590   $83   $3   $7,670 
Municipal bonds   5,334    45    —    5,379 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government sponsored enterprises   57,837    170    561    57,446 
Collateralized mortgage obligations:                    
U.S. Government agencies   17,835    85    173    17,747 
Corporate bonds   3,500    76    —    3,576 
Total securities available-for-sale  $92,096   $459   $737   $91,818 
CRA mutual fund  $836   $—   $—   $836 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $4,496   $—   $—   $4,496 

Salisbury sold $28.2 million of available-for-sale securities during the six month period ended June 30, 2019 realizing a pre-tax gain of $272 thousand and a related tax expense of $57 thousand. Salisbury sold $27.2 million in securities available-for-sale during the three month period ended June 30, 2019 realizing a pre-tax gain of $281 thousand and related tax expense of $59 thousand. Salisbury sold $8.4 million of available-for-sale securities during the three and six month periods ended June 30, 2018 realizing a pre-tax gain of $16 thousand and a related tax expense of $3 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
June 30, 2019 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                  
U.S. Government Agency notes  $—   $—   $336   $2   $336   $2 
Municipal bonds   4,679    12    —    —    4,679    12 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   6,134    14    729    6    6,863    20 
Collateralized mortgage obligations:                              
U.S. Government Agencies   —    —    1,616    1    1,616    1 
Total temporarily impaired securities  $10,813   $26   $2,681   $9   $13,494   $35 
                               
   Less than 12 Months  12 Months or Longer  Total
December 31, 2018 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                  
U.S. Government Agency notes  $34   $—   $532   $3   $566   $3 
Mortgage-backed securities:                              
U.S. Government agencies and U.S. Government –sponsored enterprises   13,063    175    26,777    386    39,840    561 
Collateralized mortgage obligations:                              
U.S. Government Agencies   —    —    8,281    173    8,281    173 
Total temporarily impaired securities  $13,097   $175   $35,590   $562   $48,687   $737 

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

June 30, 2019 (in thousands)  Maturity  Amortized cost  Fair value        Yield(1)
U.S. Government Agency notes  Within 1 year  $22   $22    3.79%
   After 1 year but within 5 years   359    358    3.60 
   After 5 year but within 10 years   4,390    4,552    3.36 
   Total   4,771    4,932    3.38 
Municipal bonds  Within 1 year   231    231    2.44 
   After 10 years   19,974    20,392    3.66 
   Total   20,205    20,623    3.65 
Mortgage-backed securities and Collateralized mortgage obligations  U.S. Government agencies   69,083    70,253    2.85 
Corporate bonds  After 5 years but within 10 years   4,250    4,341    5.43 
Securities available-for-sale     $98,309   $100,149    3.03%

(1) Yield is based on amortized cost.

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers 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 June 30, 2019.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at June 30, 2019, which approximated 0.56% 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 June 30, 2019.

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Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Eight securities had unrealized losses at June 30, 2019, which approximated 0.26% 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 June 30, 2019.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Eight securities had unrealized losses at June 30, 2019, which approximated 0.24% 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 June 30, 2019.

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 June 30, 2019. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

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

     June 30, 2019      December 31, 2018  
(In thousands)    Total Loans     Total Loans  
Residential 1-4 family  $335,479   $345,862 
Residential 5+ multifamily   37,148    36,510 
Construction of residential 1-4 family   12,553    12,041 
Home equity lines of credit   34,631    34,433 
Residential real estate   419,811    428,846 
Commercial   287,946    283,599 
Construction of commercial   10,175    8,976 
Commercial real estate   298,121    292,575 
Farm land   3,714    4,185 
Vacant land   8,050    8,322 
Real estate secured   729,696    733,928 
Commercial and industrial   163,487    162,905 
Municipal   19,782    14,344 
Consumer   5,166    4,512 
Loans receivable, gross   918,131    915,689 
Deferred loan origination fees and costs, net   1,329    1,421 
Allowance for loan losses   (8,887)   (7,831)
Loans receivable, net  $910,573   $909,279 
Loans held-for-sale          
Residential 1-4 family  $403   $— 

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Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, installment loans and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury's market area.

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 FDIC and the CTDOB.

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2019                              
Residential 1-4 family  $326,478   $4,079   $4,922   $—   $—   $335,479 
Residential 5+ multifamily   35,282    105    1,761    —    —    37,148 
Construction of residential 1-4 family   12,553    —    —    —    —    12,553 
Home equity lines of credit   33,819    329    483    —    —    34,631 
Residential real estate   408,132    4,513    7,166    —    —    419,811 
Commercial   268,152    11,733    7,988    73    —    287,946 
Construction of commercial   9,929    —    246    —    —    10,175 
Commercial real estate   278,081    11,733    8,234    73    —    298,121 
Farm land   1,974    —    1,740    —    —    3,714 
Vacant land   7,985    65    —    —    —    8,050 
Real estate secured   696,172    16,311    17,140    73    —    729,696 
Commercial and industrial   160,622    973    1,892    —    —    163,487 
Municipal   19,782    —    —    —    —    19,782 
Consumer   5,121    4    41    —    —    5,166 
Loans receivable, gross  $881,697   $17,288   $19,073   $73   $—   $918,131 
(in thousands)   Pass    Special mention    Substandard    Doubtful    Loss    Total 
December 31, 2018                              
Residential 1-4 family  $337,520   $4,281   $4,061   $—   $—   $345,862 
Residential 5+ multifamily   34,726    784    1,000    —    —    36,510 
Construction of residential 1-4 family   12,041    —    —    —    —    12,041 
Home equity lines of credit   33,728    265    440    —    —    34,433 
Residential real estate   418,015    5,330    5,501    —    —    428,846 
Commercial   270,461    4,530    8,608    —    —    283,599 
Construction of commercial   8,482    —    494    —    —    8,976 
Commercial real estate   278,943    4,530    9,102    —    —    292,575 
Farm land   3,969    —    216    —    —    4,185 
Vacant land   8,253    69    —    —    —    8,322 
Real estate secured   709,180    9,929    14,819    —    —    733,928 
Commercial and industrial   159,127    2,672    1,106    —    —    162,905 
Municipal   14,344    —    —    —    —    14,344 
Consumer   4,502    10    —    —    —    4,512 
Loans receivable, gross  $887,153   $12,611   $15,925   $—   $—   $915,689 

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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
June 30, 2019                        
Residential 1-4 family  $333,051   $806   $481   $1,141   $—   $2,428   $—   $2,402 
Residential 5+ multifamily   36,287    —    —    —    861    861    —    988 
Construction of residential 1-4 family   12,553    —    —    —    —    —    —    — 
Home equity lines of credit   33,911    208    153    —    359    720    —    483 
Residential real estate   415,802    1,014    634    1,141    1,220    4,009    —    3,873 
Commercial   286,726    935    68    73    144    1,220    —    941 
Construction of commercial   10,175    —    —    —    —    —    —    — 
Commercial real estate   296,901    935    68    73    144    1,220    —    941 
Farm land   3,517    197    —    —    —    197    —    204 
Vacant land   8,008    42    —    —    —    42    —    — 
Real estate secured   724,228    2,188    702    1,214    1,364    5,468    —    5,018 
Commercial and industrial   163,338    47    99    3    —    149    —    3 
Municipal   19,782    —    —    —    —    —    —    — 
Consumer   5,163    3    —    —    —    3    —    41 
Loans receivable, gross  $912,511   $2,238   $801   $1,217   $1,364   $5,620   $—   $5,062 

 

      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, 2018                        
Residential 1-4 family  $342,881   $1,100   $521   $—   $1,360   $2,981   $—   $2,092 
Residential 5+ multifamily   35,648    —    —    633    229    862    —    1,000 
Construction of residential 1-4 family   12,041    —    —    —    —    —    —    — 
Home equity lines of credit   33,806    235    33    —    359    627    —    411 
Residential real estate   424,376    1,335    554    633    1,948    4,470    —    3,503 
Commercial   281,053    264    240    833    1,209    2,546    654    1,388 
Construction of commercial   8,835    —    —    141    —    141    141    252 
Commercial real estate   289,888    264    240    974    1,209    2,687    795    1,640 
Farm land   4,185    —    —    —    —    —    —    216 
Vacant land   8,280    42    —    —    —    42    —    — 
Real estate secured   726,729    1,641    794    1,607    3,157    7,199    795    5,359 
Commercial and industrial   162,507    —    38    —    360    398    —    360 
Municipal   14,344    —    —    —    —    —    —    — 
Consumer   4,504    2    6    —    —    8    —    — 
Loans receivable, gross  $908,084   $1,643   $838   $1,607   $3,517   $7,605   $795   $5,719 

 

For the second quarter 2019, two residential loans with a combined loan balance of $623 thousand and one consumer loan of $41 thousand were modified in troubled debt restructurings for rate reductions. One CRE loan of $686 thousand was modified for a rate reduction in the second quarter of 2018. For the six months ended June 2019, three troubled debt restructurings with a combined loan balance of $664 thousand were modified for a rate reduction and for the same period in 2018, one CRE loan of $686 thousand was modified for a rate reduction.

 16 

 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

   Three months ended June 30, 2019  Three months ended June 30, 2018
(in thousands)  Beginning balance  Provision  Charge- offs  Reco- veries  Ending balance  Beginning balance  Provision  Charge- offs  Reco- veries  Ending balance
Residential 1-4 family  $1,980   $95   ($1)  $—   $2,074   $1,982   $24   $—   $1   $2,007 
Residential 5+ multifamily   466    29    —    —    495    216    42    —    —    258 
Construction of residential 1-4 family   77    2    —    —    79    74    8    —    —    82 
Home equity lines of credit   209    15    —    —    224    233    1    —    —    234 
Residential real estate   2,732    141    (1)   —    2,872    2,505    75    —    1    2,581 
Commercial   3,803    (13)   (14)   1    3,777    2,666    259    (149)   —    2,776 
Construction of commercial   143    (16)   —    —    127    93    9    —    —    102 
Commercial real estate   3,946    (29)   (14)   1    3,904    2,759    268    (149)   —    2,878 
Farm land   47    —    —    —    47    33    4    —    —    37 
Vacant land   89    —    —    —    89    131    3    —    —    134 
Real estate secured   6,814    112    (15)   1    6,912    5,428    350    (149)   1    5,630 
Commercial and industrial   1,233    (67)   (19)   29    1,176    938    201    —    5    1,144 
Municipal   14    16    —    —    30    30    (1)   —    —    29 
Consumer   51    40    (18)   8    81    61    3    (6)   5    63 
Unallocated   638    50    —    —    688    601    (86)   —    —    515 
Totals  $8,750   $151   ($52)  $38   $8,887   $7,058   $467   $(155)  $11   $7,381 

 In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer, gross loans receivable and the allowance for loan losses increased by $663 thousand. The balance of net loans receivable did not change as a result of this transfer.

   Six Months ended June 30, 2019  Six Months ended June 30, 2018
(in thousands) Beginning balance  Acquisition Discount Transfer  Provision  Charge- offs  Recoveries  Ending Balance  Beginning balance  Provision  Charge- offs  Recoveries  Ending balance
Residential 1-4 family  $2,149   $10   ($85)  $(1)  $1   $2,074   $1,862   $154   ($10)  $1   $2,007 
Residential 5+ multifamily   413    —    82    —    —    495    155    103    —    —    258 
Construction of residential 1-4 family   83    —    (4)   —    —    79    75    7    —    —    82 
Home equity lines of credit   219    1    4    —    —    224    236    (3)   —    1    234 
Residential real estate   2,864    11    (3)   (1)   1    2,872    2,328    261    (10)   2    2,581 
Commercial   3,048    488    262    (23)   2    3,777    2,547    377    (150)   1    2,775 
Construction of commercial   122    —    5    —    —    127    80    22    —    —    102 
Commercial real estate   3,170    488    267    (23)   2    3,904    2,627    399    (150)   1    2,877 
Farm land   33    —    14    —    —    47    32    5    —    —    37 
Vacant land   100    —    (11)   —    —    89    131    3    —    —    134 
Real estate secured   6,167    499    267    (24)   3    6,912    5,118    668    (160)   3    5,629 
Commercial and industrial   1,158    164    (127)   (50)   31    1,176    984    159    (10)   11    1,144 
Municipal   12    —    18    —    —    30    30    (1)   —    —    29 
Consumer   56    —    37    (24)   12    81    81    14    (45)   13    63 
Unallocated   438    —    250    —    —    688    563    (47)   —    —    516 
Totals  $7,831   $663   $445   ($98)  $46   $8,887   $6,776   $793   ($215)  $27   $7,381 
                                                        

 17 

 

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 
June 30, 2019                              
Residential 1-4 family  $329,847   $1,902   $5,632   $172   $335,479   $2,074 
Residential 5+ multifamily   36,160    495    988    —    37,148    495 
Construction of residential 1-4 family   12,553    79    —    —    12,553    79 
Home equity lines of credit   34,105    223    526    1    34,631    224 
Residential real estate   412,665    2,699    7,146    173    419,811    2,872 
Commercial   284,145    3,591    3,801    186    287,946    3,777 
Construction of commercial   10,175    127    —    —    10,175    127 
Commercial real estate   294,320    3,718    3,801    186    298,121    3,904 
Farm land   3,510    47    204    —    3,714    47 
Vacant land   7,865    87    185    2    8,050    89 
Real estate secured   718,360    6,551    11,336    361    729,696    6,912 
Commercial and industrial   163,349    1,176    138    —    163,487    1,176 
Municipal   19,782    30    —    —    19,782    30 
Consumer   5,125    46    41    35    5,166    81 
Unallocated allowance   —    688    —    —    —    688 
Totals  $906,616   $8,491   $11,515   $396   $918,131   $8,887 

 

 

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2018                              
Residential 1-4 family  $340,946   $2,042   $4,916   $107   $345,862   $2,149 
Residential 5+ multifamily   34,835    413    1,675    —    36,510    413 
Construction of residential 1-4 family   12,041    83    —    —    12,041    83 
Home equity lines of credit   33,975    213    458    6    34,433    219 
Residential real estate   421,797    2,751    7,049    113    428,846    2,864 
Commercial   279,389    2,907    4,210    141    283,599    3,048 
Construction of commercial   8,622    106    354    16    8,976    122 
Commercial real estate   288,011    3,013    4,564    157    292,575    3,170 
Farm land   3,969    33    216    —    4,185    33 
Vacant land   8,132    98    190    2    8,322    100 
Real estate secured   721,909    5,895    12,019    272    733,928    6,167 
Commercial and industrial   162,404    1,158    501    —    162,905    1,158 
Municipal   14,344    12    —    —    14,344    12 
Consumer   4,512    56    —    —    4,512    56 
Unallocated allowance   —    438    —    —    —    438 
Totals  $903,169   $7,559   $12,520   $272   $915,689   $7,831 

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

June 30, 2019 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $895,151   $7,328   $—   $—   $895,151   $7,328 
Potential problem loans 1   11,465    475    —    —    11,465    475 
Impaired loans   —    —    11,515    396    11,515    396 
Unallocated allowance   —    688    —    —    —    688 
Totals  $906,616   $8,491   $11,515   $396   $918,131   $8,887 

 

 18 

 

December 31, 2018 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $895,527   $6,989   $—   $—   $895,527   $6,989 
Potential problem loans 1   7,642    132    —    —    7,642    132 
Impaired loans   —    —    12,520    272    12,520    272 
Unallocated allowance   —    438    —    —    —    438 
Totals  $903,169   $7,559   $12,520   $272   $915,689   $7,831 

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

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

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance    Specific    Income   Loan balance    Income 
    Book    Note    Average    allowance    recognized    Book    Note    Average    recognized 
June 30, 2019                           
Residential  $4,629   $4,985   $3,032   $172   $66   $1,991   $2,659   $3,299   $13 
Home equity lines of credit   43    43    45    1    1    483    575    442    — 
Residential real estate   4,672    5,028    3,077    173    67    2,474    3,234    3,741    13 
Commercial   2,565    2,571    2,239    186    51    1,236    2,519    2,287    27 
Construction of commercial   —    —    143    —    —    —    3    72    — 
Farm land   —    —    —    —    —    204    428    211    — 
Vacant land   42    42    42    2    1    143    163    145    5 
Real estate secured   7,279    7,641    5,501    361    119    4,057    6,347    6,456    45 
Commercial and industrial   3    3    —    —    —    135    236    395    3 
Consumer   41    41    6    35    —    —    —    6    — 
Totals  $7,323   $7,685   $5,507   $396   $119   $4,192   $6,583   $6,857   $48 

Note: The income recognized is for the six month period ended June 30, 2019.

 

   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 
June 30, 2018                           
Residential  $3,331   $3,382   $3,965   $117   $57   $3,901   $4,936   $2,976   $63 
Home equity lines of credit   47    47    47    2    1    60    113    63    — 
Residential real estate   3,378    3,429    4,012    119    58    3,961    5,049    3,039    63 
Commercial   1,818    1,843    2,026    143    30    3,459    4,941    3,027    43 
Construction of commercial   —    —    15    —    —    362    386    348    3 
Farm land   —    —    —    —    —    230    443    240    — 
Vacant land   43    43    44    3    1    151    173    153    5 
Real estate secured   5,239    5,315    6,097    265    89    8,163    10,992    6,807    114 
Commercial and industrial   —    —    74    —    —    508    607    439    1 
Consumer   —    —    —    —    —    —    4    —    — 
Totals  $5,239   $5,315   $6,171   $265   $89   $8,671   $11,603   $7,246   $115 

Note: The income recognized is for the six month period ended June 30, 2018.

 

 19 

 

NOTE 4 – LEASES

On January 1, 2019, the Bank adopted ASU 2016-02, “Leases (Topic 842) and all subsequent ASUs that modified Topic 842. The Bank leases facilities and equipment with various expiration dates through 2036. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance are to be paid by Salisbury. The leases for three Bank facilities are accounted for as finance leases (previously referred to as capital leases). The remaining leases are classified as operating leases, and therefore, were previously not recognized on the Bank's Consolidated Balance Sheet. Effective January 1, 2019, the Bank recorded approximately $1.6 million of right-of-use assets and corresponding lease liability related to these operating leases. The Bank does not have any leases with related parties and equipment leases are not material to Salisbury's consolidated financial statements.

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 June 30, 2019 and consolidated income statements for the six months and three months ended June 30, 2019.

($ in thousands, except lease term and discount rate)  Classification       June 30, 2019  
Assets             
Operating  Other assets       $1,457 
Finance  Bank premises and equipment 1        2,740 
Total Leased Assets          $4,197 
Liabilities             
Operating  Other liabilities       $1,457 
Finance  Finance lease        3,011 
Total lease liabilities          $4,468 
1 Net of accumulated depreciation of $532 thousand and $472 thousand, respectively.
              
Lease cost  Classification   

Six months ended

June 30, 2019

    

Three months ended

June 30, 2019

 
Operating leases  Premises and equipment  $123   $61 
Finance leases:             
Amortization of leased assets  Premises and equipment   120    47 
Interest on finance leases  Interest expense   92    46 
Total lease cost     $335   $154 
              
Weighted Average Remaining Lease Term             
Operating leases           8.6 years 
Financing leases           13.1 years 
Weighted Average Discount Rate 1             
Operating leases           3.70%
Financing leases           6.20%
1 Salisbury uses the FHLBB five year 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 June 30, 2019.

  Future minimum lease payments (in thousands)    Operating Leases      Finance Leases  
 2019   $123   $168 
 2020    246    336 
 2021    228    342 
 2022    199    345 
 2023    148    347 
 Thereafter    782    2,953 
 Total future minimum lease payments    1,726    4,491 
 Less amount representing interest    (269)   (1,480)
 Total present value of net future minimum lease payments   $1,457   $3,011 

 

 20 

 

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)    June 30, 2019      December 31, 2018  
Residential mortgage loans serviced for others  $106,868   $111,378 
Fair value of mortgage servicing rights   818    951 

Changes in mortgage servicing rights are as follows:

   Three months ended  Six months ended
Periods ended June 30, (in thousands)  2019  2018  2019  2018
Mortgage Servicing Rights                    
Balance, beginning of period  $221   $228   $228   $233 
Originated   1    —    5    7 
Amortization (1)   (13)   (11)   (24)   (23)
Balance, end of period  $209   $217   $209   $217 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 6 - PLEDGED ASSETS

(in thousands)    June 30, 2019      December 31, 2018  
Securities available-for-sale (at fair value)  $70,737   $80,991 
Loans receivable (at book value)   316,252    328,674 
Total pledged assets  $386,989   $409,665 

At June 30, 2019, securities were pledged as follows: $63.4 million to secure public deposits, $7.3 million to secure repurchase agreements and $0.05 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 7 – 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 shareholders 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  Six months ended
Periods ended June 30, (in thousands, except per share data)  2019  2018  2019  2018
Net income  $2,703   $1,899   $5,137   $3,915 
Less: Undistributed earnings allocated to participating securities   (32)   (22)   (58)   (42)
Net income allocated to common stock  $2,671   $1,877   $5,079   $3,873 
Weighted average common shares issued   2,813    2,794    2,810    2,790 
Less: Unvested restricted stock awards   (33)   (32)   (31)   (30)
Weighted average common shares outstanding used to calculate basic earnings per common share   2,780    2,762    2,779    2,760 
Add: Dilutive effect of stock options, unvested restricted stock awards and units   20    17    16    20 
Weighted average common shares outstanding used to calculate diluted earnings per common share   2,800    2,779    2,795    2,780 
Earnings per common share (basic)  $0.96   $0.68   $1.83   $1.40 
Earnings per common share (diluted)  $0.95   $0.68   $1.82   $1.39 

 

 21 

 

NOTE 8 – SHAREHOLDERS' EQUITY

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The requirements of the final rules approved by the Federal Reserve Bank (“FRB”) and FDIC, include a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. The initial implementation of the capital conservation buffer began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent January 1, by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of June 30, 2019, the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. A bank can be considered “well-capitalized” even if it does not maintain the capital conservation buffer as long as it meets the “well-capitalized” levels set forth below (and provided it is not subject to any written order, agreement, capital directive, etc.). A bank with a capital conservation buffer of at least 2.5% means that it generally will not be subject to certain limitations regarding capital distributions, such as dividend payments, discretionary payments on tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers.

The Bank's risk-weighted assets at June 30, 2019 and December 31, 2018 were $869.2 million and $860.6 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
June 30, 2019                                        
                                         
Total Capital (to risk-weighted assets)   $109,272    12.57%  $69,539    8.0%  $91,270    10.5%  $86,294    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   100,293    11.54    52,154    6.0    73,885    8.5    69,539    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   100,293    11.54    39,116    4.5    60,847    7.0    56,500    6.5 
                                         
Tier 1 Capital (to average assets)   $100,293    9.10    44,090    4.0    44,090    4.0    55,113    5.0 
December 31, 2018                                        
                                         
Total Capital (to risk-weighted assets)   $104,013    12.09%  $68,848    8.0%  $90,362    10.5%  $86,059    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   96,092    11.17    51,636    6.0    73,150    8.5    68,848    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   96,092    11.17    38,727    4.5    60,242    7.0    55,939    6.5 
                                         
Tier 1 Capital (to average assets)   $96,092    8.83    43,527    4.0    43,527    4.0    54,409    5.0 
                                         

 

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Cash Dividends to Common Shareholders

Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, notes that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.

NOTE 9 – BENEFITS

Salisbury's 401(k) Plan expense was $192 thousand and $238 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $431 thousand and $520 thousand, respectively, for the six month periods ended June 30, 2019 and 2018. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $27 thousand and ($24) thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $48 thousand and $2 thousand, respectively, for the six month periods ended June 30, 2019 and 2018. The credit in the last year's second quarter reflected a reduction of the Bank's liability associated with split-dollar life insurance arrangements for employees who left the Bank in 2017.

ESOP

Salisbury offers an ESOP to eligible employees.  Under the Plan, Salisbury may make discretionary contributions to the Plan, which generally vests in full upon six years of qualified service. Salisbury's ESOP expense was $53 thousand and $66 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $102 thousand and $127 thousand, respectively, for the six month periods ended June 30, 2019 and 2018.

Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $29 thousand and $28 thousand, respectively, for the three month periods ended June 30, 2019 and 2018, and $58 thousand and $57 thousand, respectively, for the six month periods ended June 30, 2019 and 2018.

Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense was $115 thousand and $95 thousand, respectively; for the three month periods ended June 30, 2019 and 2018, and $215 thousand and $208 thousand, respectively; for the six month periods ended June 30, 2019 and 2018. The tax benefit from restricted stock expense was $24 thousand and $20 thousand, respectively; for the three month periods ended June 30, 2019 and 2018, and $45 thousand and $44 thousand, respectively; for the six month periods ended June 30, 2019 and 2018. In second quarter 2019, Salisbury granted a total of 15,130 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 $600 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of June 30, 2019 and 2018 totaled $1,075 thousand and $983 thousand, respectively. There were forfeitures of $16 thousand or 360 shares in the second quarter of 2019 and forfeitures of $21 thousand or 460 shares for year to date. There were no forfeitures in the second quarter or six month periods ended June 30, 2018.

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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. The performance goal 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. A total of 6,800 performance-based restricted stock units were granted, including 3,500 units to three Named Executive Officers. Mr. Cantele received 1,500 units, Mr. Davies received 1,000 units and Mr. Albero received 1,000 units. Compensation expense of $23 thousand was recorded with respect to these RSUs in the three and six month periods ended June 30, 2019. No performance-based restricted stock units were awarded prior to March 29, 2019.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the second quarter 2019, there were 2,025 stock options exercised at $17.04, by one employee and in the first quarter 2019, there were no exercised options. In the second quarter 2018, there were 3,350 stock options exercised at $31.11 by two employees and in the first quarter 2018, 1,350 stock options were exercised at $31.11 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury.

NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

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

Salisbury adopted ASC 820-10, “Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury's market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

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.

Salisbury adopted ASC 2016-01, “Financial Instruments – overall (subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires the exit price notion to be used when measuring the fair value of financial instruments for disclosure. Salisbury estimated the fair value of its loan portfolio based on a loan-level assessment that incorporated probabilities of default by loan type and internal risk rating, product-level loss given defaults and prepayment rates as well as discount rates.

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the three month period ended June 30, 2019.

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Assets measured at fair value are as follows:

   Fair Value Measurements Using  Assets at
(in thousands)  Level 1  Level 2  Level 3  fair
            value
June 30, 2019                    
Assets at fair value on a recurring basis                    
U.S. Government Agency notes  $—   $4,932   $—   $4,932 
Municipal bonds   —    20,623    —    20,623 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises   —    39,723    —    39,723 
Collateralized mortgage obligations:                    
U.S. Government agencies   —    30,530    —    30,530 
Corporate bonds   —    4,341    —    4,341 
Securities available-for-sale  $—   $100,149   $—   $100,149 
CRA mutual funds   869    —    —    869 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans  $—   $—   $2,872   $2,872 
Other real estate owned  $—   $—   $401   $401 
December 31, 2018                    
Assets at fair value on a recurring basis                    
U.S. Government Agency notes  $—   $7,670   $—   $7,670 
Municipal bonds   —    5,379    —    5,379 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises   —    57,446    —    57,446 
Collateralized mortgage obligations:                    
U.S. Government agencies   —    17,747    —    17,747 
Corporate bonds   —    3,576    —    3,576 
Securities available-for-sale  $—   $91,818   $—   $91,818 
CRA mutual funds   836    —    —    836 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans  $—   $—   $4,238   $4,238 
Other real estate owned  $—   $—   $1,810   $1,810 

 

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

(in thousands)  Carrying  Estimated  Fair value measurements using
   value  fair value  Level 1  Level 2  Level 3
June 30, 2019                         
Financial Assets                         
Cash and cash equivalents  $48,513   $48,513   $48,513   $—   $— 
Securities available-for-sale, net   100,149    100,149    —    100,149    — 
CRA mutual fund   869    869    869    —    — 
Federal Home Loan Bank of Boston stock   2,839    2,839    2,839    —    — 
Loans held-for-sale   403    403    —    —    403 
Loans receivable, net   910,573    910,149    —    —    910,149 
Accrued interest receivable   3,439    3,439    3,439    —    — 
Cash surrender value of life insurance policies   15,355    15,355    15,355    —    — 
Financial Liabilities                         
Demand (non-interest-bearing)  $231,019   $231,019   $—   $231,019   $— 
Demand (interest-bearing)   156,687    156,687    —    156,687    — 
Money market   231,987    231,987    —    231,987    — 
Savings and other   158,809    158,809    —    158,809    — 
Certificates of deposit   172,221    172,865    —    172,865    — 
Deposits  $950,723   $951,397    —   $951,397   $— 
Repurchase agreements   6,308    6,308    —    6,308    — 
FHLBB advances   32,769    33,057    —    33,057    — 
Subordinated debt   9,847    10,121    10,121         — 
Note payable   263    269    —    269    — 
Capital lease liability   3,011    3,225    —         3,225 
Accrued interest payable   576    576    576    —    — 
December 31, 2018                         
Financial Assets                         
Cash and cash equivalents  $58,445   $58,445   $58,445   $—   $— 
Securities available-for-sale, net   91,818    91,818    —    91,818    — 
CRA mutual fund   836    836    836    —    — 
Federal Home Loan Bank of Boston stock   4,496    4,496    4,496    —    — 
Loans receivable, net   909,279    886,222    —    —    886,222 
Accrued interest receivable   3,148    3,148    3,148    —    — 
Cash surrender value of life insurance policies   14,438    14,438    14,438    —    — 
Financial Liabilities                         
Demand (non-interest-bearing)  $228,448   $228,448   $—   $228,448   $— 
Demand (interest-bearing)   153,586    153,586    —    153,586    — 
Money market   204,219    204,219    —    204,219    — 
Savings and other   178,807    178,807    —    178,807    — 
Certificates of deposit   161,679    162,013    —    162,013    — 
Deposits   926,739    927,073    —    927,073    — 
Repurchase agreements   4,104    4,104    —    4,104    — 
FHLBB advances   67,154    67,231    —    67,231    — 
Subordinated debt   9,835    10,006    10,006    —    — 
Note payable   280    288    —    288    — 
Capital lease liability   3,081    3,339    —    —    3,339 
Accrued interest payable   237    237    237    —    — 

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

NOTE 11 – SUBSEQUENT EVENTS

On July 26, 2019 the Board of Directors declared a dividend of $0.28 per common share payable on August 30, 2019 to shareholders of record as of August 16, 2019.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. (“Salisbury” or the “Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2018. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).

BUSINESS

Salisbury Bancorp, Inc., a Connecticut corporation, formed in 1998, is the bank holding company for Salisbury Bank and Trust Company (the "Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's common stock is traded on the NASDAQ Capital Market under the symbol “SAL.” Salisbury's principal business consists of its operation and control of the business of the Bank.

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

Critical Accounting Policies and Estimates

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

Salisbury's significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements, which, along with this Management's Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury's reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance for Loan Losses” section of Management's Discussion and Analysis.

Goodwill and Intangible Assets

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

Available-For-Sale Securities

Management evaluates securities for other-than-temporary impairment giving consideration to the extent to which the fair value has been less than cost, estimates of future cash flows, delinquencies and default severity, and the intent and ability of Salisbury to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The consideration of the above factors is subjective and involves estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

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FINANCIAL CONDITION

Securities and Short Term Funds

During the first six months of 2019, securities increased $6.7 million to $103.9 million at June 30, 2019. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $9.9 million to $48.5 million at June 30, 2019.

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at June 30, 2019.

Loans

Net loans receivable increased $1.3 million to $910.6 million at June 30, 2019, compared with $909.3 million at December 31, 2018.

Asset Quality

During the first six months of 2019, non-performing assets decreased $2.9 million primarily from the payoff of certain non-performing loans and the sale of $1.4 million of OREO properties. During the first six months of 2019, total impaired and potential problem loans increased by $2.8 million to $23.0 million, or 2.50% of gross loans receivable at June 30, 2019, from $20.1 million, or 2.20% of gross loans receivable at December 31, 2018.

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

Past Due Loans

Loans past due 30 days or more decreased $2.0 million for the six months ended June 30, 2019 to $5.6 million, or 0.61% of gross loans receivable compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018.

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

(in thousands)    June 30, 2019      December 31, 2018  
Past due 30-59 days  $1,673   $1,435 
Past due 60-89 days   801    730 
Past due 90-179 days   —    795 
Accruing loans   2,474    2,960 
Past due 30-59 days   565    208 
Past due 60-89 days   —    108 
Past due 90-179 days   1,217    812 
Past due 180 days and over   1,364    3,517 
Non-accrual loans   3,146    4,645 
Total loans past due 30 days or greater  $5,620   $7,605 

Credit Risk Ratings

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

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

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

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

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

Impaired Loans

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

(in thousands)    June 30, 2019      December 31, 2018  
Non-accrual loans, excluding troubled debt restructured loans  $3,597   $4,430 
Non-accrual troubled debt restructured loans   1,465    1,289 
Accruing troubled debt restructured loans   6,453    6,801 
Total impaired loans  $11,515   $12,520 
Commitments to lend additional amounts to impaired borrowers  $—   $— 

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Non-Performing Assets

Non-performing assets decreased $2.9 million to $5.4 million or 0.49% of assets at June 30, 2019, from $8.3 million, or 0.74% of assets at December 31, 2018, and decreased $1.0 million from $6.4 million, or 0.57% of assets at June 30, 2018.

The 34.4% decrease in non-performing assets in the first six months of 2019 primarily reflected the sale of OREO properties of $1.4 million and the pay-off of non-accrual loans and accruing loans past due 90 days and over of approximately $1.5 million.

The components of non-performing assets are as follows:

(in thousands)    June 30, 2019      December 31, 2018  
Residential 1-4 family  $2,402   $2,092 
Residential 5+ multifamily   988    1,000 
Home equity lines of credit   483    411 
Commercial   941    1,640 
Farm land   204    216 
Real estate secured   5,018    5,359 
Commercial and industrial   3    360 
Consumer   41    — 
Non-accruing loans   5,062    5,719 
Accruing loans past due 90 days and over   —    795 
Non-performing loans   5,062    6,514 
Other Real Estate Owned (OREO)   401    1,810 
Non-performing assets  $5,463   $8,324 

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

(in thousands)    June 30, 2019      December 31, 2018  
Current  $1,915   $1,074 
Past due 30-59 days   566    208 
Past due 60-89 days   —    108 
Past due 90-179 days   1,217    1,607 
Past due 180 days and over   1,364    3,517 
Total non-performing loans  $5,062   $6,514 

At June 30, 2019, 37.83% of non-performing loans were current with respect to loan payments, compared with 16.49% at December 31, 2018.

Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans improved slightly during the first six months of 2019 to $7.9 million, or 0.86% of gross loans receivable at June 30, 2019, compared to $8.1 million, or 0.88% of gross loans receivable at December 31, 2018.

The components of troubled debt restructured loans are as follows:

(in thousands)    June 30, 2019      December 31, 2018  
Residential 1-4 family  $3,229   $2,824 
Residential 5+ multifamily   —    675 
Home equity lines of credit   43    47 
Vacant land   185    190 
Commercial   2,861    2,924 
Real estate secured   6,318    6,660 
Commercial and industrial   135    141 
Accruing troubled debt restructured loans   6,453    6,801 
Residential 1-4 family   435    289 
Residential 5+ multifamily   988    1,000 
Commercial   —    — 
Real estate secured   1,423    1,289 
Consumer   42    — 
Non-accrual troubled debt restructured loans   1,465    1,289 
Troubled debt restructured loans  $7,918   $8,090 

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

(in thousands)    June 30, 2019      December 31, 2018  
Current  $6,276   $6,340 
Past due 30-59 days   177    461 
Past due 60-89 days   —    — 
Accruing troubled debt restructured loans   6,453    6,801 
Current   604    359 
Past due 30-59 days   —    67 
Past due 60-89 days   —    — 
Past due 90-179 days   —    634 
Past due 180 days and over   861    229 
Non-accrual troubled debt restructured loans   1,465    1,289 
Total troubled debt restructured loans  $7,918   $8,090 

At June 30, 2019, 86.89% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.81% at December 31, 2018.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $3.8 million during the first six months of 2019 to $11.5 million, or 1.25% of gross loans receivable at June 30, 2019, compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018. The increase in potential problem loans primarily reflected the downgrade of certain residential, commercial and industrial and farm loans totaling $4.0 million, partly offset by the pay-off of two commercial loans and the upgrade of a commercial construction loan to accrual status.

The components of potential problem loans are as follows:

(in thousands)    June 30, 2019      December 31, 2018  
Residential 1-4 family  $1,758   $1,300 
Residential 5+ multifamily   773    — 
Home equity lines of credit   —    29 
Residential real estate   2,531    1,329 
Commercial   5,398    5,567 
Construction of commercial   246    141 
Commercial real estate   5,644    5,708 
Farm land   1,536    — 
Real estate secured   9,711    7,037 
Commercial and industrial   1,754    605 
Total potential problem loans  $11,465   $7,642 

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

(in thousands)    June 30, 2019      December 31, 2018  
Current  $11,126   $6,543 
Past due 30-59 days   240    78 
Past due 60-89 days   99    226 
Past due 90-179 days   —    795 
Total potential problem loans  $11,465   $7,642 

At June 30, 2019, 97.04% of potential problem loans were current with respect to loan payments, as compared with 85.62% at December 31, 2018. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

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Deposits and Borrowings

Deposits increased $24.0 million during the first six months of 2019, or 2.6%, to $950.7 million at June 30, 2019, compared with $926.7 million at December 31, 2018. Approximately $13.2 of this increase was attributed to additional Certificate of Deposit Account Registry Service (“CDARS”) one-way buys and brokered certificates of deposit (“brokered CDs”). The remainder of the increase reflected normal business activity. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. Salisbury utilizes CDARS and brokered CDs, in addition to other sources, to fund its operations.

Retail repurchase agreements increased $2.2 million during 2019 to $6.3 million at June 30, 2019, compared with $4.1 million at December 31, 2018.

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

   June 30, 2019  December 31, 2018
(in thousands)  Average Balance  Percent  Weighted
Interest Rate		  Average Balance  Percent  Weighted
Interest Rate
Demand deposits  $219,249    23.15%   0.00%  $223,356    25.61%   0.00%
Interest-bearing checking accounts   156,597    16.53    0.39    147,751    16.93    0.31 
Regular savings accounts   184,346    19.46    0.61    171,662    19.67    0.71 
Money market savings   209,351    22.11    1.07    195,741    22.43    0.64 
Certificates of deposit (CD's)1   177,535    18.75    1.88    134,057    15.36    1.27 
Total deposits  $947,078    100.00%   0.77%  $872,567    100.00%   0.31%

1CD's included CDARS one-way buys of $22.7 million at June 30, 2019 and $19.4 million at December 31, 2018 and brokered certificates of deposits of $30.0 million at June 30, 2019 and $20.0 million at December 31, 2018.

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

Interest rates    June 30, 2019      December 31, 2018  
Less than 1.00%  $35,748   $38,992 
1.00% to 1.99%   40,305    47,175 
2.00% to 2.99%   95,670    75,512 
3.00% to 3.99%   498    — 
Total  $172,221   $161,679 

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

   At June 30, 2019
  Interest rates (in thousands)  Less Than or Equal to One Year  More Than One to Two Years  More Than Two to Three Years  More Than Three Years  Total  Percent of Total
  Less than 1.00%  $29,937   $5,810   $1   $—   $35,748    20.76%
  1.00% to 1.99%   18,058    7,727    7,657    6,863    40,305    23.40%
  2.00% to 2.99%   77,512    7,998    4,450    5,710    95,670    55.55%
  3.00% to 3.99%   —    —    498    —    498    0.29%
  Total  $125,507   $21,535   $12,606   $12,573   $172,221    100.00%

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

June 30, 2019 (in thousands)  Within
3 months		 
3-6 months		 
6-12 months		  Over
1 year		  Total
Certificates of deposit $100,000 and over  $28,476   $25,022   $36,018   $25,388   $114,901 

FHLBB advances decreased $34.4 million during the first six months of 2019 to $32.8 million at June 30, 2019, compared with $67.2 million at December 31, 2018. The decrease reflected the maturity of borrowings advanced during 2018. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts.  These letters of credit are secured primarily by residential mortgage loans.  The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding.  At June 30, 2019, $33 million of letters of credit were outstanding.

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Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities.

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

Operating activities for the six-month period ended June 30, 2019 provided net cash of $6.1 million. Investing activities utilized net cash of $6.1 million principally from $1.8 million of net loan originations and principal collections, $41.3 million of purchases of securities available-for-sale and $0.2 million of capital expenditures, partly offset by proceeds of $7.0 million from calls and maturities of securities available-for-sale, $28.1 million from the sale of available-for-sale-securities and $1.7 million net redemptions of FHLBB stock. Financing activities utilized net cash of $9.9 million, principally due to repayment of FHLBB long term advances of $25.0 million and $9.5 million in short term advances, this was partially offset by an increase in deposits of $13.4 million and an increase in time deposits of $10.5 million.

At June 30, 2019, Salisbury had outstanding commitments to fund new loan originations of $20.7 million and unused lines of credit of $127.5 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

RESULTS OF OPERATIONS

For the three month periods ended June 30, 2019 and 2018

OVERVIEW

Net income allocated to common stock was $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2019 (second quarter 2019), compared with $1.9 million, or $0.68 per common share, for the second quarter ended June 30, 2018 (second quarter 2018), and $2.4 million, or $0.87 per common share, for the first quarter ended March 31, 2019 (first quarter 2019).

Net Interest Income

Tax equivalent net interest income for the second quarter 2019 decreased $76 thousand, or 0.9%, versus first quarter 2019, and increased $326 thousand, or 4.1%, versus second quarter 2018. Average earning assets increased $11.6 million versus first quarter 2019, and increased $74.9 million versus second quarter 2018. Average total interest bearing deposits increased $27.6 million versus first quarter 2019 and increased $95.3 million versus second quarter 2018. The tax equivalent net interest margin for the second quarter 2019 was 3.19% compared with 3.28% for the first quarter 2019 and 3.31% for the second quarter 2018. The decline in the net interest margin primarily reflected the higher cost of borrowing from the FHLBB and the repricing of deposits at higher interest rates. In addition, net interest income for the second quarter 2019 was reduced by $140 thousand for the write-off of unamortized premiums on purchased loans which paid off during the quarter. This write-off of premiums reduced second quarter tax equivalent net interest margin by approximately 0.05%.

 

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

Three months ended June 30,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)    2019      2018      2019      2018      2019      2018  
Loans (a)(d)  $923,513   $860,575   $9,984   $9,116    4.31%   4.24%
Securities (c)(d)   99,050    84,575    738    569    2.98    2.69 
FHLBB stock   3,258    5,006    66    53    8.09    4.23 
Short term funds (b)   35,853    36,648    186    128    2.08    1.40 
Total earning assets   1,061,674    986,804    10,974    9,866    4.13    4.00 
Other assets   56,081    54,317                     
Total assets  $1,117,755   $1,041,121                     
Interest-bearing demand deposits  $156,597   $145,913    154    101    0.39    0.28 
Money market accounts   209,351    183,618    558    275    1.07    0.60 
Savings and other   184,346    176,680    456    267    0.99    0.60 
Certificates of deposit   177,535    126,246    831    354    1.88    1.12 
Total interest-bearing deposits   727,829    632,457    1,999    997    1.10    0.63 
Repurchase agreements   3,334    2,107    4    1    0.47    0.19 
Capital lease   4,509    3,161    46    48    4.07    6.07 
Note payable   266    300    4    4    6.06    5.33 
Subordinated Debt (net of issuance costs)   9,843    9,820    156    156    6.34    6.35 
FHLBB advances   37,462    74,886    279    500    2.94    2.67 
Total interest-bearing liabilities   783,243    722,731    2,488    1,706    1.27    0.94 
Demand deposits   221,012    213,926                     
Other liabilities   5,862    5,472                     
Shareholders' equity   107,638    98,992                     
Total liabilities & shareholders' equity  $1,117,755   $1,041,121                     
Net interest income            $8,486   $8,160           
Spread on interest-bearing funds                       2.86    3.05 
Net interest margin (e)                       3.19    3.31 

(a)       Includes non-accrual loans.

(b)Includes interest-bearing deposits in other banks and federal funds sold.
(c)Average balances of securities are based on historical cost.
(d)Includes tax exempt income benefit of $142,000 and $117,000, respectively, for 2019 and 2018 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2019 and 2018.
(e)Net interest income divided by average interest-earning assets.

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

Three months ended June 30, (in thousands) 2019 versus 2018
Change in interest due to   Volume    Rate    Net 
Loans  $674   $194   $868 
Securities   103    66    169 
FHLBB stock   (27)   40    13 
Short term funds   (3)   61    58 
Interest-earning assets   747    361    1,108 
Deposits   206    797    1,002 
Repurchase agreements   1    2    3 
Capital lease   17    (19)   (2)
Note payable   —    —    — 
Subordinated Debt   —    —    — 
FHLBB advances   (264)   42    (221)
Interest-bearing liabilities   (40)   822    782 
Net change in net interest income  $787   $(461)  $326 

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Interest Income

Tax equivalent interest income increased $1.1 million to $11.0 million for second quarter 2019 as compared with $9.9 million in second quarter 2018. Loan income as compared to second quarter 2018 increased $868 thousand, or 9.5%, primarily due to a $62.9 million, or 7.3%, increase in average loans. Tax equivalent securities income increased $169 thousand, or 29.7%, for second quarter 2019 as compared with second quarter 2018, primarily due to a $14.5 million, or 17.1%, increase in average balances. Income on short-term funds as compared to second quarter 2018 increased $58 thousand, or 45.3%, primarily due to a 68 basis point increase in the average short-term funds yields.

Interest Expense

Interest expense increased $782 thousand to $2.5 million for second quarter 2019 as compared with $1.7 million in second quarter 2018. Interest on deposit accounts increased $1.0 million, or 100.5%, as a result of a $95.4 million increase in the average balances and an average increase in deposit rates of 47 basis points as compared with second quarter 2018. Interest expense on FHLBB borrowings decreased $221 thousand as a result of an average balance decrease of $37.4 million as compared with second quarter 2018, partly offset by a 27 basis point increase in the average borrowing rate. Interest expense on subordinated debt totaled $156 thousand for the second quarter in both 2019 and 2018.

Provision and Allowance for Loan Losses

The provision for loan losses was $151 thousand for second quarter 2019, compared with $467 thousand for second quarter 2018. The decline in the provision reflected lower loan growth and lower net charge-offs compared with second quarter 2018. Net loan charge-offs were $14 thousand and $144 thousand for the respective quarters.

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

Three months ended June 30,    2019      2018  
Net charge-offs to average loans receivable, gross   0.00%   0.02%
Non-performing loans to loans receivable, gross   0.55    0.67 
Accruing loans past due 30-89 days to loans receivable, gross   0.27    0.18 
Allowance for loan losses to loans receivable, gross   0.97    0.84 
Allowance for loan losses to non-performing loans   175.56    125.51 
Non-performing assets to total assets   0.49    0.58 

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 0.97% at June 30, 2019 compared to 0.84% at June 30, 2018 and the ratio of the allowance for loan losses to non-performing loans increased to 175.56% at June 30, 2019 from 125.51% at June 30, 2018. In first quarter 2019, Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, gross loans receivable and the allowance for loan losses increased by $663 thousand and the coverage ratios also increased. The balance of net loans receivable did not change as a result of this transfer.

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $5.1 million or 0.55% of gross loans receivable at June 30, 2019 as compared to $5.9 million, or 0.67%, at June 30, 2018. Accruing loans past due 30-89 days increased $1.0 million to $2.5 million, or 0.27% of gross loans receivable from $1.5 million, or 0.17% of gross loans receivable, at June 30, 2018. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

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

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

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The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. There were no significant changes in Salisbury's policies or methodology pertaining to the general component of the allowance for loan losses during the first six months of 2019.

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

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2019.

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

Non-Interest Income

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

Three months ended June 30, (dollars in thousands) 2019      2018      2019 vs. 2018  
Trust and wealth advisory  $1,044   $949   $95    10%
Service charges and fees   1,012    892    120    13.5 
Gains(losses) gains on sales of mortgage loans, net   1    (1)   2    n/a 
Mortgage servicing, net   80    84    (4)   (4.8)
Gains (losses) on CRA mutual fund   12    (7)   19    n/a 
Gains on available-for-sale securities, net   281    17    264    n/a 
Other   118    124    (6)   (4.8)
Total non-interest income  $2,548   $2,058   $490    23.8%

Non-interest income for second quarter 2019 increased $490 thousand versus second quarter 2018 or $207 thousand excluding the gains on the sale of AFS securities and gains on the CRA mutual fund. Trust and Wealth Advisory increased $95 thousand versus second quarter 2018 primarily due to higher asset-based fees. Assets under administration increased $22 million from March 31, 2019 to $713 million as of June 30, 2019 and increased $45 million from June 30, 2018. Service charges and fees increased $120 thousand versus second quarter 2018 due to higher interchange, deposit and lending fees. Lending fees for the second quarter 2019 included prepayment penalty fees of $25 thousand whereas no prepayment penalty fees were recorded in the second quarter 2018. Income from sales of mortgage loans was minimal during both the second quarter 2019 and second quarter 2018. Mortgage loans of $0.3 million were sold during the second quarter 2019 whereas no mortgage loans were sold in second quarter 2018. Mortgage servicing fees decreased $4 thousand compared with second quarter 2018 on slightly lower servicing income and higher amortization expense for mortgage servicing rights. Second quarter 2019 and second quarter 2018 included mortgage servicing amortization and periodic impairment charges (net) of $13 thousand and $11 thousand, respectively. Other income includes bank owned life insurance income and rental income.

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Non-Interest Expense

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

Three months ended June 30, (dollars in thousands) 2019      2018      2019 vs. 2018  
Salaries  $2,959   $2,939   $20    0.7%
Employee benefits   1,042    969    73    7.5 
Premises and equipment   1,004    1,101    (97)   (8.8)
Data processing   577    556    21    3.8 
Professional fees   583    611    (28)   (4.6)
OREO gains, losses and write-downs   270    1    269    n/a 
Collections and other real estate owned   79    235    (156)   (66.4)
FDIC insurance   140    123    17    13.8 
Marketing and community support   151    222    (71)   (32.0)
Amortization of core deposit intangibles   99    116    (17)   (14.7)
Other   535    544    (9)   (1.7)
Non-interest expense  $7,439   $7,417   $22    0.3%

Non-interest expense for second quarter 2019 increased $22 thousand versus second quarter 2018 or decreased $247 thousand, excluding a loss on the sale of an OREO property. Total compensation expense increased $93 thousand versus the second quarter 2018. The increase reflected the higher cost of medical benefits and lower deferred compensation expense as a result of lower loan volume. Premises and equipment expense decreased $97 thousand versus second quarter 2018. The year-over-year decrease primarily reflected lower lease and depreciation expense as well as other operating costs associated with the relocation of the Newburgh and Fishkill, N.Y. branches into new locations. Data processing expense increased $21 thousand versus second quarter 2018 primarily due to higher core system charges and higher ATM network processing fees, which were partly offset by lower data communications expenses and lower Trust & Wealth data processing charges. Professional fees decreased $28 thousand versus second quarter 2018 as lower consulting fees were partly offset by higher legal and internal audit fees. The second quarter 2018 included one-time legal and consultation expenses of approximately $75 thousand related to the acquisition of the Fishkill, N.Y. branch from Orange Bank & Trust Company. Collections, OREO and loan related expenses decreased $156 thousand versus second quarter 2018 primarily as a result of lower OREO carrying costs, delinquent real estate taxes on foreclosed properties and appraisal costs. The decrease in marketing and community support primarily reflected costs incurred in second quarter 2018 associated with the relocation of the Newburgh, N.Y. and Fishkill, N.Y. branches.

Income Taxes

The effective income tax rates for second quarter 2019 and second quarter 2018 were 18.14% and 14.35%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

Salisbury did not incur Connecticut income tax in 2019 (to date) or 2018, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.

For the six month periods ended June 30, 2019 and 2018

Overview

Net income allocated to common stock was $5.1 million, or $1.83 per common share, for the six month period ended June 30, 2019 (six month period 2019), compared with $3.9 million, or $1.40 per common share, for the six month period ended June 30, 2018 (six month period 2018).

Net Interest Income

Tax equivalent net interest income for the six month period 2019 increased $778 thousand, or 4.8%, versus the six month period 2018. Average earning assets increased $92.3 million versus the six month period 2018. Average total interest bearing deposits increased $94.3 million versus the six month period 2018. The net interest margin of 3.22% decreased 16 basis points from 3.39% for the six month period 2018. The decline in the net interest margin primarily reflected higher interest rates on interest-bearing deposits.

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

Six months ended June 30,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)    2019      2018      2019      2018      2019      2018  
Loans (a)(d)  $920,915   $840,802   $20,021   $17,874    4.35%   4.25%
Securities (c)(d)   97,856    82,516    1,454    1,071    2.97    2.60 
FHLBB stock   3,723    4,450    138    92    7.41    4.13 
Short term funds (b)   33,408    35,864    341    248    2.04    1.38 
Total earning assets   1,055,902    963,632    21,954    19,285    4.16    4.00 
Other assets   56,552    53,530                     
Total assets  $1,112,454   $1,017,162                     
Interest-bearing demand deposits  $153,910   $145,459    298    192    0.39    0.26 
Money market accounts   204,572    186,088    1,032    503    1.01    0.54 
Savings and other   184,266    164,001    907    417    0.98    0.51 
Certificates of deposit   171,334    124,185    1,558    662    1.82    1.07 
Total interest-bearing deposits   714,082    619,733    3,795    1,774    1.06    0.57 
Repurchase agreements   3,039    2,366    7    3    0.46    0.25 
Capital lease   4,293    2,563    92    83    4.29    6.48 
Note payable   271    304    8    9    5.90    5.92 
Subordinated Debt (net of issuance costs)   9,841    9,817    312    312    6.34    6.36 
FHLBB advances   48,507    62,888    691    833    2.85    2.65 
Total interest-bearing liabilities   780,033    697,671    4,905    3,014    1.26    0.86 
Demand deposits   219,825    215,349                     
Other liabilities   6,504    5,675                     
Shareholders' equity   106,092    98,467                     
Total liabilities & shareholders' equity  $1,112,454   $1,017,162                     
Net interest income            $17,049   $16,271           
Spread on interest-bearing funds                       2.90    3.14 
Net interest margin (e)                       3.22    3.38 
(a)Includes non-accrual loans.
(b)Includes interest-bearing deposits in other banks and federal funds sold.
(c)Average balances of securities are based on historical cost.
(d)Includes tax exempt income benefit of $268,000 and $236,000, respectively for 2019 and 2018 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2019 and 2018.
(e)Net interest income divided by average interest-earning assets.

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

Six months ended June 30, (in thousands) 2019 versus 2018
Change in interest due to   Volume    Rate    Net 
Loans  $1,722   $425   $2,147 
Securities   214    169    383 
FHLBB stock   (21)   67    46 
Short term funds   (21)   114    93 
Interest-earning assets   1,894    775    2,669 
Deposits   386    1,635    2,021 
Repurchase agreements   1    3    4 
Capital lease   47    (38)   9 
Note payable   (1)   —    (1)
Subordinated Debt   1    (1)   — 
FHLBB advances   (198)   56    (142)
Interest-bearing liabilities   236    1,655    1,891 
Net change in net interest income  $1,658   $(880)  $778 

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Interest Income

Tax equivalent interest income increased $2.7 million to $22.0 million for the six month period 2019 compared with $19.3 million for the six month period 2018. Loan income, as compared to the six months of 2018, increased $2.1 million, or 12%, primarily due to an $80.1 million, or 9.5%, increase in average loans and a 10 basis point increase in the average yield. Tax equivalent securities income increased $0.4 million, or 35.8%, for the six month period 2019 as compared with the six month period 2018, primarily due to a $15.3 million increase in average volume and a 37 basis point increase in average yield. Income on short-term funds as compared to six month period 2018 increased $93 thousand, or 37.5%, primarily due to a 66 basis point increase in the average short-term funds yields, partly offset by a $2.5 million, or 6.8%, decrease in average short-term funds.

Interest Expense

Interest expense increased $1.9 million to $4.9 million for the six month period 2019 compared with $3.0 million for the six month period 2018. Interest on deposit accounts increased $2.0 million, or 113.9%, as a result of a $94.3 million increase in the average balances and an increase in average deposit rates of 49 basis points compared with the six month period 2018. Interest expense on FHLBB borrowings decreased $142 thousand, or 17.0%, as a result of an average balance decrease of $14.4 million compared with the six month period 2018, partly offset by a 20 basis point increase in the average borrowings rate. Interest expense on subordinated debt totaled $312 thousand for the six month periods 2019 and 2018.

Provision and Allowance for Loan Losses

The provision for loan losses was $445 thousand for the six month period ended June 30, 2019 as compared to $793 thousand for the six month period ended June 30, 2018. Net loan charge-offs were $53 thousand and $187 thousand for the respective periods.

Reserve coverage at June 30, 2019, as measured by the ratio of allowance for loan losses to gross loans, at 0.97%, compares with 0.85% a year ago at June 30, 2018. The increase in the coverage ratio reflected the transfer of the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves in first quarter 2019. During the first six months of 2019, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.5 million to $5.1 million. Non-performing loans represent 0.55% of gross loans receivable, a decrease from 0.71% at December 31, 2018. At June 30, 2019, accruing loans past due 30-89 days increased $0.3 million to $2.5 million or 0.27% of gross loans receivable from 0.24% at December 31, 2018. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

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

Six months ended June 30, (dollars in thousands) 2019      2018      2019 vs. 2018  
Trust and wealth advisory  $1,950   $1,843   $107    5.8%
Service charges and fees   1,932    1,760    172    9.8 
Gains on sales of mortgage loans, net   8    17    (9)   (52.9)
Mortgage servicing, net   156    167    (11)   (6.6)
Gains (losses) on CRA mutual fund   23    (20)   43    n/a 
Gains (losses) on available-for-sale securities, net   272    16    256    n/a 
Other   234    249    (15)   (6.0)
Total non-interest income  $4,575   $4,032   $543    13.5%

Non-interest income for the six month period ended June 30, 2019 increased $543 thousand versus the same period in 2018. Excluding gains on the sale of AFS securities and gains (losses) on the CRA mutual fund, non-interest income increased $244 thousand versus second quarter 2018. Trust and wealth advisory revenues increased $107 thousand mainly due to growth in asset based fees. Service charges and fees increased $172 thousand due to higher deposit, interchange and lending-related fees. Income from sales of mortgage loans decreased $9 thousand substantially due to lower gains on sales of fixed rate residential mortgage loans. Mortgage loans sales totaled $0.5 million for the six month period ended June 30, 2019 compared with $0.7 million for the six month period ended June 30, 2018. The six month periods ended June 30, 2019 and 2018 included mortgage servicing amortization of $24 thousand and $23 thousand, respectively. Other income includes bank owned life insurance income and rental income.

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Non-interest expense

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

Six months ended June 30, (dollars in thousands) 2019      2018      2019 vs. 2018  
Salaries  $5,952   $5,785   $167    2.9%
Employee benefits   2,227    2,128    99    4.7 
Premises and equipment   1,976    2,125    (149)   (7.0)
Data processing   1,086    1,042    44    4.2 
Professional fees   1,118    1,230    (112)   (9.1)
OREO gains, losses and write-downs   322    53    269           n/a 
Collections and other real estate owned   209    316    (107)   (33.9)
FDIC insurance   303    253    50    19.8 
Marketing and community support   307    463    (156)   (33.7)
Amortization of core deposit intangible assets   203    236    (33)   (14.0)
Other   947    965    (18)   (1.9)
Non-interest expense  $14,650   $14,596   $54    0.4%

Non-interest expense for the six month period ended June 30, 2019 increased $54 thousand versus the same period in 2018. Salaries increased $167 thousand primarily due to increased staffing levels and lower deferred expenses due to lower loan volume. Benefits increased $99 thousand primarily due to an increase in the cost of medical premiums partly offset by lower ESOP and 401-K accruals. Premises and equipment decreased $149 thousand primarily due to lower depreciation, software maintenance and machine maintenance and repairs expense. Data processing increased $44 thousand mainly due to expenses related to core processing and higher ATM fees, partly offset by lower data communications expenses. The decrease in professional fees of $112 thousand versus the six month period 2018 primarily reflected lower consulting and investment management expenses. The six month period ended June 30, 2018 also included one-time legal and consultation expenses of approximately $75 thousand related to the acquisition of the Fishkill, N.Y. branch from Orange Bank & Trust Company. Collections, OREO and loan related expense decreased $107 thousand on lower delinquent taxes on foreclosed properties, lower mortgage taxes and lower OREO carrying costs. FDIC insurance costs increased due to the growth in deposit balances. Marketing and community support decreased $156 thousand primarily due to marketing expenses incurred in the prior year period related to the acquisition and relocation of the Newburgh, N.Y. and Fishkill N.Y. branches. Other expenses decreased $18 thousand as higher director fees were offset by lower employee-related expenses and lower investor relations costs.

Income taxes

The effective income tax rates for the six month periods ended June 30, 2019 and June 30, 2018 were 17.95% and 16.31%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets.

CAPITAL RESOURCES

Shareholders' equity was $109.0 million at June 30, 2019, up $5.5 million from December 31, 2018. Book value and tangible book value per common share were $38.59 and $33.28, respectively, compared with $36.86 and $31.45, respectively, at December 31, 2018. Contributing to the increase in shareholders' equity for year-to-date 2019 was net income of $5.1 million and issued stock of $0.2 million, partially offset by other common stock dividends of $1.6 million. Other comprehensive income consists of unrealized gains on securities available-for-sale, net of tax, of $1.7 million for year-to-date June 30, 2019.

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. 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. 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.

Failure to meet minimum capital requirements could result in supervisory actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements.

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

    June 30, 2019      December 31, 2018  
Total Capital (to risk-weighted assets)   12.57%   12.09%
Tier 1 Capital (to risk-weighted assets)   11.54    11.17 
Common Equity Tier 1 Capital (to risk-weighted assets)   11.54    11.17 
Tier 1 Capital (to average assets)   9.10    8.83 

A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action regulations issued by the FDIC and the FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity Tier 1 ratio of 6.5% or above, and a Leverage ratio of 5% or above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Maintaining strong capital is essential to the Bank's safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices.

The FRB's final rules implementing the Basel Committee on Banking Supervision's capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of June 30, 2019, the Bank met each of its' capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank's category.

On February 8, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published a proposal that would simplify capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank), consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”). Section 201 of EGRRCPA requires the banking agencies to promulgate a rule establishing a new “Community Bank Leverage Ratio” of 8%-10% for qualifying banking organizations. Under the proposal, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) (“qualifying community banking organizations”) would be eligible to use a simple on-balance sheet leverage ratio as the measure of their capital adequacy. A qualifying community banking organization with a community bank leverage ratio (“CBLR”) of greater than 9% that “elects to use the CBLR framework” would not be subject to other risk-based and leverage capital requirements and would be considered to have met the well-capitalized ratio requirements for purposes of the agencies' Prompt Corrective Action (“PCA”) framework. The proposal also “incorporates CBLR levels as proxies for the following PCA categories: adequately capitalized, undercapitalized and significantly undercapitalized,” under each of which a CBLR banking organization would be subject to the same restrictions that currently apply to any other insured depository institution in the same PCA category. As a result, the proposal would establish three CBLR proxies for the following PCA capital categories: (a) Adequately capitalized: CBLR of 7.5% or greater; (b) Undercapitalized: CBLR of less than 7.5%; (c) and significantly undercapitalized: CBLR of less than 6%. Comments on the proposal were due by April 9, 2019. Salisbury and the Bank are evaluating the potential benefits of the additional flexibility offered by EGRRCPA and will monitor the proposed regulations.

Dividends

Salisbury paid $1.571 million in common stock dividends during the six month period ended June 30, 2019.

On July 26, 2019, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on August 30, 2019 to shareholders of record on August 16, 2019. Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

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FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 31, 2015, states that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.

Salisbury believes that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisbury or the Bank. The continued payment of common stock cash dividends by Salisbury will be dependent on Salisbury's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury.

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING STATEMENTS

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

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

Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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

(a)the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
(b)changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;
(c)increased competition from other financial and non-financial institutions;
(d)the impact of technological advances and cybersecurity matters;
(e)interest rate fluctuations; and
(f)other risks detailed from time to time in Salisbury's filings with the Securities and Exchange Commission.

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

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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Salisbury manages its exposure to interest rate risk through its Asset/Liability Management Committee (“ALCO”) using risk limits and policy guidelines to manage assets and funding liabilities to produce financial results that are consistent with Salisbury's liquidity, capital adequacy, growth, risk and profitability targets. Interest rate risk is the risk of a negative impact to future earnings due to changes in interest rates.

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury's financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management's June 30, 2019 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

The ALCO reviews the simulation results to determine whether Salisbury's exposure to change in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. Salisbury's tolerance levels for changes in net interest income in its income simulations varies depending on the magnitude of interest rate changes and level of risk-based capital. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where interest rates remain stable over the forecast horizon. The ALCO also evaluates the directional trends of net interest income, net interest margin and other financial measures over the forecast horizon for consistency with its liquidity, capital adequacy, growth, risk and profitability targets.

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At June 30, 2019, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declines in interest rates – a decline in market interest rates ranging from 124 basis points for the 2-year Treasury rates to 102 basis points for the 10-year Treasury in year one and then an increase in market interest rates ranging from 61 basis points for the 2 year treasury rate to 48 basis points for the 10-year Treasury in year two. In this scenario, the yield curve is inverted through 2019 with the Fed Funds rate being drastically cut late in 2019 and into early 2020. Ultimately, the yield curve slopes upward but at very low overall market interest rates. Deposit rates are assumed to shift by lessor amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of June 30, 2019, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of June 30, 2019.

As of June 30, 2019  Months 1-12    Months 13-24  
Immediately rising interest rates + 300bp (static growth assumptions)   (8.30)%   (1.70)%
Immediately falling interest rates - 100bp (static growth assumptions)   (1.30)   (4.50)
Immediately rising increase rates + 400bp (static growth assumptions)   (11.20)   (2.60)

The negative exposure of net interest income to immediately and gradually rising rates as compared to the unchanged rate scenario results from a faster projected rise in the cost of funds versus income from earning assets, as relatively rate-sensitive money market and time deposits re-price faster than longer duration earning assets. The negative exposure of net interest income to immediately falling rates as compared to an unchanged rate scenario results from a greater decline in earning asset yields compared to rates paid on funding liabilities, as a result of faster prepayments on existing assets and lower reinvestment rates on future loans originated and securities purchased.

While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the re-pricing, maturity and prepayment characteristics of financial instruments and the composition of Salisbury's balance sheet may change to a different degree than estimated. Simulation modeling assumes Salisbury's expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO's estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.

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Salisbury also monitors the potential change in market value of its available-for-sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to Salisbury's capital and liquidity position. Results are calculated using industry-standard analytical techniques and securities data. Available-for-sale equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates.

The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:

As of June 30, 2019 (in thousands)    Rates up 100bp      Rates up 200bp  
U.S. Government Agency notes   (5)   (214)
Municipal bonds   (1,116)   (2,507)
Mortgage backed securities:          
U.S. Government agencies and U.S. Government-sponsored enterprises   (632)   (2,068)
Collateralized mortgage obligations:          
U.S. Government agencies   (347)   (1,770)
Corporate bonds   (62)   (147)
Total available-for-sale debt securities  $(2,162)  $(6,706)

 

Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of June 30, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 2019.

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

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, Salisbury's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

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

Item 1A.RISK FACTORS

During the six months ended June 30, 2019, there were no material changes to the risk factors previously disclosed in Salisbury's.

Annual Report on Form 10-K for the year ended December 31, 2018.

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

None

Item 3.DEFAULTS UPON SENIOR SECURITIES

None

Item 4.MINE SAFETY DISCLOSURES

Not Applicable

Item 5.OTHER INFORMATION

None

Item 6.EXHIBITS

Exhibit No. Description
  
3.1Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
  
3.1.1Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).
  

3.1.2 

Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).
  
3.1.3Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).
  
3.1.4Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).
  
3.2Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
  
4.1 Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed December 10, 2015).
  
10.12017 Long Term Incentive Plan adopted by the Board on February 24, 2017 and approved by shareholders at Salisbury's 2017 Annual Meeting of Shareholders (incorporated by reference to Appendix A of the Registrant's definitive proxy statement filed April 10, 2017).
  
10.2Amendment Number Three to 2011 Long Term Incentive Plan dated as of April 28, 2017 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2017).
  
31.1Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

 

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

 

 

    SALISBURY BANCORP, INC.
     
August 8, 2019 By:   /s/ Richard J. Cantele, Jr.  
    Richard J. Cantele, Jr.,
    President and Chief Executive Officer
     
August 8, 2019 By:   /s/ Peter Albero  
    Peter Albero,
    Executive Vice President and Chief Financial Officer

 

 

 

 

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