SALISBURY BANCORP, INC. - Quarter Report: 2019 March (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 March 31, 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	6039
(Address of principal executive offices)	(Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

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

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

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

Yes ☐ No ☑

The number of shares of Common Stock outstanding as of May 10, 2019 is 2,808,706.

TABLE OF CONTENTS

	PART I FINANCIAL INFORMATION	Page
Item 1.	Financial Statements (unaudited)
	CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2019 (unaudited) and DECEMBER 31, 2018	3
	CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS ENDED MARCH 31, 2019 and 2018 (unaudited)	4
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018 (unaudited)	5
	CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018 (unaudited)	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2019 and 2018 (unaudited)	6
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
Item 4.	CONTROLS AND PROCEDURES	42

	PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	43
Item 1A.	RISK FACTORS	43
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
Item 3.	DEFAULTS UPON SENIOR SECURITIES	43
Item 4.	MINE SAFETY DISCLOSURES	43
Item 5.	OTHER INFORMATION	43
Item 6.	EXHIBITS	43
SIGNATURES		44

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)		March 31, 2019			December 31, 2018
ASSETS		(unaudited)
Cash and due from banks	$	6,944		$	7,238
Interest bearing demand deposits with other banks		41,685			51,207
Total cash and cash equivalents		48,629			58,445
Securities
Available-for-sale at fair value		98,255			91,818
CRA mutual fund at fair value		852			836
Federal Home Loan Bank of Boston stock at cost		3,372			4,496
Loans receivable, net (allowance for loan losses: $8,750 and $7,831)		911,188			909,279
Other real estate owned		741			1,810
Bank premises and equipment, net		17,812			18,175
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $4,601 and $4,497)		1,279			1,383
Accrued interest receivable		3,411			3,148
Cash surrender value of life insurance policies		15,267			14,438
Deferred taxes		766			1,276
Other assets		3,538			2,635
Total Assets	$	1,118,925		$	1,121,554
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	219,168		$	228,448
Demand (interest bearing)		157,123			153,586
Money market		203,309			204,219
Savings and other		190,011			178,807
Certificates of deposit		172,358			161,679
Total deposits		941,969			926,739
Repurchase agreements		2,951			4,104
Federal Home Loan Bank of Boston advances		47,712			67,154
Subordinated debt		9,841			9,835
Note payable		272			280
Finance lease obligations		3,046			3,081
Accrued interest and other liabilities		7,025			6,902
Total Liabilities		1,012,816			1,018,095
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 5,000,000;
Issued: 2,884,888 and 2,884,988
Outstanding: 2,806,681 and 2,806,781		281			281
Unearned compensation - restricted stock awards		(606	)		(711	)
Paid-in capital		43,765			43,770
Retained earnings		61,989			60,339
Accumulated other comprehensive income (loss), net		680			(220	)
Total Shareholders' Equity		106,109			103,459
Total Liabilities and Shareholders' Equity	$	1,118,925		$	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 March 31, (in thousands except per share amounts)		2019			2018
Interest and dividend income
Interest and fees on loans	$	9,934		$	8,649
Interest on debt securities
Taxable		621			460
Tax exempt		72			32
Other interest and dividends		227			159
Total interest and dividend income		10,854			9,300
Interest expense
Deposits		1,796			777
Repurchase agreements		3			1
Finance lease		46			35
Note payable		4			5
Subordinated debt		156			156
Federal Home Loan Bank of Boston advances		412			332
Total interest expense		2,417			1,306
Net interest and dividend income		8,437			7,994
Provision for loan losses		294			326
Net interest and dividend income after provision for loan losses		8,143			7,668
Non-interest income
Trust and wealth advisory		906			894
Service charges and fees		920			868
Gains on sales of mortgage loans, net		7			18
Mortgage servicing, net		76			83
Gains (losses) on CRA mutual fund		11			(13	)
Losses on available-for-sale securities, net		(9	)		(2	)
Other		116			126
Total non-interest income		2,027			1,974
Non-interest expense
Salaries		2,993			2,846
Employee benefits		1,185			1,159
Premises and equipment		972			1,024
Data processing		509			486
Professional fees		535			619
OREO gains, losses and write-downs		52			52
Collections and other real estate owned		130			82
FDIC insurance		163			130
Marketing and community support		156			242
Amortization of core deposit intangibles		104			120
Other		412			422
Total non-interest expense		7,211			7,182
Income before income taxes		2,959			2,460
Income tax provision		525			445
Net income	$	2,434		$	2,015
Net income allocated to common stock	$	2,408		$	1,995

Basic earnings per common share	$	0.87		$	0.72
Weighted average common shares outstanding, to calculate basic earnings per share		2,777			2,759
Diluted earnings per common share	$	0.86		$	0.72
Weighted average common shares outstanding, to calculate diluted earnings per share		2,789			2,780
Common dividends per share	$	0.28		$	0.28

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 March 31, (in thousands)		2019			2018
Net income	$	2,434		$	2,015
Other comprehensive income
Net unrealized gains (losses) on securities available-for-sale		1,130			(1,019	)
Reclassification of net realized losses in net income⁽¹⁾		9			2
Unrealized gains (losses) on securities available-for-sale		1,139			(1,017	)
Income tax (expense) benefit		(239	)		210
Unrealized gains (losses) on securities available-for-sale, net of tax		900			(807	)
Comprehensive income	$	3,334		$	1,208

^{(1)
Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated
other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax
amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect, which is immaterial to
Salisbury's consolidated results, is included in the income tax provision and the after tax amount is included in net income.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(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		—			—		—			2,015			—			—			2,015
Adoption of ASU 2016-01		—			—		—			(16	)		—			16			—
Other comprehensive loss, net of tax		—			—		—			—			—			(807	)		(807	)
Common stock dividends declared		—			—		—			(780	)		—			—			(780	)
Stock options exercised		1,350			—		42			—			—			—			42
Stock based compensation- restricted stock awards		—			—		—			—			113			—			113
Balances at March 31, 2018		2,786,566		$	279	$	43,040		$	55,883		$	(493	)	$	(612	)	$	98,097
Balances at December 31, 2018		2,806,781		$	281	$	43,770		$	60,339		$	(711	)	$	(220	)	$	103,459
Net income		—			—		—			2,434			—			—			2,434
Other comprehensive income, net of tax		—			—		—			—			—			900			900
Common stock dividends declared		—			—		—			(784	)		—			—			(784	)
Forfeiture of restricted stock shares		(100	)		—		(5	)		—			5			—			—
Stock based compensation- restricted stock awards		—			—		—			—			100			—			100
Balances at March 31, 2019		2,806,681		$	281	$	43,765		$	61,989		$	(606	)	$	680		$	106,109

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended March 31, (in thousands)		2019			2018
Operating Activities
Net income	$	2,434		$	2,015
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation:
Securities		12			19
Bank premises and equipment		410			371
Core deposit intangible		104			120
Modification fees on Federal Home Loan Bank of Boston advances		58			58
Subordinated debt issuance costs		6			6
Mortgage servicing rights		11			11
Fair value adjustment on loans		(64	)		(285	)
Fair value adjustment on deposits		(2	)		(11	)
(Gains) and losses, including write-downs
(Gain) loss on CRA mutual fund		(11	)		13
Loss on securities available-for-sale, net		9			2
Gain on sales of loans, excluding capitalized servicing rights		(5	)		(10	)
Write-downs of other real estate owned		52			52
Provision for loan losses		294			326
Proceeds from loans sold		368			679
Loans originated for sale		(363	)		—
Decrease (increase) in deferred loan origination fees and costs, net		88			(92	)
Mortgage servicing rights originated		(4	)		(6	)
Increase in interest receivable		(263	)		(39	)
Deferred tax expense (benefit)		271			(18	)
Increase in prepaid expenses		(143	)		(170	)
Increase in cash surrender value of life insurance policies		(79	)		(81	)
Decrease in income tax receivable		137			625
Decrease in other assets		649			70
Decrease in accrued expenses		(1,628	)		(821	)
Increase in interest payable		341			208
Decrease in other liabilities		(142	)		(55	)
Stock based compensation- restricted stock awards		100			113
Net cash provided by operating activities		2,640			3,100
Investing Activities
Redemption (purchase) of Federal Home Loan Bank of Boston stock		1,124			(333	)
Purchases of securities available-for-sale		(9,391	)		(7,999	)
Proceeds from sale of securities		965			—
Reinvestment of CRA mutual fund		(5	)		(4	)
Proceeds from calls of securities available-for-sale		—			500
Proceeds from maturities/principal payments of securities available-for-sale		3,107			4,767
Loan originations and principal collections, net		(2,235	)		(28,630	)
Recoveries of loans previously charged off		7			14
Proceeds from sale of OREO		1,017			—
Purchase of life insurance (BOLI)		(750	)		—
Capital expenditures		(47	)		(794	)
Net cash utilized provided by investing activities		(6,208	)		(32,479	)

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)

Three months ended March 31, (in thousands)		2019			2018
Financing Activities
Increase in deposit transaction accounts, net		4,551			10,029
Increase in time deposits, net		10,681			6,324
(Decrease) increase in securities sold under agreements to repurchase, net		(1,153	)		2,294
Federal Home Loan Bank of Boston advances, net change in advances with maturity dates less than three months		(9,500	)		35,000
Principal payments on Federal Home Loan Bank of Boston long term advances		(10,000	)		(27,000	)
Principal payments on note payable		(8	)		(8	)
Principal payments on finance lease obligations		(35	)		(29	)
Stock options exercised		—			42
Common stock dividends paid		(784	)		(780	)
Net cash (utilized) provided by financing activities		(6,248	)		25,872
Net decrease in cash and cash equivalents		(9,816	)		(3,507	)
Cash and cash equivalents, beginning of period		58,445			48,486
Cash and cash equivalents, end of period	$	48,629		$	44,979
Cash paid(received) during period
Interest	$	2,014		$	1,045
Income taxes		81			(162	)
Non-cash investing and financing activities
Finance lease obligation		—			1,373
Adoption of ASU 2016-02- Other assets		1,552			—
Adoption of ASU 2016-02- Other liabilities		(1,552	)		—
Adoption of ASU 2016-01 – Recognition and measurement of financial assets and liabilities		—			16

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

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

Recent Accounting Pronouncements

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

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. Salisbury will adopt the standard in the first quarter of 2020. Salisbury will apply the standard's provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury has been working with a third-party vendor and is in the process of finalizing the methodologies that will be utilized. Salisbury anticipates that adoption of ASU 2016-13 will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses and the Bank continues to evaluate the extent of potential impact.

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

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

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

In August 2018, the FASB issued ASU 2018-03, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-03 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on the Bank'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
March 31, 2019
Available-for-sale
U.S. Government Agency notes	$	7,391	$	124	$	2	$	7,513
Municipal bonds		9,251		240		—		9,491
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		56,009		503		153		56,359
Collateralized mortgage obligations:
U.S. Government agencies		20,493		186		74		20,605
Corporate bonds		4,250		37		—		4,287
Total securities available-for-sale	$	97,394	$	1,090	$	229	$	98,255
CRA mutual fund	$	852	$	—	$	—	$	852
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,372	$	—	$	—	$	3,372
(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 $1.0 million in securities available-for-sale during the three month period ended March 31, 2019 realizing a pre-tax loss of $9 thousand and related tax benefit of $2 thousand. Salisbury did not sell any available-for-sale securities during the three month period ended March 31, 2018.

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
March 31, 2019 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	448	$	2	$	448	$	2
Mortgage- backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		1,060		13		22,957		140		24,017		153
Collateralized mortgage obligations:
U.S. Government Agencies		—		—		8,159		74		8,159		74
Total temporarily impaired securities	$	1,060	$	13	$	31,564	$	216	$	32,624	$	229

		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:

March 31, 2019 (in thousands)	Maturity	Amortized cost		Fair value		Yield(1)
U.S. Government Agency notes	After 1 year but within 5 years	$	505	$	503		3.63	%
	After 5 year but within 10 years		6,886		7,010		3.48
	Total		7,391		7,513		3.49
Municipal bonds	Within 1 year		257		257		2.44
	After 10 years		8,994		9,234		4.06
	Total		9,251		9,491		4.02
Mortgage-backed securities and Collateralized mortgage obligations	U.S. Government agencies		76,502		76,964		2.92

Corporate bonds	After 5 years but within 10 years		4,250		4,287		5.43
Securities available-for-sale		$	97,394	$	98,255		3.04	%

⁽¹⁾ Yield is based on amortized cost.

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at March 31, 2019.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at March 31, 2019, which approximated 0.44% 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 March 31, 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. Twenty-eight securities had unrealized losses at March 31, 2019, which approximated 0.70% 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 March 31, 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 March 31, 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 is as follows:

(In thousands)		March 31, 2019			December 31, 2018
Residential 1-4 family	$	334,357		$	345,862
Residential 5+ multifamily		37,427			36,510
Construction of residential 1-4 family		11,272			12,041
Home equity credit		35,022			34,433
Residential real estate		418,078			428,846
Commercial		289,267			283,599
Construction of commercial		11,359			8,976
Commercial real estate		300,626			292,575
Farm land		4,155			4,185
Vacant land		8,164			8,322
Real estate secured		731,023			733,928
Commercial and industrial		167,503			162,905
Municipal		15,702			14,344
Consumer		4,377			4,512
Loans receivable, gross		918,605			915,689
Deferred loan origination fees and costs, net		1,333			1,421
Allowance for loan losses		(8,750	)		(7,831	)
Loans receivable, net	$	911,188		$	909,279

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" 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" 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" 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" 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
March 31, 2019
Residential 1-4 family	$	325,934	$	4,235	$	4,188	$	—	$	—	$	334,357
Residential 5+ multifamily		35,941		492		994		—		—		37,427
Construction of residential 1-4 family		11,272		—		—		—		—		11,272
Home equity lines of credit		34,351		264		407		—		—		35,022
Residential real estate		407,498		4,991		5,589		—		—		418,078
Commercial		274,021		5,485		9,761		—		—		289,267
Construction of commercial		11,010		—		349		—		—		11,359
Commercial real estate		285,031		5,485		10,110		—		—		300,626
Farm land		2,400		—		1,755		—		—		4,155
Vacant land		8,097		67		—		—		—		8,164
Real estate secured		703,026		10,543		17,454		—		—		731,023
Commercial and industrial		163,607		2,346		1,550		—		—		167,503
Municipal		15,702		—		—		—		—		15,702
Consumer		4,370		6		1		—		—		4,377
Loans receivable, gross	$	886,705	$	12,895	$	19,005	$	—	$	—	$	918,605
(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
March 31, 2019
Residential 1-4 family	$	331,427	$	1,120	$	1,283	$	—	$	527	$	2,930	$	—	$	2,040
Residential 5+ multifamily		36,566		—		—		—		861		861		—		994
Construction of residential 1-4 family		11,272		—		—		—		—		—		—		—
Home equity lines of credit		34,511		—		152		—		359		511		—		407
Residential real estate		413,776		1,120		1,435		—		1,747		4,302		—		3,441
Commercial		287,436		245		—		192		1,394		1,831		—		2,107
Construction of commercial		11,359		—		—		—		—		—		—		249
Commercial real estate		298,795		245		—		192		1,394		1,831		—		2,356
Farm land		3,536		212		407		—		—		619		—		212
Vacant land		8,122		42		—		—		—		42		—		—
Real estate secured		724,229		1,619		1,842		192		3,141		6,794		—		6,009
Commercial and industrial		167,099		3		21		20		360		404		20		360
Municipal		15,702		—		—		—		—		—		—		—
Consumer		4,362		6		8		1		—		15		1		—
Loans receivable, gross	$	911,392	$	1,628	$	1,871	$	213	$	3,501	$	7,213	$	21	$	6,369

			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

There were no troubled debt restructurings in the first quarter of 2019 or 2018.

Allowance for Loan Losses

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.

	Three Months ended March 31, 2019														Three Months ended March 31, 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	$	(180	)	$	—		$	1	$	1,980	$	1,862	$	129		$	(10	)	$	1	$	1,982
Residential 5+ multifamily		413		—		53			—			—		466		155		61			—			—		216
Construction of residential 1-4 family		83		—		(6	)		—			—		77		75		(1	)		—			—		74
Home equity lines of credit		219		1		(11	)		—			—		209		236		(3	)		—			—		233
Residential real estate		2,864		11		(144	)		—			1		2,732		2,328		186			(10	)		1		2,505
Commercial		3,048		488		276			(9	)		—		3,803		2,547		119			—			—		2,666
Construction of commercial		122		—		21			—			—		143		80		13			—			—		93
Commercial real estate		3,170		488		297			(9	)		—		3,946		2,627		132			—			—		2,759
Farm land		33		—		14			—			—		47		32		1			—			—		33
Vacant land		100		—		(11	)		—			—		89		131		—			—			—		131
Real estate secured		6,167		499		156			(9	)		1		6,814		5,118		319			(10	)		1		5,428
Commercial and industrial		1,158		164		(61	)		(30	)		2		1,233		984		(42	)		(9	)		5		938
Municipal		12		—		2			—			—		14		30		—			—			—		30
Consumer		56		—		(3	)		(6	)		4		51		81		12			(40	)		8		61
Unallocated		438		—		200			—			—		638		563		38			—			—		601
Totals	$	7,831	$	663	$	294		$	(45	)	$	7	$	8,750	$	6,776	$	327		$	(59	)	$	14	$	7,058

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

(in thousands)	Collectively evaluated ¹				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
March 31, 2019
Residential 1-4 family	$	329,513	$	1,867	$	4,844	$	113	$	334,357	$	1,980
Residential 5+ multifamily		36,048		466		1,379		—		37,427		466
Construction of residential 1-4 family		11,272		77		—		—		11,272		77
Home equity lines of credit		34,570		207		452		2		35,022		209
Residential real estate		411,403		2,617		6,675		115		418,078		2,732
Commercial		284,272		3,617		4,995		186		289,267		3,803
Construction of commercial		11,010		129		349		14		11,359		143
Commercial real estate		295,282		3,746		5,344		200		300,626		3,946
Farm land		3,943		47		212		—		4,155		47
Vacant land		7,977		87		187		2		8,164		89
Real estate secured		718,605		6,497		12,418		317		731,023		6,814
Commercial and industrial		167,005		1,233		498		—		167,503		1,233
Municipal		15,702		14		—		—		15,702		14
Consumer		4,377		51		—		—		4,377		51
Unallocated allowance		—		638		—		—		—		638
Totals	$	905,689	$	8,433	$	12,916	$	317	$	918,605	$	8,750

(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:

March 31, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	895,685	$	7,373	$	—	$	—	$	895,685	$	7,373
Potential problem loans ¹		10,004		422		—		—		10,004		422
Impaired loans		—		—		12,916		317		12,916		317
Unallocated allowance		—		638		—		—		—		638
Totals	$	905,689	$	8,433	$	12,916	$	317	$	918,605	$	8,750

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 fair value of expected cash flows or collateral, in accordance with the most likely means of recovery. Certain data with respect to loans individually evaluated for impairment is as follows as of and for the three months ended:

	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
March 31, 2019
Residential	$	2,769	$	2,823	$	2,780	$	113	$	27	$	3,454	$	4,758	$	3,620	$	16
Home equity lines of credit		45		45		46		2		1		407		495		409		—
Residential real estate		2,814		2,868		2,826		115		28		3,861		5,253		4,029		16
Commercial		2,568		2,568		1,993		186		24		2,427		3,912		2,748		14
Construction of commercial		249		249		251		14		—		100		108		101		2
Farm land		—		—		—		—		—		212		430		215		—
Vacant land		42		42		42		2		1		145		165		146		3
Real estate secured		5,673		5,727		5,112		317		53		6,745		9,868		7,239		35
Commercial and industrial		—		—		—		—		—		498		620		500		2
Consumer		—		—		—		—		—		—		1		—		—
Totals	$	5,673	$	5,727	$	5,112	$	317	$	53	$	7,243	$	10,489	$	7,739	$	37

	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
March 31, 2018
Residential	$	4,724	$	5,008	$	3,884	$	162	$	30	$	2,270	$	3,020	$	3,015	$	28
Home equity lines of credit		47		47		47		1		1		63		116		64		—
Residential real estate		4,771		5,055		3,931		163		31		2,333		3,136		3,079		28
Commercial		1,847		2,080		2,258		100		40		2,355		3,447		3,138		47
Construction of commercial		—		—		27		—		—		364		386		338		2
Farm land		—		—		—		—		—		241		447		244		—
Vacant land		44		44		44		3		1		153		176		154		3
Real estate secured		6,662		7,179		6,260		266		72		5,446		7,592		6,953		80
Commercial and industrial		106		115		108		7		—		407		498		408		1
Consumer		—		—		—		—		—		—		5		—		—
Totals	$	6,768	$	7,294	$	6,368	$	273	$	72	$	5,853	$	8,095	$	7,361	$	81

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2018:

	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
December 31, 2018
Residential	$	2,792	$	2,842	$	3,429	$	107	$	101	$	3,799	$	5,140	$	3,726	$	102
Home equity lines of credit		47		47		158		6		2		411		498		114		2
Residential real estate		2,839		2,889		3,587		113		103		4,210		5,638		3,840		104
Commercial		1,808		1,808		2,001		141		88		2,403		3,989		2,992		75
Construction of commercial		252		252		67		16		—		102		110		295		7
Farm land		—		—		—		—		—		216		432		232		—
Vacant land		42		42		43		2		3		147		168		151		10
Real estate secured		4,941		4,991		5,698		272		194		7,078		10,337		7,510		196
Commercial and industrial		—		—		40		—		—		501		596		469		5
Totals	$	4,941	$	4,991	$	5,738	$	272	$	194	$	7,579	$	10,933	$	7,979	$	201

NOTE 4 - LEASES

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

The following table provides the assets and liabilities as well as the costs of operating and financial leases which are included in the Bank's consolidated income statement for the three months ended March 31, 2019.

Three months ended (in thousands, except lease term and discount rate)	Classification		March 31, 2019
Assets
Operating	Other assets	$	1,505
Finance	Bank premises and equipment ¹		2,801
Total Leased Assets		$	4,306
Liabilities
Operating	Other liabilities	$	1,505
Finance	Finance lease		3,046
Total lease liabilities		$	4,551
¹ Net of accumulated depreciation of $472 thousand.

Lease cost	Classification		March 31, 2019
Operating leases	Premises and equipment	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		47
Interest on finance leases	Interest expense		46
Total lease cost		$	154

Weighted Average Remaining Lease Term
Operating leases			8.7 years
Financing leases			13.2 years
Weighted Average Discount Rate ¹
Operating leases			3.7	%
Financing leases			7.5	%
¹ Salisbury uses the FHLB five year Advance rate as the discount rate, as our leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of March 31, 2019.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2019	$	185		$	254
2020		246			336
2021		228			342
2022		199			345
2023		148			347
Thereafter		782			2,956
Total future minimum lease payments		1,788			4,580
Less amount representing interest		(283	)		(1,534	)
Total present value of net future minimum lease payments	$	1,505		$	3,046

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)		March 31, 2019		December 31, 2018
Residential mortgage loans serviced for others	$	109,848	$	111,378
Fair value of mortgage servicing rights		903		951

Changes in mortgage servicing rights are as follows:

Three months ended March 31, (in thousands)		2019			2018
Mortgage Servicing Rights
Balance, beginning of period	$	228		$	233
Originated		4			6
Amortization ⁽¹⁾		(11	)		(11	)
Balance, end of period	$	221		$	228

⁽¹⁾Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net. There were no increases in the impairment reserve for the three months ended March 31, 2019 or March 31, 2018.

NOTE 6 - PLEDGED ASSETS

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

(in thousands)		March 31, 2019		December 31, 2018
Securities available-for-sale (at fair value)	$	78,963	$	80,991
Loans receivable		330,202		328,674
Total pledged assets	$	409,165	$	409,665

At March 31, 2019, securities were pledged as follows: $91.5 million to secure public deposits, $11.2 million to secure repurchase agreements and $0.05 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 7 - EARNINGS PER SHARE

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

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

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

Three months ended March 31, (in thousands, except per share data)		2019			2018
Net income	$	2,434		$	2,015
Less: Undistributed earnings allocated to participating securities		(26	)		(20	)
Net income allocated to common stock	$	2,408		$	1,995
Weighted-average common shares issued		2,806			2,786
Less: Unvested restricted stock awards		(29	)		(27	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,777			2,759
Add: Dilutive effect of stock options		12			21
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,789			2,780
Earnings per common share (basic)	$	0.87		$	0.72
Earnings per common share (diluted)	$	0.86		$	0.72

NOTE 8 - SHAREHOLDERS' EQUITY

Capital Requirements

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on Salisbury's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Salisbury and the Bank must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Salisbury and 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 March 31, 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.

Salisbury's risk-weighted assets at March 31, 2019 and December 31, 2018 were $865.2 million and $860.6 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for Salisbury and 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
March 31, 2019
Total Capital (to risk-weighted assets)
Salisbury	$	109,676		12.68	%	$	69,213		8.00	%	$	90,842		10.50	%		n/a		—
Bank		106,847		12.35			69,213		8.0			90,842		10.5		$	86,516		10.00	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		90,833		10.50			51,910		6.0			73,539		8.5			n/a		—
Bank		98,004		11.33			51,910		6.0			73,539		8.5			69,213		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)
Salisbury		90,833		10.50			38,932		4.5			60,561		7.0			n/a		—
Bank		98,004		11.33			38,932		4.5			60,561		7.0			56,235		6.5
Tier 1 Capital (to average assets)
Salisbury		90,833		8.32			43,688		4.0			43,688		4.0			n/a		—
Bank		98,004		8.97			43,688		4.0			43,688		4.0			54,610		5.0

	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
December 31, 2018
Total Capital (to risk-weighted assets)
Salisbury	$	107,659		12.51	%	$	68,848		8.00	%	$	90,362		10.50	%		n/a		n/a
Bank		104,013		12.09			68,848		8.0			90,362		10.5		$	86,059		10.00	%
Tier 1 Capital (to risk-weighted assets)
Salisbury		89,738		10.43			51,636		6.0			73,150		8.5			n/a		n/a
Bank		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)
Salisbury		89,738		10.43			38,727		4.5			60,242		7.0			n/a		n/a
Bank		96,092		11.17			38,727		4.5			60,242		7.0			55,939		6.5
Tier 1 Capital (to average assets)
Salisbury		89,738		8.25			43,527		4.0			43,527		4.0			n/a		n/a
Bank		96,092		8.83			43,527		4.0			43,527		4.0			54,409		5.0

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 $239 thousand and $282 thousand, respectively, for the three month periods ended March 31, 2019 and 2018. The decrease in the expense reflected a reduction in the Bank's safe-harbor and employer match percentages. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $21 thousand and $26 thousand for the three month periods ended March 31, 2019 and 2018, respectively.

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 $49 thousand and $60 thousand, respectively, for the three month periods ended March 31, 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 who 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 March 31, 2019 and 2018.

Grants of Restricted Stock, Performance Based Restricted Stock Units and Options

Restricted stock

Expense in first quarter 2019 and 2018 related to stock based compensation totaled $100 thousand and $113 thousand, respectively. Unrecognized compensation cost relating to the awards as of March 31, 2019 and 2018 totaled $606 thousand and $493 thousand, respectively. Forfeitures in the first quarter 2019 and 2018 totaled 100 and 0 shares, respectively.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan. The performance goal is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. A total of 6,800 performance-based restricted stock units were granted, including 3,500 units to three Named Executive Officers. Mr. Cantele received 1,500 units, Mr. Davies received 1,000 units and Mr. Albero received 1,000 units. No compensation expense was recorded with respect to these RSUs in the three month period ending March 31, 2019.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the first quarter 2019, 0 stock options were exercised. In the first quarter 2018, 1,350 stock options were exercised at $31.11 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury.

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:

(in thousands)		March 31, 2019		December 31, 2018
Unrealized gains (losses) on securities available-for-sale, net of tax	$	680	$	(220	)
Accumulated other comprehensive income (loss), net	$	680	$	(220	)

NOTE 11 - FAIR VALUE OF ASSETS AND LIABILITIES

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

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

•

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

•

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

•

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 March 31, 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
March 31, 2019
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	7,513	$	—	$	7,513
Municipal bonds		—		9,491		—		9,491
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		56,359		—		56,359
Collateralized mortgage obligations:
U.S. Government agencies		—		20,605		—		20,605
Corporate bonds		—		4,287		—		4,287
Securities available-for-sale	$	—	$	98,255	$	—	$	98,255
CRA mutual funds		852		—		—		852
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	4,599	$	4,599
Other real estate owned	$	—	$	—	$	741	$	741
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
March 31, 2019
Financial Assets
Cash and cash equivalents	$	48,629	$	48,629	$	48,629	$	—	$	—
Securities available-for-sale, net		98,255		98,255		—		98,255		—
CRA mutual fund		852		852		852		—		—
Federal Home Loan Bank of Boston stock		3,372		3,372		—		—		3,372
Loans held-for-sale		—		—		—		—		—
Loans receivable, net		911,188		902,084		—		—		902,084
Accrued interest receivable		3,411		3,411		—		—		3,411
Cash surrender value of life insurance policies		15,267		15,267		15,267		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	219,168	$	219,168	$	—	$	—	$	219,168
Demand (interest-bearing)		157,123		157,123		—		—		157,123
Money market		203,309		203,309		—		—		203,309
Savings and other		190,011		190,011		—		—		190,011
Certificates of deposit		172,358		172,895		—		—		172,895
Deposits		941,969		942,506		—		—		942,506
Repurchase agreements		2,951		2,951		—		—		2,951
FHLBB advances		47,712		47,925		—		—		47,925
Subordinated debt		9,841		10,115		—		—		10,115
Note payable		272		279		—		—		279
Finance lease obligation		3,046		3,282		—		—		3,282
Accrued interest payable		578		578		—		—		578

December 31, 2018
Financial Assets
Cash and cash equivalents	$	58,445	$	58,445	$	58,445	$	—	$	—
Securities available-for-sale		91,818		91,818		—		91,818		—
CRA mutual fund		836		836		836		—		—
Federal Home Loan Bank of Boston stock		4,496		4,496		—		—		4,496
Loans receivable, net		909,279		886,222		—		—		886,222
Accrued interest receivable		3,148		3,148		—		—		3,148
Cash surrender value of life insurance policies		14,438		14,438		14,438		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	228,448	$	228,448	$	—	$	—	$	228,448
Demand (interest-bearing)		153,586		153,586		—		—		153,586
Money market		204,219		204,219		—		—		204,219
Savings and other		178,807		178,807		—		—		178,807
Certificates of deposit		161,679		162,013		—		—		162,013
Deposits		926,739		927,073		—		—		927,073
Repurchase agreements		4,104		4,104		—		—		4,104
FHLBB advances		67,154		67,231		—		—		67,231
Subordinated debt		9,835		10,006		—		—		10,006
Note payable		280		288		—		—		288
Capital lease liability		3,081		3,339		—		—		3,339
Accrued interest payable		237		237		—		—		237

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

NOTE 12 - SUBSEQUENT EVENTS

On April 26, 2019 the Board of Directors declared a dividend of $0.28 per common share payable on May 31, 2019 to shareholders of record as of May 17, 2019. In April 2019, the Bank executed a purchase and sale agreement to purchase its New Paltz, New York branch premises for $1.6 million. This transaction is expected to close in September, 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.

Revenue Recognition

Topic 606 does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP. Thus, the new guidance, which was effective January 1, 2018, did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. Management evaluated its revenue streams and reviewed related contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income.

Revenue is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration Salisbury expects to receive in exchange for transferring products or services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, Salisbury estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount to which Salisbury expects to be entitled. Variable consideration is included in the transaction price if, in Salisbury's judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of Salisbury's anticipated performance and all information (historical, current, and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, Salisbury does not assess whether a significant financing component exists if the period between when Salisbury performs its obligations under the contract and when the customer pays is one year or less. None of the Salisbury's contracts contained a significant financing component as of March 31, 2019.

Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. Salisbury determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through fee schedules provided to its customers or through past transactions, Salisbury estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new or changes the existing enforceable rights and obligations. Generally, contract modifications are for products or services that are distinct from the existing contract and are accounted for as if they were a new and separate contract. The original contract is still accounted for according to its original terms.

Product revenue is generally recognized when the customer obtains control of Salisbury's product, which occurs at a point in time, and are generally upon completion of the service based on the terms of a contract. Service revenue is generally recognized over time as the services are delivered to the customer. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. Salisbury generally measures its progress based on the right to invoice. Salisbury uses the right to invoice measure of progress when Salisbury has a right to invoice the customer for an amount that corresponds directly with the value to the customer of Salisbury's performance to date. Under the right to invoice measure of progress, revenues are recorded equal to the amount Salisbury could invoice the customer. The right to invoice is generally determined by the passage of time during which the service is performed.

Trust and Wealth Advisory

The Trust and Wealth Advisory business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, families, businesses and institutions. Revenue from these services are generally recognized over time and is typically based on a right to invoice measure of progress (output method). Certain fees, such as real estate sale fees, asset liquidation fees, special asset fees, and daily money management fees, are recorded as revenue at a point in time at the completion of the service.

Customer Deposit Fees

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates and other terms, which are designed to meet customer financial needs. Additional depositor related services provided to customers include Landlord/Tenant Lease Security Accounts and Services, Payroll Services, Cash Management (Remote Deposit Capture, ACH Origination, Wire Transfers and Positive Pay), ATM, Bank-by-Phone, Internet Banking, Internet Bill Pay, Person to Person Payments, Bank to Bank Transfers, Mobile Banking with remote deposit, and Online Financial Management with Account Aggregation Services. Monthly deposit account fees and account research fees are recognized over time using the right to invoice measure of progress. Overdraft protection, ATM services, cash management, bill pay, money transfers, among others, are generally recognized at point in time at the completion of the service.

Interchange Fees

Salisbury earns interchange fee revenue through customers' use of the Bank's debit cards. Interchange fees are generally recognized as revenue at a point in time when customers make a purchase using their debit card.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that Salisbury disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2019. The guidance provides certain practical expedients that limit this requirement and, therefore, Salisbury does not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less and (2) contracts for which revenue is recognized at the amount to which Salisbury has the right to invoice for services performed. All revenue accounted for under the scope of ASC 606 meets one of these two criteria.

FINANCIAL CONDITION

Securities and Short Term Funds

During the first quarter of 2019, securities increased $5.3 million to $102.5 million. The net increase reflected purchases of $4.1 million of municipal securities, $3.5 million of collateralized mortgage obligations, $1.0 million of mortgage-backed securities and $0.8 million of corporate subordinated debt, which were partly offset by $3.1million in maturities/principal payments of securities, sales of $1.0 million of mortgage-backed securities and $1.1 million in FHLB stock redemptions. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $9.8 million to $48.6 million.

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 March 31, 2019.

Loans

Net loans receivable increased $1.9 million to $911.2 million at March 31, 2019, compared with $909.3 million at December 31, 2018.

Asset Quality

During the first three months of 2019, non-performing assets decreased $1.2 million primarily from the sale of other real estate owned. During the first quarter of 2019, total impaired and potential problem loans increased by $2.8 million to $22.9 million, or 2.5% of gross loans receivable at March 31, 2019, from $20.1 million, compared to 2.20% of gross loans receivable at December 31, 2018.

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

Past Due Loans

Loans past due 30 days or more decreased $0.4 million during first quarter 2019 to $7.2 million, or 0.79% of gross loans receivable at March 31, 2019 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)		March 31, 2019		December 31, 2018
Past due 30-59 days	$	1,344	$	1,435
Past due 60-89 days		885		730
Past due 90-179 days		21		795
Accruing loans		2,250		2,960
Past due 30-59 days		284		208
Past due 60-89 days		986		108
Past due 90-179 days		192		812
Past due 180 days and over		3,501		3,517
Non-accrual loans		4,963		4,645
Total loans past due 30 days or greater	$	7,213	$	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" 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" 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" 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" 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)		March 31, 2019		December 31, 2018
Non-accrual loans, excluding troubled debt restructured loans	$	5,091	$	4,430
Non-accrual troubled debt restructured loans		1,278		1,289
Accruing troubled debt restructured loans		6,547		6,801
Total impaired loans	$	12,916	$	12,520
Commitments to lend additional amounts to impaired borrowers	$	—	$	—

Non-Performing Assets

Non-performing assets decreased $1.2 million to $7.1 million, or 0.64% of assets at March 31, 2019, from $8.3 million, or 0.74% of assets at December 31, 2018, and increased $1.3 million from $5.8 million, or 0.57% of assets at March 31, 2018.

The 9.3% decrease in non-performing assets in the first quarter 2019 resulted primarily from loan payoff of $1.0 million of bank acquired real estate property sold.

The components of non-performing assets are as follows:

(in thousands)		March 31, 2019		December 31, 2018
Residential 1-4 family	$	2,040	$	2,092
Residential 5+ multifamily		994		1,000
Home equity lines of credit		407		411
Commercial		2,356		1,640
Farm land		212		216
Real estate secured		6,009		5,359
Commercial and industrial		360		360
Non-accruing loans		6,369		5,719
Accruing loans past due 90 days and over		21		795
Non-performing loans		6,390		6,514
Other Real Estate Owned (OREO)		741		1,810
Non-performing assets	$	7,131	$	8,324

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

(in thousands)		March 31, 2019		December 31, 2018
Current	$	1,405	$	1,074
Past due 30-59 days		284		208
Past due 60-89 days		986		108
Past due 90-179 days		213		1,607
Past due 180 days and over		3,502		3,517
Total non-performing loans	$	6,390	$	6,514

At March 31, 2019, 21.99% of non-performing loans were current with respect to loan payments, compared with 16.49% at December 31, 2018.

Troubled Debt Restructured Loans

Troubled debt restructured loans improved slightly during first quarter 2019 to $7.8 million, or 0.85% of gross loans receivable at March 31, 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)		March 31, 2019		December 31, 2018
Residential 1-4 family	$	2,804	$	2,824
Residential 5+ multifamily		385		675
Home equity lines of credit		45		47
Vacant land		187		190
Commercial		2,988		2,924
Real estate secured		6,409		6,660
Commercial and industrial		138		141
Accruing troubled debt restructured loans		6,547		6,801
Residential 1-4 family		284		289
Residential 5+ multifamily		994		1,000
Commercial		—		—
Real estate secured		1,278		1,289
Commercial and Industrial		—		—
Non-accrual troubled debt restructured loans		1,278		1,289
Troubled debt restructured loans	$	7,825	$	8,090

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

(in thousands)		March 31, 2019		December 31, 2018
Current	$	6,089	$	6,340
Past due 30-59 days		458		461
Past due 60-89 days		—		—
Accruing troubled debt restructured loans		6,547		6,801
Current		417		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		1,278		1,289
Total troubled debt restructured loans	$	7,825	$	8,090

At March 31, 2019, 83.14% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.82% 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 $2.4 million during the first quarter of 2019 to $10.0 million, or 1.09% of gross loans receivable at March 31, 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)		March 31, 2019		December 31, 2018
Residential 1-4 family	$	1,485	$	1,300
Residential 5+ multifamily		—		—
Construction of residential 1-4 family		—		—
Home equity lines of credit		—		29
Residential real estate		1,485		1,329
Commercial		5,922		5,567
Construction of commercial		—		141
Commercial real estate		5,922		5,708
Farm land		1,543		—
Vacant land		—		—
Real estate secured		8,950		7,037
Commercial and industrial		1,053		605
Consumer		1		—
Total potential problem loans	$	10,004	$	7,642

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

(in thousands)		March 31, 2019		December 31, 2018
Current	$	9,659	$	6,543
Past due 30-59 days		219		78
Past due 60-89 days		105		226
Past due 90-179 days		21		795
Total potential problem loans	$	10,004	$	7,642

At March 31, 2019, 96.55% 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 $15.2 million during the first quarter of 2019, or 1.6%, to $942.0 million at March 31, 2019, compared with $926.7 million at December 31, 2018. Retail repurchase agreements decreased $1.2 million during 2019 to $2.9 million at March 31, 2019, compared with $4.1 million at December 31, 2018.

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

	March 31, 2019								December 31, 2018
(in thousands)	Average Balance		Percent			Weighted Interest Rate			Average Balance		Percent			Weighted Interest Rate
Demand deposits	$	218,650		23.80	%		0.00	%	$	223,356		25.61	%		0.00	%
Interest-bearing checking accounts		151,193		16.45			0.38			147,751		16.93			0.31
Regular savings accounts		184,184		20.05			0.98			171,662		19.67			0.71
Money market savings		199,741		21.74			0.95			195,741		22.43			0.64
Certificates of deposit (CD's) ¹		165,067		17.96			1.76			134,057		15.36			1.27
Total deposits	$	918,835		100.00	%		0.78%		$	872,567		100.00	%		0.31	%

¹CD's included Certificate of Deposit Account Registry Service (“CDARS”) one-way buys of $20.7 million at March 31, 2019 and $19.4 million at December 31, 2018. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. CD's also include brokered certificates of deposits of $29.0 million at March 31, 2019 and $20.0 million at December 31, 2018.

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

Interest rates		March 31, 2019		December 31, 2018
Less than 1.00%	$	36,730	$	38,992
1.00% to 1.99%		44,741		47,175
2.00% to 2.99%		90,389		75,512
3.00% to 3.99%		498		—
Total	$	172,358	$	161,679

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

	At March 31, 2019
Interest rates	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%	$	30,018	$	6,711	$	1	$	—	$	36,730		21.31	%
1.00% to 1.99%		21,076		9,617		6,939		7,109		44,741		25.96
2.00% to 2.99%		70,518		8,643		5,546		5,682		90,389		52.44
3.00% to 3.99%		—		—		498		—		498		0.29
Total	$	121,612	$	24,971	$	12,984	$	12,791	$	172,358		100.00	%

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

March 31, 2019 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	28,652			$	23,688			$	34,698			$	26,975			$	114,012

FHLBB advances decreased $19.4 million during the first quarter of 2019 to $47.7 million at March 31, 2019, compared with $67.2 million at December 31, 2018. The decrease was primarily due to the maturity of overnight borrowings of $9.5 million and the maturity of a long term advance of $10.0 million during first quarter 2019. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At March 31, 2019 and December 31, 2018, $33.0 million of letters of credit were outstanding. Salisbury's borrowing capacity at the FHLB was $166.4 million at March 31, 2019.

Liquidity

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

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

Operating activities for the three-month period ended March 31, 2019 provided net cash of $2.6 million. Investing activities utilized net cash of $6.2 million, due to the purchase of securities available-for-sale of $9.4 million, net loan originations of $2.2 million and $0.8 million for the purchase of a BOLI policy for a named executive officer, partly offset by $3.1 million from the maturities/principle paydowns of available-for-sale (AFS) securities, proceeds of $1.0 million from the sale of AFS securities, proceeds of $1.1 million from the redemption of FHLBB stock and proceeds of $1.0 million from the sale of an OREO property. Financing activities utilized net cash of $6.2 million, primarily due to the maturity of $10 million in long term FHLBB borrowings, the maturity of $9.5 million in overnight FHLBB borrowings, and a decrease of $1.2 million in securities sold under agreements to repurchase, partly offset by an increase of $10.7 million in time deposits and an increase of $4.6 million in deposit transaction accounts.

At March 31, 2019, Salisbury had outstanding commitments to fund new loan originations of $23.3 million and unused lines of credit of $125.5 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

RESULTS OF OPERATIONS

For the three month periods ended March 31, 2019 and 2018

OVERVIEW

Net income allocated to common stock was $2.4 million, or $0.87 per common share, for the first quarter ended March 31, 2019 (first quarter 2019), compared with $2.5 million, or $0.91 per common share, for the fourth quarter ended December 31, 2018 (fourth quarter 2018), and $2.0 million, or $0.72 per common share, for the first quarter ended March 31, 2018 (first quarter 2018).

Net Interest Income

Tax equivalent net interest income for first quarter 2019 increased $450 thousand, or 5.6%, versus first quarter 2018. Average earning assets increased $109 million versus first quarter 2018. Average total interest bearing deposits increased $93.3 million versus first quarter 2018. The net interest margin of 3.28% decreased 23 basis points versus 3.51% for the first quarter 2018.

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 March 31,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2019		2018		2019		2018		2019		2018
Loans (a)(d)(e)	$	918,290	$	820,809	$	10,036	$	8,758		4.37	%	4.27	%
Securities (c)(d)		96,648		80,433		716		501		2.96		2.49
FHLBB stock		4,192		3,888		72		39		6.87		4.01
Short term funds (b)		30,936		35,073		155		120		2.00		1.37
Total interest-earning assets		1,050,066		940,203		10,979		9,418		4.18		4.01
Other assets		57,027		52,735
Total assets	$	1,107,093	$	992,938
Interest-bearing demand deposits	$	151,193	$	144,999		144		91		0.38		0.25
Money market accounts		199,741		188,588		474		228		0.95		0.48
Savings and other		184,184		151,180		451		150		0.98		0.40
Certificates of deposit		165,067		122,100		727		308		1.76		1.01
Total interest-bearing deposits		700,185		606,867		1,796		777		1.03		0.51
Repurchase agreements		2,740		2,629		3		1		0.44		0.15
Capital lease		4,075		1,958		46		35		4.52		7.15
Note payable		275		308		4		5		5.82		6.49
Subordinated debt		9,837		9,814		156		156		6.34		6.36
FHLBB advances		59,675		50,756		412		332		2.76		2.62
Total interest-bearing liabilities		776,787		672,332		2,417		1,306		1.24		0.78
Demand deposits		218,625		216,788
Other liabilities		7,150		5,883
Shareholders' equity		104,531		97,935
Total liabilities & shareholders' equity	$	1,107,093	$	992,938
Net interest income					$	8,562	$	8,112
Spread on interest-bearing funds										2.94		3.23
Net interest margin (e)										3.28		3.51

	(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 $126,000 and $118,000, 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 March 31, (in thousands)	2019 versus 2018
Change in interest due to		Volume			Rate			Net
Interest-earning assets
Loans	$	1,053		$	225		$	1,278
Securities		111			104			215
FHLBB stock		4			29			33
Short term funds		(17	)		52			35
Interest-earning assets		1,151			410			1,561
Interest-bearing liabilities
Deposits		179			840			1,019
Repurchase agreements		—			2			2
Capital lease		31			(20	)		11
Note payable		(1	)		—			(1	)
Subordinated debt		—			—			—
FHLBB advances		60			20			80
Interest-bearing liabilities		269			842			1,111
Net change in net interest income	$	882		$	(432	)	$	450

Interest Income

Tax equivalent interest income increased $1.5 million to $11.0 million for first quarter 2019 as compared with first quarter 2018. Loan income as compared to first quarter 2019 increased $1.3 million, or 15%, primarily due to a $89.5 million, or 12%, increase in average loans and a 10 basis point increase in the average loan yield. Tax equivalent securities income increased $215 thousand, or 43%, for first quarter 2019 as compared with first quarter 2018, primarily due to a 47 basis point increase in average yield and a $16 million, or 20%, increase in average volume. Income on short-term funds as compared to first quarter 2018 increased $35 thousand, or 29%, primarily due to a 63 basis point increase in the average short-term funds yields.

Interest Expense

Interest expense increased $1.1 million, or 85%, to $2.4 million for first quarter 2019 as compared with first quarter 2018. Interest on deposit accounts increased $1.0 million, or 131%, as a result of a $93.3 million increase in the average balances and a 52 basis point increase in average deposit rates as compared with first quarter 2018. Interest expense on FHLBB borrowings increased $80 thousand as a result of an average balance increase of $8.9 million as compared with first quarter 2018, and a 14 basis point increase in the average borrowings rate. Interest expense on subordinated debt totaled $156 thousand for the first quarter in both 2019 and 2018.

Provision and Allowance for Loan Losses

During the first quarter 2019, the allowance for loan losses activity included reduced charge-offs, quarterly provisions, and the transfer of the remaining unearned credit-related discount on the loans acquired in the 2014 Riverside Bank acquisition. The transfer of the unearned credit-related discount increased gross loans receivable and the allowance for loan losses by $664 thousand without changing net loans receivable. The allowance for loan losses was further increased by the provision for loan loss expense of $294 thousand for first quarter 2019 compared with $558 thousand for fourth quarter 2018 and $326 thousand for the first quarter 2018. Net loan charge-offs were $38 thousand for the first quarter 2019, $471 thousand for fourth quarter 2018 and $43 thousand for the first quarter 2018.

As a result of these factors, reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 0.95% for the first quarter 2019, versus 0.85% for the fourth quarter 2018 and 0.84% for the first quarter 2018. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 137% for the first quarter of 2019, versus 120% for the fourth quarter of 2018 and 139% for the first quarter of 2018.

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

Three months ended March 31,	2019		2018
Net charge-offs (recoveries) to average loans receivable, gross	0.00	%	0.01	%
Non-performing loans to loans receivable, gross	0.69		0.61
Accruing loans past due 30-89 days to loans receivable, gross	0.24		0.40
Allowance for loan losses to loans receivable, gross	0.95		0.84
Allowance for loan losses to non-performing loans	136.95		138.56
Non-performing assets to total assets	0.64		0.57

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $6.4 million, or 0.69% of gross loans receivable at March 31, 2019 as compared to $6.5 million, or 0.71% at December 31, 2018 and $5.1 million, or 0.61%, at March 31, 2018. Accruing loans past due 30-89 days were $2.2 million, or 0.24% of gross loans receivable compared with $2.2 million, or 0.24% of gross loans receivable at December 31, 2018 and $3.4 million, or 0.40% of gross loans receivable, at March 31, 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, is 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 first quarter 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 March 31, 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 March 31, (dollars in thousands)		2019			2018			2019 vs. 2018
Trust and wealth advisory	$	906		$	894		$	12		1	%
Service charges and fees		920			868			52		6
Gains on sales of mortgage loans, net		7			18			(11	)	(61	)
Mortgage servicing, net		76			83			(7	)	(8	)
Gain on CRA mutual fund		11			(13	)		24		(185	)
Gain (losses) on available-for-sale securities, net		(9	)		(2	)		(7	)	350
Other		116			126			(10	)	(8	)
Total non-interest income	$	2,027		$	1,974		$	53		3	%

Non-interest income increased $53 thousand, or 3% in the first quarter of 2019 versus the first quarter of 2018. Trust and wealth advisory revenues increased $12 thousand versus first quarter 2018 primarily due to higher asset based fees. Service charges and fees increased $52 thousand versus first quarter 2018 primarily due to higher deposit and interchange fees as well as higher loan prepayment penalties. First quarter 2019 gains on mortgage loans declined $11 thousand on lower volume. Mortgage sales in first quarter 2019 were $0.4 million compared with $0.7 million for first quarter 2018. Net mortgage servicing fees declined from first quarter 2018 on lower mortgage volume. The first quarter 2019 included net gains of $11 thousand on investments in CRA Funds compared with net losses of $13 thousand in first quarter 2018. Other income primarily includes income on bank-owned life insurance policies and rental property income.

Non-Interest Expense

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

Three months ended March 31, (dollars in thousands)		2019		2018		2019 vs. 2018
Salaries	$	2,993	$	2,846	$	147		5	%
Employee benefits		1,185		1,159		26		2
Premises and equipment		972		1,024		(52	)	(5	)
Data processing		509		486		23		5
Professional fees		535		619		(84	)	(14	)
OREO gains, losses and write-downs		52		52		—		—
Collections, OREO, and loan related		130		82		48		59
FDIC insurance		163		130		33		25
Marketing and community support		156		242		(86	)	(36	)
Amortization of core deposit intangibles		104		120		(16	)	(13	)
Other		412		422		(10	)	(2	)
Non-interest expense	$	7,211	$	7,182	$	29

Non-interest expense for first quarter 2019 increased $29 thousand versus first quarter 2018. Salaries expense increased $147 thousand versus first quarter 2018. The increase primarily reflected the mix and levels of staff, the impact of annual merit increases and higher production accruals. Employee benefits expense increased $26 thousand versus first quarter 2018 primarily due to higher costs for medical insurance, which was partly offset by lower accruals for ESOP and 401k plans. Professional fees decreased $84 thousand versus first quarter 2018 primarily as a result of lower consulting and investment management fees partly offset by higher audit and exam fees. Loan and OREO related expenses increased $48 thousand versus first quarter 2018, mainly due higher carrying costs on OREO properties. Marketing and community support expense decreased $86 thousand versus first quarter 2018 primarily due to marketing costs incurred in first quarter 2018 related to the relocation of the Bank's Newburgh and Fishkill, New York branches as well as the timing of general marketing campaigns and donations.

Income Taxes

The effective income tax rates for first quarter 2019 and first quarter 2018 were 17.75% and 18.09%, 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 Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.

CAPITAL RESOURCES

Shareholders' equity was $106.1 million at March 31, 2019, up $2.7 million from December 31, 2018. Book value and tangible book value per common share were $37.81 and $32.43, 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 $2.4 million, partially offset by common stock dividends of $0.8 million. The increase in accumulated other comprehensive income consisted of unrealized gains on securities available-for-sale, net of tax, of $0.9 million for the three month period ending March 31, 2019.

Capital Requirements

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

Salisbury and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Salisbury and the Bank must meet specific guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

Under current regulatory definitions, Salisbury and the Bank meet all capital adequacy requirements to which they are 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 Salisbury's and the Bank's regulatory capital ratios are as follows:

	March 31, 2019					December 31, 2018
		Salisbury		Bank			Salisbury		Bank
Total Capital (to risk-weighted assets)		12.68	%	12.35	%		12.51	%	12.09	%
Tier 1 Capital (to risk-weighted assets)		10.50		11.33			10.43		11.17
Common Equity Tier 1 Capital (to risk-weighted assets)		10.50		11.33			10.43		11.17
Tier 1 Capital (to average assets)		8.32		8.97			8.25		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 Salisbury and the Bank's safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices.

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, is 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 increases 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 March 31, 2019, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank's category.

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

Dividends

During the three month period ended March 31, 2019, Salisbury paid $784,000 in dividends on common stock.

On April 26, 2019, the Board of Directors of Salisbury declared a dividend of $0.28 per common share payable on May 31, 2019 to shareholders of record on May 17, 2019. Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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

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 identified from time to time in Salisbury's filings with the Securities and Exchange Commission.

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

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury's financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management's March 31, 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 March 31, 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 gradual decline in market interest rates ranging from 65 basis points for the 2-year Treasury rates to 87 basis points for the 10-year Treasury in year one and then a further decline in market interest rates ranging from 65 basis points for the 2 year treasury rate to 17 basis points for the 10-year Treasury in year two. In this scenario, the yield curve inverts in the second and third quarter of 2019 and flattens in the fourth quarter of 2019 before normalizing in 2020 as short-term rates decline more than longer term rates. Ultimately, the yield curve slopes upward but at very low overall market interest rates. Deposit rates are assumed to shift by lessor amounts due to their relative historical insensitivity to market interest rate movements. Further, deposits are assumed to have certain minimum rate levels below which they will not fall. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of March 31, 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 March 31, 2019.

As of March 31, 2019	Months 1-12			Months 13-24
Immediately rising interest rates + 300bp (static growth assumptions)		(6.87	)%		(1.76	)%
Immediately falling interest rates - 100bp (static growth assumptions)		(1.80	)		(4.70	)
Immediately rising interest rates + 400bp (static growth assumptions)		(9.42	)		(2.85	)

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 March 31, 2019 (in thousands)		Rates up 100bp			Rates up 200bp
U.S. Government Agency notes		(194	)		(561	)
Municipal bonds		(339	)		(874	)
Mortgage backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		(1,456	)		(3,293	)
Collateralized mortgage obligations:
U.S. Government agencies		(761	)		(1,755	)
Corporate bonds		(113	)		(205	)
Total available-for-sale debt securities	$	(2,863	)	$	(6,688	)

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 March 31, 2019. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of March 31, 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 March 31, 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 three months ended March 31, 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).
21.1	Subsidiaries of the Registrant.
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.

May 10, 2019	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

May 10, 2019	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer