SALISBURY BANCORP, INC. - Quarter Report: 2019 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended September 30, 2019

☐

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut	06-1514263
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

5 Bissell Street, Lakeville, CT	06039
(Address of principal executive offices)	(Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

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

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

Yes ☑ No ☐

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

Yes ☑ No ☐

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

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of shares of Common Stock outstanding as of November 8, 2019 is 2,823,212.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2019 (unaudited) AND DECEMBER 31, 2018	3
	CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (unaudited)	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (unaudited)	5
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (unaudited)	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (unaudited)	7
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	9
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	38
Item 4.	CONTROLS AND PROCEDURES	40

PART II.	OTHER INFORMATION	40
Item 1.	LEGAL PROCEEDINGS	40
Item 1A.	RISK FACTORS	40
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40
Item 3.	DEFAULTS UPON SENIOR SECURITIES	40
Item 4.	MINE SAFETY DISCLOSURES	40
Item 5.	OTHER INFORMATION	40
Item 6.	EXHIBITS	41
SIGNATURES		41

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except share data)		September 30, 2019			December 31, 2018
ASSETS		(unaudited)
Cash and due from banks	$	7,670		$	7,238
Interest bearing demand deposits with other banks		45,878			51,207
Total cash and cash equivalents		53,548			58,445
Interest bearing time deposits with financial institutions		786			—
Securities
Available-for-sale at fair value		94,814			91,818
CRA mutual fund		881			836
Federal Home Loan Bank of Boston stock at cost		2,575			4,496
Loans held-for-sale		506			—
Loans receivable, net (allowance for loan losses: $8,846 and $7,831)		915,083			909,279
Other real estate owned		317			1,810
Bank premises and equipment, net		17,567			18,175
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $4,795 and $4,498)		1,086			1,383
Accrued interest receivable		3,425			3,148
Cash surrender value of life insurance policies		20,441			14,438
Deferred taxes		941			1,276
Other assets		18,455			2,635
Total Assets	$	1,144,240		$	1,121,554
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	247,771		$	228,448
Demand (interest bearing)		160,139			153,586
Money market		238,494			204,219
Savings and other		166,298			178,807
Certificates of deposit		153,476			161,679
Total deposits		966,178			926,739
Repurchase agreements		8,588			4,104
Federal Home Loan Bank of Boston advances		37,828			67,154
Subordinated debt		9,853			9,835
Note payable		255			280
Finance lease obligations		1,729			3,081
Accrued interest and other liabilities		8,229			6,902
Total Liabilities		1,032,660			1,018,095
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 5,000,000;
Issued: 2,899,408 and 2,884,988
Outstanding: 2,823,212 and 2,806,781		282			281
Unearned compensation - restricted stock awards		(887	)		(711	)
Paid-in capital		44,372			43,770
Retained earnings		66,104			60,339
Accumulated other comprehensive income (loss), net		1,709			(220	)
Total Shareholders' Equity		111,580			103,459
Total Liabilities and Shareholders' Equity	$	1,144,240		$	1,121,554

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

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)		2019			2018			2019		2018
Interest and dividend income
Interest and fees on loans	$	10,045		$	9,570		$	29,859	$	27,226
Interest on debt securities
Taxable		530			596			1,734		1,588
Tax exempt		166			28			355		89
Other interest and dividends		282			322			761		662
Total interest and dividend income		11,023			10,516			32,709		29,565
Interest expense
Deposits		1,879			1,323			5,674		3,098
Repurchase agreements		9			4			16		6
Capital lease		43			48			135		130
Note payable		4			4			12		14
Subordinated debt		156			156			468		468
Federal Home Loan Bank of Boston advances		265			481			956		1,314
Total interest expense		2,356			2,016			7,261		5,030
Net interest and dividend income		8,667			8,500			25,448		24,535
Provision for loan losses		94			378			539		1,171
Net interest and dividend income after provision for loan losses		8,573			8,122			24,909		23,364
Non-interest income
Trust and wealth advisory		1,023			936			2,973		2,779
Service charges and fees		1,003			932			2,935		2,693
Gains on sales of mortgage loans, net		42			21			50		38
Mortgage servicing, net		76			84			232		251
Gains (losses) on CRA mutual fund		6			(6	)		29		(26	)
(Losses) gains on available-for-sale securities, net		(9	)		—			263		16
Other		115			121			349		370
Total non-interest income		2,256			2,088			6,831		6,121
Non-interest expense
Salaries		3,042			3,078			8,994		8,864
Employee benefits		1,181			1,065			3,408		3,192
Premises and equipment		974			1,036			2,950		3,161
Data processing		534			519			1,620		1,561
Professional fees		572			496			1,690		1,725
OREO losses and write-downs		84			38			406		91
Collections and other real estate owned		119			116			328		432
FDIC insurance		(9	)		141			294		394
Marketing and community support		141			167			448		630
Amortization of intangibles		93			111			297		347
Other		453			562			1,398		1,528
Total non-interest expense		7,184			7,329			21,833		21,925
Income before income taxes		3,645			2,881			9,907		7,560
Income tax provision		657			537			1,781		1,301
Net income	$	2,988		$	2,344		$	8,126	$	6,259
Net income available to common stock	$	2,940		$	2,311		$	8,016	$	6,185

Basic earnings per common share	$	1.06		$	0.84		$	2.88	$	2.24
Weighted average common shares outstanding, to calculate basic earnings per share		2,783			2,764			2,781		2,762
Diluted earnings per common share	$	1.05		$	0.83		$	2.87	$	2.23
Weighted average common shares outstanding, to calculate diluted earnings per share		2,795			2,779			2,793		2,780
Common dividends per share	$	0.28		$	0.28		$	0.84	$	0.84

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2019			2018			2019			2018
Net income	$	2,988		$	2,344		$	8,126		$	6,259
Other comprehensive income (loss)
Net unrealized gains (losses) on securities available-for-sale		313			(162	)		2,704			(1,475	)
Reclassification of net realized losses (gains) and write-downs in net income ⁽¹⁾		9			—			(263	)		(16	)
Unrealized gains (losses) on securities available-for-sale		322			(162	)		2,441			(1,491	)
Income tax (expense) benefit		(67	)		34			(512	)		322
Other comprehensive income (loss)		255			(128	)		1,929			(1,169	)
Comprehensive income	$	3,243		$	2,216		$	10,055		$	5,089

^{(1) Reclassification adjustments include
realized security gains and losses. The gains and losses have been reclassified out of 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 on sales
and calls of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount
is included in net income. The net tax effect for the three months ending September 30, 2019 was $2 thousand. The net tax effect
for the nine months ending September 30, 2019 and 2018 were ($55) thousand and ($3) thousand, respectively.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended September 30, (dollars in thousands)	Common Stock						Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares			Amount			Capital			Earnings			awards			(loss) income			equity
Balances at June 30, 2018		2,803,126		$	280		$	43,727		$	57,002		$	(983	)	$	(846	)	$	99,180
Net income for period		—			—			—			2,344			—			—			2,344
Other comprehensive loss, net of tax		—			—			—			—			—			(128	)		(128	)
Common stock dividends declared		—			—			—			(785	)		—			—			(785	)
Stock options exercised		1,755			(1	)		31			—			—			—			30
Issuance of restricted common stock		—			1			(1	)		—			—			—			—
Stock based compensation-restricted stock awards		—			—			—			—			126			—			126
Balances at September 30, 2018		2,804,881		$	280		$	43,757		$	58,561		$	(857	)	$	(974	)	$	100,767
Balances at June 30, 2019		2,823,476		$	282		$	44,382		$	63,905		$	(1,075	)	$	1,454		$	108,948
Net income		—			—			—			2,988			—			—			2,988
Other comprehensive loss, net of tax		—			—			—			—			—			255			255
Common stock dividends declared		—			—			—			(789	)		—			—			(789	)
Stock options exercised		—			—			—			—			—			—			—
Forfeiture of stock awards		(250	)		—			(10	)		—			10			—			—
Retired common stock		(14	)		—			—			—			—			—			—
Stock based compensation-restricted stock awards		—			—			—			—			178			—			178
Balances at September 30, 2019		2,823,212		$	282		$	44,372		$	66,104		$	(887	)	$	1,709		$	111,580

Nine months ended September 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares			Amount		Capital			Earnings			awards			(loss) income			equity
Balances at December 31, 2017		2,785,216		$	279	$	42,998		$	54,664		$	(606	)	$	179		$	97,514
Net income for period		—			—		—			6,259			—			—			6,259
Adoption of ASU 2016-01		—			—		—			(16	)		—			16
Other comprehensive loss, net of tax		—			—		—						—			(1,169	)		(1,169	)
Common stock dividends declared		—			—		—			(2,346	)		—			—			(2,346	)
Stock options exercised		6,455			—		175			—			—			—			175
Issuance of restricted common stock		9,250			1		409			—			(410	)		—			—
Issuance of director's restricted stock awards		3,960			—		175			—			(175	)		—			—
Stock based compensation-restricted stock awards		—			—		—			—			334			—			334
Balances at September 30, 2018		2,804,881		$	280	$	43,757		$	58,561		$	(857	)	$	(974	)	$	100,767
Balances at December 31, 2018		2,806,781		$	281	$	43,770		$	60,339		$	(711	)	$	(220	)	$	103,459
Net income for period		—			—		—			8,126			—			—			8,126
Other comprehensive income, net of tax		—			—		—						—			1,929			1,929
Common stock dividends declared		—			—		—			(2,361	)		—			—			(2,361	)
Stock options exercised		2,025			—		34			—			—			—			34
Issuance of restricted common stock		11,530			1		457			—			(458	)		—			—
Forfeiture of stock awards		(710	)		—		(31	)		—			31			—			—
Issuance of director's restricted stock awards		3,600			—		142			—			(142	)		—			—
Retired Common Stock		(14	)		—		—			—			—			—			—
Stock based compensation-restricted stock awards		—			—		—			—			393			—			393
Balances at September 30, 2019		2,823,212		$	282	$	44,372		$	66,104		$	(887	)	$	1,709		$	111,580

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)		2019			2018
Operating Activities
Net income	$	8,126		$	6,259
Adjustments to reconcile net income to net cash provided by operating activities
(Accretion), amortization and depreciation
Securities		238			32
Bank premises and equipment		1,210			1,249
Core deposit intangible		297			347
Modification fees on Federal Home Loan Bank of Boston advances		174			174
Subordinated debt issuance costs		18			18
Mortgage servicing rights		36			34
Fair value adjustment on loans		(64	)		(658	)
Fair value adjustment on deposits		(6	)		(30	)
(Gains) and losses, including write-downs
Sales and calls of securities available-for-sale, net		(263	)		(16	)
CRA Mutual Fund		(29	)		26
Sales of loans, excluding capitalized servicing rights		(50	)		(28	)
Other real estate owned		406			91
Sales/disposals of premises and equipment		—			1
Provision for loan losses		539			1,171
Proceeds from loans sold		6,107			1,946
Loans originated for sale		(6,563	)		(1,838	)
Decrease (increase) in deferred loan origination fees and costs, net		62			(179	)
Mortgage servicing rights originated		(25	)		(18	)
Increase in interest receivable		(277	)		(647	)
Deferred tax benefit		(176	)		(471	)
Increase in prepaid expenses		(147	)		(167	)
Increase in cash surrender value of life insurance policies		(253	)		(246	)
Decrease in income tax receivable		137			839
Increase (decrease) in other assets		728			(48	)
(Decrease) increase in accrued expenses		(348	)		496
Increase in interest payable		270			283
(Decrease) increase in other liabilities		(147	)		1,596
Stock based compensation-restricted stock awards		393			334
Net cash provided by operating activities		10,393			10,550
Investing Activities
Redemption (purchase) of Federal Home Loan Bank of Boston stock, net of redemptions		1,921			(1,175	)
Purchases of securities available-for-sale		(51,931	)		(40,035	)
Purchases of interest bearing time deposits with financial institutions		(786	)		—
Proceeds from sales of securities available-for-sale		41,802			8,410
Proceeds from calls of securities available-for-sale		75			995
Proceeds from principal payments and maturities of securities available-for-sale		9,523			11,554
Reinvestment of CRA Mutual Fund		(16	)		(14	)
Loan originations and principal collections, net		(6,405	)		(89,457	)
Recoveries of loans previously charged off		64			50
Proceeds from sales of other real estate owned		1,086			288
Capital expenditures		(1,760	)		(1,209	)
Purchase of life insurance policies		(5,750	)		—
Cash and cash equivalents paid for acquisition		—			(298	)
Net cash used by investing activities		(12,177	)		(110,891	)

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands)		2019			2018
Financing Activities
Increase in deposit transaction accounts, net		47,642			57,502
(Decrease) increase in time deposits, net		(23,193	)		20,872
Increase in securities sold under agreements to repurchase, net		4,484			4,990
Federal Home Loan Bank of Boston short-term advances, net change		5,500			82,000
Principal payments on Federal Home Loan Bank of Boston advances		(35,000	)		(69,000	)
Principal payments on note payable		(25	)		(24	)
Decrease in capital lease obligation		(194	)		(94	)
Stock options exercised		34			175
Common stock dividends paid		(2,361	)		(2,346	)
Net cash (applied to) provided by financing activities		(3,113	)		94,075
Net decrease in cash and cash equivalents		(4,897	)		(6,266	)
Cash and cash equivalents, beginning of period		58,445			48,486
Cash and cash equivalents, end of period	$	53,548		$	42,220

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	$	6,805		$	4,585
Cash paid for income taxes		1,593			665
Non-cash investing and financing activity:
Assets acquired under capital lease		—			1,373
Assets under capital lease paid off		(1,158	)
Adoption of ASU 2016-02 - Other assets		1,552			—
Adoption of ASU 2016-02 – Other liabilities		(1,552	)		—
Adoption of ASU 2016-01		—			16
Other Assets – Receivable from Broker		14,996			—
Branch Acquisitions ⁽¹⁾
Cash and cash equivalents (paid) acquired					(298	)
Net loans acquired					7,849
Fixed assets acquired (including capital leases)					761
Accrued interest receivable acquired					5
Other assets acquired					6
Deposits assumed					8,323
Capital lease assumed					—
Other liabilities assumed					—

⁽¹⁾

Includes the acquisition Orange Bank & Trust Company's Fishkill, New York Branch in 2018.

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

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

The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. The guidance in ASU 2016-13 is effective for “public business entities,” as defined, that are SEC filers for fiscal years and for interim periods with those fiscal years beginning after December 15, 2019. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. On October 16, 2019 the FASB formally delayed the implementation of this standard for smaller reporting companies to years beginning after December 15, 2022, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. Upon adoption, Salisbury will apply the standard's provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses and the Bank will continue to evaluate the extent of the impact.

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

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

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

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
September 30, 2019
Available-for-sale
U.S. Government Agency notes	$	4,642	$	165	$	3	$	4,804
Municipal bonds		26,604		746		45		27,305
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		30,534		624		37		31,121
Collateralized mortgage obligations:
U.S. Government agencies		26,621		626		—		27,247
Corporate bonds		4,250		87		—		4,337
Total securities available-for-sale	$	92,651	$	2,248	$	85	$	94,814
CRA mutual fund	$	881	$	—	$	—	$	881
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	2,575	$	—	$	—	$	2,575
(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2018
Available-for-sale
U.S. Government Agency notes	$	7,590	$	83	$	3	$	7,670
Municipal bonds		5,334		45		—		5,379
Mortgage-backed securities:
U.S. Government agencies and U.S. Government sponsored enterprises		57,837		170		561		57,446
Collateralized mortgage obligations:
U.S. Government agencies		17,835		85		173		17,747
Corporate bonds		3,500		76		—		3,576
Total securities available-for-sale	$	92,096	$	459	$	737	$	91,818
CRA mutual fund	$	836	$	—	$	—	$	836
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	4,496	$	—	$	—	$	4,496

Salisbury sold $41.8 million of available-for-sale securities during the nine month period ended September 30, 2019 realizing a pre-tax gain of $263 thousand and a related tax expense of $55 thousand. Salisbury sold $13.7 million in securities available-for-sale during the three month period ended September 30, 2019 realizing a pre-tax loss of $9 thousand and related tax benefit of $2 thousand. Salisbury sold $8.4 million of available-for-sale securities during the three and nine month periods ended September 30, 2018 realizing a pre-tax gain of $16 thousand and a related tax expense of $3 thousand.

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, 2019 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	306	$	3	$	306	$	3
Municipal bonds		6,307		45		—		—		6,307		45
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		6,097		34		731		3		6,828		37
Total temporarily impaired securities	$	12,404	$	79	$	1,037	$	6	$	13,441	$	85

	Less than 12 Months				12 Months or Longer				Total
December 31, 2018 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	34	$	—	$	532	$	3	$	566	$	3
Mortgage-backed securities:
U.S. Government agencies and U.S. Government –sponsored enterprises		13,063		175		26,777		386		39,840		561
Collateralized mortgage obligations:
U.S. Government Agencies		—		—		8,281		173		8,281		173
Total temporarily impaired securities	$	13,097	$	175	$	35,590	$	562	$	48,687	$	737

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

September 30, 2019 (in thousands)	Maturity	Amortized cost		Fair value		Yield⁽¹⁾
U.S. Government Agency notes	Within 1 year	$	49	$	49		3.32	%
	After 1 year but within 5 years		292		290		3.88
	After 5 year but within 10 years		4,301		4,465		3.36
	Total		4,642		4,804		3.39
Municipal bonds	Within 1 year		61		61		2.63
	After 5 year but within 10 years		1,741		1,846		3.16
	After 10 years		24,802		25,398		3.48
	Total		26,604		27,305		3.46
Mortgage-backed securities and Collateralized mortgage obligations	U.S. Government agencies		57,155		58,368		2.88
Corporate bonds	After 5 years but within 10 years		4,250		4,337		5.43
Securities available-for-sale		$	92,651	$	94,814		3.07	%

⁽¹⁾Yield is based on amortized cost.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2019.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at September 30, 2019, which approximated 0.89% 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, 2019.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Eight securities had unrealized losses at September 30, 2019, which approximated 0.72% 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, 2019.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Eight securities had unrealized losses at September 30, 2019, which approximated 0.54% 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, 2019.

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2019. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

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

		September 30, 2019			December 31, 2018
(In thousands)		Total Loans			Total Loans
Residential 1-4 family	$	336,475		$	345,862
Residential 5+ multifamily		38,090			36,510
Construction of residential 1-4 family		13,206			12,041
Home equity lines of credit		34,072			34,433
Residential real estate		421,843			428,846
Commercial		284,249			283,599
Construction of commercial		12,053			8,976
Commercial real estate		296,302			292,575
Farm land		3,686			4,185
Vacant land		8,111			8,322
Real estate secured		729,942			733,928
Commercial and industrial		164,078			162,905
Municipal		22,260			14,344
Consumer		6,290			4,512
Loans receivable, gross		922,570			915,689
Deferred loan origination fees and costs, net		1,359			1,421
Allowance for loan losses		(8,846	)		(7,831	)
Loans receivable, net	$	915,083		$	909,279
Loans held-for-sale
Residential 1-4 family	$	506		$	—

Concentrations of Credit Risk

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

Credit Quality

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

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

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

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

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

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

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
September 30, 2019
Residential 1-4 family	$	327,623	$	3,877	$	4,975	$	—	$	—	$	336,475
Residential 5+ multifamily		36,242		102		1,746		—		—		38,090
Construction of residential 1-4 family		13,206		—		—		—		—		13,206
Home equity lines of credit		33,287		322		463		—		—		34,072
Residential real estate		410,358		4,301		7,184		—		—		421,843
Commercial		265,825		11,400		6,953		71		—		284,249
Construction of commercial		11,809		—		244		—		—		12,053
Commercial real estate		277,634		11,400		7,197		71		—		296,302
Farm land		1,959		—		1,727		—		—		3,686
Vacant land		8,049		62		—		—		—		8,111
Real estate secured		698,000		15,763		16,108		71		—		729,942
Commercial and industrial		161,540		732		1,806		—		—		164,078
Municipal		22,260		—		—		—		—		22,260
Consumer		6,247		5		38		—		—		6,290
Loans receivable, gross	$	888,047	$	16,500	$	17,952	$	71	$	—	$	922,570
(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2018
Residential 1-4 family	$	337,520	$	4,281	$	4,061	$	—	$	—	$	345,862
Residential 5+ multifamily		34,726		784		1,000		—		—		36,510
Construction of residential 1-4 family		12,041		—		—		—		—		12,041
Home equity lines of credit		33,728		265		440		—		—		34,433
Residential real estate		418,015		5,330		5,501		—		—		428,846
Commercial		270,461		4,530		8,608		—		—		283,599
Construction of commercial		8,482		—		494		—		—		8,976
Commercial real estate		278,943		4,530		9,102		—		—		292,575
Farm land		3,969		—		216		—		—		4,185
Vacant land		8,253		69		—		—		—		8,322
Real estate secured		709,180		9,929		14,819		—		—		733,928
Commercial and industrial		159,127		2,672		1,106		—		—		162,905
Municipal		14,344		—		—		—		—		14,344
Consumer		4,502		10		—		—		—		4,512
Loans receivable, gross	$	887,153	$	12,611	$	15,925	$	—	$	—	$	915,689

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, 2019
Residential 1-4 family	$	334,992	$	228	$	203	$	269	$	783	$	1,483	$	134	$	2,331
Residential 5+ multifamily		37,229		—		—		—		861		861		—		982
Construction of residential 1-4 family		13,206		—		—		—		—		—		—		—
Home equity lines of credit		33,503		164		46		—		359		569		—		463
Residential real estate		418,930		392		249		269		2,003		2,913		134		3,776
Commercial		283,734		7		71		293		144		515		293		928
Construction of commercial		12,053		—		—		—		—		—		—		—
Commercial real estate		295,787		7		71		293		144		515		293		928
Farm land		3,494		—		192		—		—		192		—		199
Vacant land		8,070		—		41		—		—		41		—		—
Real estate secured		726,281		399		553		562		2,147		3,661		427		4,903
Commercial and industrial		163,971		6		100		1		—		107		1		—
Municipal		22,260		—		—		—		—		—		—		—
Consumer		6,288		1		1		—		—		2		—		38
Loans receivable, gross	$	918,800	$	406	$	654	$	563	$	2,147	$	3,770	$	428	$	4,941

			Past due

									180		30		Accruing
(in thousands)									days		days		90 days
			30-59		60-89		90-179		and		and		and		Non-
	Current		days		days		days		over		over		over		accrual
December 31, 2018
Residential 1-4 family	$	342,881	$	1,100	$	521	$	—	$	1,360	$	2,981	$	—	$	2,092
Residential 5+ multifamily		35,648		—		—		633		229		862		—		1,000
Construction of residential 1-4 family		12,041		—		—		—		—		—		—		—
Home equity lines of credit		33,806		235		33		—		359		627		—		411
Residential real estate		424,376		1,335		554		633		1,948		4,470		—		3,503
Commercial		281,053		264		240		833		1,209		2,546		654		1,388
Construction of commercial		8,835		—		—		141		—		141		141		252
Commercial real estate		289,888		264		240		974		1,209		2,687		795		1,640
Farm land		4,185		—		—		—		—		—		—		216
Vacant land		8,280		42		—		—		—		42		—		—
Real estate secured		726,729		1,641		794		1,607		3,157		7,199		795		5,359
Commercial and industrial		162,507		—		38		—		360		398		—		360
Municipal		14,344		—		—		—		—		—		—		—
Consumer		4,504		2		6		—		—		8		—		—
Loans receivable, gross	$	908,084	$	1,643	$	838	$	1,607	$	3,517	$	7,605	$	795	$	5,719

For the third quarter 2019, one residential loan with a loan balance of $791 thousand was modified in a troubled debt restructuring for interest only payments to sell the property and one CRE loan of $274 thousand was modified for extension. There were no troubled debt restructurings in the third quarter for 2018. For the nine months ended September 2019, five troubled debt restructurings with a combined loan balance of $1.7 million were modified. $651 thousand was modified for a rate reduction and one residential loan with a loan balance of $791 thousand was modified for interest only payments to sell the property and one CRE loan of $274 thousand was modified for extension. One CRE loan of $686 thousand was modified in a troubled debt restructuring for a rate reduction for the same period in 2018.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended September 30, 2019												Three months ended September 30, 2018
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,074	$	175		$	(31	)	$	1	$	2,219	$	2,007	$	201		$	—		$	2	$	2,210
Residential 5+ multifamily		495		(5	)		—			—		490		258		80			—			—		338
Construction of residential 1-4 family		79		4			—			—		83		82		8			—			—		90
Home equity lines of credit		224		(11	)		—			—		213		234		21			—			—		255
Residential real estate		2,872		163			(31	)		1		3,005		2,581		310			—			2		2,893
Commercial		3,777		(149	)		(20	)		—		3,608		2,776		211			(26	)		1		2,962
Construction of commercial		127		23			—			—		150		102		12			—			—		114
Commercial real estate		3,904		(126	)		(20	)		—		3,758		2,878		223			(26	)		1		3,076
Farm land		47		—			—			—		47		37		(12	)		—			7		32
Vacant land		89		(14	)		—			—		75		134		(27	)		—			—		107
Real estate secured		6,912		23			(51	)		1		6,885		5,630		494			(26	)		10		6,108
Commercial and industrial		1,176		74			(97	)		14		1,167		1,144		(173	)		(2	)		7		976
Municipal		30		17			—			—		47		29		(11	)		—			—		18
Consumer		81		(26	)		(5	)		3		53		63		(9	)		(10	)		7		51
Unallocated		688		6			—			—		694		515		77			—			—		592
Totals	$	8,887	$	94		$	(153	)	$	18	$	8,846	$	7,381	$	378		$	(38	)	$	24	$	7,745

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

	Nine Months ended September 30, 2019														Nine Months ended September 30, 2018
(in thousands)	Beginning balance		Acquisition Discount Transfer		Provision			Charge- offs			Recoveries		Ending Balance		Beginning balance		Provision			Charge- offs			Recoveries		Ending balance
Residential 1-4 family	$	2,149	$	10	$	90		$	(32	)	$	2	$	2,219	$	1,862	$	355		$	(10	)	$	3	$	2,210
Residential 5+ multifamily		413		—		77			—			—		490		155		183			—			—		338
Construction of residential 1-4 family		83		—		—			—			—		83		75		15			—			—		90
Home equity lines of credit		219		1		(7	)		—			—		213		236		18			—			1		255
Residential real estate		2,864		11		160			(32	)		2	$	3,005		2,328		571			(10	)		4	$	2,893
Commercial		3,048		488		114			(44	)		2		3,608		2,547		589			(175	)		1		2,962
Construction of commercial		122		—		28			—			—		150		80		34			—			—		114
Commercial real estate		3,170		488		142			(44	)		2		3,758		2,627		623			(175	)		1		3,076
Farm land		33		—		14			—			—		47		32		(7	)		—			7		32
Vacant land		100		—		(25	)		—			—		75		131		(24	)		—			—		107
Real estate secured		6,167		499		291			(76	)		4		6,885		5,118		1,163			(185	)		12		6,108
Commercial and industrial		1,158		164		(54	)		(146	)		45		1,167		984		(14	)		(12	)		18		976
Municipal		12		—		35			—			—		47		30		(12	)		—			—		18
Consumer		56		—		11			(29	)		15		53		81		5			(55	)		20		51
Unallocated		438		—		256			—			—		694		563		29			—			—		592
Totals	$	7,831	$	663	$	539		$	(251	)	$	64	$	8,846	$	6,776	$	1,171		$	(252	)	$	50	$	7,745

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, 2019
Residential 1-4 family	$	330,146	$	1,964	$	6,329	$	255	$	336,475	$	2,219
Residential 5+ multifamily		37,108		490		982		—		38,090		490
Construction of residential 1-4 family		13,206		83		—		—		13,206		83
Home equity lines of credit		33,609		213		463		—		34,072		213
Residential real estate		414,069		2,750		7,774		255		421,843		3,005
Commercial		280,218		3,366		4,031		242		284,249		3,608
Construction of commercial		12,053		150		—		—		12,053		150
Commercial real estate		292,271		3,516		4,031		242		296,302		3,758
Farm land		3,487		47		199		—		3,686		47
Vacant land		7,929		73		182		2		8,111		75
Real estate secured		717,756		6,386		12,186		499		729,942		6,885
Commercial and industrial		163,948		1,167		130		—		164,078		1,167
Municipal		22,260		47		—		—		22,260		47
Consumer		6,252		52		38		1		6,290		53
Unallocated allowance		—		694		—		—		—		694
Totals	$	910,216	$	8,346	$	12,354	$	500	$	922,570	$	8,846

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

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

September 30, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	900,006	$	7,248	$	—	$	—	$	900,006	$	7,248
Potential problem loans ¹		10,210		404		—		—		10,210		404
Impaired loans		—		—		12,354		500		12,354		500
Unallocated allowance		—		694		—		—		—		694
Totals	$	910,216	$	8,346	$	12,354	$	500	$	922,570	$	8,846

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

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

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

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
September 30, 2019
Residential	$	4,855	$	4,956	$	3,531	$	255	$	129	$	2,455	$	3,103	$	3,100	$	21
Home equity lines of credit		—		—		32		—		—		463		530		449		—
Residential real estate		4,855		4,956		3,563		255		129		2,918		3,633		3,549		21
Commercial		2,996		3,014		2,376		242		76		1,036		1,747		1,950		41
Construction of commercial		—		—		100		—		—		—		—		50		—
Farm land		—		—		—		—		—		199		333		208		—
Vacant land		41		41		42		2		2		141		160		144		7
Real estate secured		7,892		8,011		6,081		499		207		4,294		5,873		5,901		69
Commercial and industrial		35		39		4		—		2		95		257		322		3
Consumer		38		39		16		1		—		—		—		4		—
Totals	$	7,965	$	8,089	$	6,101	$	500	$	209	$	4,389	$	6,130	$	6,227	$	72

Note: The income recognized is for the nine month period ended September 30, 2019.

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
September 30, 2018
Residential	$	2,818	$	2,864	$	3,633	$	123	$	74	$	5,303	$	6,358	$	3,540	$	83
Home equity lines of credit		406		437		155		21		2		55		110		61		—
Residential real estate		3,224		3,301		3,788		144		76		5,358		6,468		3,601		83
Commercial		2,286		2,304		2,012		154		48		2,790		4,295		3,075		53
Construction of commercial		—		—		11		—		—		361		384		352		5
Farm land		—		—		—		—		—		224		435		236		—
Vacant land		43		43		43		3		2		149		171		152		8
Real estate secured		5,553		5,648		5,854		301		126		8,882		11,753		7,416		149
Commercial and industrial		—		—		52		—		—		505		602		459		3
Consumer		—		—		—		—		—		—		4		—		—
Totals	$	5,553	$	5,648	$	5,906	$	301	$	126	$	9,387	$	12,359	$	7,875	$	152

Note: The income recognized is for the nine month period ended September 30, 2018.

NOTE 4 – LEASES

On January 1, 2019, the Bank adopted ASU 2016-02, “Leases (Topic 842) and all subsequent ASUs that modified Topic 842. The Bank leases facilities and equipment with various expiration dates through 2036. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance are to be paid by Salisbury. The leases for two Bank facilities were accounted for as finance leases (previously referred to as capital leases) at September 30, 2019. In September 2019, the bank completed the purchase of its Newburgh, New York branch, which had previously been treated as a finance lease. The remaining leases were classified as operating leases, and therefore, were previously not recognized on the Bank's Consolidated Balance Sheet. Effective January 1, 2019, the Bank recorded approximately $1.6 million of right-of-use assets and corresponding lease liability related to these operating leases. The Bank does not have any leases with related parties and equipment leases are material to Salisbury's consolidated financial statements.

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

($ in thousands, except lease term and discount rate)	Classification				September 30, 2019
Assets
Operating	Other assets			$	1,408
Finance	Bank premises and equipment ¹				1,529
Total Leased Assets				$	2,937
Liabilities
Operating	Other liabilities			$	1,408
Finance	Finance lease				1,729
Total lease liabilities				$	3,137
¹ Net of accumulated depreciation of $269 thousand.

Lease cost	Classification		Nine months ended September 30, 2019		Three months ended September 30, 2019
Operating leases	Premises and equipment	$	193	$	70
Finance leases:
Amortization of leased assets	Premises and equipment		174		54
Interest on finance leases	Interest expense		135		43
Total lease cost		$	502	$	167

Weighted Average Remaining Lease Term
Operating leases					8.4 years
Financing leases					16.0 years
Weighted Average Discount Rate ¹
Operating leases					3.70%
Financing leases					8.41%
¹ Salisbury uses the FHLBB five year Advance rate as the discount rate, as its leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of September 30, 2019.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2019	$	61		$	47
2020		246			186
2021		228			192
2022		199			195
2023		134			197
Thereafter		783			2,174
Total future minimum lease payments		1,651			2,991
Less amount representing interest		(243	)		(1,262	)
Total present value of net future minimum lease payments	$	1,408		$	1,729

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)		September 30, 2019		December 31, 2018
Residential mortgage loans serviced for others	$	106,365	$	111,378
Fair value of mortgage servicing rights		765		951

Changes in mortgage servicing rights are as follows:

	Three months ended						Nine months ended
Periods ended September 30, (in thousands)	2019			2018			2019			2018
Mortgage Servicing Rights
Balance, beginning of period	$	209		$	217		$	228		$	233
Originated		21			11			25			18
Amortization (1)		(13	)		(11	)		(36	)		(34	)
Balance, end of period	$	217		$	217		$	217		$	217

⁽¹⁾

Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net on the consolidated income statement.

NOTE 6 - PLEDGED ASSETS

(in thousands)		September 30, 2019		December 31, 2018
Securities available-for-sale (at fair value)	$	70,737	$	80,991
Loans receivable (at book value)		311,448		328,674
Total pledged assets	$	382,185	$	409,665

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

NOTE 7 – EARNINGS PER SHARE

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

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

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

	Three months ended						Nine months ended
Periods ended September 30, (in thousands, except per share data)	2019			2018			2019			2018
Net income	$	2,988		$	2,344		$	8,126		$	6,259
Less: Undistributed earnings allocated to participating securities		(48	)		(33	)		(110	)		(74	)
Net income allocated to common stock	$	2,940		$	2,311		$	8,016		$	6,185
Weighted average common shares issued		2,823			2,804			2,815			2,795
Less: Unvested restricted stock awards		(40	)		(40	)		(34	)		(33	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,783			2,764			2,781			2,762
Add: Dilutive effect of stock options, unvested restricted stock awards and units		12			15			12			18
Weighted average common shares outstanding used to calculate diluted earnings per common share		2,795			2,779			2,793			2,780
Earnings per common share (basic)	$	1.06		$	0.84		$	2.88		$	2.24
Earnings per common share (diluted)	$	1.05		$	0.83		$	2.87		$	2.23

NOTE 8 – SHAREHOLDERS' EQUITY

Capital Requirements

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

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

The Bank's risk-weighted assets at September 30, 2019 and December 31, 2018 were $888.8 million and $860.6 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2019

Total Capital (to risk-weighted assets)	$	111,788		12.58	%	$	71,102		8.0	%	$	93,321		10.5	%	$	88,877		10.0	%

Tier 1 Capital (to risk-weighted assets)		102,844		11.57			53,326		6.0			75,546		8.5			71,102		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		102,844		11.57			39,995		4.5			62,214		7.0			57,770		6.5

Tier 1 Capital (to average assets)	$	102,844		9.27			44,393		4.0			44,393		4.0			55,491		5.0
December 31, 2018

Total Capital (to risk-weighted assets)	$	104,013		12.09	%	$	68,848		8.0	%	$	90,362		10.5	%	$	86,059		10.0	%

Tier 1 Capital (to risk-weighted assets)		96,092		11.17			51,636		6.0			73,150		8.5			68,848		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		96,092		11.17			38,727		4.5			60,242		7.0			55,939		6.5

Tier 1 Capital (to average assets)	$	96,092		8.83		$	43,527		4.0		$	43,527		4.0		$	54,409		5.0

DIVIDENDS

Cash Dividends to Common Shareholders

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

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

NOTE 9 – BENEFITS

Salisbury's 401(k) Plan expense was $231 thousand and $244 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $662 thousand and $765 thousand, respectively, for the nine month periods ended September 30, 2019 and 2018. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $21 thousand and $19 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $69 thousand and $20 thousand, respectively, for the nine month periods ended September 30, 2019 and 2018.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan, which generally vests in full upon six years of qualified service. Salisbury's ESOP expense was $105 thousand and $62 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $207 thousand and $188 thousand, respectively, for the nine month periods ended September 30, 2019 and 2018.

Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $29 thousand and $28 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $87 thousand and $85 thousand, respectively, for the nine month periods ended September 30, 2019 and 2018.

Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense for awards granted to employees and Directors was $131 thousand and $127 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $348 thousand and $299 thousand, respectively for the nine month periods ended September 30, 2019 and 2018. The tax benefit from restricted stock expense was $24 thousand and $23 thousand, respectively for the three month periods ended September 30, 2019 and 2018; and $63 thousand and $54 thousand, respectively for the nine month periods ended September 30, 2019 and 2018. In second quarter 2019, Salisbury granted a total of 15,130 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $600 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of September 30, 2019 and 2018 totaled $933 thousand and $857 thousand, respectively. There were forfeitures of $10 thousand or 250 shares in the third quarter of 2019 and forfeitures of $31 thousand or 710 shares for year to date 2019. There were no forfeitures in the third quarter or nine month periods ended September 30, 2018.

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 will continue to record an expense for the Phantom plan until the final tranche of awards is paid out in January 2021. Salisbury's expense for the Phantom plan was $84 thousand and $56 thousand, respectively, for the three month periods ended September 30, 2019 and 2018, and $203 thousand and $180 thousand, respectively, for the nine month periods ended September 30, 2019 and 2018.

The performance goal under the RSU plan is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. Compensation expense of $23 thousand was recorded with respect to these RSUs in the three months ended September 30, 2019 and $46 thousand for the nine months ended September 30, 2019. No performance-based restricted stock units were awarded prior to March 29, 2019.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the first and third quarters of 2019 there were no stock options exercised. In the second quarter 2019, there were 2,025 stock options exercised at $17.04, by one employee. In the first quarter 2018, 1,350 stock options were exercised at $31.11 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury. In the second quarter 2018, there were 3,350 stock options exercised at $31.11 by two employees. In the third quarter 2018, there were 1,755 stock options exercised at $16.94 by one former Riverside employee.

NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

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

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

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
September 30, 2019
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,804	$	—	$	4,804
Municipal bonds		—		27,305		—		27,305
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		31,121		—		31,121
Collateralized mortgage obligations:
U.S. Government agencies		—		27,247		—		27,247
Corporate bonds		—		4,337		—		4,337
Securities available-for-sale	$	—	$	94,814	$	—	$	94,814
CRA mutual funds		881		—		—		881
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	3,162	$	3,162
Other real estate owned	$	—	$	—	$	317	$	317
December 31, 2018
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	7,670	$	—	$	7,670
Municipal bonds		—		5,379		—		5,379
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		57,446		—		57,446
Collateralized mortgage obligations:
U.S. Government agencies		—		17,747		—		17,747
Corporate bonds		—		3,576		—		3,576
Securities available-for-sale	$	—	$	91,818	$	—	$	91,818
CRA mutual funds		836		—		—		836
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	4,238	$	4,238
Other real estate owned	$	—	$	—	$	1,810	$	1,810

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, 2019
Financial Assets
Cash and cash equivalents	$	53,548	$	53,548	$	53,548	$	—	$	—
Interest bearing time deposits with financial institutions		786		786		786		—		—
Securities available-for-sale		94,814		94,814		—		94,814		—
CRA mutual fund		881		881		881		—		—
Federal Home Loan Bank of Boston stock		2,575		2,575		2,575		—		—
Loans held-for-sale		506		512		—		—		512
Loans receivable, net		915,083		919,524		—		—		919,524
Accrued interest receivable		3,425		3,425		3,425		—		—
Cash surrender value of life insurance policies		20,441		20,441		20,441		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	247,771	$	247,771	$	—	$	247,771	$	—
Demand (interest-bearing)		160,139		160,139		—		160,139		—
Money market		238,494		238,494		—		238,494		—
Savings and other		166,298		166,298		—		166,298		—
Certificates of deposit		153,476		154,205		—		154,205		—
Deposits		966,178		966,907		—		966,907		—
Repurchase agreements		8,588		8,588		—		8,588		—
FHLBB advances		37,828		38,010		—		38,010		—
Subordinated debt		9,853		10,072		10,072		—		—
Note payable		255		260		—		260		—
Finance lease liability		1,729		1,929		—		—		1,929
Accrued interest payable		508		508		508		—		—
December 31, 2018
Financial Assets
Cash and cash equivalents	$	58,445	$	58,445	$	58,445	$	—	$	—
Securities available-for-sale, net		91,818		91,818		—		91,818		—
CRA mutual fund		836		836		836		—		—
Federal Home Loan Bank of Boston stock		4,496		4,496		4,496		—		—
Loans receivable, net		909,279		886,222		—		—		886,222
Accrued interest receivable		3,148		3,148		3,148		—		—
Cash surrender value of life insurance policies		14,438		14,438		14,438		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	228,448	$	228,448	$	—	$	228,448	$	—
Demand (interest-bearing)		153,586		153,586		—		153,586		—
Money market		204,219		204,219		—		204,219		—
Savings and other		178,807		178,807		—		178,807		—
Certificates of deposit		161,679		162,013		—		162,013		—
Deposits		926,739		927,073		—		927,073		—
Repurchase agreements		4,104		4,104		—		4,104		—
FHLBB advances		67,154		67,231		—		67,231		—
Subordinated debt		9,835		10,006		10,006		—		—
Note payable		280		288		—		288		—
Finance lease liability		3,081		3,339		—		—		3,339
Accrued interest payable		237		237		237		—		—

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

NOTE 11 – SUBSEQUENT EVENTS

On October 25, 2019 the Board of Directors declared a dividend of $0.28 per common share payable on November 29, 2019 to shareholders of record as of November 15, 2019.

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

BUSINESS

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

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

Critical Accounting Policies and Estimates

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

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

Allowance for Loan Losses

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

Goodwill and Intangible Assets

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

Available-For-Sale Securities

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

FINANCIAL CONDITION

Securities and Short Term Funds

During the first nine months of 2019, securities available-for-sale increased $3.0 million to $94.8 million at September 30, 2019. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $4.9 million to $53.5 million at September 30, 2019.

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

Loans

Net loans receivable increased $5.8 million to $915.1 million at September 30, 2019, compared with $909.3 million at December 31, 2018.

Asset Quality

During the first nine months of 2019, non-performing assets decreased $2.6 million primarily from a net decrease in the balance of non-performing loans of $1.1 million and a reduction in OREO assets of $1.5 million. During the first nine months of 2019, total impaired and potential problem loans increased by $2.5 million to $22.6 million, or 2.45% of gross loans receivable at September 30, 2019, from $20.1 million, or 2.20% of gross loans receivable at December 31, 2018.

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

Past Due Loans

Loans past due 30 days or more decreased $3.8 million for the nine months ended September 30, 2019 to $3.8 million, or 0.41% of gross loans receivable compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018.

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

(in thousands)		September 30, 2019		December 31, 2018
Past due 30-59 days	$	406	$	1,435
Past due 60-89 days		392		730
Past due 90-179 days		428		795
Accruing loans		1,226		2,960
Past due 30-59 days		—		208
Past due 60-89 days		263		108
Past due 90-179 days		134		812
Past due 180 days and over		2,147		3,517
Non-accrual loans		2,544		4,645
Total loans past due 30 days or greater	$	3,770	$	7,605

Credit Risk Ratings

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

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

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

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

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

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

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.

Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.

Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.

Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower's financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.

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

Impaired Loans

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

(in thousands)		September 30, 2019		December 31, 2018
Non-accrual loans, excluding troubled debt restructured loans	$	3,494	$	4,430
Non-accrual troubled debt restructured loans		1,447		1,289
Accruing troubled debt restructured loans		7,413		6,801
Total impaired loans	$	12,354	$	12,520

Non-Performing Assets

Non-performing assets decreased $2.6 million to $5.7 million, or 0.50% of assets for the nine months ended September 30, 2019, from $8.3 million, or 0.74% of assets at December 31, 2018 and decreased $2.8 million from $8.5 million, or 0.77% of assets at September 30, 2018.

The 31.7% decrease in non-performing assets in the first nine months 2019 resulted primarily from: $0.4 million of loans returned to accrual status, $1.8 million of loan payoffs, $0.1 million of charge-offs, $0.4 million of OREO write-down and $1.1 million of sale of OREO, offset by $1.4 million of loans placed on non-accrual.

The components of non-performing assets are as follows:

(in thousands)		September 30, 2019		December 31, 2018
Residential 1-4 family	$	2,331	$	2,092
Residential 5+ multifamily		982		1,000
Home equity lines of credit		463		411
Commercial		928		1,640
Farm land		199		216
Vacant land		—		—
Real estate secured		4,903		5,359
Commercial and industrial		—		360
Consumer		38		—
Non-accruing loans		4,941		5,719
Accruing loans past due 90 days and over		428		795
Non-performing loans		5,369		6,514
Foreclosed assets		317		1,810
Non-performing assets	$	5,686	$	8,324

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

(in thousands)		September 30, 2019		December 31, 2018
Current	$	2,397	$	1,074
Past due 30-59 days		—		208
Past due 60-89 days		263		108
Past due 90-179 days		563		1,607
Past due 180 days and over		2,147		3,517
Total non-performing loans	$	5,370	$	6,514

At September 30, 2019, 44.64% of non-performing loans were current with respect to loan payments, compared with 16.49% at December 31, 2018.

Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans increased slightly during first nine months of 2019 to $8.9 million, or 0.96% of gross loans receivable at September 30, 2019, compared to $8.1 million, or 0.88% of gross loans receivable at December 31, 2018.

The components of troubled debt restructured loans are as follows:

(in thousands)		September 30, 2019		December 31, 2018
Residential 1-4 family	$	3,997	$	2,824
Residential 5+ multifamily		—		675
Home equity lines of credit		—		47
Vacant land		182		190
Commercial		3,104		2,924
Real estate secured		7,283		6,660
Commercial and industrial		130		141
Accruing troubled debt restructured loans		7,413		6,801
Residential 1-4 family		427		289
Residential 5+ multifamily		982		1,000
Real estate secured		1,409		1,289
Consumer		38		—
Non-accrual troubled debt restructured loans		1,447		1,289
Troubled debt restructured loans	$	8,860	$	8,090

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

(in thousands)		September 30, 2019		December 31, 2018
Current	$	6,999	$	6,340
Past due 30-59 days		198		461
Past due 60-89 days		82		—
Past due 90-179 days		134		—
Accruing troubled debt restructured loans		7,413		6,801
Current		586		359
Past due 30-59 days		—		67
Past due 60-89 days		—		—
Past due 90-179 days		—		634
Past due 180 days and over		861		229
Non-accrual troubled debt restructured loans		1,447		1,289
Total troubled debt restructured loans	$	8,860	$	8,090

At September 30, 2019, 85.61% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.81% at December 31, 2018.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $2.6 million during the first nine months of 2019 to $10.2 million, or 1.11% of gross loans receivable at September 30, 2019, compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018.

The components of potential problem loans are as follows:

(in thousands)		September 30, 2019		December 31, 2018
Residential 1-4 family	$	1,887	$	1,300
Residential 5+ multifamily		764		—
Home equity lines of credit		—		29
Residential real estate		2,651		1,329
Commercial		4,110		5,567
Construction of commercial		244		141
Commercial real estate		4,354		5,708
Farm land		1,529		—
Real estate secured		8,534		7,037
Commercial and industrial		1,676		605
Total potential problem loans	$	10,210	$	7,642

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

(in thousands)		September 30, 2019		December 31, 2018
Current	$	9,717	$	6,543
Past due 30-59 days		33		78
Past due 60-89 days		167		226
Past due 90-179 days		293		795
Total potential problem loans	$	10,210	$	7,642

At September 30, 2019, 95.17% of potential problem loans were current with respect to loan payments, as compared with 85.62% at December 31, 2018. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits increased $39.5 million during 2019, or 4.3%, to $966.2 million at September 30, 2019, compared with $926.7 million at December 31, 2018. Compared to December 31, 2018, balances in interest-bearing demand deposit and money market accounts increased $40.8 million and balances in non-interest bearing accounts increased $19.3 million. These increases were partly offset by a decline in savings accounts and certificate of deposit balances of $12.5 million and $8.1 million, respectively. The balance fluctuations reflected normal business activity. Salisbury also utilizes Certificate of Deposit Account Registry Service (“CDARS”) one-way buys and brokered certificates of deposit (“brokered CDs”) to fund its operations. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. CDARS balances, which are included in certificates of deposit balances, declined $11.5 million from year end 2018 while balances in brokered CDs increased by $5.0 million over the same period.

Retail repurchase agreements increased $4.5 million during 2019 to $8.6 million at September 30, 2019, compared with $4.1 million at December 31, 2018.

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

	September 30, 2019								December 31, 2018
(in thousands)	Average Balance		Percent			Weighted Interest Rate			Average Balance		Percent			Weighted Interest Rate
Demand deposits	$	221,568		23.61	%		0.00	%	$	223,356		25.61	%		0.00	%
Interest-bearing checking accounts		156,803		16.71			0.40			147,751		16.93			0.31
Regular savings accounts		165,297		17.61			0.77			171,662		19.67			0.71
Money market savings		242,310		25.82			1.15			195,741		22.43			0.64
Certificates of deposit (CD's)¹		152,475		16.25			1.81	%		134,057		15.36			1.27
Total deposits	$	938,453		100.00	%		0.79	%	$	872,567		100.00	%		0.31	%

¹CD's included CDARS one-way buys of $7.9 million at September 30, 2019 and $19.4 million at December 31, 2018 and brokered certificates of deposits of $25.0 million at September 30, 2019 and $20.0 million at December 31, 2018.

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

Interest rates (in thousands)		September 30, 2019		December 31, 2018
Less than 1.00%	$	4,321	$	38,992
1.00% to 1.99%		50,547		47,175
2.00% to 2.99%		79,567		75,512
3.00% to 3.99%		19,041		—
Total	$	153,476	$	161,679

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

	At September 30, 2019
Interest rates (in thousands)	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
Less than 1.00%	$	3,971	$	349	$	1	$	—	$	4,321		2.82	%
1.00% to 1.99%		35,170		7,820		6,465		1,092		50,547		32.93	%
2.00% to 2.99%		62,130		7,101		5,037		5,299		79,567		51.84	%
3.00% to 3.99%		11,176		1,235		993		5,637		19,041		12.41	%
Total	$	112,447	$	16,505	$	12,496	$	12,028	$	153,476		100.00	%

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

September 30, 2019 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	40,554			$	17,815			$	19,085			$	21,542			$	98,996

FHLBB advances decreased $29.3 million during the first nine months of 2019 to $37.8 million at September 30, 2019, compared with $67.2 million at December 31, 2018. The decrease reflected the maturity of borrowings advanced during 2018. Salisbury recorded a receivable of $15.0 million at September 30, 2019 for brokered funds that were not received on the contractual settlement. This receivable was reported in other assets in the consolidated balance sheet for third quarter 2019. As a result of the delayed settlement of borrowed funds, Salisbury borrowed $15.0 million over night from FHLBB on September 30, 2019.

Salisbury also 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 FHLBB to the Bank is reduced by any letters of credit outstanding. At September 30, 2019, $18.0 million of letters of credit were outstanding.

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, 2019, Salisbury's excess borrowing capacity at FHLBB was approximately $236.5 million.

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, 2019 provided net cash of $10.4 million. Investing activities utilized net cash of $12.2 million principally from $51.9 million of purchases of available-for-sale securities and $6.4 million of net loan originations and principal collections, $5.8 million from the purchase of bank-owned life insurance policies, and $1.8 million of capital expenditures, partly offset by proceeds of $41.8 million from the sale and calls of securities available-for-sale and $9.5 million from principal payments and the maturity of available-for-sale-securities, $1.9 million from the redemption of Federal Home Loan Bank stock and $1.1 million from the sale of other real estate owned. Financing activities utilized net cash of $3.1 million, as an increase in deposits in transaction accounts of $47.6 million, a net increase of $5.5 million in FHLBB advances and a net increase in securities sold under agreements to repurchase of $4.5 million were more than offset by $35.0 million in principal repayments to the Federal Home Loan Bank Boston, a net decrease of $23.2 million in time deposits and payments of common stock dividends of $2.4 million.

At September 30, 2019, Salisbury had outstanding commitments to fund new loan originations of $39.1 million and unused lines of credit of $121.4 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, 2019 and 2018

OVERVIEW

Net income allocated to common stock was $2.9 million, or $1.06 per common share, for the third quarter ended September 30, 2019 (third quarter 2019), compared with $2.3 million, or $0.84 per common share, for the third quarter ended September 30, 2018 (third quarter 2018), and $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2019 (second quarter 2019).

Net Interest Income

Tax equivalent net interest income for the third quarter 2019 increased $216 thousand, or 2.5%, versus third quarter 2018. Average earning assets increased $23.4 million versus third quarter 2018. Average total interest bearing deposits increased $42.9 million versus third quarter 2018. The average total interest bearing deposits for third quarter 2018 reflected approximately $38.0 million deposited by a Trust and Wealth Advisory client on June 28, 2018. Approximately $27.0 million of these funds were withdrawn in July, with the remainder withdrawn in September. The tax equivalent net interest margin for both third quarter 2019 and third quarter 2018 was 3.29%.

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)		2019		2018		2019		2018		2019		2018
Loans (a)(d)(f)	$	920,946	$	896,516	$	10,158	$	9,678		4.41	%	4.32	%
Securities (c)(d)		96,317		90,193		747		631		3.10		2.80
FHLBB stock		3,024		5,218		46		70		6.08		5.37
Short term funds (b)		49,057		54,032		236		252		1.92		1.87
Total earning assets		1,069,344		1,045,959		11,187		10,631		4.18		4.07
Other assets		57,196		53,846
Total assets	$	1,126,540	$	1,099,805
Interest-bearing demand deposits	$	156,803	$	149,746		160		114		0.41		0.30
Money market accounts		242,310		208,836		700		447		1.16		0.86
Savings and other		165,297		179,298		323		315		0.78		0.70
Certificates of deposit		152,475		136,148		697		448		1.83		1.32
Total interest-bearing deposits		716,885		674,028		1,880		1,324		1.05		0.79
Repurchase agreements		7,266		4,271		9		4		0.50		0.37
Capital lease		4,356		3,128		42		48		3.86		6.14
Note payable		258		292		4		4		6.20		5.48
Subordinated debt (net of issuance costs)		9,849		9,826		156		156		6.34		6.35
FHLBB advances		31,983		70,845		266		481		3.33		2.72
Total interest-bearing liabilities		770,597		762,390		2,357		2,017		1.22		1.06
Demand deposits		238,689		230,760
Other liabilities		6,669		6,254
Shareholders' equity		110,585		100,401
Total liabilities & shareholders' equity	$	1,126,540	$	1,099,805
Net interest income					$	8,830	$	8,614
Spread on interest-bearing funds										2.96		3.01
Net interest margin (e)										3.29		3.29

(a)	Includes non-accrual loans.
(b)	Includes interest-bearing deposits in other banks and federal funds sold.

(c)

Average balances of securities are based on historical cost.

(d)

Includes tax exempt income benefit of $164,000 and $115,000, respectively, for 2019 and 2018 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis.

(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)	2019 versus 2018
Change in interest due to		Volume			Rate			Net
Loans	$	267		$	213		$	480
Securities		45			71			116
FHLBB stock		(31	)		7			(24	)
Short term funds		(24	)		8			(16	)
Interest-earning assets		257			299			556
Deposits		98			458			556
Repurchase agreements		3			2			5
Capital lease		15			(21	)		(6	)
FHLBB advances		(294	)		79			(215	)
Interest-bearing liabilities		(178	)		518			340
Net change in net interest income	$	435		$	(219	)	$	216

Interest Income

Tax equivalent interest income increased $0.6 million to $11.2 million for third quarter 2019 compared with third quarter 2018. Loan income compared to third quarter 2018 increased $0.5 million, or 5.0%, primarily due to a $24.4 million, or 2.7%, increase in average loans. Tax equivalent securities income increased $116 thousand, or 18.4%, for third quarter 2019 compared with third quarter 2018, primarily due to a $6.1 million, or 6.8%, increase in average balances. Income on short-term funds compared to third quarter 2018 decreased $16 thousand, or 6.3%, primarily due to a $5.0 million, or 9.3%, decrease in average short-term funds partly offset by a 5 basis point increase in the average short-term funds yields.

Interest Expense

Interest expense increased $340 thousand to $2.4 million for third quarter 2019 compared with third quarter 2018. Interest on deposit accounts increased $556 thousand, or 42.0%, as a result of a $42.9 million, or 6.4%, increase in average balances and an average increase in deposit rates of 26 basis points compared with third quarter 2018. Interest expense on FHLBB borrowings decreased $215 thousand, or 44.7%, as a result of a reduction in the average balance of $38.9 million, or 54.8%, compared with third quarter 2018, partly offset by an average borrowings rate which increased 61 basis points. Interest expense on subordinated debt totaled $156 thousand for the third quarter in both 2019 and 2018.

Provision and Allowance for Loan Losses

The provision for loan losses was $94 thousand for third quarter 2019, compared with $378 thousand for third quarter 2018. Net loan charge-offs were $135 thousand and $14 thousand for the respective quarters.

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

Three months ended September 30,	2019		2018
Net charge-offs to average loans receivable, gross	0.01	%	0.00	%
Non-performing loans to loans receivable, gross	0.58		0.71
Accruing loans past due 30-89 days to loans receivable, gross	0.19		0.20
Allowance for loan losses to loans receivable, gross	0.96		0.86
Allowance for loan losses to non-performing loans	164.73		94.76
Non-performing assets to total assets	0.50		0.77

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 0.96% at September 30, 2019 compared to 0.86% at September 30, 2018 and the ratio of the allowance for loan losses to non-performing loans increased to 164.73% at September 30, 2019 from 94.76% at September 30, 2018. In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, gross loans receivable and the allowance for loan losses increased by $663 thousand and the coverage ratios also increased. The balance of net loans receivable did not change as a result of this transfer.

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $5.4 million, or 0.58% of gross loans receivable at September 30, 2019 as compared to $8.2 million, or 0.90%, at September 30, 2018. Accruing loans past due 30-89 days decreased $1.0 million to $0.8 million, or 0.09% of gross loans receivable from $1.8 million, or 0.20% of gross loans receivable, at September 30, 2018. See “Financial Condition – Asset Quality” above for further discussion and analysis.

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

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

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

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

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

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

Non-Interest Income

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

Three months ended September 30, (dollars in thousands)		2019			2018			2019 vs. 2018
Trust and wealth advisory	$	1,023		$	936		$	87		9	%
Service charges and fees		1,003			932			71		8
Gains on sales of mortgage loans, net		42			21			21		100
Mortgage servicing, net		76			84			(8	)	(10	)
Loss on sale of AFS securities		(9	)		—			(9	)	n/a
Gain (loss) on CRA mutual fund		6			(6	)		12		n/a
Other		115			121			(6	)	(5	)
Total non-interest income	$	2,256		$	2,088		$	168		8	%

Non-interest income for third quarter 2019 increased $168 thousand versus third quarter 2018. Trust and Wealth Advisory income increased $87 thousand versus third quarter 2018. The increase primarily reflected higher asset management fees. Assets under administration were $752.5 million as of September 30, 2018 compared with $713.3 million at June 30, 2019 and $690.4 million as of September 30, 2018. Service charges and fees increased $71 thousand versus third quarter 2018 primarily due to higher interchange fees, resulting from higher debit card volume, and other fees. Gains on the sales of mortgages increased $21 thousand versus third quarter 2018 primarily as a result of an increase in volume. Third quarter 2019 mortgage loans sales totaled $5.6 million versus $1.3 million for third quarter 2018. The reduction in mortgage servicing revenue primarily reflected a decline in volume of participated loans for which the Bank records servicing income. Third quarter 2019 and third quarter 2018 included net mortgage servicing amortization of $13 thousand and $12 thousand, respectively. Other income includes bank owned life insurance income and rental income.

Non-Interest Expense

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

Three months ended September 30, (dollars in thousands)		2019			2018		2019 vs. 2018
Salaries	$	3,042		$	3,078	$	(36	)	(1	)%
Employee benefits		1,181			1,065		116		11
Premises and equipment		974			1,036		(62	)	(6	)
Data processing		534			519		15		3
Professional fees		572			496		76		15
OREO losses and write-downs		84			38		46		121
Collections, OREO, and loan related		119			116		3		3
FDIC insurance		(9	)		141		(150	)	(106	)
Marketing and community support		141			167		(26	)	(16	)
Amortization of intangibles		93			111		(18	)	(16	)
Other		453			562		(109	)	(19	)
Total non-interest expense	$	7,184		$	7,329	$	(145	)	(2	)%

Non-interest expense for third quarter 2019 decreased $145 thousand versus third quarter 2018. Total salary and employee benefits expense increased $80 thousand in the current year's quarter as compared to the same period in the prior year. The increase was mainly attributable to higher medical insurance premiums and higher deferred compensation accruals, partly offset by lower production accruals as a result of lower loan volume. Premises and equipment expense decreased $62 thousand versus third quarter 2018. The year-over-year decrease primarily reflected lower depreciation expense and lower building maintenance and repair costs. In September 2019, Salisbury completed the purchase of its New Paltz, New York branch. This property was previously accounted for as a finance lease. Data processing expense increased $15 thousand versus third quarter 2018 due to higher data communications charges, which were mostly offset by lower core data processing charges and lower Trust and Wealth data processing costs. Professional fees increased $76 thousand versus third quarter 2018 as higher investment management and consultation fees were partly offset by lower internal audit fees. OREO gains, losses and write-downs increased $46 thousand versus third quarter 2018. As of third quarter 2019 and 2018, Salisbury owned one OREO property. OREO and loan related expenses increased $3 thousand versus third quarter 2018 as higher OREO carrying costs and litigation expense were mostly offset by lower appraisal costs. The decrease in FDIC insurance reflected an assessment credit of $120 thousand received during third quarter 2019. Marketing and community support costs decreased $26 thousand compared to the prior year third quarter on lower marketing spend. The decline in other expenses of $109 thousand primarily reflected a one-time charge of $95 thousand recorded in third quarter 2018 related to write-down of a mortgage loan previously sold to FHLBB.

Income Taxes

The effective income tax rates for third quarter 2019 and third quarter 2018 were 18.02% and 18.65%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

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

For the nine month periods ended September 30, 2019 and 2018

Overview

Net income allocated to common shareholders was $8.0 million, or $2.88 per common share, for the nine month period ended September 30, 2019 (nine month period 2019), compared with $6.2 million, or $2.24 per common share, for the nine month period ended September 30, 2018 (nine month period 2018).

Net Interest Income

Tax equivalent net interest income for the nine months of 2019 increased $992 thousand, or 3.9%, versus the nine months of 2018. Average earning assets increased $69.0 million versus the nine months of 2018. Average total interest bearing deposits increased $77.0 million versus the nine months of 2018. The net interest margin of 3.24% decreased 12 basis points versus 3.36% for the nine months of 2018.

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)		2019		2018		2019		2018		2019		2018
Loans (a)(d)(f)	$	920,925	$	859,578	$	30,179	$	27,551		4.37	%	4.27	%
Securities (c)(d)		97,337		85,103		2,201		1,702		3.01		2.67
FHLBB stock		3,487		4,709		183		162		7.00		4.59
Short term funds (b)		38,682		41,987		577		500		1.99		1.59
Total earning assets		1,060,431		991,377		33,140		29,915		4.17		4.02
Other assets		56,769		53,634
Total assets	$	1,117,200	$	1,045,011
Interest-bearing demand deposits	$	154,885	$	146,904		458		305		0.39		0.28
Money market accounts		217,290		193,754		1,732		950		1.06		0.65
Savings and other		177,873		169,156		1,229		732		0.92		0.58
Certificates of deposit		164,979		128,216		2,255		1,110		1.82		1.15
Total interest-bearing deposits		715,027		638,030		5,674		3,097		1.06		0.65
Repurchase agreements		4,463		3,008		16		6		0.48		0.27
Capital lease		4,314		2,753		135		130		4.17		6.30
Note payable		266		300		12		14		6.02		6.22
Subordinated debt (net of issuance costs)		9,844		9,820		468		468		6.34		6.35
FHLBB advances		42,938		65,569		957		1,314		2.97		2.67
Total interest-bearing liabilities		776,852		719,480		7,262		5,029		1.25		0.93
Demand deposits		226,182		220,543
Other liabilities		6,560		5,870
Shareholders' equity		107,606		99,118
Total liabilities & shareholders' equity	$	1,117,200	$	1,045,011
Net interest income					$	25,878	$	24,886
Spread on interest-bearing funds										2.92		3.09
Net interest margin (e)										3.24		3.36

(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 $432,000 and $350,000, respectively for 2019 and 2018 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis.

(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)	2019 versus 2018
Change in interest due to		Volume			Rate			Net
Loans	$	1,988		$	640		$	2,628
Securities		261			238			499
FHLBB stock		(53	)		74			21
Short term funds		(44	)		121			77
Interest-earning assets		2,152			1,073			3,225
Deposits		492			2,085			2,577
Repurchase agreements		4			6			10
Capital lease		61			(56	)		5
Note payable		(2	)		—			(2	)
Subordinated Debt		1			(1	)		—
FHLBB advances		(479	)		122			(357	)
Interest-bearing liabilities		77			2,156			2,233
Net change in net interest income	$	2,075		$	(1,083	)	$	992

Interest Income

Tax equivalent interest income increased $3.2 million to $33.1 million for the nine month period 2019 compared with the nine month period 2018. Loan income, as compared to the nine months of 2018, increased $2.6 million, or 9.5%, primarily due to a $61.3 million, or 7.1%, increase in average loans and a 10 basis point increase in the average yield. Tax equivalent securities income increased $0.5 million, or 29.3%, for the nine month period 2019 as compared with the nine month period 2018, primarily due to a $12.2 million increase in average volume and a 34 basis point increase in average yield. Income on short-term funds as compared to nine month period 2018 increased $77 thousand, or 15.4%, primarily due to a 40 basis point increase in the average short-term funds yields, partly offset by a $3.3 million, or 7.9%, decrease in average short-term funds.

Interest Expense
Interest expense increased $2.2 million, or 44.4%, to $7.3 million for the nine month period 2019 as compared with the nine month period 2018. Interest on deposit accounts increased $2.6 million, or 83.2%, as a result of a $77.0 million increase in the average balances and a 41 basis point increase in average deposit rates. Interest expense on FHLBB borrowings decreased $357 thousand, or 27.2%, as a result of $22.6 million, or 34.5%, decrease in average balances, partly offset by a 30 basis point increase in the average borrowing rate. Interest expense on subordinated debt totaled $468 thousand for the nine month periods 2019 and 2018.

Provision and Allowance for Loan Losses

The provision for loan losses was $539 thousand for the nine month period ended September 30, 2019 as compared to $1,171 thousand for the nine month period ended September 30, 2018. The decrease in the provision primarily reflected lower loan growth for the nine month period ended September 30, 2019 compared with the same period in the prior year. Net loan charge-offs were $187 thousand and $202 thousand for the respective nine month periods.

Reserve coverage at September 30, 2019, as measured by the ratio of allowance for loan losses to gross loans, at 0.96%, compares with 0.86% a year ago at September 30, 2018. During the first nine months of 2019, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.1 million to $5.4 million. Non-performing loans represent 0.58% of gross loans receivable, a decrease from 0.71% at December 31, 2018. At September 30, 2019, accruing loans past due 30-89 days decreased $1.4 million to $0.8 million or 0.09% of gross loans receivable from 0.24% at December 31, 2018. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

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

Nine months ended September 30, (dollars in thousands)		2019		2018			2019 vs. 2018
Trust and wealth advisory	$	2,973	$	2,779		$	194		7	%
Service charges and fees		2,935		2,693			242		9
Gains on sales of mortgage loans, net		50		38			12		32
Mortgage servicing, net		232		251			(19	)	(8	)
Gain (loss) on sale of AFS securities		263		16			247		n/a
Gain (loss) on CRA mutual fund		29		(26	)		55		n/a
Other		349		370			(21	)	(6	)
Total non-interest income	$	6,831	$	6,121		$	710		12	%

Non-interest income for the nine month period ended September 30, 2019 increased $710 thousand versus the same period in 2018. Trust and wealth advisory revenues increased $194 thousand mainly due to growth in asset based fees. Assets under administration increased $62.0 million from third quarter 2018 to $752.5 million as of third quarter 2019. Discretionary assets under administration increased $40.0 million from third quarter 2018 to $475.5 million as of third quarter 2019. Service charges and fees increased $242 thousand from third quarter 2018 due to higher interchange and ATM fees as well as higher prepayment penalties collected in 2019. Gains on the sale of mortgage loans increased $12 thousand due to an increase in the number of loans sold. Mortgage loans sales totaled $6.1 million for the nine month period ended September 30, 2019 and $1.9 million for the nine month period ended September 30, 2018. The reduction in mortgage servicing revenue primarily reflected a decline in volume of participated loans for which the Bank records servicing income. The nine month periods ended September 30, 2019 and 2018 included mortgage servicing amortization of $37 thousand and $34 thousand, respectively. Other income included bank owned life insurance income and rental income.

Non-interest expense

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

Nine months ended September 30, (dollars in thousands)		2019		2018		2019 vs. 2018
Salaries	$	8,994	$	8,864	$	130		1	%
Employee benefits		3,408		3,192		216		7
Premises and equipment		2,950		3,161		(211	)	(7	)
Data processing		1,620		1,561		59		4
Professional fees		1,690		1,725		(35	)	(2	)
OREO gains, losses and write-downs		406		91		315		n/a
Collections, OREO, and loan related		328		432		(104	)	(24	)
FDIC insurance		294		394		(100	)	(25	)
Marketing and community support		448		630		(182	)	(29	)
Amortization of intangible assets		297		347		(50	)	(14	)
Other		1,398		1,528		(130	)	(9	)
Non-interest expense	$	21,833	$	21,925	$	(92	)	—	%

Non-interest expense for the nine month period ended September 30, 2019 decreased $92 thousand versus the same period in 2018. Salaries and benefits increased $346 thousand primarily due to higher medical insurance premiums and merit adjustments as well as lower deferred expenses related to loan originations. These increases were partly offset by lower production accruals due to lower loan origination volume. Premises and equipment decreased $211 thousand mainly due to lower software and computer equipment costs as well as lower lease expense. Data processing increased $59 thousand mainly due to higher core processing and higher ATM and debit card processing costs partly offset by lower Trust and Wealth data processing costs. Professional fees decreased $35 thousand versus the nine month period 2018 as lower consulting fees were partly offset by higher investment management and audit fees. OREO gains, losses and write-downs increased $315 thousand versus third quarter 2018. As of third quarter 2019 and 2018, Salisbury owned one OREO property. OREO and loan related expenses decreased $104 thousand year over year primarily reflecting lower delinquent taxes on foreclosed properties and lower costs for appraisals and inspections. The decrease in FDIC related expense primarily reflected an assessment credit of $120 thousand received in third quarter 2019. Marketing and community support costs decreased $182 thousand compared to the same period in 2018 primarily due to lower marketing spend. Amortization of intangible assets decreased $50 thousand due to the aging off of expenses related to previous acquisitions. The decline in other expenses of $130 thousand primarily reflected a one-time charge of $95 thousand recorded in third quarter 2018 related to a write-down of a mortgage loan previously sold to FHLBB.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2019 and September 30, 2018 were 17.98% and 17.21%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets.

CAPITAL RESOURCES

Shareholders' equity was $111.6 million at September 30, 2019, up $8.2 million from December 31, 2018. Book value and tangible book value per common share were $39.52 and $34.24, respectively, compared with $36.86 and $31.45, respectively, at December 31, 2018. Contributing to the increase in shareholders' equity for year-to-date 2019 was net income of $8.1 million and a reduction of unearned compensation of $0.4 million, partially offset by other common stock dividends of $2.4 million. Accumulated other comprehensive income consisted of unrealized gains on securities available-for-sale, net of tax, of $1.9 million as of September 30, 2019.

Capital Requirements

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

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

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, 2019		December 31, 2018
Total Capital (to risk-weighted assets)	12.58	%	12.09	%
Tier 1 Capital (to risk-weighted assets)	11.57		11.17
Common Equity Tier 1 Capital (to risk-weighted assets)	11.57		11.17
Tier 1 Capital (to average assets)	9.27		8.83

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

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

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

On 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 will become effective on January 1, 2020. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy.

Dividends

Salisbury paid $2.4 million in common stock dividends during the nine month period ended September 30, 2019.

On October 25, 2019, the Board of Directors of Salisbury declared a common stock dividend of $0.28 per common share payable on November 29, 2019 to shareholders of record on November 15, 2019. 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)

other risks detailed from time to time in Salisbury's filings with the Securities and Exchange Commission.

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

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, 2019 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At September 30, 2019, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declines in interest rates – a decline in short term market interest rates with the top end of the Fed Funds range declining by 50 basis points while the 2-year Treasury rate to the 10-year Treasury rate trade in a range but are ultimately unchanged over year one and then an increase in market interest rates with the Fed Funds rate unchanged while there is a 22 basis points increase for the 2 year treasury rate to 58 basis points for the 10-year Treasury in year two. In this scenario, the yield curve is flat to modestly inverted through late 2019 and into 2020. Ultimately, the yield curve slopes upward but at very low overall market interest rates. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

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

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

As of September 30, 2019	Months 1-12			Months 13-24
Immediately rising interest rates + 300bp (static growth assumptions)		(9.10	)%		(5.10	)%
Immediately falling interest rates - 100bp (static growth assumptions)		(1.40	)		(3.30	)
Immediately rising increase rates + 400bp (static growth assumptions)		(12.40	)		(7.20	)

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

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

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

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

As of September 30, 2019 (in thousands)		Rates up 100bp			Rates up 200bp
U.S. Government agency notes	$	20		$	(156	)
Municipal bonds		(916	)		(2,648	)
Mortgage backed securities
U.S. Government agencies and U.S. Government- sponsored enterprises		15			(1,299	)
Collateralized mortgage obligations
U.S. Government agencies		568			(486	)
Corporate bonds		(57	)		(140	)
Total available-for-sale debt securities	$	(370	)	$	(4,729	)

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, 2019. 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, 2019.

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

Changes in Internal Controls

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

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

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

Item 1A.

RISK FACTORS

During the nine months ended September 30, 2019, there were no material changes to the risk factors previously disclosed in Salisbury's Annual Report on Form 10-K for the year ended December 31, 2018.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None

Item 4.

MINE SAFETY DISCLOSURES

Not Applicable

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS

Exhibit No.	Description

3.1	Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).

3.1.1	Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).

3.1.2	Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).

3.1.3	Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).

3.1.4	Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).

3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).

4.1	Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K filed December 10, 2015).

10.1	2017 Long Term Incentive Plan adopted by the Board on February 24, 2017 and approved by shareholders at Salisbury's 2017 Annual Meeting of Shareholders (incorporated by reference to Appendix A of the Registrant's definitive proxy statement filed April 10, 2017).

10.2	Amendment Number Three to 2011 Long Term Incentive Plan dated as of April 28, 2017 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2017).

31.1	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 8, 2019	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

November 8, 2019	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer