SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the
ended ,
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
| | |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant's telephone number, including area code)
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act).
| Large accelerated filer ☐ | Accelerated filer ☐ |
| ☑ | 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
☐
The number of shares of Common Stock outstanding as of November 2, 2021 is .
TABLE OF CONTENTS
| PART 1 FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2021 (unaudited) AND DECEMBER 31, 2020 | 3 | |
| CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 4 | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 5 | |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 5 | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 7 | |
| NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | 9 | |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 31 |
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 47 |
| Item 4. | CONTROLS AND PROCEDURES | 48 |
| PART II. OTHER INFORMATION | ||
| Item 1. | LEGAL PROCEEDINGS | 48 |
| Item 1A. | RISK FACTORS | 48 |
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 48 |
| Item 3. | DEFAULTS UPON SENIOR SECURITIES | 48 |
| Item 4. | MINE SAFETY DISCLOSURES | 48 |
| Item 5. | OTHER INFORMATION | 48 |
| Item 6. | EXHIBITS | 49 |
| SIGNATURES | 49 | |
| 2 |
PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (unaudited)
| (in thousands, except share data) | September 30, 2021 (unaudited) |
December 31, 2020 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing demand deposits with other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Interest bearing Time Deposits with Financial Institutions | ||||||||
| Securities | ||||||||
| Available-for-sale at fair value | ||||||||
| CRA mutual fund at fair value | ||||||||
| Federal Home Loan Bank of Boston stock at cost | ||||||||
| Loans held-for-sale | ||||||||
| Loans receivable, net (allowance for loan losses: $13,168 and $13,754) | ||||||||
| Bank premises and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets (net of accumulated amortization: $5,405 and $5,207) | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of life insurance policies | ||||||||
| Deferred taxes | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES and SHAREHOLDERS' EQUITY | ||||||||
| Deposits | ||||||||
| Demand (non-interest bearing) | $ | $ | ||||||
| Demand (interest bearing) | ||||||||
| Money market | ||||||||
| Savings and other | ||||||||
| Certificates of deposit | ||||||||
| Total deposits | ||||||||
| Repurchase agreements | ||||||||
| Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt | ||||||||
| Note payable | ||||||||
| Finance lease obligations | ||||||||
| Accrued interest and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Common stock - $ per share par value | ||||||||
| Authorized: ; | ||||||||
| Issued: and | ||||||||
| Outstanding: and | ||||||||
| Unearned compensation - restricted stock awards | ( | ) | ( | ) | ||||
| Paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income, net | ||||||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ |
The accompanying notes are
an integral part of these unaudited consolidated financial statements.
| 3 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest and dividend income | ||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest on debt securities | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax exempt | ||||||||||||||||
| Other interest and dividends | ||||||||||||||||
| Total interest and dividend income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Deposits | ||||||||||||||||
| Repurchase agreements | ||||||||||||||||
| Finance lease | ||||||||||||||||
| Note payable | ||||||||||||||||
| Subordinated debt | ||||||||||||||||
| Federal Home Loan Bank of Boston advances | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest and dividend income | ||||||||||||||||
| Provision (release) for loan losses | ( | ) | ||||||||||||||
| Net interest and dividend income after provision (release) for loan losses | ||||||||||||||||
| Non-interest income | ||||||||||||||||
| Trust and wealth advisory | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Mortgage banking activities, net | ||||||||||||||||
| (Losses) gains on CRA mutual fund | ( | ) | ( | ) | ||||||||||||
| Gains (losses) on securities, net | ( | ) | ||||||||||||||
| Bank-owned life insurance ("BOLI") income | ||||||||||||||||
| Gain on sale of assets | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-interest expense | ||||||||||||||||
| Salaries | ||||||||||||||||
| Employee benefits | ||||||||||||||||
| Premises and equipment | ||||||||||||||||
| Write-down of assets | ||||||||||||||||
| Data processing | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Collections, OREO, and loan related | ||||||||||||||||
| FDIC insurance | ||||||||||||||||
| Marketing and community support | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||||
| Common dividends per share | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income | ||||||||||||||||
| Net unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ||||||||||||
| Reclassification of net realized (gains) losses in net income (1) | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Unrealized (losses) gains on securities available-for-sale, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains (losses) on securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending September 30, 2021 and 2020 are $(1) thousand and $(7) thousand, respectively. The net tax effect for the nine months ending September 30, 2021 and 2020 were $1 thousand and ($45) thousand, respectively.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Three
months ended September 30, | Common Stock | Paid-in | Retained | Unearned compensation- restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | awards | income | equity | ||||||||||||||||||||||
| Balances at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | |||||||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Issuance of restricted common stock | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Forfeiture of stock awards | ( | ) | - | ( | ) | - | - | - | ||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
Nine
months ended September 30, | Common Stock | Paid-in | Retained | Unearned compensation- restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | awards | income (loss) | equity | ||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income for period | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | |||||||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock options exercised | - | - | - | - | ||||||||||||||||||||||||
| Issuance of restricted common stock | - | ( | ) | - | - | |||||||||||||||||||||||
| Forfeiture of stock awards | ( | ) | - | ( | ) | - | - | - | ||||||||||||||||||||
| Issuance of director's restricted stock awards | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income for period | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock options exercised | - | - | - | |||||||||||||||||||||||||
| Issuance of restricted common stock | - | ( | ) | - | - | |||||||||||||||||||||||
| Issuance of director's restricted stock awards | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Nine months ended September 30, (in thousands) | 2021 | 2020 | ||||||
| Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| (Accretion), amortization and depreciation | ||||||||
| Securities | ||||||||
| Bank premises and equipment | ||||||||
| Core deposit intangible | ||||||||
| Modification fees on Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt issuance costs | ||||||||
| Mortgage servicing rights | ||||||||
| Fair value adjustment on deposits | ( | ) | ||||||
| (Gains) and losses, including write-downs | ||||||||
| Sales and calls of securities available-for-sale, net | ( | ) | ||||||
| CRA Mutual Fund | ( | ) | ||||||
| Sales of loans, excluding capitalized servicing rights | ( | ) | ( | ) | ||||
| Loss on write-down of asset | ||||||||
| Gain on sale of premises and equipment | ( | ) | ||||||
| (Release) provision for loan losses | ( | ) | ||||||
| Proceeds from loans sold | ||||||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| (Decrease) increase in deferred loan origination fees and costs, net | ( | ) | ||||||
| Mortgage servicing rights originated | ( | ) | ( | ) | ||||
| Decrease (increase) in interest receivable | ( | ) | ||||||
| Decrease (increase) in deferred tax benefit | ( | ) | ||||||
| (Increase) decrease in prepaid expenses | ( | ) | ||||||
| Increase in cash surrender value of life insurance policies | ( | ) | ( | ) | ||||
| Increase in income tax receivable | ( | ) | ||||||
| (Decrease) increase in income tax payable | ( | ) | ||||||
| (Increase) decrease in other assets | ( | ) | ||||||
| Decrease in accrued expenses | ( | ) | ( | ) | ||||
| (Decrease) increase in interest payable | ( | ) | ||||||
| Increase (decrease) in other liabilities | ( | ) | ||||||
| Stock based compensation-restricted stock awards | ||||||||
| Net cash provided by operating activities | ||||||||
| Investing Activities | ||||||||
| Net redemption of Federal Home Loan Bank of Boston stock | ||||||||
| Purchases of securities available-for-sale | ( | ) | ( | ) | ||||
| Proceeds from sales of securities available-for-sale | ||||||||
| Proceeds from calls of securities available-for-sale | ||||||||
| Proceeds from principal payments and maturities of securities available-for-sale | ||||||||
| Reinvestment of CRA Mutual Fund | ( | ) | ( | ) | ||||
| Loan originations and principal collections, net | ( | ) | ( | ) | ||||
| Recoveries of loans previously charged off | ||||||||
| Proceeds from sale/ disposal of premises and equipment | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Purchase of life insurance policies | ( | ) | ||||||
| Proceeds from life insurance policy | ||||||||
| Net cash used by investing activities | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 7 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| Nine months ended September 30, (in thousands) | 2021 | 2020 | ||||||
| Financing Activities | ||||||||
| Increase in deposit transaction accounts, net | $ | $ | ||||||
| (Decrease) increase in time deposits, net | ( | ) | ||||||
| Increase in securities sold under agreements to repurchase, net | ||||||||
| Federal Home Loan Bank of Boston long term advances | ||||||||
| Federal Home Loan Bank of Boston long-term maturities/payments | ( | ) | ||||||
| Federal Home Loan Bank of Boston short-term advances, net change | ( | ) | ||||||
| Principal payments on Amortizing Federal Home Loan Bank of Boston advance | ( | ) | ( | ) | ||||
| Issuance of Sub Debt, net of issuance costs | ||||||||
| Repayment of Sub Debt | ( | ) | ||||||
| Principal payments on note payable | ( | ) | ( | ) | ||||
| Decrease in finance lease obligation | ( | ) | ( | ) | ||||
| Stock options exercised | ||||||||
| Common stock dividends paid | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Non cash investing and financing activities: | ||||||||
| Transfers from Fixed Assets to Other Assets | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 8 |
Salisbury Bancorp, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the interim periods presented.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities and impairment of goodwill and intangibles.
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2020 Annual Report on Form 10-K for the year ended December 31, 2020.
The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses (ACL) for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero.
| 9 |
Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.
The Bank is working towards the completion of its ACL methodology. To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, the Bank will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.
Based on the credit quality of Salisbury's existing available for sale debt securities portfolio, which primarily consists of obligations of U.S. government agency and U.S. government-sponsored enterprise securities, including mortgage-backed securities, Salisbury does not expect the adoption of ASU 2016-13, as it relates to debt securities, to be significant. For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.
The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury expects to complete independent model validation and to finalize its documentation of ACL processes and controls by the first quarter of 2023.
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes." The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. Under current generally accepted accounting principles, entities amortize the premium on purchased callable debt securities to the earliest call date. If a callable debt security contains additional future call dates, entities should consider whether the amortized cost basis exceeded the amount repayable by the issuer at the next call date. If so, the excess or premium should be amortized to the next call date. This ASU clarifies that the next call date is the first date when a call option at a specified price becomes exercisable. Once that date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that the financial statements are available to be issued. Salisbury is currently evaluating the impact of the transition from LIBOR to a new reference rate.
| 10 |
NOTE 2 - SECURITIES
The composition of securities is as follows:
| (in thousands) | Amortized cost basis | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| September 30, 2021 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency notes | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| CRA mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
| (in thousands) | Amortized cost basis | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Government Agency notes | $ | $ | $ | $ | ||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| CRA mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
In third quarter
2021, $
| 11 |
The following table summarizes the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| September 30, 2021 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | - | $ | - | $ | $ | ||||||||||||||||
| U.S. Government Agency notes | ||||||||||||||||||||||||
| Municipal bonds | - | - | ||||||||||||||||||||||
| Mortgage- backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||||||||||
| Collateralized mortgage obligations | - | - | ||||||||||||||||||||||
| Corporate bonds | - | - | - | - | - | - | ||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| December 31, 2020 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Government Agency notes | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Municipal bonds | - | - | ||||||||||||||||||||||
| Mortgage- backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.
| September 30, 2021 (in thousands) | Maturity | Amortized cost | Fair value | Yield(1) | ||||||||||
| U.S. Treasury | After 5 year but within 10 years | $ | $ | % | ||||||||||
| U.S. Government Agency notes | After 5 year but within 10 years | |||||||||||||
| Total | ||||||||||||||
| Municipal bonds | After 5 year but within 10 years | |||||||||||||
| After 10 years | ||||||||||||||
| Total | ||||||||||||||
| Mortgage-backed securities, Collateralized mortgage obligations, | Securities not due at a single maturity date | 98,094 | 98,616 | 1.64 | ||||||||||
| Corporate bonds | After 5 years but within 10 years | |||||||||||||
| Securities available-for-sale | $ | $ | % | |||||||||||
(1) Yield is based on amortized cost.
Salisbury evaluates debt securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI.
The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2021.
U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at September 30, 2021, which approximated 0.91% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
| 12 |
U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Nineteen securities had unrealized losses at September 30, 2021, which approximated 0.45% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixteen securities had unrealized losses at September 30, 2021, which approximated 1.77% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
U.S. Government agency and U.S. Government-sponsored enterprise securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Forty nine securities had unrealized losses at September 30, 2021, which approximated 1.51% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2021.
The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2021. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.
| 13 |
NOTE 3 - LOANS
The composition of loans receivable and loans held-for-sale is as follows:
| (In thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Residential 1-4 family | $ | $ | ||||||
| Residential 5+ multifamily | ||||||||
| Construction of residential 1-4 family | ||||||||
| Home equity lines of credit | ||||||||
| Residential real estate | ||||||||
| Commercial | ||||||||
| Construction of commercial | ||||||||
| Commercial real estate | ||||||||
| Farm land | ||||||||
| Vacant land | ||||||||
| Real estate secured | ||||||||
| Commercial and industrial ex PPP Loans | ||||||||
| PPP Loans | ||||||||
| Total Commercial and industrial | ||||||||
| Municipal | ||||||||
| Consumer | ||||||||
| Loans receivable, gross | ||||||||
| Deferred loan origination fees, net | ( | ) | ( | ) | ||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Loans receivable, net | $ | $ | ||||||
| Loans held-for-sale | ||||||||
| Residential 1-4 family | $ | $ |
Salisbury has entered into loan participation agreements with other banks and transferred a portion of its originated loans to the participating banks. Transferred amounts are accounted for as sales and excluded from Salisbury's loans receivable. Salisbury and its participating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. Salisbury services the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.
Salisbury also has entered into loan participation agreements with other banks and purchased a portion of the other banks' originated loans. Purchased amounts are accounted for as loans without recourse to the originating bank. Salisbury and its originating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. The originating banks service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.
At
September 30, 2021 and December 31, 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling
$
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.
| 14 |
Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges due to the COVID-19 virus pandemic ("virus"). Approximately 41% of the Bank's commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 13% of the Bank's commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank's commercial loans are to educational institutions and approximately 6% of Salisbury's commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury's commercial real estate exposure as a percentage of the Bank's total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 173% as of September 30, 2021 and 182% at December 31, 2020 compared to the regulatory monitoring guideline of 300%.
Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration ("SBA") guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.
In 2021 Salisbury
processed
Credit Quality
Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.
Loans rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management's close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.
Loans rated as "substandard" (6) are loans where the Bank's position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.
Loans rated "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.
Loans classified as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio is examined periodically by its regulatory agencies, the Federal Deposit Insurance Corporation ("FDIC") and the Connecticut Department of Banking ("CTDOB").
| 15 |
The composition of loans receivable by risk rating grade is as follows:
| (in thousands) | Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | - | $ | - | $ | ||||||||||||||||
| Residential 5+ multifamily | - | - | ||||||||||||||||||||||
| Construction of residential 1-4 family | - | - | - | |||||||||||||||||||||
| Home equity lines of credit | - | - | ||||||||||||||||||||||
| Residential real estate | - | - | ||||||||||||||||||||||
| Commercial | - | - | ||||||||||||||||||||||
| Construction of commercial | - | - | - | - | ||||||||||||||||||||
| Commercial real estate | - | - | ||||||||||||||||||||||
| Farm land | - | - | ||||||||||||||||||||||
| Vacant land | - | - | ||||||||||||||||||||||
| Real estate secured | - | - | ||||||||||||||||||||||
| Commercial and industrial | - | - | ||||||||||||||||||||||
| Municipal | - | - | - | - | ||||||||||||||||||||
| Consumer | - | - | ||||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | - | $ | - | $ | ||||||||||||||||
| (in thousands) | Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | - | $ | - | $ | ||||||||||||||||
| Residential 5+ multifamily | - | - | ||||||||||||||||||||||
| Construction of residential 1-4 family | - | - | - | - | ||||||||||||||||||||
| Home equity lines of credit | - | - | ||||||||||||||||||||||
| Residential real estate | - | - | ||||||||||||||||||||||
| Commercial | - | - | ||||||||||||||||||||||
| Construction of commercial | - | - | - | |||||||||||||||||||||
| Commercial real estate | - | - | ||||||||||||||||||||||
| Farm land | - | - | - | |||||||||||||||||||||
| Vacant land | - | - | ||||||||||||||||||||||
| Real estate secured | - | - | ||||||||||||||||||||||
| Commercial and industrial | - | |||||||||||||||||||||||
| Municipal | - | - | - | - | ||||||||||||||||||||
| Consumer | - | - | - | |||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||
| 16 |
The composition of loans receivable by delinquency status is as follows:
| Past due | ||||||||||||||||||||||||||||||||
| 180 | 30 | Accruing | ||||||||||||||||||||||||||||||
| (in thousands) | days | days | 90 days | |||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90-179 | and | and | and | Non- | ||||||||||||||||||||||||||
| Current | days | days | days | over | over | over | accrual | |||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Residential 5+ multifamily | - | - | - | - | ||||||||||||||||||||||||||||
| Construction of residential 1-4 family | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Home equity lines of credit | - | - | ||||||||||||||||||||||||||||||
| Residential real estate | - | |||||||||||||||||||||||||||||||
| Commercial | - | - | ||||||||||||||||||||||||||||||
| Construction of commercial | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Commercial real estate | - | - | ||||||||||||||||||||||||||||||
| Farm land | - | - | - | - | ||||||||||||||||||||||||||||
| Vacant land | - | - | - | - | ||||||||||||||||||||||||||||
| Real estate secured | - | |||||||||||||||||||||||||||||||
| Commercial and industrial | - | |||||||||||||||||||||||||||||||
| Municipal | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Consumer | - | - | - | - | ||||||||||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Past due | ||||||||||||||||||||||||||||||||
| 180 | 30 | Accruing | ||||||||||||||||||||||||||||||
| (in thousands) | days | days | 90 days | |||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90-179 | and | and | and | Non- | ||||||||||||||||||||||||||
| Current | days | days | days | over | over | over | accrual | |||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | $ | - | $ | |||||||||||||||||||||||
| Residential 5+ multifamily | - | - | - | - | ||||||||||||||||||||||||||||
| Construction of residential 1-4 family | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Home equity lines of credit | - | - | ||||||||||||||||||||||||||||||
| Residential real estate | - | |||||||||||||||||||||||||||||||
| Commercial | - | |||||||||||||||||||||||||||||||
| Construction of commercial | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Commercial real estate | - | |||||||||||||||||||||||||||||||
| Farm land | - | - | - | |||||||||||||||||||||||||||||
| Vacant land | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Real estate secured | - | |||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||
| Municipal | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Consumer | - | - | - | - | - | |||||||||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 17 |
Troubled Debt Restructurings (TDRs)
For the three and nine month periods
ended September 30, 2021, one residential loan with a loan balance of $
Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Provision (Benefit) | Charge- offs | Reco- veries | Ending balance | Beginning balance | Provision (Benefit) | Charge- offs | Reco- veries | Ending balance | |||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||
| Residential 5+ multifamily | |||||||||||||||||||||||||||||||||||||||||
| Construction of residential 1-4 family | |||||||||||||||||||||||||||||||||||||||||
| Home equity lines of credit | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Residential real estate | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Commercial | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Construction of commercial | |||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Farm land | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Vacant land | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Real estate secured | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Municipal | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Consumer | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Unallocated | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Provision (Benefit) | Charge- offs | Reco- veries | Ending balance | Beginning balance | Provision (Benefit) | Charge- offs | Reco- veries | Ending balance | |||||||||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | ( |
) | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||
| Residential 5+ multifamily | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Construction of residential 1-4 family | |||||||||||||||||||||||||||||||||||||||||
| Home equity lines of credit | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Residential real estate | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Commercial | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Construction of commercial | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Commercial real estate | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Farm land | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Vacant land | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Real estate secured | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Municipal | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||||
| Consumer | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Unallocated | ( |
) | |||||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||
| 18 |
The composition of loans receivable and the allowance for loan losses is as follows:
| (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential 5+ multifamily | ||||||||||||||||||||||||
| Construction of residential 1-4 family | ||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Construction of commercial | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Farm land | ||||||||||||||||||||||||
| Vacant land | ||||||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Unallocated allowance | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||
| Residential 1-4 family | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential 5+ multifamily | ||||||||||||||||||||||||
| Construction of residential 1-4 family | ||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||
| Construction of commercial | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Farm land | ||||||||||||||||||||||||
| Vacant land | ||||||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Unallocated allowance | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The credit quality segments of loans receivable and the allowance for loan losses are as follows:
| September 30, 2021 (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| Performing loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Potential problem loans 1 | ||||||||||||||||||||||||
| Impaired loans | ||||||||||||||||||||||||
| Unallocated allowance | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2020 (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| Performing loans | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Potential problem loans 1 | ||||||||||||||||||||||||
| Impaired loans | ||||||||||||||||||||||||
| Unallocated allowance | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.
| 19 |
A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or fair value of collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows:
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Specific | Income | Loan balance | Income | |||||||||||||||||||||||||||||||
| Book | Note | Average | allowance | recognized | Book | Note | Average | recognized | ||||||||||||||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||
| Construction of commercial | ||||||||||||||||||||||||||||||||||||
| Farm land | ||||||||||||||||||||||||||||||||||||
| Vacant land | ||||||||||||||||||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Note: The income recognized is for the nine month period ended September 30, 2021.
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Specific | Income | Loan balance | Income | |||||||||||||||||||||||||||||||
| Book | Note | Average | allowance | recognized | Book | Note | Average | recognized | ||||||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||
| Construction of commercial | ||||||||||||||||||||||||||||||||||||
| Farm land | ||||||||||||||||||||||||||||||||||||
| Vacant land | ||||||||||||||||||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Note: The income recognized is for the nine month period ended September 30, 2020.
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Loan balance | ||||||||||||||||||||||||||||||||||
| Recorded Investment | Note | Average | Specific allowance | Income recognized | Recorded Investment | Note | Average | Income recognized | ||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||
| Residential | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Home equity lines of credit | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||||||||||
| Construction of commercial | ||||||||||||||||||||||||||||||||||||
| Farm land | ||||||||||||||||||||||||||||||||||||
| Vacant land | ||||||||||||||||||||||||||||||||||||
| Real estate secured | ||||||||||||||||||||||||||||||||||||
| Commercial and industrial | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| 20 |
NOTE 4 - LEASES
The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of September 30, 2021 and December 31, 2020 and consolidated income statements for the nine months and three months ended September 30, 2021 and 2020.
| ($ in thousands, except lease term and discount rate) | Classification | September 30, 2021 | December 31, 2020 | |||||||
| Assets | ||||||||||
| Operating | Other assets | $ | $ | |||||||
| Finance | Bank premises and equipment 1 | |||||||||
| Total Leased Assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Operating | Other liabilities | $ | $ | |||||||
| Finance | Finance lease | |||||||||
| Total Lease Liabilities | $ | $ | ||||||||
| 1 Net of accumulated depreciation of $471 thousand and $396 thousand, respectively. | ||||||||||
| Lease Cost | Classification | Nine months ended September 30, 2021 | Three months ended September 30, 2021 | |||||||
| Operating leases | Premises and equipment | $ | $ | |||||||
| Finance leases: | ||||||||||
| Amortization of leased assets | Premises and equipment | |||||||||
| Interest on finance leases | Interest expense | |||||||||
| Total lease cost | $ | $ | ||||||||
| Lease Cost | Classification | Nine months ended September 30, 2020 | Three months ended September 30, 2020 | |||||||
| Operating leases | Premises and equipment | $ | $ | |||||||
| Finance leases: | ||||||||||
| Amortization of leased assets | Premises and equipment | |||||||||
| Interest on finance leases | Interest expense | |||||||||
| Total lease cost | $ | $ | ||||||||
| Weighted Average Remaining Lease Term | September 30, 2021 | December 31, 2020 | ||||||||
| Operating leases | ||||||||||
| Financing leases | ||||||||||
| Weighted Average Discount Rate 1 | ||||||||||
| Operating leases | % | % | ||||||||
| Financing leases | % | % | ||||||||
| 1 Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate. | ||||||||||
The following is a schedule by years of the present value of the net minimum lease payments as of September 30, 2021.
| Future minimum lease payments (in thousands) | Operating Leases | Finance Leases | ||||||||
| 2021 | $ | $ | ||||||||
| 2022 | ||||||||||
| 2023 | ||||||||||
| 2024 | ||||||||||
| 2025 | ||||||||||
| Thereafter | ||||||||||
| Total future minimum lease payments | ||||||||||
| Less amount representing interest | ( | ) | ( | ) | ||||||
| Total present value of net future minimum lease payments | $ | $ | ||||||||
| 21 |
NOTE 5 - ASSETS HELD FOR SALE
The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation process, the Bank has entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. As of September 30, 2021, the current branch location met the accounting guidance criteria to be classified as assets held for sale. There are no liabilities held for sale associated with this location.
Following is a summary of the assets held for sale, which are recorded in other assets within the consolidated balance sheet as of September 30, 2021:
| Buildings and leasehold improvements | $ |
An impairment expense of
$
NOTE 6 - MORTGAGE SERVICING RIGHTS
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Residential mortgage loans serviced for others | $ | $ | ||||||
| Fair value of mortgage servicing rights |
Changes in mortgage servicing rights are as follows:
| Three months ended | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Mortgage Servicing Rights | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Originated | ||||||||||||||||
| Amortization (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
Valuation Allowance | ||||||||||||||||
| Balance, beginning of period | ( | ) | ||||||||||||||
| Decrease in impairment reserve (1) | ||||||||||||||||
| Balance, end of period | ||||||||||||||||
| Mortgage servicing rights, net | $ | $ | $ | $ | ||||||||||||
| (1) | Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net. |
NOTE 7 - PLEDGED ASSETS
The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Securities available-for-sale (at fair value) | $ | $ | ||||||
| Loans receivable (at book value) | ||||||||
| Total pledged assets | $ | $ |
At September 30, 2021,
securities were pledged as follows: $
NOTE 8 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
Salisbury is exposed to certain risk arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank uses derivative financial instruments to manage differences in the amount, timing, and duration of the Bank's known or expected cash receipts and its known or expected cash payments principally related to its portfolio of loans to first-time home buyers.
| 22 |
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
As of September 30, 2021 and December 31, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:
| Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Carrying
Amount of the Hedged Assets | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets | ||||||||||||||
| (in thousands) | September 30, 2021 | December 31, 2020 | September 30, 2021 | December 31, 2020 | ||||||||||||
| Loans receivable(1) | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Total | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
(1) These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $39.7 million; the cumulative basis adjustment associated with these hedging relationships was $4 thousand; and the amount of the designated hedged item was $10.0 million.
The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30, 2021 and December 31, 2020.
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||
| (in thousands) | Notional Amount | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||
| Derivatives designated as hedge instruments | ||||||||||||||||
| Interest Rate Products | $ | Other assets | $ | Other Assets | $ | |||||||||||
| Total Derivatives designated as hedge instruments | $ | $ | ||||||||||||||
The tables below present the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2021 and 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.
|
|
| |||||||||||||||
Three months ended September 30, 2021 |
Nine months ended September 30, 2021 |
|||||||||||||||
| (in thousands) | Interest Income |
Interest Expense |
Interest Income |
Interest Expense |
||||||||||||
| Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded | $ | $ | $ | - | $ | - | ||||||||||
| Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts | ||||||||||||||||
| Hedged items | - | |||||||||||||||
| Derivatives designated as hedging instruments | $ | ( | ) | $ | $ | ( | ) | $ | - | |||||||
|
|
| |||||||||||||||
Three months ended September 30, 2020 |
Nine months ended September 30, 2020 |
|||||||||||||||
| (in thousands) | Interest Income |
Interest Expense |
Interest Income |
Interest Expense |
||||||||||||
| Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded | $ | $ | $ | - | $ | - | ||||||||||
| Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts | ||||||||||||||||
| Hedged items | - | |||||||||||||||
| Derivatives designated as hedging instruments | $ | ( | ) | $ | $ | - | $ | ( | ) | |||||||
| 23 |
Credit-Risk Related Contingent Features
Salisbury has an agreement with its derivative counterparty that contains a provision that provides that if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.
The agreement also contains a provision where if the
Bank fails to maintain its status as a well / adequate capitalized institution, then Salisbury could be required to post cash or certain
marketable securities issued by the U.S. Treasury or U.S. Government-sponsored enterprises as collateral. The minimum amount that Salisbury
would have to post as collateral is $
As of September 30, 2021, the fair value of
derivative was $
Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.
The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
| Three months ended | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less: Undistributed earnings allocated to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income allocated to common stock | $ | $ | $ | $ | ||||||||||||
| Weighted-average common shares issued | ||||||||||||||||
| Less: Unvested restricted stock awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average common shares outstanding used to calculate basic earnings per common share | ||||||||||||||||
| Add: Dilutive effect of stock options | ||||||||||||||||
| Weighted-average common shares outstanding used to calculate diluted earnings per common share | ||||||||||||||||
| Earnings per common share (basic) | $ | $ | $ | $ | ||||||||||||
| Earnings per common share (diluted) | $ | $ | $ | $ | ||||||||||||
NOTE 10 - SHAREHOLDERS' EQUITY
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of September 30, 2021, the Company and the Bank met each of their capital requirements.
The Company and the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as "well capitalized" under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At September 30, 2021, the Bank exceeded the minimum requirement for the capital conservation buffer. As of September 30,2021, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.
| 24 |
On March 31, 2021, Salisbury issued $
As of September 30, 2021, Salisbury did not repurchase any of its common shares pursuant to the Common Stock Repurchase Plan approved by the Board of Directors in March 2021.
The Bank's risk-weighted assets at September 30, 2021 and December 31, 2020 were $1.05 billion and $938.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:
| Actual | Minimum Capital Required For Capital Adequacy | Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets) | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Tier 1 Capital (to average assets) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets) | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Tier 1 Capital (to average assets) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Restrictions on Cash Dividends to Common Shareholders
Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.
FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, notes that, as a general matter, the Board of Directors of a Bank Holding Company ("BHC") should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.
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NOTE 11 - BENEFITS
401(k)
Salisbury's 401(k) Plan expense
was $
ESOP
Salisbury offers an ESOP to eligible employees.
Under the ESOP, Salisbury may make discretionary contributions to the ESOP. Discretionary contributions
vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year
thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $
Other Retirement Plans
Salisbury
adopted ASC 715-60, "Compensation - Retirement Benefits - Defined Benefit Plans - Other Post-retirement" and recognized a
liability for Salisbury's future post-retirement benefit obligations under endorsement split dollar life insurance arrangements.
The total liability for the arrangements included in other liabilities was $
On September 1, 2021, the Bank and Richard Cantele, President and Chief Executive Officer of the Bank and of the Company, entered into an updated split dollar agreement which superseded and replaced a prior split dollar agreement between the parties. In addition, the Bank and named executive officers Peter Albero and John Davies (together with Mr. Cantele, the "executive(s)"), entered into updated split dollar agreements which superseded and replaced their existing split dollar agreements (collectively with the split dollar agreement for Richard Cantele, the "Updated Agreements"). The Updated Agreements for Messrs. Albero and Davies are identical and substantially similar to the split dollar agreement for Mr. Cantele, except as discussed below. The Updated Agreements provide for a death benefit during employment of each executive equal to the lesser of (i) three times the executive's base salary, not to exceed $800,000, less $50,000 or (ii) the net amount at risk, defined as the difference between the death benefit payable on death and the accrued cash value of the life insurance policy at the time of death. Mr. Cantele's post-retirement death benefit will be 1.5 times his final base salary, not to exceed $800,000. If Messrs. Albero and Davies retire after reaching age 65, the executives will be entitled to a post-retirement death benefit equal to 1.5 times final base salary at age 65 through age 71, 1.0 times final base salary at age 72 through 79, and 0.5 times final base salary at age 80 and later, provided that the death benefit shall not exceed $800,000. In the event of a change in control of the Bank, the executive will become fully vested in the death benefit under the policy, including the post-retirement death benefit, and the policy cannot be terminated or amended without the express written consent of the executive. The Bank is the sole beneficiary of any death proceeds remaining after the aforementioned death proceeds have been paid to the designated beneficiaries.
A Non-Qualified Deferred Compensation Plan (the
"Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive"
or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation
by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided
by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance
issued under such Section. Salisbury's expense for this plan was $
Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers, including a severance agreement with Mr. Cantele, President and Chief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the New York Region and Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with eleven other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and other benefits. Such agreements, and their subsequent amendments, are designed to allow Salisbury to retain the services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury's operations.
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NOTE 12 - LONG TERM INCENTIVE PLANS
Restricted stock
Restricted stock expense was $
Performance-based restricted stock units
On March 29, 2019, the Compensation Committee granted performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan (Phantom). Salisbury paid out the final tranche of these awards in January 2021. The performance goal for awards granted under the RSU plan in 2019 is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. No performance-based restricted stock units were awarded prior to 2019.
On July 29, 2020, the Compensation Committee granted
an additional
On June 23, 2021, the Compensation Committee granted
an additional
The fair value of the awards granted under the RSU
plan at the grant date was $
Short Term Incentive Plan (STIP)
Salisbury
offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury
may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP
expense, which is included in compensation expenses, totaled $
Options
Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In third quarter 2021 and third quarter 2020, no stock options were exercised. In first quarter 2021 and first quarter 2020, a former Riverside Bank executive exercised stock options at $ per share. Also, in first quarter 2020, a former Riverside employee exercised stock options at $ per share.
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NOTE 13 - FAIR VALUE OF ASSETS AND LIABILITIES
Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as assets and loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
Salisbury adopted ASC 820-10, "Fair Value Measurement - Overall," which provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.
In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs") are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury's market assumptions. These two types of inputs have created the following fair value hierarchy:
| • | Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
| • | Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities. |
| • | Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities. |
The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.
| • | Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. |
| • | Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. |
| • | Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3. |
| • | Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3. |
| • | Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price. |
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Assets measured at fair value are as follows:
| Fair Value Measurements Using | Assets and Liabilities at | |||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | fair | ||||||||||||
| value | ||||||||||||||||
| September 30, 2021 | ||||||||||||||||
| Assets at fair value on a recurring basis | ||||||||||||||||
| U.S. Treasury | $ | - | $ | $ | - | $ | ||||||||||
| U.S. Government Agency notes | - | - | ||||||||||||||
| Municipal bonds | - | - | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government-sponsored enterprises | - | - | ||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | - | - | ||||||||||||||
| Corporate bonds | - | - | ||||||||||||||
| Securities available-for-sale | $ | - | $ | $ | - | $ | ||||||||||
| CRA mutual funds | $ | $ | - | $ | - | $ | ||||||||||
| Derivative financial instruments | $ | - | $ | $ | - | $ | ||||||||||
| Assets at fair value on a non-recurring basis | ||||||||||||||||
| Assets held for sale 1 | $ | $ | - | $ | - | $ | ||||||||||
| December 31, 2020 | ||||||||||||||||
| Assets at fair value on a recurring basis | ||||||||||||||||
| U.S. Government Agency notes | $ | - | $ | $ | - | $ | ||||||||||
| Municipal bonds | - | - | ||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government-sponsored enterprises | - | - | ||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | - | - | ||||||||||||||
| Corporate bonds | - | - | ||||||||||||||
| Securities available-for-sale | $ | - | $ | $ | - | $ | ||||||||||
| CRA mutual funds | $ | $ | - | $ | - | $ | ||||||||||
| Derivative financial instruments | $ | - | $ | $ | - | $ | ||||||||||
1 The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation, the Bank entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. This agreement resulted in a pre-tax loss of $144 thousand in third quarter 2021. At December 30, 2020, Salisbury did not have any assets measured at fair value on a non-recurring basis.
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Carrying values and estimated fair values of financial instruments are as follows:
| (in thousands) | Carrying | Estimated | Fair value measurements using | |||||||||||||||||
| value | fair value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| September 30, 2021 | ||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | - | $ | - | |||||||||||||
| Interest bearing time deposits with financial institutions | - | - | ||||||||||||||||||
| Securities available-for-sale | - | - | ||||||||||||||||||
| CRA mutual fund | - | - | ||||||||||||||||||
| Federal Home Loan Bank of Boston stock | - | - | ||||||||||||||||||
| Loans held-for-sale | - | - | ||||||||||||||||||
| Loans receivable, net | - | - | ||||||||||||||||||
| Accrued interest receivable | - | - | ||||||||||||||||||
| Derivative financial instruments | - | - | ||||||||||||||||||
| Cash surrender value of life insurance policies | - | - | ||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Demand (non-interest-bearing) | $ | $ | $ | - | $ | $ | - | |||||||||||||
| Demand (interest-bearing) | - | - | ||||||||||||||||||
| Money market | - | - | ||||||||||||||||||
| Savings and other | - | - | ||||||||||||||||||
| Certificates of deposit | - | - | ||||||||||||||||||
| Deposits | - | - | ||||||||||||||||||
| Repurchase agreements | - | - | ||||||||||||||||||
| FHLBB advances | - | - | ||||||||||||||||||
| Subordinated debt | - | - | ||||||||||||||||||
| Note payable | - | - | ||||||||||||||||||
| Finance lease liability | - | - | ||||||||||||||||||
| Accrued interest payable | - | - | ||||||||||||||||||
| December 31, 2020 | ||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | - | $ | - | |||||||||||||
| Interest bearing time deposits with financial institutions | - | - | ||||||||||||||||||
| Securities available-for-sale | - | - | ||||||||||||||||||
| CRA mutual fund | - | - | ||||||||||||||||||
| Federal Home Loan Bank of Boston stock | - | - | ||||||||||||||||||
| Loans held-for-sale | - | - | ||||||||||||||||||
| Loans receivable, net | - | - | ||||||||||||||||||
| Accrued interest receivable | - | - | ||||||||||||||||||
| Cash surrender value of life insurance policies | - | - | ||||||||||||||||||
| Derivative financial instruments | - | - | ||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Demand (non-interest-bearing) | $ | $ | $ | - | $ | $ | - | |||||||||||||
| Demand (interest-bearing) | - | - | ||||||||||||||||||
| Money market | - | - | ||||||||||||||||||
| Savings and other | - | - | ||||||||||||||||||
| Certificates of deposit | - | - | ||||||||||||||||||
| Deposits | - | - | ||||||||||||||||||
| Repurchase agreements | - | - | ||||||||||||||||||
| FHLBB advances | - | - | ||||||||||||||||||
| Subordinated debt | - | - | ||||||||||||||||||
| Note payable | - | - | ||||||||||||||||||
| Finance lease liability | - | - | ||||||||||||||||||
| Accrued interest payable | - | - | ||||||||||||||||||
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 other assets and other liabilities. During the three months ended March 31, 2021, Salisbury issued new subordinated debt, and during the three months ended June 30, 2021 paid off its previously issued subordinated debt in its entirety. Salisbury categorized its new subordinated debt within level 2 of the fair value hierarchy.
NOTE 14 - SUBSEQUENT EVENTS
On October 1, 2021, the bank entered into a lease agreement for a new branch in Poughkeepsie, New York. The lease is for an initial period of 10 years with two ten-year optional renewal periods.
On October 20, 2021 the Board of Directors declared a dividend of $ per common share payable on November 26, 2021 to shareholders of record as of November 12, 2021.
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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, 2020. 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 at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives, could have a material adverse impact on the results of operations.
Available-For-Sale Securities
Management evaluates securities for other-than-temporary impairment ("OTTI") by 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 nine months of 2021, securities available-for-sale increased $77.2 million to $175.6 million at September 30, 2021. Cash and cash equivalents (non-time interest-bearing deposits with other banks and interest-bearing demand deposits with other banks) increased $73.1 million to $166.3 million at September 30, 2021. The increase in cash and cash equivalents was driven by growth in customer deposits during the nine-month period ended September 30, 2021. Salisbury actively invested a portion of these additional funds into higher yielding securities to enhance net interest margin and earnings.
Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at September 30, 2021.
Loans
Net loans receivable increased $29.8 million, or 2.9%, to $1.057 billion at September 30, 2021, compared with $1.028 billion at December 31, 2020. PPP loan balances declined from $86.6 million at December 31, 2020 to $40.7 million at September 30, 2021 due to the forgiveness of PPP loans by the SBA. Excluding PPP loans, net loans receivable increased approximately $75.7 million, or 8.0%, compared with December 31, 2020. The increase reflected broad-based growth across Salisbury's loan portfolio. For the nine months ended September 30, 2021, commercial real estate loan balances increased $19.4 million, or 5.7%, and commercial and industrial loan balances, excluding PPP loans, increased $27.0 million, or 19.2%. Additionally, residential loans receivable increased $28.8 million, or 6.8%, from year end 2020, reflecting continued high demand for homes in less densely populated areas as a result of COVID-19. The allowance for loan losses of $13.2 million at September 30, 2021 declined by $0.6 million from December 2020 due to the improvement in the business environment and the lifting of COVID-19 restrictions in Salisbury's market.
Salisbury continued to experience significant residential mortgage activity both as purchasers relocated from the New York metropolitan area to less populated communities in response to COVID-19, and as a result of the attractive mortgage interest rate environment, which precipitated refinance activity. During the third quarter 2021, Salisbury originated $46.3 million of residential mortgage loans, including refinance activity, compared to $45.5 million of loans during third quarter 2020. For the nine-month period ended September 30, 2021, Salisbury originated $136.1 million of residential mortgage loans, including refinance activity, compared with $106.6 million of loans during the comparable period of 2020. During the third quarter 2021, Salisbury sold approximately $1.8 million of residential mortgage loans to FHLB Boston compared with $26.6 million in third quarter 2020. For the nine-month period ended September 30, 2021 and September 30, 2020, Salisbury sold approximately $29.7 million and $44.4 million of residential mortgage loans, respectively, to FHLB Boston.
Asset Quality
During the first nine months of 2021, non-performing assets decreased $0.6 million to $5.0 million, which primarily reflected a decrease in non-performing real estate secured loans. During the first nine months of 2021, total impaired and potential problem loans increased by $15.6 million to $45.7 million, or 4.27% of gross loans receivable at September 30, 2021, from $30.1 million, or 2.89% of gross loans receivable at December 31, 2020. The increase primarily reflected loans in the hospitality and entertainment and recreation industries which were deemed by management to be a higher risk of default due to COVID-19.
Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.
On March 22, 2020, the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus". This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the virus. The guidance goes on to explain that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of the relief program are not Troubled Debt Restructurings ("TDRs"). CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied this guidance and implemented a loan payment deferral program which allowed residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. In certain instances, management granted additional loan payment deferrals to borrowers in industries severely impacted by COVID-19, such as hospitality and entertainment and recreation.
| 32 |
As of September 30, 2021, two existing commercial loans with an aggregate balance of $3.1 million to borrowers in the hospitality industry were granted payment deferrals. Both borrowers are expected to resume regular payments in fourth quarter 2021. The loan balance for which payments were deferred represented approximately 0.3% of Salisbury's gross loan balance at September 30, 2021, excluding loans granted under the SBA's Paycheck Protection Program. At September 30, 2021, both loans were deferring principal and interest. There were no outstanding deferrals related to residential and consumer loans as of September 30, 2021. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. Salisbury evaluated each borrower's request for loan payment deferrals on a case-by-case basis. Salisbury also reviewed the credit characteristics and internal risk rating assigned to each borrower that was granted a deferral. This review considered several factors, which included an assessment of COVID-19's impact on the operations of the business, other sources of liquidity available to a borrower for loan payments, the borrower's cooperation, the value of collateral and the number of payment deferrals granted to that borrower. Salisbury also considered a borrower's ability to make partial payments, which represent a subset or combination of principal, interest and mortgage taxes.
The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program. As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. In 2020, Salisbury processed 932 PPP loans for a principal balance of approximately $100 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was signed into law. The PPPFA increased the covered period from eight weeks to twenty-four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two-year term. Management funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank ("FHLB") advances, and brokered deposits. Salisbury did not participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF").
On December 27, 2020 the Consolidated Appropriations Act, 2021 was signed into law. Certain provisions of the CARES Act were modified and extended by the Act. One of the features of the Act was the provision of $284 billion in additional funding for the PPP program, including a Second draw Paycheck Protection Program for qualifying businesses for which there was a quarterly revenue reduction of at least 25% compared to the same quarter in 2019. In 2021, Salisbury processed 472 customer PPP applications for loans of approximately $48 million, which the Bank funded through deposits. As of September 30, 2021, approximately $97.0 million of the PPP loans Salisbury originated in 2020 and $10.4 million of the loans originated in 2021 were forgiven by the SBA. Salisbury had gross PPP loans of $40.7 million on its consolidated balance sheet at September 30, 2021 compared with $86.6 million at December 31, 2020.
Past Due Loans
Loans past due 30 days or more decreased $7.0 million for the nine months ended September 30, 2021 to $2.9 million, or 0.27% of gross loans receivable compared with $9.9 million, or 0.95% of gross loans receivable at December 31, 2020.
The components of loans past due 30 days or greater are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Past due 30-59 days | $ | 708 | $ | 5,263 | ||||
| Past due 60-89 days | 201 | 1,575 | ||||||
| Past due 90-179 days | - | 1 | ||||||
| Past due 180 days and over | 10 | 11 | ||||||
| Accruing loans | 919 | 6,850 | ||||||
| Past due 30-59 days | 222 | 480 | ||||||
| Past due 60-89 days | 14 | 179 | ||||||
| Past due 90-179 days | 442 | 768 | ||||||
| Past due 180 days and over | 1,276 | 1,665 | ||||||
| Non-accrual loans | 1,954 | 3,092 | ||||||
| Total loans past due 30 days or greater | $ | 2,873 | $ | 9,942 |
Credit Risk Ratings
Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury's rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings (special mention, substandard, doubtful, and loss) defined by the bank's regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.
| · | Loans risk rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management's close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date. |
| · | Loans risk rated as "substandard" (6) are loans where the Bank's position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection. |
| · | Loans risk rated as "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined. |
| · | Loans risk rated as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future. |
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, the FDIC and CTDOB.
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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) | September 30, 2021 | December 31, 2020 | ||||||
| Non-accrual loans, excluding troubled debt restructured loans | $ | 3,429 | $ | 4,091 | ||||
| Non-accrual troubled debt restructured loans | 1,561 | 1,545 | ||||||
| Accruing troubled debt restructured loans | 3,953 | 6,273 | ||||||
| Total impaired loans | $ | 8,943 | $ | 11,909 |
Non-Performing Assets
Non-performing assets decreased $0.6 million to $5.0 million, or 0.34% of assets for the nine months ended September 30, 2021, from $5.6 million, or 0.44% of assets at December 31, 2020. The 11.5% decrease in non-performing assets in the first nine months 2021 resulted primarily from loan sales of $0.3 million and loan pay-offs of $0.8 million, which were partially offset by $0.5 million of loans placed on non-accrual.
The components of non-performing assets are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Residential 1-4 family | $ | 1,235 | $ | 1,508 | ||||
| Residential 5+ multifamily | 861 | 861 | ||||||
| Home equity lines of credit | 86 | 154 | ||||||
| Commercial | 1,954 | 2,544 | ||||||
| Farm land | 576 | 158 | ||||||
| Vacant land | 35 | 37 | ||||||
| Real estate secured | 4,747 | 5,262 | ||||||
| Commercial and industrial | 243 | 374 | ||||||
| Consumer | - | - | ||||||
| Non-accrual loans | 4,990 | 5,636 | ||||||
| Accruing loans past due 90 days and over | 11 | 12 | ||||||
| Non-performing loans | 5,001 | 5,648 | ||||||
| Foreclosed assets | - | - | ||||||
| Non-performing assets | $ | 5,001 | $ | 5,648 |
The past due status of non-performing loans is as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Current | $ | 3,036 | $ | 2,545 | ||||
| Past due 30-59 days | 222 | 480 | ||||||
| Past due 60-89 days | 14 | 179 | ||||||
| Past due 90-179 days | 442 | 769 | ||||||
| Past due 180 days and over | 1,287 | 1,675 | ||||||
| Total non-performing loans | $ | 5,001 | $ | 5,648 |
At September 30, 2021, 60.71% of non-performing loans were current with respect to loan payments, compared with 45.06% at December 31, 2020.
| 34 |
Total Outstanding Troubled Debt Restructured Loans
Total outstanding troubled debt restructured loans decreased $2.3 million during first nine months of 2021 to $5.5 million, or 0.52% of gross loans receivable at September 30, 2021, compared to $7.8 million, or 0.75% of gross loans receivable at December 31, 2020. The reduction in loan balance from year end 2020 primarily reflected loan payoffs of $1.0 million, loan sales of $0.6 million, refinanced loans of $0.4 million and other net activity of $0.3 million.
The components of troubled debt restructured loans are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Residential 1-4 family | $ | 1,845 | $ | 2,798 | ||||
| Residential 5+ multifamily | 93 | 103 | ||||||
| Personal | 18 | 26 | ||||||
| Vacant land | - | 130 | ||||||
| Commercial | 1,919 | 3,105 | ||||||
| Real estate secured | 3,875 | 6,162 | ||||||
| Commercial and industrial | 78 | 111 | ||||||
| Accruing troubled debt restructured loans | 3,953 | 6,273 | ||||||
| Residential 1-4 family | 427 | 378 | ||||||
| Residential 5+ multifamily | 861 | 861 | ||||||
| Vacant land | 35 | 37 | ||||||
| Commercial | 238 | 269 | ||||||
| Real estate secured | 1,561 | 1,545 | ||||||
| Commercial and Industrial | - | - | ||||||
| Non-accrual troubled debt restructured loans | 1,561 | 1,545 | ||||||
| Troubled debt restructured loans | $ | 5,514 | $ | 7,818 |
The past due status of troubled debt restructured loans is as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Current | $ | 3,915 | $ | 5,737 | ||||
| Past due 30-59 days | 38 | 536 | ||||||
| Past due 60-89 days | - | - | ||||||
| Accruing troubled debt restructured loans | 3,953 | 6,273 | ||||||
| Current | 590 | 237 | ||||||
| Past due 30-59 days | 35 | - | ||||||
| Past due 90-179 days | - | 178 | ||||||
| Past due 180 days and over | 936 | 1,130 | ||||||
| Non-accrual troubled debt restructured loans | 1,561 | 1,545 | ||||||
| Total troubled debt restructured loans | $ | 5,514 | $ | 7,818 |
At September 30, 2021, 81.70% of troubled debt restructured loans were current with respect to loan payments, as compared with 76.41% at December 31, 2020.
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 $18.6 million during the first nine months of 2021 to $36.8 million, or 3.44% of gross loans receivable at September 30, 2021, compared with $18.2 million, or 1.75% of gross loans receivable at December 31, 2020. The increase primarily reflected internal credit risk rating downgrades on $18.4 million of commercial loans and $1.7 million of commercial and industrial loans to businesses primarily in the hospitality, health care and entertainment and recreation industries due to concerns over the impact of COVID-19. These downgrades were partly offset by internal credit risk rating upgrades on $1.4 million of farm related loans and loan payments of $0.1 million.
The components of potential problem loans are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Residential 1-4 family | $ | 1,688 | $ | 1,620 | ||||
| Residential 5+ multifamily | 715 | 732 | ||||||
| Home equity lines of credit | - | - | ||||||
| Residential real estate | 2,403 | 2,352 | ||||||
| Commercial | 32,172 | 13,703 | ||||||
| Construction of commercial | - | 229 | ||||||
| Commercial real estate | 32,172 | 13,932 | ||||||
| Farm land | - | 1,427 | ||||||
| Real estate secured | 34,575 | 17,711 | ||||||
| Commercial and industrial | 2,219 | 486 | ||||||
| Consumer | 1 | 1 | ||||||
| Total potential problem loans | $ | 36,795 | $ | 18,198 |
| 35 |
The past due status of potential problem loans is as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Current | $ | 36,733 | $ | 17,598 | ||||
| Past due 30-59 days | 14 | 40 | ||||||
| Past due 60-89 days | 48 | 560 | ||||||
| Past due 90-179 days | - | - | ||||||
| Total potential problem loans | $ | 36,795 | $ | 18,198 |
At September 30, 2021, 99.83% of potential problem loans were current with respect to loan payments, as compared with 96.70% at December 31, 2020. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.
Goodwill
Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Due to COVID-19 and volatility in the market price of bank stocks, the Bank continues to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired at September 30, 2021. At September 30, 2021, Salisbury's stock price closed at $51.02 per share compared with its book value of $46.66 per share. Bank stocks, as measured by the S&P US BMI Banks Index, increased 31.9% since year end 2020 whereas SAL increased 36.9% over the same period. Management performed a qualitative analysis that evaluated several factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price. Management concluded that as of September 30, 2021 it was not more likely than not that goodwill was impaired. As a result, the Bank did not record an impairment charge for goodwill for third quarter 2021.
Deposits and Borrowings
Deposits increased $160.6 million, or 14.2%, to $1.3 billion at September 30, 2021 compared with $1.1 billion at December 31, 2020. The increase reflected the funding and forgiveness of PPP loans, customer receipts of stimulus payments from the U.S. government as well as an increase in retail and business customer balances, which were driven in part by the uncertainty surrounding COVID-19. Retail repurchase agreements increased $3.4 million during 2021 to $10.5 million at September 30, 2021, compared with $7.1 million at December 31, 2020.
The distribution of average total deposits by account type is as follows:
| September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||
| (in thousands) | Average Balance | Percent | Weighted Average Interest Rate | Average Balance | Percent | Weighted Average Interest Rate | ||||||||||||||||||
| Demand deposits | $ | 355,163 | 28.33 | % | 0.00 | % | $ | 294,603 | 27.94 | % | 0.00 | % | ||||||||||||
| Interest-bearing checking accounts | 227,291 | 18.13 | 0.19 | 183,870 | 17.44 | 0.24 | ||||||||||||||||||
| Regular savings accounts | 217,541 | 17.35 | 0.11 | 175,204 | 16.61 | 0.26 | ||||||||||||||||||
| Money market savings | 327,861 | 26.15 | 0.17 | 256,402 | 24.31 | 0.45 | ||||||||||||||||||
| Certificates of deposit (CD's)1 | 125,768 | 10.03 | 0.70 | 144,488 | 13.70 | 1.27 | ||||||||||||||||||
| Total deposits | $ | 1,253,624 | 100.00 | % | 0.17 | % | $ | 1,054,567 | 100.00 | % | 0.37 | % | ||||||||||||
1 CD's also include brokered certificates of deposits of $7.9 million at September 30, 2021 and $18.0 million at December 31, 2020.
The classification of certificates of deposit by interest rates is as follows:
| Interest rates (in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Less than 1.00% | $ | 97,426 | $ | 73,538 | ||||
| 1.00% to 1.99% | 17,902 | 25,589 | ||||||
| 2.00% to 2.99% | 8,269 | 31,889 | ||||||
| 3.00% to 3.99% | 498 | 498 | ||||||
| Total | $ | 124,095 | $ | 131,514 |
The distribution of certificates of deposit by interest rate and maturity is as follows:
| At September 30, 2021 | ||||||||||||||||||||||||
| 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% | $ | 79,485 | $ | 10,478 | $ | 1,911 | $ | 5,234 | $ | 97,108 | 78.25 | % | ||||||||||||
| 1.00% to 1.99% | 8,188 | 4,457 | 3,096 | 2,377 | 18,118 | 14.60 | % | |||||||||||||||||
| 2.00% to 2.99% | 2,684 | 1,046 | 4,641 | - | 8,371 | 6.75 | % | |||||||||||||||||
| 3.00% to 3.99% | 498 | - | - | - | 498 | 0.40 | % | |||||||||||||||||
| Total | $ | 90,855 | $ | 15,981 | $ | 9,648 | $ | 7,611 | $ | 124,095 | 100.00 | % | ||||||||||||
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Scheduled maturities of time certificates of deposit in denominations of $100,000 or more are as follows:
| September 30, 2021 (in thousands) | Within
3 months | 3-6 months | 6-12 months | Over
1 year | Total | |||||||||||||||
| Certificates of deposit $100,000 and over | $ | 22,828 | $ | 15,518 | $ | 21,998 | $ | 16,199 | $ | 76,543 | ||||||||||
FHLBB advances decreased $3.7 million during the first nine months of 2021 to $8.9 million at September 30, 2021, compared with $12.6 million at December 31, 2020. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At September 30, 2021, $20 million of letters of credit were outstanding.
The following table sets forth certain information concerning short-term FHLBB advances:
| (dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||
| Highest month-end balance during period | $ | - | $ | 15,000 | ||||
| Ending balance | - | - | ||||||
| Average balance during period | - | 5,956 |
Liquidity
Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At September 30, 2021, Salisbury's excess borrowing capacity at FHLBB was approximately $252 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.
Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. Management believes Salisbury's funding sources will meet anticipated funding needs.
Operating activities for the nine-month period ended September 30, 2021 provided net cash of $15.4 million. Investing activities utilized net cash of $114.2 million principally from $29.3 million of net loan originations and principal collections, $107.8 million of purchases of securities available-for-sale, $3.5 million in purchase of Bank Owned Life Insurance (BOLI) and $1.9 million of capital expenditures, partly offset by proceeds of $24.4 million from calls, maturities and principle payments on securities available-for-sale, and $3.3 million from the sale of available-for-sale-securities. Financing activities provided net cash of $172.0 million principally due to an increase in deposit transaction accounts of $168.0 million, an increase of $24.4 million for the issuance of subordinated debt, and $3.3 million for an increase in securities sold under repurchase agreements, partially offset by $7.4 million decrease in time deposits, the redemption of $10 million of subordinated debt issued in 2015, payments of $3.8 million on amortizing FHLBB advances, and the payment of common stock dividends of $2.6 million.
At September 30, 2021, Salisbury had outstanding commitments to fund new loan originations of $40.1 million and unused lines of credit of $196.5 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 September 30, 2021 and 2020
OVERVIEW
Net income allocated to common stock was $3.4 million, or $1.21 per basic common share, for the third quarter ended September 30, 2021 (third quarter 2021), compared with $4.3 million, or $1.53 per basic common share, for the third quarter ended September 30, 2020 (third quarter 2020), and $4.3 million, or $1.53 per basic common share, for the second quarter ended June 30, 2021 (second quarter 2021).
Net Interest Income
Tax equivalent net interest income of $10.3 million for the third quarter 2021 increased $246 thousand, or 2.4%, versus third quarter 2020. Average total earning assets increased $185.6 million, or 15.2%, versus third quarter 2020. Average total interest bearing deposits increased $132.8 million, or 17.3%, versus third quarter 2020. The tax equivalent net interest margin for the third quarter 2021 was 2.92% compared with 3.29% for the third quarter 2020. Excluding PPP loan, the tax equivalent net interest margin for the third quarter 2021 was 2.78% compared with 3.35% for the third quarter 2020. The decline in net interest margin from third quarter 2020 primarily reflected a $118.7 million, or 151.6%, increase in average short term funds, due to higher average customer deposit balances, earning an average yield of 15 basis points, as well as a reduction of 7 basis points in average loan yields, and an increase in subordinated debt interest expense.
| 37 |
The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE") net interest income and yields on average interest-earning assets and interest-bearing liabilities.
| Three months ended September 30, | Average Balance | Income / Expense | Average Yield / Rate | |||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| Loans (a)(d) | $ | 1,056,266 | $ | 1,049,313 | $ | 10,382 | $ | 10,485 | 3.90 | % | 3.97 | % | ||||||||||||
| Securities (c)(d) | 150,841 | 89,220 | 720 | 606 | 1.91 | 2.72 | ||||||||||||||||||
| FHLBB stock | 1,743 | 3,440 | 6 | 34 | 1.38 | 3.96 | ||||||||||||||||||
| Short term funds (b) | 196,997 | 78,306 | 73 | 52 | 0.15 | 0.27 | ||||||||||||||||||
| Total earning assets | 1,405,847 | 1,220,279 | 11,181 | 11,177 | 3.15 | 3.64 | ||||||||||||||||||
| Other assets | 72,547 | 64,943 | ||||||||||||||||||||||
| Total assets | $ | 1,478,394 | $ | 1,285,222 | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 227,291 | $ | 195,253 | 111 | 110 | 0.19 | 0.22 | ||||||||||||||||
| Money market accounts | 327,861 | 258,257 | 140 | 195 | 0.17 | 0.30 | ||||||||||||||||||
| Savings and other | 217,541 | 176,963 | 58 | 69 | 0.11 | 0.15 | ||||||||||||||||||
| Certificates of deposit | 125,768 | 135,238 | 223 | 391 | 0.70 | 1.15 | ||||||||||||||||||
| Total interest-bearing deposits | 898,461 | 765,711 | 532 | 765 | 0.23 | 0.40 | ||||||||||||||||||
| Repurchase agreements | 14,296 | 12,218 | 5 | 6 | 0.15 | 0.20 | ||||||||||||||||||
| Finance lease | 2,685 | 2,928 | 33 | 35 | 4.98 | 4.80 | ||||||||||||||||||
| Note payable | 183 | 221 | 3 | 3 | 6.11 | 6.08 | ||||||||||||||||||
| Subordinated debt (net of issuance costs) | 24,452 | 9,872 | 233 | 156 | 3.82 | 6.32 | ||||||||||||||||||
| FHLBB advances | 9,329 | 44,522 | 30 | 113 | 1.28 | 0.99 | ||||||||||||||||||
| Total interest-bearing liabilities | 949,406 | 835,472 | 836 | 1,078 | 0.35 | 0.51 | ||||||||||||||||||
| Demand deposits | 388,557 | 321,392 | ||||||||||||||||||||||
| Other liabilities | 6,965 | 7,592 | ||||||||||||||||||||||
| Shareholders' equity | 133,466 | 120,766 | ||||||||||||||||||||||
| Total liabilities & shareholders' equity | $ | 1,478,394 | $ | 1,285,222 | ||||||||||||||||||||
| Net interest income | $ | 10,345 | $ | 10,099 | ||||||||||||||||||||
| Spread on interest-bearing funds | 2.80 | 3.13 | ||||||||||||||||||||||
| Net interest margin (e) | 2.92 | 3.29 | ||||||||||||||||||||||
| (a) | Includes non-accrual loans. |
| (b) | Includes interest-bearing deposits in other banks and federal funds sold. |
| (c) | Average balances of securities are based on historical cost. |
| (d) | Includes tax exempt income benefit of $180,000 and $176,000, respectively, for 2021 and 2020 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 2021 and 2020. |
| (e) | Net interest income divided by average interest-earning assets. |
The following table sets forth the changes in FTE interest due to volume and rate.
| Three months ended September 30, (in thousands) | 2021 versus 2020 | |||||||||||
| Change in interest due to | Volume | Rate | Net | |||||||||
| Loans | $ | 77 | $ | (180 | ) | $ | (103 | ) | ||||
| Securities | 357 | (243 | ) | 114 | ||||||||
| FHLBB stock | (11 | ) | (17 | ) | (28 | ) | ||||||
| Short term funds | 63 | (42 | ) | 21 | ||||||||
| Interest-earning assets | 486 | (482 | ) | 4 | ||||||||
| Deposits | 127 | (360 | ) | (233 | ) | |||||||
| Repurchase agreements | 1 | (2 | ) | (1 | ) | |||||||
| Finance lease | (3 | ) | 1 | (2 | ) | |||||||
| Note Payable | - | - | - | |||||||||
| Subordinated Debt | 184 | (107 | ) | 77 | ||||||||
| FHLBB advances | (102 | ) | 19 | (83 | ) | |||||||
| Interest-bearing liabilities | 207 | (449 | ) | (242 | ) | |||||||
| Net change in net interest income | $ | 279 | $ | (33 | ) | $ | 246 | |||||
| 38 |
Interest Income
Tax equivalent interest income of $11.2 million for third quarter 2021 was essentially unchanged from third quarter 2020. Loan income decreased $0.1 million, or 1.0%, compared to third quarter 2020 due to a decrease in yield of 7bps, partially offset by a $6.9 million, or 0.7%, increase in average loan balances. Tax equivalent securities income increased $114 thousand, or 18.8%, compared to third quarter 2020 due to a $61.6 million, or 69.0%, increase in average balances, partially offset by an 81 basis point decline in average yield. Income on short-term funds increased $21 thousand, or 40.3%, compared with third quarter 2020 primarily due to a $118.7 million, or 1.52%, increase in average short-term funds, due to higher average customer deposit balances, partially offset by a 12 basis point decrease in the average yield.
Interest Expense
Interest expense of $0.8 million for third quarter 2021 decreased $0.2 million, or 22.4%, compared with third quarter 2020. Interest on deposit accounts decreased $0.2 million, or 30.5%, from third quarter 2020 as a result of a 17 basis points decrease in average deposit rates, partly offset by a $132.7 million, or 17.3%, increase in average balances. Interest expense on FHLBB borrowings decreased $83 thousand, or 73.4%, from third quarter 2020 primarily as a result of a decrease in the average balance of $35.1 million, or 79.0%, partly offset by an increase in the average borrowing rate of 29 basis points. Interest expense on subordinated debt increased $77 thousand, or 49.3%, from third quarter 2020 due to the issuance of $25 million of subordinated debt by Salisbury on March 31, 2021. In May 2021, Salisbury redeemed in full, the $10 million of subordinated debt issued in 2015.
Provision and Allowance for Loan Losses
A provision expense of $0.4 million was recorded for third quarter 2021, compared with $0.7 million for third quarter 2020. The provision expense for third quarter 2021 primarily reflected loan growth during the quarter as well as adjustments to certain qualitative factors due to rising residential housing prices in the Bank's market area, as a result of continued high demand, and an increase in commercial construction lending activity. Net loan (recovery) charge-offs were ($60) thousand for third quarter 2021 compared with $56 thousand for third quarter 2020. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic, which causes a deterioration in economic conditions and an increase in loan payment deferrals or delinquencies, may subsequently necessitate an increase in loan loss reserves.
The reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans excluding PPP loans, was 1.28% for third quarter 2021, versus 1.44% for fourth quarter 2020 and 1.38% for third quarter 2020. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 263% for third quarter of 2021, versus 244% for fourth quarter of 2020 and 278% for third quarter of 2020.
The following table details the principal categories of credit quality ratios:
| Three months ended September 30, | 2021 | 2020 | ||||||
| Net charge-offs (recoveries) to average loans receivable, gross | (0.01 | %) | 0.01 | % | ||||
| Non-performing loans to loans receivable, gross | 0.47 | 0.45 | ||||||
| Accruing loans past due 30-89 days to loans receivable, gross | 0.08 | 0.16 | ||||||
| Allowance for loan losses to loans receivable, gross | 1.23 | 1.24 | ||||||
| Allowance for loan losses to non-performing loans | 263.30 | 277.76 | ||||||
| Non-performing assets to total assets | 0.34 | 0.36 |
Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $5.0 million or 0.47% of gross loans receivable at September 30, 2021 compared with $4.7 million, or 0.45%, at September 30, 2020. Accruing loans past due 30-89 days decreased $0.7 million to $0.9 million, or 0.08% of gross loans receivable, from $1.6 million, or 0.16% of gross loans receivable, at September 30, 2020. 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.
| 39 |
The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.
In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19 ("COVID-19 pool"). This COVID-19 pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, in second quarter 2020, management increased the risk weights for loans with an internal risk rating of "4" (Watch), "5" (Special Mention) and "6" (Substandard") to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. In first quarter 2021, management reduced these risk weights back to their pre-COVID-19 levels because the internal risk rating on several loans with a higher degree of credit risk due to the pandemic was downgraded during the quarter. Such downgrades resulted in a higher loan loss reserve for each affected loan. Management believes that this more targeted approach was prudent because loans to borrowers in certain industries, such as hospitality and entertainment and recreation, have a relatively higher degree of credit risk due to COVID-19.
In second quarter 2021, approximately $56 million of loans were moved out of the discrete COVID-19 pool, which carries higher loan loss reserve rates, and back to their pre-pandemic pool. These loans were deemed by management to be a lower risk of default because the level of business activity of these businesses substantially returned to pre-pandemic levels and the borrowers were current on loan payments. Management also updated certain qualitative factors to reflect the overall improvement in local economic conditions since first quarter 2021. Collectively, these factors resulted in a release of credit reserves of $1.4 million for second quarter 2021, which was partially offset by an increase in credit reserves of $0.3 million due to loan growth in the quarter.
In third quarter 2021, management recorded a provision expense of $0.4 million due to loan growth and adjustments to certain qualitative factors reflecting the continued increase in residential housing prices in the Bank's market area and an increase in the Bank's commercial construction loan exposure.
The unallocated component of the allowance is maintained to cover uncertainties that could affect management's estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Additionally, reserves are established for off balance sheet exposures.
Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2021.
Management's loan risk rating assignments, loss percentages and specific reserves are subjected annually to an independent credit review by an external firm. In addition, the Bank is examined annually on a rotational basis by one of its two primary regulatory agencies, the FDIC and CTDOB. As an integral part of their examination process, the FDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.
Non-Interest Income
The following table details the principal categories of non-interest income.
| Three months ended September 30, (dollars in thousands) | 2021 | 2020 | 2021 vs. 2020 | |||||||||||||
| Trust and wealth advisory | $ | 1,286 | $ | 1,068 | $ | 218 | 20.4 | % | ||||||||
| Service charges and fees | 1,211 | 711 | 500 | 70.3 | ||||||||||||
| Mortgage banking activities, net | 108 | 736 | (628 | ) | (85.3 | ) | ||||||||||
| (Losses) gains on CRA mutual fund | (4 | ) | - | (4 | ) | - | ||||||||||
| Gains on securities, net | 7 | 34 | (27 | ) | (79.4 | ) | ||||||||||
| Bank-owned life insurance ("BOLI") income | 135 | 719 | (584 | ) | (81.2 | ) | ||||||||||
| Gain on sale of assets | 73 | - | 73 | - | ||||||||||||
| Other | 24 | 18 | 6 | 33.3 | ||||||||||||
| Total non-interest income | $ | 2,840 | $ | 3,286 | ($ | 446 | ) | (13.6 | %) | |||||||
Non-interest income for third quarter 2021 decreased $446 thousand versus third quarter 2020. Trust and Wealth Advisory income increased $218 thousand versus third quarter 2020 primarily reflecting higher asset management fees. Assets under administration were $973.2 million as of September 30, 2021 compared with $970.3 million at June 30, 2021 and $748.2 million as of September 30, 2020. Discretionary assets under administration of $608.2 million at September 30, 2021 decreased from $614.3 million at June 30, 2021 and increased from $515.0 million at September 30, 2020. The decrease from second quarter 2021 primarily reflected lower market valuations, whereas the increase from third quarter 2020 was primarily due to higher market valuations. Non-discretionary assets under administration of $365.0 million for third quarter 2021 increased from $356.0 million at second quarter 2021 and $233.2 million at third quarter 2020. The increase from comparative periods reflected the addition of partnership assets under administration for an existing client relationship. The trust and wealth business records only a nominal annual fee on this non-discretionary relationship.
| 40 |
Service charges and fees increased $500 thousand versus third quarter 2020 primarily due to higher interchange and deposit fees. During the third quarter 2020, Salisbury waived approximately $289 thousand in various deposit fees, including overdraft and ATM fees. Income from mortgage sales and servicing decreased $628 thousand from third quarter 2020 due to lower sales volume. Third quarter 2021 mortgage loan sales totaled $1.7 million versus $26.6 million for third quarter 2020. BOLI income decreased $584 thousand compared to third quarter 2020, which included a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Non-interest income for third quarter 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury's operations center in Canaan, Connecticut.
Non-Interest Expense
The following table details the principal categories of non-interest expense.
| Three months ended September 30, (dollars in thousands) | 2021 | 2020 | 2021 vs. 2020 | |||||||||||||
| Salaries | $ | 3,361 | $ | 3,114 | $ | 247 | 7.9 | % | ||||||||
| Employee benefits | 1,322 | 1,061 | 261 | 24.6 | ||||||||||||
| Premises and equipment | 1,060 | 1,005 | 55 | 5.5 | ||||||||||||
| Write-down of assets | 144 | - | 144 | 100.0 | ||||||||||||
| Data processing | 632 | 569 | 63 | 11.1 | ||||||||||||
| Professional fees | 735 | 635 | 100 | 15.7 | ||||||||||||
| Collections, OREO, and loan related | 120 | 108 | 12 | 11.1 | ||||||||||||
| FDIC insurance | 146 | 123 | 23 | 18.7 | ||||||||||||
| Marketing and community support | 256 | 126 | 130 | 103.2 | ||||||||||||
| Amortization of intangibles | 61 | 78 | (17 | ) | (21.8 | ) | ||||||||||
| Other | 447 | 440 | 7 | 1.6 | ||||||||||||
| Total non-interest expense | $ | 8,284 | $ | 7,259 | $ | 1,025 | 14.1 | % | ||||||||
Non-interest expense for third quarter 2021 increased $1.0 million versus third quarter 2020. Salaries increased $247 thousand versus third quarter 2020 reflecting higher salary and lower deferred loan origination expenses. Employee benefits expense increased $261 thousand from third quarter 2020 due to higher medical insurance costs, 401K employer match, payroll taxes and BOLI related expenses. Premises and equipment expense increased $55 thousand versus third quarter 2020 due to increased software and maintenance costs. Third quarter 2021 also included a pre-tax loss of $144 thousand on the pending sale of the building housing the Bank's branch in Poughkeepsie, New York, which is expected to close in fourth quarter 2021. Data processing expense increased $63 thousand versus third quarter 2020 mainly due to ATM fees and data processing costs partially offset by lower data communications. Professional fees increased $100 thousand versus third quarter 2020 as higher investment management fees and legal expenses were partly offset by lower consultation fees. Collections, OREO and loan related expenses increased $12 thousand versus third quarter 2020 primarily due to higher appraisal and mortgage recording costs. FDIC insurance increased $23 thousand versus third quarter 2020 on higher deposit balances. Marketing and community support costs increased $130 thousand compared to the prior year third quarter primarily due to Salisbury's ongoing web site redesign and branding initiatives.
Income Taxes
The effective income tax rates for third quarter 2021 and third quarter 2020 were 20.09% and 17.28%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, the lower tax rate in third quarter 2020 reflected the non-taxable BOLI gain of $601 thousand recorded during the quarter.
Salisbury did not incur Connecticut income tax in 2021 (to date) or 2020, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.
For the nine month periods ended September 30, 2021 and 2020
Overview
Net income allocated to common shareholders was $12.1 million, or $4.32 per basic common share, for the nine month period ended September 30, 2021 (nine month period 2021), compared with $9.0 million, or $3.22 per basic common share, for the nine month period ended September 30, 2020 (nine month period 2020).
Net Interest Income
Tax equivalent net interest income of $30.6 million for the nine month period 2021 increased $1.8 million, or 6.1%, versus the nine month period 2020. Average total earning assets increased $191.8 million, or 16.6%, versus the nine month period 2020. Average total interest bearing deposits increased $138.8 million, or 18.7%, versus the nine month period 2020. The net interest margin of 3.01% decreased 31 basis points from 3.32% for the nine month period 2020. Excluding PPP loans, the net interest margin for the nine month period ended September 30, 2021 was approximately 2.90% compared with 3.33% for the same period in 2020. The significant decline in net interest margin for the nine month period ended September 30, 2021 compared to the prior year period primarily reflected a $109.7 million, or 18.8%, increase in short term funds, due to higher average customer deposit balances, earning an average yield of 12 basis points, as well as a reduction of 17 basis points in average loan yields, and an increase in subordinated debt interest expense.
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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.
| Nine months ended September 30, | Average Balance | Income / Expense | Average Yield / Rate | |||||||||||||||||||||
| (dollars in thousands) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||
| Loans (a)(d) | $ | 1,053,451 | $ | 1,012,070 | $ | 30,989 | $ | 31,010 | 3.90 | % | 4.07 | % | ||||||||||||
| Securities (c)(d) | 130,864 | 88,603 | 2,080 | 1,939 | 2.12 | 2.92 | ||||||||||||||||||
| FHLBB stock | 1.840 | 3,354 | 26 | 106 | 1.89 | 4.24 | ||||||||||||||||||
| Short term funds (b) | 160,055 | 50,312 | 148 | 123 | 0.12 | 0.33 | ||||||||||||||||||
| Total earning assets | 1,346,210 | 1,154,339 | 33,243 | 33,178 | 3.27 | 3.82 | ||||||||||||||||||
| Other assets | 71,421 | 63,265 | ||||||||||||||||||||||
| Total assets | $ | 1,417,631 | $ | 1,217,604 | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 224,479 | $ | 174,299 | 332 | 331 | 0.20 | 0.25 | ||||||||||||||||
| Money market accounts | 310,908 | 245,581 | 408 | 994 | 0.18 | 0.54 | ||||||||||||||||||
| Savings and other | 209,180 | 170,880 | 173 | 405 | 0.11 | 0.32 | ||||||||||||||||||
| Certificates of deposit | 134,143 | 149,080 | 739 | 1,530 | 0.74 | 1.37 | ||||||||||||||||||
| Total interest-bearing deposits | 878,710 | 739,840 | 1,652 | 3,260 | 0.25 | 0.59 | ||||||||||||||||||
| Repurchase agreements | 11,608 | 7,572 | 13 | 16 | 0.15 | 0.29 | ||||||||||||||||||
| Finance lease | 2,753 | 2,988 | 102 | 106 | 4.95 | 4.74 | ||||||||||||||||||
| Note payable | 192 | 231 | 9 | 11 | 6.13 | 6.08 | ||||||||||||||||||
| Subordinated debt (net of issuance costs) | 21,851 | 9,867 | 767 | 468 | 4.68 | 6.32 | ||||||||||||||||||
| FHLBB advances | 10,567 | 45,667 | 96 | 473 | 1.20 | 1.36 | ||||||||||||||||||
| Total interest-bearing liabilities | 925,681 | 806,165 | 2,639 | 4,334 | 0.38 | 0.72 | ||||||||||||||||||
| Demand deposits | 355,352 | 286,608 | ||||||||||||||||||||||
| Other liabilities | 6,897 | 6,847 | ||||||||||||||||||||||
| Shareholders' equity | 129,701 | 117,984 | ||||||||||||||||||||||
| Total liabilities & shareholders' equity | $ | 1,417,631 | $ | 1,217,604 | ||||||||||||||||||||
| Net interest income | $ | 30,604 | $ | 28,844 | ||||||||||||||||||||
| Spread on interest-bearing funds | 2.89 | 3.11 | ||||||||||||||||||||||
| Net interest margin (e) | 3.01 | 3.32 | ||||||||||||||||||||||
| (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 $523,000 and $514,000, respectively for 2021 and 2020 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 2021 and 2020. |
| (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.
| Nine months ended September 30, (in thousands) | 2021 versus 2020 | |||||||||||
| Change in interest due to | Volume | Rate | Net | |||||||||
| Loans | $ | 1,717 | $ | (1,738 | ) | $ | (21 | ) | ||||
| Securities | 1,019 | (878 | ) | 141 | ||||||||
| FHLBB stock | (19 | ) | (61 | ) | (80 | ) | ||||||
| Short term funds | 243 | (218 | ) | 25 | ||||||||
| Interest-earning assets | 2,960 | (2,895 | ) | 65 | ||||||||
| Deposits | 1,160 | (2,768 | ) | (1,608 | ) | |||||||
| Repurchase agreements | 10 | (13 | ) | (3 | ) | |||||||
| Finance lease | (10 | ) | 6 | (4 | ) | |||||||
| Note payable | (2 | ) | - | (2 | ) | |||||||
| Subordinated Debt | 559 | (260 | ) | 299 | ||||||||
| FHLBB advances | (332 | ) | (45 | ) | (377 | ) | ||||||
| Interest-bearing liabilities | 1,385 | (3,080 | ) | (1,695 | ) | |||||||
| Net change in net interest income | $ | 1,575 | $ | 185 | $ | 1,760 | ||||||
| 42 |
Interest Income
Tax equivalent interest income of $33.2 million for the nine month period 2021 was essentially unchanged compared with the nine month period 2020. Loan income decreased $21 thousand, or 0.1%, compared with the nine months of 2020 primarily due to a 17 basis point decrease in the average yield, partly offset by a $41.3 million, or 4.0%, increase in average loans. Tax equivalent securities income for the nine month period 2021 increased $141 thousand, or 7.2%, compared with the nine month period 2020, primarily due to a $42.3 million, or 47.7%, increase in average balances, partially offset by an 80 basis point decrease in average yield. Income on short-term funds for the nine month period 2021 increased $25 thousand, or 20.3%, compared with the nine months of 2020 primarily due to a $109.7 million, or 218.1%, increase in average short-term funds, due to higher average customer deposit balances, partially offset by a 21 basis point decrease in the average short-term funds yields.
Interest Expense
Interest expense of $2.6 million for the nine month period 2021 decreased $1.7 million, or 39.1%, compared with the nine month period 2020. Interest on deposit accounts decreased $1.6 million, or 49.3%, as a result of a 34 basis point decrease in average deposit rates, partly offset by a $138.9 million, or 18.8%, increase in the average balances. Interest expense on FHLBB borrowings decreased $377 thousand, or 79.7%, due to a $35.1 million, or 76.8%, decrease in average balances and a 16 basis point decrease in the average borrowing rate. Interest expense on subordinated debt for the nine month period 2021 increased $299 thousand, or 63.8%, due to an increase in the average balance, which reflected the issuance of $25 million of subordinated debt by Salisbury on March 31, 2021 and Salisbury's full redemption, in May 2021, of the $10 million of subordinated debt issued in 2015.
Provision and Allowance for Loan Losses
A net credit reserve release of $0.5 million was recorded for the nine month period ended September 30, 2021 compared to a provision of $4.2 million for the nine month period ended September 30, 2020. Net loan charge-offs were $69 thousand and $92 thousand for the respective periods. Management increased the allowance for loan losses in 2020 due to uncertainty surrounding COVID-19. In 2021, however, the business environment in Salisbury's market areas improved significantly due to the rollout out of vaccinations and the lifting of COVID-19 restrictions. In addition, the number of commercial loans, for which payments have been deferred, continued to decline. As a result of these improved conditions, management released $1.1 million of credit reserves in second quarter 2021. This release was partially offset by an increase in reserves in third quarter 2021 due to loan growth and adjustments to certain qualitative factors reflecting the continued increase in residential housing prices in the Bank's market area and an increase in commercial construction loan exposure. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic, which causes a deterioration in economic conditions and an increase in loan payment deferrals or delinquencies, may subsequently necessitate an increase in loan loss reserves.
Reserve coverage at September 30, 2021, as measured by the ratio of allowance for loan losses to gross loans, at 1.23%, compares with 1.24% at September 30, 2020. The decrease in the coverage ratio primarily reflected the reduction in credit reserves noted above as well as loan growth. Excluding PPP loans, the reserve coverage ratio was 1.28% at September 30, 2021 compared with 1.37% at September 30, 2020. During the first nine months of 2021, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $0.6 million to $5.0 million. Non-performing loans represent 0.47% of gross loans receivable compared with 0.54% at December 31, 2020. During the nine months ended September 30, 2021, accruing loans past due 30-89 days decreased $5.9 million to $0.9 million or 0.08% of gross loans receivable from 0.66% at December 31, 2020. 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.
| Nine months ended September 30, (dollars in thousands) | 2021 | 2020 | 2021 vs. 2020 | |||||||||||||
| Trust and wealth advisory | $ | 3,685 | $ | 3,129 | $ | 556 | 17.8 | % | ||||||||
| Service charges and fees | 3,536 | 2,214 | 1,322 | 59.7 | ||||||||||||
| Mortgage banking activities, net | 912 | 1,182 | (270 | ) | (22.8 | ) | ||||||||||
| (Losses) gains on CRA mutual fund | (18 | ) | 22 | (40 | ) | (181.8 | ) | |||||||||
| (Losses) gains on available-for-sale securities, net | (2 | ) | 216 | (218 | ) | (100.9 | ) | |||||||||
| BOLI income and gains | 386 | 986 | (600 | ) | (60.9 | ) | ||||||||||
| Gain on sale of assets | 73 | - | 73 | - | ||||||||||||
| Other | 81 | 97 | (16 | ) | 16.5 | |||||||||||
| Total non-interest income | $ | 8,653 | $ | 7,846 | $ | 807 | 10.3 | % | ||||||||
Non-interest income for the nine month period ended September 30, 2021 increased $807 thousand versus the same period in 2020. Trust and wealth advisory revenues increased $556 thousand mainly on higher asset based fees primarily as a result of market appreciation. Service charges and fees increased $1.3 million reflecting higher deposit, interchange and loan prepayment fees. During the nine month period 2020, Salisbury waived approximately $558 thousand in various deposit fees, including overdraft and ATM fees. Income from mortgage sales and servicing decreased $270 thousand due to lower volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $29.7 million for the nine month period ended September 30, 2021 compared with $44.4 million for the nine month period ended September 30, 2020. The nine month periods ended September 30, 2021 and 2020 included mortgage servicing amortization of $167 thousand and $84 thousand, respectively. BOLI income and gains declined $600 thousand versus the same period in 2020. The decline primarily reflected a non-taxable gain of $601 thousand recorded in the prior year related to proceeds received by the Bank from a BOLI policy due to the death of a covered former employee. Non-interest income for nine month period ended September 30, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury's operations center in Canaan, Connecticut. Other income primarily includes rental property income.
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Non-interest expense
The following table details the principal categories of non-interest expense.
| Nine months ended September 30, (dollars in thousands) | 2021 | 2020 | 2021 vs. 2020 | |||||||||||||
| Salaries | $ | 9,664 | $ | 8,375 | $ | 1,289 | 15.4 | % | ||||||||
| Employee benefits | 3,990 | 3,244 | 746 | 23.0 | ||||||||||||
| Premises and equipment | 3,034 | 2,897 | 137 | 4.7 | ||||||||||||
| Write-down of assets | 144 | - | 144 | 100.0 | ||||||||||||
| Data processing | 1,824 | 1,666 | 158 | 9.5 | ||||||||||||
| Professional fees | 2,090 | 2,020 | 70 | 3.5 | ||||||||||||
| Collections, OREO, and loan related | 317 | 212 | 105 | 49.5 | ||||||||||||
| FDIC insurance | 370 | 331 | 39 | 11.8 | ||||||||||||
| Marketing and community support | 552 | 419 | 133 | 31.7 | ||||||||||||
| Amortization of core deposit intangible assets | 198 | 247 | (49 | ) | (19.8 | ) | ||||||||||
| Other | 1,448 | 1,572 | (124 | ) | (7.9 | ) | ||||||||||
| Non-interest expense | $ | 23,631 | $ | 20,983 | $ | 2,648 | 12.6 | % | ||||||||
Non-interest expense for the nine month period ended September 30, 2021 increased $2.6 million versus the same period in 2020. Salaries increased $1.3 million primarily due to higher base salaries, incentive and production accruals as a result of higher loan originations. Benefits increased $746 thousand primarily due higher medical insurance costs, 401K employer match, payroll taxes and BOLI related expenses. Premises and equipment increased $137 thousand mainly due to higher building depreciation and facilities related expenses. The nine month period ended September 30, 2021 also included a pre-tax loss of $144 thousand on the pending sale of the building housing the Bank's branch in Poughkeepsie, New York, which is expected to close in fourth quarter 2021. Data processing increased $158 thousand mainly due to ATM fees, core data processing costs and Trust and Wealth data processing expense. The increase in professional fees of $70 thousand versus the nine month period 2020 primarily reflected higher audit and exam and investment management expenses partially offset by lower consulting expense. Collections, OREO and loan related expense increased $105 thousand primarily due to higher appraisal and mortgage recording costs. FDIC related expense increased $39 thousand compared to the same period in 2020 reflecting higher deposit balances. Marketing and community support costs increased $133 thousand compared to the same period in 2020 primarily due to Salisbury's ongoing web site redesign and branding initiatives. Amortization of intangible assets decreased $49 thousand due to the aging off of expenses related to previous acquisitions. Other expenses decreased $124 thousand primarily due to higher litigation related accruals during the nine month period ended September 30, 2020.
Income taxes
The effective income tax rates for the nine month periods ended September 30, 2021 and September 30, 2020 were 21.05% and 16.90%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets. The lower effective tax rate for the nine month period ended September 30, 2020 also reflected the non-taxable BOLI gain of $601 thousand recorded in third quarter 2020.
Salisbury did not incur Connecticut income tax in 2021 (to date) or 2020, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.
CAPITAL RESOURCES
Shareholders' Equity
Shareholders' equity was $133.5 million at September 30, 2021, up $8.8 million from December 31, 2020. Book value and tangible book value per common share were $46.66 and $41.67, respectively, compared with $43.88 and $38.78, respectively, at December 31, 2020. Contributing to the increase in shareholders' equity for year-to-date 2021 was net income of $12.3 million, and stock based compensation of $0.7 million partially offset by common stock dividends of $2.6 million and unrealized losses on securities available-for-sale, net of tax, of $1.7 million.
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Capital Requirements
Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not "well-capitalized." Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:
| September 30, 2021 | December 31, 2020 | |||||||
| Total Capital (to risk-weighted assets) | 14.20 | % | 13.57 | % | ||||
| Tier 1 Capital (to risk-weighted assets) | 12.95 | 12.31 | ||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | 12.95 | 12.31 | ||||||
| Tier 1 Capital (to average assets) | 9.31 | 8.90 | ||||||
A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action regulations issued by the FDIC and the FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity Tier 1 ratio of 6.5% or above, and a Leverage ratio of 5% or above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Maintaining strong capital is essential to Salisbury and the Bank's safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices. While Salisbury believes that the subsidiary Bank has sufficient capital to withstand an economic shutdown as a result of the virus, the Bank's regulatory capital ratios could be adversely impacted by further credit losses.
The FRB's final rules implementing the Basel Committee on Banking Supervision's capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.
The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of September 30, 2021, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as "well-capitalized." There are no conditions or events since that notification that management believes have changed the Bank's category.
On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a "Community Bank Leverage Ratio" ("CBLR") that simplifies capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) ("qualifying community banking organizations") will be required to report the components of its tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that "elects to use the CBLR framework" will not be subject to other risk-based and leverage capital requirements and will be considered to have met the well-capitalized ratio requirements for purposes of the agencies' Prompt Corrective Action ("PCA") framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria, but continues to report a leverage ratio of greater than 8%, the bank may continue to use the framework and will be deemed "well capitalized" for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period( including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be "well capitalized" if it elected to utilize such methodology.
On April 6, 2020, the regulators announced that the CBLR will be modified so that: (1) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (2) community banks will have until January 1, 2022 before the CBLR requirement is re-established at greater than 9%. Under the interim final rules, the CBLR was reduced to 8% beginning in the second quarter 2020 and for the remainder of the calendar year, 8.5% for calendar year 2021 and 9% thereafter. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy.
Share Repurchases
On March 24, 2021 Salisbury announced that its Board of Directors has adopted a share repurchase program. The share repurchase program provides for the potential repurchase of Salisbury's common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury's common stock from time to time over the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares within the allowable period. During the third quarter 2021, Salisbury did not repurchase any its outstanding common stock pursuant to this program.
Subordinated Debt
On March 31, 2021 Salisbury completed a private placement of $25.0 million in aggregate principal amount of Fixed to Floating Rate Subordinated Notes due 2031 (the "Notes") to various accredited investors. The Notes have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50% per annum, from and including the closing date to, but excluding March 31, 2026 or the earlier redemption date, payable quarterly in arrears. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the rate will be a floating per annum rate expected to be equal to the then current three-month SOFR plus 280 basis points, provided, however, that in the event three-month SOFR is less than zero, three-month term SOFR shall be deemed to be zero, payable quarterly in arrears. On May 28, 2021, Salisbury redeemed in full the $10 million of subordinated debt issued in 2015.
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Dividends
Salisbury paid $2.6 million in common stock dividends during the nine month period ended September 30, 2021.
On October 20, 2021, the Board of Directors of Salisbury declared a common stock dividend of $0.31 per common share payable on November 26, 2021 to shareholders of record on November 12, 2021. Common stock dividends, when declared, are generally paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.
Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.
FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 31, 2015, states that, as a general matter, the Board of Directors of a Bank Holding Company ("BHC") should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.
Salisbury believes that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisbury or the Bank. The continued payment of common stock cash dividends by Salisbury will be dependent on Salisbury's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury.
IMPACT OF INFLATION AND CHANGING PRICES
Salisbury's consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury's consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on Salisbury's consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and future filings made by Salisbury with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by Salisbury and the Bank, and oral statements made by executive officers of Salisbury and the Bank, may include forward-looking statements relating to such matters as:
| (a) | assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and |
| (b) | expectations for revenues and earnings for Salisbury and the Bank. |
Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of Salisbury's and the Bank's business include the following:
| (a) | the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates; |
| (b) | changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses; |
| (c) | increased competition from other financial and non-financial institutions; |
| (d) | the impact of technological advances and cybersecurity matters; |
| (e) | interest rate fluctuations; and |
| (f) | the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the jurisdictions in which Salisbury operates, and the United States, related to the economy and overall financial stability; |
| (g) | government and regulatory responses to the COVID-19 pandemic; and |
| (h) | other risks identified from time to time in Salisbury's filings with the Securities and Exchange Commission. |
Such developments could have an adverse impact on Salisbury's and the Bank's financial position and results of operations.
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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 September 30, 2021 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.
The ALCO reviews the simulation results to determine whether Salisbury's exposure to change in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. Salisbury's tolerance levels for changes in net interest income in its income simulations varies depending on the magnitude of interest rate changes and level of risk-based capital. All changes are measured in comparison to the projected net interest income that would result from an "unchanged" rate scenario where interest rates remain stable over the forecast horizon. The ALCO also evaluates the directional trends of net interest income, net interest margin and other financial measures over the forecast horizon for consistency with its liquidity, capital adequacy, growth, risk and profitability targets.
ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At September 30, 2021, 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 changes in interest rates - the yield curve is assumed to rise throughout 2022 and 2023 with the treasury yield curve ultimately ending up higher as of September 30, 2023. The two year, five year and 10 year treasury as of September 30, 2023 are ultimately 1.44%, 1.70% and 1.51% higher than actual rates as of September 30, 2021 with three Fed Funds rate increases assumed from the second half of 2022 through September 30, 2023. The yield curve is positively sloping over the time period. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
As of September 30, 2021, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.
The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of September 30, 2021.
| As of September 30, 2021 | Months 1-12 | Months 13-24 | ||||||
| Immediately rising interest rates + 300bp (static growth assumptions) | 4.40 | % | 14.6 | % | ||||
| Immediately falling interest rates - 100bp (static growth assumptions) | (4.70 | ) | (9.70 | ) | ||||
| Immediately rising interest rates + 400bp (static growth assumptions) | 3.70 | 16.50 | ||||||
The negative exposure of net interest income to immediately falling rates as compared to an unchanged rate scenario results from a greater decline in earning asset yields compared to rates paid on funding liabilities, as a result of faster prepayments on existing assets and lower reinvestment rates on future loans originated and securities purchased.
While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the re-pricing, maturity and prepayment characteristics of financial instruments and the composition of Salisbury's balance sheet may change to a different degree than estimated. Simulation modeling assumes Salisbury's expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO's estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
Salisbury also monitors the potential change in market value of its available-for-sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to Salisbury's capital and liquidity position. Results are calculated using industry-standard analytical techniques and securities data. Available-for-sale equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates.
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The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:
| As of September 30, 2021 (in thousands) | Rates up 100bp | Rates up 200bp | ||||||
| U.S. Treasury | $ | (641 | ) | $ | (1,237 | ) | ||
| U.S. Government agency notes | (1,092 | ) | (2,139 | ) | ||||
| Municipal bonds | (1,977 | ) | (4,065 | ) | ||||
| Mortgage backed securities | ||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | (2,651 | ) | (5,447 | ) | ||||
| Collateralized mortgage obligations | ||||||||
| U.S. Government agencies | (563 | ) | (1,336 | ) | ||||
| Corporate bonds | (325 | ) | (622 | ) | ||||
| Total available-for-sale debt securities | $ | (7,249 | ) | $ | (14,846 | ) |
| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of September 30, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of September 30, 2021.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended September 30, 2021 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 |
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, 2020.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
| Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None
| Item 4. | MINE SAFETY DISCLOSURES |
Not Applicable
| Item 5. | OTHER INFORMATION |
None
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| Item 6. | EXHIBITS |
| Exhibit No. | Description |
| 3.1 | Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857). |
| 3.1.1 | Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009). |
| 3.1.2 | Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009). |
| 3.1.3 | Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011). |
| 3.1.4 | Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014). |
| 3.2 | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014). |
| 4.1 | Form of Subordinated Note, dated as of March 31, 2021, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed March 31, 2021). |
| 10.1 | Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with Richard Cantele, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed September 2, 2021). |
| 10.2 | Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with John Davies, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.2 of Registrant's Form 8-K filed September 2, 2021). |
| 10.2 | Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with Peter Albero, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.3 of Registrant's Form 8-K filed September 2, 2021). |
| 31.1 | Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SALISBURY BANCORP, INC. | |||
| November 5, 2021 | By: | /s/ Richard J. Cantele, Jr. | |
| Richard J. Cantele, Jr., | |||
| President and Chief Executive Officer | |||
| November 5, 2021 | By: | /s/ Peter Albero | |
| Peter Albero, | |||
| Executive Vice President and Chief Financial Officer | |||
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