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SALISBURY BANCORP, INC. - Quarter Report: 2020 June (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended June 30, 2020

OR

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

 

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

 

(860) 435-9801

(Registrant's telephone number, including area code)

 

Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Common Stock, Par Value $0.10 per share SAL NASDAQ

 

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

Yes ☑ No

 

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

Yes ☑ No

 

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

Large accelerated filer ☐

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☑

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

Yes ☐ No ☑

 

The number of shares of Common Stock outstanding as of August 5, 2020 is 2,843,292.

 
 

 

 

 

TABLE OF CONTENTS

 

  PART 1 FINANCIAL INFORMATION Page
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2020 (unaudited) and DECEMBER 31, 2019 3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited) 7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 40
Item 4. CONTROLS AND PROCEDURES 42
     
  PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 42
Item 1A. RISK FACTORS 42
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 42
Item 3. DEFAULTS UPON SENIOR SECURITIES 42
Item 4. MINE SAFETY DISCLOSURES 42
Item 5. OTHER INFORMATION 42
Item 6. EXHIBITS 43
SIGNATURES 43

 2 

 

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)    June 30, 2020      December 31, 2019  
ASSETS   (unaudited)      
Cash and due from banks  $7,391   $7,406 
Interest bearing demand deposits with other banks   77,104    19,479 
Total cash and cash equivalents   84,495    26,885 
Interest bearing Time Deposits with Financial Institutions   750    750 
Securities          
Available-for-sale at fair value   89,452    91,801 
CRA mutual fund at fair value   912    882 
Federal Home Loan Bank of Boston stock at cost   3,353    3,242 
Loans held-for-sale   5,313    332 
Loans receivable, net (allowance for loan losses: $12,371 and $8,895)   1,040,358    927,413 
Other real estate owned       314 
Bank premises and equipment, net   17,950    17,385 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $5,054 and $4,884)   825    995 
Accrued interest receivable   3,988    3,415 
Cash surrender value of life insurance policies   20,846    20,580 
Deferred taxes   1,935    1,249 
Other assets   3,145    3,390 
Total Assets  $1,287,137   $1,112,448 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $325,531   $237,852 
Demand (interest bearing)   188,487    153,314 
Money market   251,242    239,504 
Savings and other   170,537    161,112 
Certificates of deposit   149,802    127,724 
Total deposits   1,085,599    919,506 
Repurchase agreements   7,809    8,530 
Federal Home Loan Bank of Boston advances   55,118    50,887 
Subordinated debt   9,871    9,859 
Note payable   228    246 
Finance lease obligations   1,696    1,718 
Accrued interest and other liabilities   8,372    8,047 
Total Liabilities   1,168,693    998,793 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000          
Issued: 2,843,292 and 2,825,912          
Outstanding: 2,843,292 and 2,825,912   284    283 
Unearned compensation - restricted stock awards   (1,031)   (795)
Paid-in capital   45,096    44,490 
Retained earnings   71,461    68,320 
Accumulated other comprehensive income, net   2,634    1,357 
Total Shareholders' Equity   118,444    113,655 
Total Liabilities and Shareholders' Equity  $1,287,137   $1,112,448 

 

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

 

 3 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands, except per share amounts)    2020      2019      2020      2019  
Interest and dividend income                    
Interest and fees on loans  $10,313   $9,880   $20,300   $19,814 
Interest on debt securities:                    
Taxable   409    583    864    1,204 
Tax exempt   171    117    356    189 
Other interest and dividends   51    252    142    479 
Total interest and dividend income   10,944    10,832    21,662    21,686 
Interest expense                    
Deposits   988    1,999    2,497    3,795 
Repurchase agreements   4    4    10    7 
Finance lease   35    46    71    92 
Note payable   4    4    7    8 
Subordinated debt   156    156    312    312 
Federal Home Loan Bank of Boston advances   140    279    359    691 
Total interest expense   1,327    2,488    3,256    4,905 
Net interest and dividend income   9,617    8,344    18,406    16,781 
Provision for loan losses   1,806    151    3,512    445 
Net interest and dividend income after provision for loan losses   7,811    8,193    14,894    16,336 
Non-interest income                    
Trust and wealth advisory   1,031    1,044    2,061    1,950 
Service charges and fees   598    1,012    1,503    1,932 
Gains on sales of mortgage loans, net   252    1    313    8 
Mortgage servicing, net   66    80    133    156 
Gains on CRA mutual fund   8    12    22    23 
Gains on available-for-sale securities, net   181    281    182    272 
BOLI income and gains   133    87    266    166 
Other   47    31    80    68 
Total non-interest income   2,316    2,548    4,560    4,575 
Non-interest expense                    
Salaries   2,411    2,959    5,261    5,952 
Employee benefits   1,037    1,042    2,183    2,227 
Premises and equipment   981    1,004    1,891    1,976 
Data processing   557    577    1,098    1,086 
Professional fees   758    583    1,385    1,118 
OREO gains, losses and write-downs, net       270        322 
Collections, OREO, and loan related   79    79    104    209 
FDIC insurance   103    140    208    303 
Marketing and community support   169    151    293    307 
Amortization of core deposit intangibles   83    99    170    203 
Other   611    535    1,133    947 
Total non-interest expense   6,789    7,439    13,726    14,650 
Income before income taxes   3,338    3,302    5,728    6,261 
Income tax provision   604    599    947    1,124 
Net income  $2,734   $2,703   $4,781   $5,137 
Net income allocated to common stock  $2,691   $2,671   $4,704   $5,079 
                     
Basic earnings per common share  $0.96   $0.96   $1.68   $1.83 
Diluted earnings per common share  $0.96   $0.95   $1.68   $1.82 
Common dividends per share  $0.29   $0.28   $0.58   $0.56 

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

 4 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

     Three months ended      Six months ended  
Periods ended June 30, (in thousands)    2020      2019      2020      2019  
Net income  $2,734   $2,703   $4,781   $5,137 
Other comprehensive income                    
Net unrealized gains on securities available-for-sale   470    1,261    1,799    2,390 
Reclassification of net realized gains in net income (1)   (181)   (281)   (182)   (272)
Unrealized gains on securities available-for-sale   289    980    1,617    2,118 
Income tax (expense)   (61)   (206)   (340)   (444)
Unrealized gains on securities available-for-sale, net of tax   228    774    1,277    1,674 
Comprehensive income  $2,962   $3,477   $6,058   $6,811 


(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains on sales and calls of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending June 30, 2020 and 2019 are $38 thousand and $59 thousand, respectively. The net tax effect for the six month periods ending June 30, 2020 and 2019 are $38 thousand and $57 thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended June 30,
(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at March 31, 2019   2,806,681   $281   $43,765   $61,989   $(606)  $680   $106,109 
Net income               2,703            2,703 
Other comprehensive income, net of tax                       774    774 
Common stock dividends declared               (787)           (787)
Issuance of restricted stock awards   11,530    1    457        (458)        
Stock options exercised   2,025        34                34 
Forfeiture of stock awards   (360)       (16)       16         
Issuance of director's restricted stock awards   3,600        142        (142)        
Stock based compensation-restricted stock awards                   115        115 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905   $  (1,075  $1,454   $108,948 
Balances at March 31, 2020   2,829,017   $283   $44,566   $69,547   $(659)  $2,406   $116,143 
Net income               2,734            2,734 
Other comprehensive income, net of tax                       228    228 
Common stock dividends declared               (820)           (820)
Issuance of restricted stock awards   11,775    1    421        (422)        
Stock options exercised                            
Forfeiture of stock awards
   (700)       (29)       29         
Issuance of director's restricted stock awards
   3,200        114        (114)        
Stock based compensation-restricted stock awards           24        135        159 
Balances at June 30, 2020   2,843,292   $284   $45,096   $71,461   $   (1,031  $2,634   $118,444 

 5 

 

Six months ended June 30,
(dollars in thousands)

  Common Stock  Paid-in  Retained  Unearned compensation restricted stock  Accumulated other comprehensive  Total shareholders'
   Shares  Amount  Capital  Earnings  awards  (loss) income  equity
Balances at December 31, 2018   2,806,781   $281   $43,770   $60,339   $(711)  $(220)  $103,459 
Net income               5,137            5,137 
Other comprehensive income, net of tax                       1,674    1,674 
Common stock dividends declared               (1,571)           (1,571)
Issuance of restricted stock awards   11,530    1    457        (458)        
Stock options exercised   2,025        34                34 
Forfeiture of restricted stock awards   (460)       (21)       21         
Issuance of director's restricted stock awards   3,600        142        (142)        
Stock based compensation-restricted stock awards                   215        215 
Balances at June 30, 2019   2,823,476   $282   $44,382   $63,905   $(1,075)  $1,454   $108,948 
Balances at December 31, 2019   2,825,912   $283   $44,490   $68,320   $(795)  $1,357   $113,655 
Net income               4,781            4,781 
Other comprehensive income, net of tax                       1,277    1,277 
Common stock dividends declared               (1,640)           (1,640)
Issuance of restricted stock awards   11,775    1    421        (422)        
Stock options exercised   3,105        53                53 
Forfeiture of restricted stock awards   (700)       (29)       29         
Issuance of director's restricted stock awards   3,200        114        (114)        
Stock based compensation-restricted stock awards           47        271        318 
Balances at June 30, 2020   2,823,292   $284   $45,096   $71,461   $(1,031)  $2,634   $118,444 


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

 

 6 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands)    2020      2019  
Operating Activities          
Net income  $4,781   $5,137 
Adjustments to reconcile net income to net cash provided by operating activities          
Amortization(accretion) and depreciation          
Securities   231    137 
Bank premises and equipment   720    813 
Core deposit intangible   170    203 
Modification fees on Federal Home Loan Bank of Boston advances   59    115 
Subordinated debt issuance costs   12    12 
Mortgage servicing rights   28    24 
Fair value adjustment on loans       (64)
Fair value adjustment on deposits   (2)   (4)
Gain on sales and calls of securities available-for-sale, net   (182)   (272)
Gain on CRA mutual fund   (22)   (23)
Gain on sales of loans, excluding capitalized servicing rights   (295)   (7)
OREO losses and write-downs       322 
Provision for loan losses   3,512    445 
Proceeds from loans sold   18,117    458 
Loans originated for sale   (22,803)   (854)
Decrease in deferred loan origination fees and costs, net   2,701    92 
Mortgage servicing rights originated   (143)   (5)
Increase in interest receivable   (573)   (291)
(Increase) decrease in deferred tax benefit   (1,026)   125 
Decrease in prepaid expenses   367    101 
Increase in cash surrender value of life insurance policies   (266)   (167)
Decrease in income tax receivable       13 
(Increase) decrease in other assets   (8)   694 
Increase in income taxes payable   1,728     
Decrease in accrued expenses   (1,556)   (1,072)
Increase in interest payable   109    339 
Increase (decrease) in other liabilities   44    (378)
Stock based compensation-restricted stock awards   318    215 
Net cash provided by operating activities  $6,021   $6,108 
Investing Activities          
Net (purchases) redemptions of Federal Home Loan Bank of Boston stock   (111)   1,657 
Purchases of securities available-for-sale   (15,417)   (41,255)
Proceeds from sales of securities available-for-sale   10,598    28,170 
Proceeds from calls of securities available-for-sale   655    25 
Proceeds from maturities of securities available-for-sale   8,082    6,982 
Reinvestment of CRA mutual fund   (8)   (10)
Loan originations and principal collections, net   (119,192)   (1,813)
Recoveries of loans previously charged off   34    46 
Proceeds from sales of other real estate owned   314    1,087 
Capital expenditures   (1,285)   (247)
Purchase of life insurance policies       (750)
Net cash utilized by investing activities  $(116,330)  $(6,108)


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

 7 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)    2020      2019  
Financing Activities          
Increase in deposit transaction accounts, net  $144,015   $13,442 
Increase in time deposits, net   22,080    10,546 
(Decrease) increase in securities sold under agreements to repurchase, net   (721)   2,204 
Federal Home Loan Bank of Boston short-term advances, net change   (20,000)   (9,500)
Advances, (principal payments) on Federal Home Loan Bank of Boston advances   25,000    (25,000)
Principal payments on Amortizing FHLB Advances   (828)    
Principal payments on note payable   (18)   (17)
Decrease in finance lease obligation   (22)   (70)
Stock options exercised   53    34 
Common stock dividends paid   (1,640)   (1,571)
Net cash provided (utilized) by financing activities   167,919    (9,932)
Net increase (decrease) in cash and cash equivalents   57,610    (9,932)
Cash and cash equivalents, beginning of period   26,885    58,445 
Cash and cash equivalents, end of period  $84,495   $48,513 
Cash paid during period          
Interest  $3,078   $4,443 
Income taxes   245    986 
Non-cash transfers          
Finance lease obligation          
Adoption of ASU 2016-02 - Other assets       1,552 
Adoption of ASU 2016-02 – Other Liabilities       (1,552)

 

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


 8 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the interim periods presented.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, other-than-temporary impairment of securities and impairment of goodwill and intangibles.

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

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.

Risks and Uncertainties

The outbreak of the COVID-19 pandemic (“virus” or “COVID-19”) has adversely impacted a broad range of industries in which the Bank's customers operate and could impair their ability to fulfill their financial obligations to the Bank. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bank operates. Salisbury proactively implemented many operational changes in March 2020 to protect its employees and customers, which included the closing of the lobbies of its branches to customers, implementing banking by appointment and requiring employees to work remotely or from different locations. Salisbury has experienced neither a significant interruption in service provided to its customers nor a material decline in business activity as a result of the virus. On July 8, 2020, Salisbury reopened its branches to customers.

The Coronavirus Aid, Relief and Economic Security(“CARES”) Act was signed into law on March 27, 2020 as a legislative economic stimulus package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to small businesses. While the states in the Bank's market area have begun a phased reopening, economic conditions have not returned to pre-COVID-19 levels and many businesses remain closed or are operating at reduced capacity. It is also unknown if the northeast will experience a resurgence of the virus similar to many southern states. Such a resurgence may cause the states in the Bank's market area to close businesses again. If this were to happen, the Bank could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact that the virus and an economic shutdown will have on Salisbury's operations, Salisbury is disclosing the material items of which it is currently aware.

 9 

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan and losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its 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. Entities should apply the guidance prospectively. On January 1, 2020, 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 2018-13, “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 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting or Income Taxes.” The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years; early adoption is permitted. Salisbury is currently evaluating the provisions of ASU 2019-12 to determine the potential impact the new standard will have on Salisbury's Consolidated Financial Statements.

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Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and are effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a “smaller reporting company” and an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of “accelerated filer” and expands the category of “non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
June 30, 2020                    
Available-for-sale                    
U.S. Government Agency notes  $4,186   $176   $1   $4,361 
Municipal bonds   24,701    1,207    12    25,896 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   30,881    1,179    35    32,025 
Collateralized mortgage obligations:                    
U.S. Government agencies   20,349    699        21,048 
Corporate bonds   6,000    147    25    6,122 
Total securities available-for-sale  $86,117   $3,408   $73   $89,452 
CRA mutual fund                 $912 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,353   $   $   $3,353 
(in thousands)   Amortized cost basis (1)    Gross un-realized gains    Gross un-realized losses    Fair value 
December 31, 2019                    
Available-for-sale                    
U.S. Government Agency notes  $4,520   $125   $1   $4,644 
Municipal bonds   26,562    704    73    27,193 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   28,961    420    24    29,357 
Collateralized mortgage obligations:                    
U.S. Government agencies   25,041    468    10    25,499 
Corporate bonds   5,000    108        5,108 
Total securities available-for-sale  $90,084   $1,825   $108   $91,801 
CRA mutual fund                 $882 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $3,242   $   $   $3,242 

Salisbury sold $10.6 million of available-for-sale securities during the six month period ended June 30, 2020 realizing a pre-tax gain of $182 thousand and a related tax expense of $38 thousand. Salisbury sold $10.6 million in securities available-for-sale during the three month period ended June 30, 2020 realizing a pre-tax gain of $181 thousand and related tax expense of $38 thousand. Salisbury sold $28.2 million of available-for-sale securities during the six month period ended June 30, 2019 realizing a pre-tax gain of $272 thousand and a related tax expense of $57 thousand. Salisbury sold $27.2 million in securities available-for-sale during the three month period ended June 30, 2019 realizing a pre-tax gain of $281 thousand and related tax expense of $59 thousand.

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The following table summarizes the aggregate fair value and gross unrealized loss of securities that have been in a continuous unrealized loss position as of the date presented:

   Less than 12 Months  12 Months or Longer  Total
June 30, 2020 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                  
U.S. Government Agency notes  $   $   $102   $1   $102   $1 
Municipal bonds   2,074    12            2,074    12 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   4,160    34    105    1    4,265    35 
Corporate bonds   725    25            725    25 
Total temporarily impaired securities  $6,959   $71   $207   $2   $7,166   $73 
                               
   Less than 12 Months  12 Months or Longer  Total
December 31, 2019 (in thousands)  Fair value  Unrealized losses  Fair value  Unrealized losses  Fair value  Unrealized losses
Available-for-sale                              
U.S. Government Agency notes  $   $   $195   $1   $195   $1 
Municipal bonds   6,273    73            6,273    73 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   5,781    22    704    2    6,485    24 
Collateralized mortgage obligations:                              
U.S. Government Agencies   1,438    10            1,438    10 
Total temporarily impaired securities  $13,492   $105   $899   $3   $14,391   $108 

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

June 30, 2020 (in thousands)  Maturity  Amortized cost    Fair value     Yield(1)  
U.S. Government Agency notes  After 5 year but within 10 years  $2,496   $2,557    3.48%
   Total   2,496    2,557    3.48 
Municipal bonds  After 5 year but within 10 years   1,720    1,881    3.16 
   After 10 years   22,981    24,015    3.07 
   Total   24,701    25,896    3.08 
Mortgage-backed securities and Collateralized mortgage obligations  U.S. Government agencies   52,920    54,877    2.85 
Corporate bonds  After 5 years but within 10 years   6,000    6,122    5.21 
Securities available-for-sale     $86,117   $89,452    3.17%

(1) Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Three securities had unrealized losses at June 30, 2020, which approximated 0.95% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Three securities had unrealized losses at June 30, 2020, which approximated 0.60% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

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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. Six securities had unrealized losses at June 30, 2020, which approximated 0.81% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2020.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. One security had unrealized losses at June 30, 2020, which approximated 3.29% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of June 30, 2020. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 – LOANS

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

(In thousands)    June 30, 2020     December 31, 2019  
Residential 1-4 family  $357,518   $346,299 
Residential 5+ multifamily   38,353    35,455 
Construction of residential 1-4 family   11,041    11,889 
Home equity lines of credit   30,286    33,798 
Residential real estate   437,198    427,441 
Commercial   309,935    289,795 
Construction of commercial   13,699    8,466 
Commercial real estate   323,634    298,261 
Farm land   3,324    3,641 
Vacant land   13,879    7,893 
Real estate secured   778,035    737,236 
Commercial and industrial (1)   247,440    169,411 
Municipal   20,707    21,914 
Consumer   7,886    6,385 
Loans receivable, gross   1,054,068    934,946 
Deferred loan origination (fees) and costs, net   (1,339)   1,362 
Loans receivable, gross  $1,052,729   $936,308 
Allowance for loan losses   (12,371)   (8,895)
Loans receivable, net  $1,040,358   $927,413 
Loans held-for-sale          
Residential 1-4 family  $5,313   $332 

(1) Commercial and industrial balance as of June 30, 2020 includes $98.9 million of Paycheck Protection Program loans.

Salisbury has entered into loan participation agreements with other banks and transferred a portion of its originated loans to the participating banks. Transferred amounts are accounted for as sales and excluded from Salisbury's loans receivable. Salisbury and its participating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan. Salisbury services the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.

Salisbury also has entered into loan participation agreements with other banks and purchased a portion of the other banks' originated loans.  Purchased amounts are accounted for as loans without recourse to the originating bank.  Salisbury and its originating lenders share ratably in any gains or losses that may result from a borrower's lack of compliance with contractual terms of the loan.  The originating banks service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties. 

At June 30, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $61.9 million and $67.0 million, respectively.

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Concentrations of Credit Risk

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

Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 35% of the Bank's commercial gross loans receivable are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15% of the Bank's gross commercial loan receivables is to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of gross commercial loan receivables is to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables is to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

Credit Quality

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

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

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

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

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

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio is examined periodically by its regulatory agencies, the Federal Deposit Insurance Corporation (“FDIC”) and the Connecticut Department of Banking (“CTDOB”).

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
June 30, 2020                              
Residential 1-4 family  $350,494   $3,357   $3,667   $   $   $357,518 
Residential 5+ multifamily   36,539    96    1,718            38,353 
Construction of residential 1-4 family   11,041                    11,041 
Home equity lines of credit   29,689    332    265            30,286 
Residential real estate   427,763    3,785    5,650            437,198 
Commercial   292,546    3,081    14,237    71        309,935 
Construction of commercial   13,464        235            13,699 
Commercial real estate   306,010    3,081    14,472    71        323,634 
Farm land   1,637        1,687            3,324 
Vacant land   13,785    55    39            13,879 
Real estate secured   749,195    6,921    21,848    71        778,035 
Commercial and industrial   245,768    581    731    360        247,440 
Municipal   20,707                    20,707 
Consumer   7,851    3    32            7,886 
Loans receivable, gross  $1,023,521   $7,505   $22,611   $431   $   $1,054,068 
(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2019                              
Residential 1-4 family  $337,302   $4,278   $4,719   $   $   $346,299 
Residential 5+ multifamily   33,619    99    1,737            35,455 
Construction of residential 1-4 family   11,889                    11,889 
Home equity lines of credit   33,381    312    105            33,798 
Residential real estate   416,191    4,689    6,561            427,441 
Commercial   271,708    10,964    7,052    71        289,795 
Construction of commercial   8,225        241            8,466 
Commercial real estate   279,933    10,964    7,293    71        298,261 
Farm land   1,934        1,707            3,641 
Vacant land   7,834    59                7,893 
Real estate secured   705,892    15,712    15,561    71        737,236 
Commercial and industrial   167,458    443    1,510            169,411 
Municipal   21,914                    21,914 
Consumer   6,344    3    38            6,385 
Loans receivable, gross  $901,608   $16,158   $17,109   $71   $   $934,946 

The composition of loans receivable by delinquency status is as follows:

      Past due   
                         
               180  30  Accruing   
(in thousands)          days  days  90 days 
      30-59  60-89  90-179  and  and  and  Non-
    Current  days  days  days  over  over  over  accrual
June 30, 2020                        
Residential 1-4 family  $356,297   $349   $618   $217   $37   $1,221   $   $1,410 
Residential 5+ multifamily   37,492                861    861        861 
Construction of residential 1-4 family   11,041                             
Home equity lines of credit   29,825    62    159    73    167    461        265 
Residential real estate   434,655    411    777    290    1,065    2,543        2,536 
Commercial   308,473    954        437    71    1,462        1,281 
Construction of commercial   13,699                             
Commercial real estate   322,172    954        437    71    1,462        1,281 
Farm land   3,155        169            169        174 
Vacant land   13,879                            39 
Real estate secured   773,861    1,365    946    727    1,136    4,174        4,030 
Commercial and industrial   246,535    781            124    905    11    774 
Municipal   20,707                             
Consumer   7,853    3    30            33         
Loans receivable, gross  $1,048,956   $2,149   $976   $727   $1,260   $5,112   $11   $4,804 

 15 

 

      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, 2019                        
Residential 1-4 family  $344,085   $971   $351   $200   $692   $2,214   $   $1,551 
Residential 5+ multifamily   34,594                861    861        861 
Construction of residential 1-4 family   11,889                             
Home equity lines of credit   33,522    152    46        78    276        105 
Residential real estate   424,090    1,123    397    200    1,631    3,351        2,517 
Commercial   289,103    336    141    71    144    692        914 
Construction of commercial   8,466                             
Commercial real estate   297,569    336    141    71    144    692        914 
Farm land   3,461    180                180        186 
Vacant land   7,852        41            41         
Real estate secured   732,972    1,639    579    271    1,775    4,264        3,617 
Commercial and industrial   169,262    2    146    1        149    1     
Municipal   21,914                             
Consumer   6,382        1    2        3    2     
Loans receivable, gross  $930,530   $1,641   $726   $274   $1,775   $4,416   $3   $3,617 

 

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

   For the three months ending June 30, 2020  For the three months ending June 30, 2019
(in thousands)  Quantity  Pre-modification balance  Post-modification balance  Quantity  Pre-modification balance  Post-modification balance
Residential real estate      $   $    2   $623   $623 
Commercial real estate                        
Consumer               1    42    42 
Troubled debt restructurings      $   $    3   $665   $665 
Interest only payments to sell property      $   $       $   $ 
Rate reduction               3    665    665 
Modification and Rate reduction                        
Workout refinance. Extension of new funds to pay outstanding taxes                        
Modification and term extension                        
Troubled debt restructurings      $   $    3   $665   $665 

 

   For the six months ending June 30, 2020  For the six months ending June 30, 2019
(in thousands)  Quantity  Pre-modification balance  Post-modification balance  Quantity  Pre-modification balance  Post-modification balance
Residential real estate      $   $    2   $623   $623 
Commercial real estate   1    133    133             
Consumer               1    42    42 
Troubled debt restructurings   1   $133   $133    3   $665   $665 
Interest only payments to sell property      $   $       $   $ 
Rate reduction               3    665    665 
Modification and Rate reduction                        
Workout refinance. Extension of new funds to pay outstanding taxes   1    133    133             
Modification and term extension                        
Troubled debt restructurings   1   $133   $133    3   $665   $665 

For the second quarter 2020, there were no troubled debt restructurings, and for the same period in 2019, two residential loans with a combined loan balance of $623 thousand and one consumer loan of $42 thousand were modified in troubled debt restructurings for rate reductions. For the six months ended June 2020, one troubled debt restructuring of $133 thousand was modified to extend new funds to pay outstanding taxes and for the same period in 2019, three troubled debt restructurings with a combined loan balance of $665 thousand were modified for a rate reduction.

 16 

 

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

  Three months ended June 30, 2020  Three months ended June 30, 2019
(in thousands)  Beginning balance  Provision (Benefit)  Charge-offs  Reco-veries  Ending balance  Beginning balance  Provision (Benefit)  Charge-offs  Reco-veries  Ending balance
Residential 1-4 family  $2,706   $342   $   $   $3,048   $1,980   $95   ($1)  $   $2,074 
Residential 5+ multifamily   508    122    (41)       589    466    29            495 
Construction of residential 1-4 family   87                87    77    2            79 
Home equity lines of credit   278    5            283    209    15            224 
Residential real estate   3,579    469    (41)       4,007    2,732    141    (1)       2,872 
Commercial   4,519    645    (4)       5,160    3,803    (13)   (14)   1    3,777 
Construction of commercial   126    79            205    143    (16)           127 
Commercial real estate   4,645    724    (4)       5,365    3,946    (29)   (14)   1    3,904 
Farm land   52    8            60    47                47 
Vacant land   144    38            182    89                89 
Real estate secured   8,420    1,239    (45)       9,614    6,814    112    (15)   1    6,912 
Commercial and industrial   1,071    444            1,515    1,233    (67)   (19)   29    1,176 
Municipal   53    (17)           36    14    16            30 
Consumer   102    (20)   (13)   5    74    51    40    (18)   8    81 
Unallocated   972    160            1,132    638    50            688 
Totals  $10,618   $1,806   ($58)  $5   $12,371   $8,750   $151   ($52)  $38   $8,887 

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

   Six months ended June 30, 2020  Six months ended June 30, 2019
(in thousands)  Beginning balance  Provision  Charge- offs  Reco- veries  Ending balance  Beginning balance  Acquisition Discount Transfer  Provision  Charge- offs  Reco- veries  Ending balance
Residential 1-4 family  $2,393   $647   $   $8   $3,048   $2,149   $10   ($85)  $(1)  $1   $2,074 
Residential 5+ multifamily   446    185    (42)       589    413        82            495 
Construction of residential 1-4 family   75    12            87    83        (4)           79 
Home equity lines of credit   197    86            283    219    1    4            224 
Residential real estate   3,111    930    (42)   8    4,007    2,864    11    (3)   (1)   1    2,872 
Commercial   3,742    1,402    (3)   19    5,160    3,048    488    262    (23)   2    3,777 
Construction of commercial   104    101            205    122        5            127 
Commercial real estate   3,846    1,503    (3)   19    5,365    3,170    488    267    (23)   2    3,904 
Farm land   47    13            60    33        14            47 
Vacant land   71    111            182    100        (11)           89 
Real estate secured   7,075    2,557    (45)   27    9,614    6,167    499    267    (24)   3    6,912 
Commercial and industrial   1,145    370            1,515    1,158    164    (127)   (50)   31    1,176 
Municipal   46    (10)           36    12        18            30 
Consumer   60    32    (25)   7    74    56        37    (24)   12    81 
Unallocated   569    563            1,132    438        250            688 
Totals  $8,895   $3,512   ($70)  $34   $12,371   $7,831   $663   $445   ($98)  $46   $8,887 

 

 17 

 

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

  (in thousands)  Collectively evaluated 1  Individually evaluated 1  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
June 30, 2020                              
Residential 1-4 family  $352,590   $2,642   $4,928   $406   $357,518   $3,048 
Residential 5+ multifamily   37,382    589    971        38,353    589 
Construction of residential 1-4 family   11,041    87            11,041    87 
Home equity lines of credit   30,021    263    265    20    30,286    283 
Residential real estate   431,034    3,581    6,164    426    437,198    4,007 
Commercial   305,393    4,836    4,542    324    309,935    5,160 
Construction of commercial   13,699    205            13,699    205 
Commercial real estate   319,092    5,041    4,542    324    323,634    5,365 
Farm land   3,150    60    174        3,324    60 
Vacant land   13,705    179    174    3    13,879    182 
Real estate secured   766,981    8,861    11,054    753    778,035    9,614 
Commercial and industrial   246,544    1,139    896    376    247,440    1,515 
Municipal   20,707    36            20,707    36 
Consumer   7,855    55    31    19    7,886    74 
Unallocated allowance       1,132                1,132 
Totals  $1,042,087   $11,223   $11,981   $1,148   $1,054,068   $12,371 

 

 

  (in thousands)  Collectively evaluated 1  Individually evaluated 1  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2019                              
Residential 1-4 family  $340,847   $2,117   $5,452   $276   $346,299   $2,393 
Residential 5+ multifamily   34,478    446    977        35,455    446 
Construction of residential 1-4 family   11,889    75            11,889    75 
Home equity lines of credit   33,693    197    105        33,798    197 
Residential real estate   420,907    2,835    6,534    276    427,441    3,111 
Commercial   285,462    3,333    4,333    409    289,795    3,742 
Construction of commercial   8,466    104            8,466    104 
Commercial real estate   293,928    3,437    4,333    409    298,261    3,846 
Farm land   3,455    47    186        3,641    47 
Vacant land   7,713    66    180    5    7,893    71 
Real estate secured   726,003    6,385    11,233    690    737,236    7,075 
Commercial and industrial   169,285    1,143    126    2    169,411    1,145 
Municipal   21,914    46            21,914    46 
Consumer   6,349    59    36    1    6,385    60 
Unallocated allowance       569                569 
Totals  $923,551   $8,202   $11,395   $693   $934,946   $8,895 

1 For a further discussion of the allowance for loan losses, see “Provision and allowance for loan losses” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

 

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

June 30, 2020 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $1,027,217   $9,157   $   $   $1,027,217   $9,157 
Potential problem loans 1   14,870    934            14,870    934 
Impaired loans           11,981    1,148    11,981    1,148 
Unallocated allowance       1,132                1,132 
Totals  $1,042,087   $11,223   $11,981   $1,148   $1,054,068   $12,371 

 

 

December 31, 2019 (in thousands) Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans   Allowance 
Performing loans  $913,648   $7,251   $   $   $913,648   $7,251 
Potential problem loans 1   9,903    382            9,903    382 
Impaired loans           11,395    693    11,395    693 
Unallocated allowance       569                569 
Totals  $923,551   $8,202   $11,395   $693   $934,946   $8,895 

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

 18 

 

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

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance           Loan balance     
    Recorded Investment    Note    Average    Specific allowance    Income recognized    Recorded Investment    Note    Average    Income recognized 
June 30, 2020                           
Residential  $4,203   $4,345   $4,066   $406   $45   $1,696   $2,043   $1,919   $13 
Home equity lines of credit   227    540    79    20        38    74    100     
Residential real estate   4,430    4,885    4,145    426    45    1,734    2,117    2,019    13 
Commercial   3,727    3,818    3,452    324    75    816    1,411    899    16 
Construction of commercial                                    
Farm land                       174    325    181     
Vacant land   39    41    40    3        134    151    137    5 
Real estate secured   8,196    8,744    7,637    753    120    2,858    4,004    3,236    34 
Commercial and industrial   896    901    241    376    7        151    64     
Consumer   31    31    34    19    1                 
Totals  $9,123   $9,676   $7,912   $1,148   $128   $2,858   $4,155   $3,300   $34 

Note: The income recognized is for the six month period ended June 30, 2020.

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

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

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2019:

   Impaired loans with specific allowance   Impaired loans with no specific allowance
(in thousands)  Loan balance           Loan balance     
    Recorded Investment    Note    Average    Specific allowance    Income recognized    Recorded Investment    Note    Average    Income recognized 
December 31, 2019                           
Residential  $4,111   $4,190   $3,725   $276   $162   $2,318   $3,081   $2,940   $52 
Home equity lines of credit           52            105    450    391     
Residential real estate   4,111    4,190    3,777    276    162    2,423    3,531    3,331    52 
Commercial   3,309    3,335    2,574    409    90    1,024    1,733    1,747    54 
Construction of commercial           77                    39     
Farm land                       186    329    203     
Vacant land   41    41    42    5    3    139    157    143    10 
Real estate secured   7,461    7,566    6,470    690    255    3,772    5,750    5,463    116 
Commercial and industrial   93    97    16    2    4    33    188    265    4 
Consumer   36    36    21    1                3     
Totals  $7,590   $7,699   $6,507   $693   $259   $3,805   $5,938   $5,731   $120 

 19 

 

NOTE 4 – LEASES

The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of June 30, 2020 and consolidated income statements for the six months and three months ended June 30, 2020.

($ in thousands, except lease term and discount rate)   Classification    June 30, 2020      December 31, 2019  
Assets         
Operating  Other assets  $1,258   $1,360 
Finance  Bank premises and equipment 1   1,453    1,503 
Total Leased Assets     $2,711   $2,863 
Liabilities             
Operating  Other liabilities  $1,258   $1,360 
Finance  Finance lease   1,696    1,718 
Total lease liabilities     $2,954   $3,078 
1 Net of accumulated depreciation of $344 thousand and $294 thousand, respectively.
              
Lease cost  Classification   Six months ended June 30, 2020    Three months ended June 30, 2020 
Operating leases  Premises and equipment  $123   $61 
Finance leases:             
Amortization of leased assets  Premises and equipment   51    25 
Interest on finance leases  Interest expense   71    36 
Total lease cost     $245   $122 
              
Lease cost  Classification   Six months ended June 30, 2019    Three months ended June 30, 2019 
Operating leases  Premises and equipment  $123   $61 
Finance leases:             
Amortization of leased assets  Premises and equipment   120    47 
Interest on finance leases  Interest expense   92    46 
Total lease cost     $335   $154 
              
Weighted Average Remaining Lease Term     June 30, 2020       December 31, 2019  
Operating leases      8.3 years    8.6 years 
Financing leases      14.9 years    13.1 years 
Weighted Average Discount Rate1             
Operating leases      3.73%   3.70%
Financing leases      8.38%   6.20%
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 June 30, 2020.

  Future minimum lease payments (in thousands)    Operating Leases      Finance Leases  
 2020   $128   $93 
 2021    250    192 
 2022    198    195 
 2023    148    197 
 2024    129    200 
 Thereafter    654    1,980 
 Total future minimum lease payments    1,507    2,857 
 Less amount representing interest    (249)   (1,161)
 Total present value of net future minimum lease payments   $1,258   $1,696 

 

NOTE 5 - MORTGAGE SERVICING RIGHTS

The following tables provide the balance of the residential mortgage loans serviced for others as well as the balance of mortgage servicing rights associated with those loans. The increase in balances from December 31, 2019 reflected the sale of additional loans to FHLB Boston for which the Bank retained servicing rights.

(in thousands)    June 30, 2020      December 31, 2019  
Residential mortgage loans serviced for others  $110,933   $106,255 
Fair value of mortgage servicing rights   613    813 

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Changes in mortgage servicing rights are as follows:

     Three months ended      Six months ended  
Periods ended June 30, (in thousands)    2020      2019      2020      2019  
Mortgage Servicing Rights                    
Balance, beginning of period  $255   $221   $238   $228 
Originated   110    1    143    5 
Amortization (1)   (12)   (13)   (28)   (24)
Balance, end of period  $353   $209   $353   $209 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 6 - PLEDGED ASSETS

(in thousands)    June 30, 2020      December 31, 2019  
Securities available-for-sale (at fair value)  $54,195   $52,845 
Loans receivable (at book value)   428,772    434,329 
Total pledged assets  $482,967   $487,174 

At June 30, 2020, securities were pledged as follows: $45.68 million to secure public deposits, $8.47 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      Six months ended  
Periods ended June 30, (in thousands, except per share data)    2020      2019      2020      2019  
Net income  $2,734   $2,703   $4,781   $5,137 
Less: Undistributed earnings allocated to participating securities   (43)   (32)   (77)   (58)
Net income allocated to common stock  $2,691   $2,671   $4,704   $5,079 
Weighted-average common shares issued   2,834    2,813    2,831    2,810 
Less: Unvested restricted stock awards   (38)   (33)   (38)   (31)
Weighted average common shares outstanding used to calculate basic earnings per common share   2,796    2,780    2,793    2,779 
Add: Dilutive effect of stock options   7    20    8    16 
Weighted-average common shares outstanding used to calculate diluted earnings per common share   2,803    2,800    2,801    2,795 
Earnings per common share (basic)  $0.96   $0.96   $1.68   $1.83 
Earnings per common share (diluted)  $0.96   $0.95   $1.68   $1.82 

NOTE 8 – SHAREHOLDERS' EQUITY

Capital Requirements

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

The requirements of the final rules approved by the Federal Reserve Board (“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. As of June 30, 2020, the Bank exceeded the 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.

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The Bank's risk-weighted assets at June 30, 2020 and December 31, 2019 were $918.5 million and $891.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

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

June 30, 2020 

                                        
Total Capital (to risk-weighted assets)  $120,802    13.15%  $73,480    8.0%  $96,443    10.5%  $91,850    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   109,309    11.90    55,110    6.0    78,073    8.5    73,480    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   109,309    11.90    41,333    4.5    64,295    7.0    59,703    6.5 
                                         
Tier 1 Capital (to average assets)  $109,309    8.95   $48,856    4.0   $48,856    4.0   $61,071    5.0 
December 31, 2019                                        
Total Capital (to risk-weighted assets)  $114,421    12.84%  $71,278    8.0%  $93,553    10.5%  $89,098    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   105,430    11.83    53,459    6.0    75,733    8.5    71,278    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   105,430    11.83    40,094    4.5    62,368    7.0    57,914    6.5 
                                         
Tier 1 Capital (to average assets)  $105,430    9.60   $43,944    4.0   $43,944    4.0   $54,930    5.0 
                                         

Restrictions on Cash Dividends to Common Shareholders

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

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

NOTE 9 – BENEFITS

Salisbury's 401(k) Plan expense was $200 thousand and $192 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $438 thousand and $431 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $14 thousand and $27 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $38 thousand and $48 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $56 thousand and $53 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $113 thousand and $102 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

Other Retirement Plans

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $33 thousand and $29 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $67 thousand and $58 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

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Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense was $135 thousand and $115 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $271 thousand and $215 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. The second quarter 2020 included an expense of $32 thousand for the accelerated vesting of restricted stock awards previously granted to certain Directors, who retired from Salisbury's Board of Directors during the quarter. The tax benefit from restricted stock expense was $25 thousand and $21 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $49 thousand and $39 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. In second quarter 2020, Salisbury granted a total of 14,975 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $536 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of June 30, 2020 and 2019 totaled $1,031 thousand and $1,075 thousand, respectively. There were forfeitures of $29 thousand or 700 shares in the second quarter of 2020 and forfeitures of $29 thousand or 700 shares for year to date. There were forfeitures of $16 thousand or 360 shares in the second quarter of 2019 and forfeitures of $21 thousand or 460 shares for year to date.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan. The performance goal is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. A total of 6,800 performance-based restricted stock units were granted, including 3,500 units to three Named Executive Officers. Mr. Cantele received 1,500 units, Mr. Davies received 1,000 units and Mr. Albero received 1,000 units. Compensation expense was recorded with respect to these RSUs, for the quarter a total of $24 thousand and $21 thousand, and year to date $47 thousand and $39 thousand, were expensed in 2020 and 2019, respectively. No performance-based restricted stock units were awarded to date in 2020 and prior to March 29, 2019.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the second quarter 2020, there were no stock options exercised and year to date 2020, 1,755 stock options were exercised at $17.04 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury. Also, in the first quarter of 2020, a former Riverside employee exercised 1,350 stock options at $17.04 per share. In the second quarter 2019, a former Riverside employee exercised 2,025 at $17.04 per share, these was the only activity year to date in 2019.

NOTE 10 – FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

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

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 six month period ended June 30, 2020.

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Assets measured at fair value are as follows:

   Fair Value Measurements Using  Assets at
(in thousands)  Level 1  Level 2  Level 3  fair
            value
June 30, 2020                    
Assets at fair value on a recurring basis                    
U.S. Government Agency notes  $   $4,361   $   $4,361 
Municipal bonds       25,896        25,896 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       32,025        32,025 
Collateralized mortgage obligations:                    
U.S. Government agencies       21,048        21,048 
Corporate bonds       6,122        6,122 
Securities available-for-sale  $   $89,452   $   $89,452 
CRA mutual funds   912            912 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans  $   $   $1,282   $1,282 
Other real estate owned  $   $   $   $ 
December 31, 2019                    
Assets at fair value on a recurring basis                    
U.S. Government Agency notes  $   $4,644   $   $4,644 
Municipal bonds       27,193        27,193 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises       29,357        29,357 
Collateralized mortgage obligations:                    
U.S. Government agencies       25,499        25,499 
Corporate bonds       5,108        5,108 
Securities available-for-sale  $   $91,801   $   $91,801 
CRA mutual funds   882            882 
Assets at fair value on a non-recurring basis                    
Collateral dependent impaired loans  $   $   $1,593   $1,593 
Other real estate owned  $   $   $314   $314 

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

(in thousands)  Carrying  Estimated  Fair value measurements using
   value  fair value  Level 1  Level 2  Level 3
June 30, 2020                         
Financial Assets                         
Cash and cash equivalents  $84,495   $84,495   $84,495   $   $ 
Interest bearing time deposits with financial institutions   750    750    750         
Securities available-for-sale, net   89,452    89,452        89,452     
CRA mutual fund   912    912    912         
Federal Home Loan Bank of Boston stock   3,353    3,353    3,353         
Loans held-for-sale   5,313    5,392            5,392 
Loans receivable, net   1,040,358    1,062,289            1,062,289 
Accrued interest receivable   3,988    3,988    3,988         
Cash surrender value of life insurance policies   20,846    20,846    20,846         
Financial Liabilities                         
Demand (non-interest-bearing)  $325,531   $325,531   $   $325,531   $ 
Demand (interest-bearing)   188,487    188,487        188,487     
Money market   251,242    251,242        251,242     
Savings and other   170,537    170,537        170,537     
Certificates of deposit   149,802    151,315        151,315     
Deposits   1,085,599    1,087,112        1,087,112     
Repurchase agreements   7,809    7,809        7,809     
FHLBB advances   55,118    55,377        55,377     
Subordinated debt   9,871    9,910    9,910         
Note payable   228    231        231     
Finance lease obligation   1,696    1,902            1,902 
Accrued interest payable   187    187    187         
December 31, 2019                         
Financial Assets                         
Cash and cash equivalents  $26,885   $26,885   $26,885   $   $ 
Interest bearing time deposits with financial institutions   750    750    750         
Securities available-for-sale   91,801    91,801        91,801     
CRA mutual fund   882    882    882         
Federal Home Loan Bank of Boston stock   3,242    3,242    3,242         
Loans held-for-sale   332    334            334 
Loans receivable, net   927,413    933,287            933,287 
Accrued interest receivable   3,415    3,415    3,415         
Cash surrender value of life insurance policies   20,580    20,580    20,580         
Financial Liabilities                         
Demand (non-interest-bearing)  $237,852   $237,852   $   $237,852   $ 
Demand (interest-bearing)   153,314    153,314        153,314     
Money market   239,504    239,504        239,504     
Savings and other   161,112    161,112        161,112     
Certificates of deposit   127,724    128,629        128,629     
Deposits   919,506    920,411        920,411     
Repurchase agreements   8,530    8,530        8,530     
FHLBB advances   50,887    51,028        51,028     
Subordinated debt   9,859    10,113    10,113         
Note payable   246    251        251     
Finance lease liability   1,718    1,967            1,967 
Accrued interest payable   78    78    78         

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

NOTE 11 – SUBSEQUENT EVENTS

In July 2020, Salisbury was notified of the death of a former employee who was covered under a Bank Owned Life Insurance policy (“BOLI”). Under the terms of the BOLI policy, the Bank will record a tax-free gain of $600 thousand in July 2020.

On July 29, 2020, the Compensation Committee of the Board of Directors approved grants of performance-based restricted stock units (“RSUs”) to named executive officers (“NEOs”) and other key employees under the Company’s 2017 Long Term Incentive Plan. The Compensation Committee granted a total of 7,250 RSUs, including 3,500 RSUs to NEOs. Richard J. Cantele, Jr., President and Chief Executive Officer received 1,500 target RSUs; John M. Davies, President of NY Region and Chief Lending Officer received 1,000 target RSUs; and Peter Albero, Executive Vice President and Chief Financial Officer received 1,000 target RSUs. The maximum number of shares deliverable upon vesting of RSUs assuming 150% of the TBV growth target is met or exceeded, will be 10,875.

On July 31, 2020 the Board of Directors declared a dividend of $0.29 per common share payable on August 28, 2020 to shareholders of record as of August 14, 2020.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. (“Salisbury” or the “Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019. 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).

On June 29, 2020, Salisbury Bank was added to the Russell 3000 stock index.

Critical Accounting Policies and Estimates

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

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

Allowance for Loan Losses

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

Goodwill and Intangible Assets

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

Available-For-Sale Securities

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

FINANCIAL CONDITION

Impact of COVID-19 Virus

COVID-19 has placed significant health and economic pressure on the communities the Bank serves, the State of Connecticut, the United States and other countries. In response, the Bank has proactively implemented several steps such as those set forth below to support the safety and well-being of its employees and customers, which procedures continue through the date of this Report:

The Bank is practicing social distancing following the guidelines of the Center for Disease Control and requires many of its employees to work from home or from alternate locations.
On July 8, 2020, the lobbies to the Bank's branches reopened to customers and banking is also available to customers by appointment.
The Bank continues to leverage the drive-up windows in twelve of its fourteen branches as well as its electronic banking platform to continue to serve customers.

Salisbury will continue to adjust its operating model as the circumstances surrounding the pandemic continue to evolve.

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Securities and Short Term Funds

During the first six months of 2020, securities decreased $2.2 million to $93.7 million at June 30, 2020. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $57.6 million to $84.5 million at June 30, 2020.

Salisbury evaluates securities for OTTI when the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at June 30, 2020.

Loans

Net loans receivable increased $113.0 million to $1,040.4 million at June 30, 2020, compared with $927.4 million at December 31, 2019. The increase primarily reflected PPP loan balances of $96.3 million, net of deferred fees, and growth in commercial real estate loans receivable. In addition, residential loans receivable increased approximately $9.8 million from year end 2019, partly reflecting higher demand for homes in less densely populated areas as a result of COVID-19. These increases were partly offset by a $3.5 million increase in the allowance for loan losses, which primarily reflected the uncertainty surrounding the impact of COVID-19 as well as loan growth during the period.

Asset Quality

During the first six months of 2020, non-performing assets increased $0.9 million, which primarily reflected an increase of $0.8 million in commercial and industrial loans, and an increase of $0.4 million in real estate secured loans, offset by the sale of OREO properties of $0.3 million. During the first six months of 2020, total impaired and potential problem loans increased by $5.6 million to $26.9 million, or 2.55% of gross loans receivable at June 30, 2020, from $21.3 million, or 2.28% of gross loans receivable at December 31, 2019.

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

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the virus.  The guidance goes on to explain that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of the relief program are not Troubled Debt Restructurings (“TDRs”).  CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019 are not TDRs.  The Bank has applied this guidance and implemented a loan payment deferral program which allows residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. Borrowers may apply to the Bank for additional deferments, which will be evaluated on a case-by-case basis.

As of June 30, 2020, 124 residential and consumer loans ($35 million loan balances) and 196 commercial loans ($137 million loan balances) were granted payment deferrals. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).  As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. As of June 30, 2020, Salisbury processed 890 PPP loans for a principal balance of approximately $99 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020 the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. The PPPFA increased the covered period from eight weeks to twenty four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two year term. Management has funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank (“FHLB”) advances, and brokered deposits. Salisbury has not participated in the Federal Reserve's Paycheck Protection Program Liquidity Facility (“PPPLF”).

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Past Due Loans

Loans past due 30 days or more increased $0.7 million for the six months ended June 30, 2020 to $5.1 million, or 0.49% of gross loans receivable compared with $4.4 million, or 0.47% of gross loans receivable at December 31, 2019.

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

(in thousands)    June 30, 2020      December 31, 2019  
Past due 30-59 days  $1,849   $1,351 
Past due 60-89 days   807    726 
Past due 90-179 days       3 
Past due 180 days and over   11     
Accruing loans   2,667    2,080 
Past due 30-59 days   300    290 
Past due 60-89 days   169     
Past due 90-179 days   727    271 
Past due 180 days and over   1,249    1,775 
Non-accrual loans   2,445    2,336 
Total loans past due 30 days or greater  $5,112   $4,416 

Credit Risk Ratings

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

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

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

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

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

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Impaired Loans

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

(in thousands)    June 30, 2020      December 31, 2019  
Non-accrual loans, excluding troubled debt restructured loans  $3,297   $2,604 
Non-accrual troubled debt restructured loans   1,507    1,013 
Accruing troubled debt restructured loans   7,177    7,778 
Total impaired loans  $11,981   $11,395 

Non-Performing Assets

Non-performing assets increased $0.9 million to $4.8 million or 0.37% of assets at June 30, 2020, from $3.9 million, or 0.35% of assets at December 31, 2019, and decreased $0.8 million from $5.4 million, or 0.49% of assets at June 30, 2019.

The 22.4% increase in non-performing assets in the first six months of 2020 primarily reflected an increase of $0.8 million in commercial and industrial loans and an increase in real estate secured loans of $0.4 million, partly offset by the sale of $0.3 million of OREO properties.

The components of non-performing assets are as follows:

(in thousands)    June 30, 2020      December 31, 2019  
Residential 1-4 family  $1,410   $1,551 
Residential 5+ multifamily   861    861 
Home equity lines of credit   265    105 
Commercial   1,281    914 
Farm land   174    186 
Vacant land   39     
Real estate secured   4,030    3,617 
Commercial and industrial   774     
Non-accruing loans   4,804    3,617 
Accruing loans past due 90 days and over   11    3 
Non-performing loans   4,815    3,620 
Other Real Estate Owned (OREO)       314 
Non-performing assets  $4,815   $3,934 

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

(in thousands)    June 30, 2020      December 31, 2019  
Current  $2,358   $1,281 
Past due 30-59 days   300    290 
Past due 60-89 days   169     
Past due 90-179 days   727    274 
Past due 180 days and over   1,261    1,775 
Total non-performing loans  $4,815   $3,620 

At June 30, 2020, 48.97% of non-performing loans were current with respect to loan payments, compared with 35.39% at December 31, 2019.

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Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans improved slightly during the first six months of 2020 to $8.7 million, or 0.82% of gross loans receivable at June 30, 2020, compared to $8.8 million, or 0.94% of gross loans receivable at December 31, 2019.

The components of troubled debt restructured loans are as follows:

(in thousands)    June 30, 2020      December 31, 2019  
Residential 1-4 family  $3,518   $3,901 
Residential 5+ multifamily   109    116 
Personal   31    36 
Vacant land   134    180 
Commercial   3,263    3,419 
Real estate secured   7,055    7,652 
Commercial and industrial   122    126 
Accruing troubled debt restructured loans   7,177    7,778 
Residential 1-4 family   335    152 
Residential 5+ multifamily   861    861 
Vacant land   39     
Commercial   272     
Real estate secured   1,507    1,013 
Non-accrual troubled debt restructured loans   1,507    1,013 
Troubled debt restructured loans  $8,684   $8,791 

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

(in thousands)    June 30, 2020      December 31, 2019  
Current  $7,080   $7,227 
Past due 30-59 days       470 
Past due 60-89 days   97    81 
Accruing troubled debt restructured loans   7,177    7,778 
Current   374    19 
Past due 90-179 days   272    133 
Past due 180 days and over   861    861 
Non-accrual troubled debt restructured loans   1,507    1,013 
Total troubled debt restructured loans  $8,684   $8,791 

At June 30, 2020, 85.84% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.43% at December 31, 2019.

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 $5.0 million during the first six months of 2020 to $14.9 million, or 1.41% of gross loans receivable at June 30, 2020, compared with $9.9 million, or 1.06% of gross loans receivable at December 31, 2019. The increase primarily reflected the downgrade of certain commercial loans of $7.0 million, partly offset by the upgrade of both commercial and industrial loans of $1.2 million and residential 1-4 family loans of $0.8 million.

The components of potential problem loans are as follows:

(in thousands)    June 30, 2020      December 31, 2019  
Residential 1-4 family  $1,346   $2,109 
Residential 5+ multifamily   748    760 
Home equity lines of credit        
Residential real estate   2,094    2,869 
Commercial   10,832    3,886 
Construction of commercial   235    241 
Commercial real estate   11,067    4,127 
Farm land   1,513    1,521 
Real estate secured   14,674    8,517 
Commercial and industrial   195    1,384 
Consumer   1    2 
Total potential problem loans  $14,870   $9,903 

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

(in thousands)    June 30, 2020      December 31, 2019  
Current  $14,486   $9,654 
Past due 30-59 days   384    108 
Past due 60-89 days       138 
Past due 90-179 days       3 
Total potential problem loans  $14,870   $9,903 

At June 30, 2020, 97.42% of potential problem loans were current with respect to loan payments, as compared with 97.49% at December 31, 2019. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Goodwill

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. The virus triggered significant volatility in the global financial markets. On June 30, 2020, Salisbury's closing stock price was $40.99 per share compared with its book value of $41.66 per share. Salisbury's stock price has declined approximately 10% from December 31, 2019 whereas financial stocks, as measured by the SNL US Bank $1 billion - $5 billion index, declined approximately 31% over the same period. As a result of the stock market volatility, the Bank was required to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired. Management evaluated several qualitative factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price to determine if it was more likely than not that the fair value of the goodwill declined below its carrying value on a sustained basis. Management concluded that there is still much uncertainty surrounding the impact of COVID-19 to determine if it is more likely than not that the Bank's fair value has fallen below carrying value on a sustained basis. As a result, the Bank did not record an impairment charge for goodwill for the second quarter 2020.

Deposits and Borrowings

Deposits increased $166.1 million during the first six months of 2020, or 18.1%, to $1.1 billion at June 30, 2020, compared with $919.5 million at December 31, 2019. The increase partly reflected the funding of $98.9 million of PPP loans as well as an increase in brokered certificate of deposit balances of $33.0 million. Retail repurchase agreements decreased $0.7 million during 2020 to $7.8 million at June 30, 2020, compared with $8.5 million at December 31, 2019.

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

   June 30, 2020  December 31, 2019
(in thousands)  Average Balance  Percent  Weighted
Interest Rate
  Average Balance  Percent  Weighted
Interest Rate
Demand deposits  $269,047    26.68%   0.00%  $231,169    24.50%   0.00%
Interest-bearing checking accounts   172,811    17.14%   0.39%   155,463    16.48    0.39 
Regular savings accounts   171,436    17.00%   0.61%   175,011    18.55    0.87 
Money market savings   237,667    23.57%   1.07%   222,090    23.54    1.05 
Certificates of deposit (CD's)1   157,288    15.60%   1.88%   159,863    16.94    1.80 
Total deposits  $1,008,249    100.00%   0.72%  $943,596    100.00%   0.78%

1CD's included Certificate of Deposit Account Registry Service (“CDARS”) one-way buys of $5.2 million at June 30, 2020 and $2.9 million at December 31, 2019. 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 $33.0 million at June 30, 2020. Salisbury did not have any brokered certificates of deposit outstanding at December 31, 2019.

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

Interest rates (in thousands)    June 30, 2020      December 31, 2019  
Less than 1.00%  $47,899   $34,261 
1.00% to 1.99%   46,808    46,502 
2.00% to 2.99%   54,597    46,463 
3.00% to 3.99%   498    498 
Total  $149,802   $127,724 

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

   At June 30, 2020
  Interest rates (in thousands)  Less Than or Equal to One Year  More Than One to Two Years  More Than Two to Three Years  More Than Three Years  Total  Percent of Total
  Less than 1.00%  $37,424   $8,644   $269   $1,562   $47,899    31.97%
  1.00% to 1.99%   26,570    7,732    5,832    6,674    46,808    31.25%
  2.00% to 2.99%   44,381    4,530    159    5,527    54,597    36.45%
  3.00% to 3.99%       498            498    0.33%
  Total  $108,375   $21,404   $6,260   $13,763   $149,802    100.00%

 

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

June 30, 2020 (in thousands)  Within
3 months
 
3-6 months
 
6-12 months
  Over
1 year
  Total
Certificates of deposit $100,000 and over  $47,832   $29,043   $21,565   $22,783   $121,223 

FHLBB advances increased $4.2 million during the first six months of 2020 to $55.1 million at June 30, 2020, compared with $50.9 million at December 31, 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 June 30, 2020, $15 million of letters of credit were outstanding.

The following table sets forth certain information concerning short-term FHLBB advances:

(dollars in thousands)    June 30, 2020      December 31, 2019  
Highest month-end balance during period  $15,000   $47,000 
Ending balance   10,000    30,000 
Average balance during period   11,868    5,670 

 

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At June 30, 2020, Salisbury's excess borrowing capacity at FHLBB was approximately $223.1 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

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

Operating activities for the six-month period ended June 30, 2020 provided net cash of $6.0 million. Investing activities utilized net cash of $116.3 million principally from $119.2 million of net loan originations and principal collections, $15.4 million of purchases of securities available-for-sale and $1.3 million of capital expenditures, partly offset by proceeds of $8.7 million from calls and maturities of securities available-for-sale, $10.6 million from the sale of available-for-sale-securities and $0.3 million from the sale of other real estate owned. Financing activities provided net cash of $168.0 million, principally due to increase of deposits of $144.0 million and an increase in time deposits of $22.1 million and $25.0 million in long-term FHLBB advances offset by repayment of FHLBB short term advances of $20.0 and the payment of common stock dividends of $1.6 million.

At June 30, 2020, Salisbury had outstanding commitments to fund new loan originations of $31.1 million and unused lines of credit of $137.1 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.

 

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RESULTS OF OPERATIONS

For the three-month periods ended June 30, 2020 and 2019

OVERVIEW

Net income allocated to common stock was $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2020 (second quarter 2020), compared with $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2019 (second quarter 2019), and $2.0 million, or $0.72 per common share, for the first quarter ended March 31, 2020 (first quarter 2020).

Net Interest Income

Tax equivalent net interest income for the second quarter 2020 increased $832 thousand, or 9.3%, versus first quarter 2020, and increased $1.3 million, or 15.3%, versus second quarter 2019. Average earning assets increased $114 million versus first quarter 2020, and increased $116.5 million versus second quarter 2019. Average total interest bearing deposits increased $24.8 million versus first quarter 2020 and increased $11.3 million versus second quarter 2019. The tax equivalent net interest margin for the second quarter 2020 was 3.31% compared with 3.35% for the first quarter 2020 and 3.19% for the second quarter 2019. The increase in the net interest margin primarily reflected the lower cost of borrowing from the FHLBB and the repricing of deposits at lower interest rates. In addition, net interest income for the second quarter 2019 was reduced by $140 thousand for the write-off of unamortized premiums on purchased loans which paid off during the quarter. This write-off of premiums reduced second quarter 2019 tax equivalent net interest margin by approximately 0.05%.

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

Three months ended June 30,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)    2020      2019      2020      2019      2020      2019  
Loans (a)(d)  $1,038,551   $923,513   $10,428   $9,984    4.02%   4.31%
Securities (c)(d)   86,987    99,050    634    738    2.92    2.98 
FHLBB stock   3,580    3,258    39    66    4.36    8.09 
Short term funds (b)   49,105    35,853    12    186    0.10    2.08 
Total earning assets   1,178,223    1,061,674    11,113    10,974    3.77    4.13 
Other assets   60,288    56,081                     
Total assets  $1,238,511   $1,117,755                     
Interest-bearing demand deposits  $172,811   $156,597    103    154    0.24    0.39 
Money market accounts   237,667    209,351    239    558    0.40    1.07 
Savings and other   171,436    184,346    102    456    0.24    0.99 
Certificates of deposit   157,288    177,535    544    831    1.38    1.88 
Total interest-bearing deposits   739,202    727,829    988    1,999    0.53    1.10 
Repurchase agreements   4,773    3,334    4    4    0.34    0.47 
Capital lease   2,987    4,509    35    46    4.69    4.07 
Note payable   231    266    4    4    6.93    6.06 
Subordinated Debt (net of issuance costs)   9,866    9,843    156    156    6.32    6.34 
FHLBB/FRB borrowings   55,374    37,462    140    279    1.01    2.94 
Total interest-bearing liabilities   812,433    783,243    1,327    2,488    0.65    1.27 
Demand deposits   302,965    221,012                     
Other liabilities   6,029    5,862                     
Shareholders' equity   117,084    107,638                     
Total liabilities & shareholders' equity  $1,238,511   $1,117,755                     
Net interest income            $9,786   $8,486           
Spread on interest-bearing funds                       3.12    2.86 
Net interest margin (e)                       3.31    3.19 

(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 $170,000 and $142,000, respectively, for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e)Net interest income divided by average interest-earning assets.

 

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

Three months ended June 30, (in thousands) 2020 versus 2019
Change in interest due to   Volume    Rate    Net 
Loans  $1,164   $(720)  $444 
Securities   (89)   (15)   (104)
FHLBB stock   5    (32)   (27)
Short term funds   36    (210)   (174)
Interest-earning assets   1,116    (977)   139 
Deposits   23    (1,034)   (1,011)
Repurchase agreements   1    (1)    
Capital lease   (17)   6    (11)
Note payable   (1)   1     
Subordinated Debt            
FHLBB/FRB borrowings   85    (224)   (139)
Interest-bearing liabilities   91    (1,252)   (1,161)
Net change in net interest income  $1,025   $275   $1,300 

Interest Income

Tax equivalent interest income increased $139 thousand to $11.1 million for second quarter 2020 as compared with $11.0 million in second quarter 2019. Loan income as compared to second quarter 2019 increased $444 thousand, or 4.4%, primarily due to a $115.1 million, or 12.5%, increase in average loans. Tax equivalent securities income decreased $104 thousand, or 14.1%, for second quarter 2020 as compared with second quarter 2019, primarily due to a $12.0 million, or 12.2%, decrease in average balances. Income on short-term funds as compared to second quarter 2019 decreased $174 thousand, or 93.5%, primarily due to a 198 basis point decrease in the average short-term funds yields, which was partly offset by a $13.3 million, or 37.0%, increase in the average balance.

Interest Expense

Interest expense decreased $1.2 million to $1.3 million for second quarter 2020 as compared with $2.5 million in second quarter 2019. Interest on deposit accounts decreased $1.0 million, or 50.6%, as a result of a $11.4 million increase in the average balances and an average decrease in deposit rates of 57 basis points as compared with second quarter 2019. Interest expense on FHLBB borrowings decreased $139 thousand as a result of an average balance increase of $17.9 million as compared with second quarter 2019, partly offset by a 193 basis point decrease in the average borrowing rate. Interest expense on subordinated debt totaled $156 thousand for the second quarter in both 2020 and 2019.

Provision and Allowance for Loan Losses

The provision for loan losses was $1.8 million for second quarter 2020, compared with $151 thousand for second quarter 2019. Net loan charge-offs were $53 thousand and $14 thousand for the respective quarters. The increase in the provision from second quarter 2019 primarily reflected management's assessment of the impact of COVID-19 on certain qualitative and environmental factors and impaired loans as well as loan growth. Management will continue to monitor the impact of the virus on its borrowers and adjust the allowance as appropriate. The length of time required for the economy to substantially recover from the virus will have a direct impact on Salisbury's provision and allowance for loan losses. A longer recovery or another forced shutdown that leads to sustained levels of unemployment will likely result in an increase in Salisbury's provision and allowance for loan losses.

As a result of these factors, reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 1.18% for the second quarter 2020, versus 0.95% for the fourth quarter 2019 and 0.97% for the second quarter 2019. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 257% for the second quarter of 2020, versus 246% for the fourth quarter of 2019 and 176% for the second quarter of 2019.

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

Three months ended June 30,    2020      2019  
Net charge-offs to average loans receivable, gross   0.00%   0.00%
Non-performing loans to loans receivable, gross   0.46    0.55 
Accruing loans past due 30-89 days to loans receivable, gross   0.25    0.27 
Allowance for loan losses to loans receivable, gross   1.18    0.97 
Allowance for loan losses to non-performing loans   256.89    175.56 
Non-performing assets to total assets   0.37    0.49 

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 1.18% at June 30, 2020 compared to 0.97% at June 30, 2019 and the ratio of the allowance for loan losses to non-performing loans increased to 256.89% at June 30, 2020 from 175.56% at June 30, 2019. In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, gross loans receivable and the allowance for loan losses increased by $663 thousand and the coverage ratios also increased. The balance of net loans receivable did not change as a result of this transfer.

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $4.8 million or 0.46% of gross loans receivable at June 30, 2020 as compared to $5.1 million, or 0.55%, at June 30, 2019. Accruing loans past due 30-89 days increased $0.2 million to $2.7 million, or 0.25% of gross loans receivable from $2.5 million, or 0.27% of gross loans receivable, at June 30, 2019. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

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

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

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors.  The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.  In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19. This new loan pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, management increased the risk weights for loans with an internal risk rating of “4” (Watch), “5” (Special Mention) and “6” (Substandard”) to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. Management will actively monitor the population of loans in the new loan pool and evaluate the risk weightings to determine if further adjustments are warranted based on the impact of COVID-19.

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

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2020.

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

Non-Interest Income

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

Three months ended June 30, (dollars in thousands) 2020      2019      2020 vs. 2019  
Trust and wealth advisory  $1,031   $1,044   $(13)   (1.2)%
Service charges and fees   598    1,012    (414)   (40.9)
Gains on sales of mortgage loans, net   252    1    251    n/a 
Mortgage servicing, net   66    80    (14)   (17.5)
Gains (losses) on CRA mutual fund   8    12    (4)   (33.3)
Gains on available-for-sale securities, net   181    281    (100)   (35.6)
BOLI income and gains   133    87    46    52.9 
Other   47    131    (84)   (64.1)
Total non-interest income  $2,316   $2,548   $(232)   (9.1)%

Non-interest income decreased $232 thousand, or 9.1% in the second quarter 2020 versus second quarter 2019. Trust and wealth advisory revenues decreased $13 thousand versus second quarter 2019 primarily due to lower asset-based fees. Assets under administration were $704.1 million at June 30, 2020 compared with $639.5 million at March 31, 2020 and $713.3 million at June 30, 2019. Discretionary assets under administration of $480.5 million at June 30, 2020 increased from $425.4 million at March 31, 2020 and $464.5 million at June 30, 2019. The increase from first quarter 2020 primarily reflected higher valuations, whereas the increase from second quarter 2019 was primarily due to new business activity. Non-discretionary assets under administration of $223.6 million in second quarter 2020 increased from $214.1 million at first quarter 2020 and declined from $248.8 million in second quarter 2019. The decline versus second quarter 2019 was due to a lower valuation of shares in a partnership for one significant client relationship. The trust and wealth business recorded only a nominal annual fee on this relationship. Historically, trust and wealth advisory income correlates with the value of assets under management. Accordingly, trust and wealth advisory income is likely to be impacted by high levels of market volatility that may result from business disruptions caused by COVID-19.

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Service charges and fees decreased $414 thousand versus second quarter 2019. During the second quarter 2020, Salisbury waived approximately $240 thousand in various deposit fees, including overdraft and ATM fees. Salisbury will continue to waive such fees to help its customers and surrounding communities until economic conditions improve. Second quarter 2020 gains on mortgage loans, net increased $251 thousand due to an increase in sales volume. Mortgage sales in second quarter 2020 were $14.7 million compared with $0.1 million for second quarter 2019. Mortgage servicing fees decreased $14 thousand compared with second quarter 2019 on lower servicing income. Second quarter 2020 and second quarter 2019 included mortgage servicing amortization and periodic impairment charges (net) of $12 thousand and $13 thousand, respectively. BOLI income of $133 thousand increased $46 thousand compared to $87 thousand in second quarter 2019. Other income primarily includes rental property income.

Non-Interest Expense

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

Three months ended June 30, (dollars in thousands) 2020      2019      2020 vs. 2019  
Salaries  $2,411   $2,959   $(548)   (18.5)%
Employee benefits   1,037    1,042    (5)   (0.5)
Premises and equipment   981    1,004    (23)   (2.3)
Data processing   557    577    (20)   (3.5)
Professional fees   758    583    175    30.0 
OREO gains, losses and write-downs       270    (270)   (100.0)
Collections and other real estate owned   79    79         
FDIC insurance   103    140    (37)   (26.4)
Marketing and community support   169    151    18    11.9 
Amortization of core deposit intangibles   83    99    (16)   (16.2)
Other   611    535    76    14.2 
Non-interest expense  $6,789   $7,439   $(650)   (8.7)%

Non-interest expense for second quarter 2020 decreased $650 thousand versus second quarter 2019. Total compensation expense decreased $553 thousand versus the second quarter 2019. The decline from the comparative quarters primarily reflected the deferral of compensation costs associated with originating PPP loans. This expense will be amortized into income over the term of the loans as a reduction to interest income and net interest margin. Premises and equipment expense decreased $23 thousand versus second quarter 2019 primarily due to lower depreciation and utilities expense. Data processing expense decreased $20 thousand versus second quarter 2019 primarily due lower ATM network processing fees, data communications expenses and lower Trust & Wealth data processing charges. Professional fees increased $175 thousand versus second quarter 2019 primarily due to higher consulting, legal and investment management fees. Collections, OREO and loan related expenses decreased $270 thousand versus second quarter 2019 primarily as a result of OREO losses in second quarter 2019. Marketing and community support expense increased $18 thousand versus first quarter 2019 primarily due to timing of current marketing campaigns and contributions. The increase in other expenses of $76 thousand primarily reflected litigation related accruals.

Income Taxes

The effective income tax rates for second quarter 2020 and second quarter 2019 were 18.1% and 18.1%, 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 2020 (to date) or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.

For the six month periods ended June 30, 2020 and 2019

Overview

Net income allocated to common stock was $4.7 million, or $1.68 per common share, for the six month period ended June 30, 2020 (six month period 2020), compared with $5.1 million, or $1.83 per common share, for the six month period ended June 30, 2019 (six month period 2019).

Net Interest Income

Tax equivalent net interest income for the six month period 2020 increased $1.7 million, or 9.9%, versus the six month period 2019. Average earning assets increased $65.2 million versus the six month period 2019. Average total interest bearing deposits increased $12.7 million, or 1.8%, versus the six month period 2019. The net interest margin of 3.33% increased 11 basis points from 3.22% for the six month period 2019. The increase in the net interest margin primarily reflected lower interest rates on interest-bearing deposits.

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

Six months ended June 30,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)    2020      2019      2020      2019      2020      2019  
Loans (a)(d)  $993,293   $920,915   $20,524   $20,021    4.13%   4.35%
Securities (c)(d)   88,292    97,856    1,332    1,454    3.02    2.97 
FHLBB stock   3,310    3,723    72    138    4.35    7.41 
Short term funds (b)   36,161    33,408    70    341    0.39    2.04 
Total earning assets   1,121,056    1,055,902    21,998    21,954    3.92    4.16 
Other assets   62,365    56,552                     
Total assets  $1,183,421   $1,112,454                     
Interest-bearing demand deposits  $163,707   $153,910    222    298    0.27    0.39 
Money market accounts   239,173    204,572    799    1,032    0.67    1.01 
Savings and other   167,805    184,266    336    907    0.40    0.98 
Certificates of deposit   156,078    171,334    1,140    1,558    1.46    1.82 
Total interest-bearing deposits   726,763    714,082    2,497    3,795    0.69    1.06 
Repurchase agreements   5,223    3,039    10    7    0.38    0.46 
Capital lease   3,019    4,293    71    92    4.70    4.29 
Note payable   235    271    7    8    5.96    5.90 
Subordinated Debt (net of issuance costs)   9,864    9,841    312    312    6.33    6.34 
FHLBB/FRB borrowings   46,247    48,507    359    691    1.55    2.85 
Total interest-bearing liabilities   791,351    780,033    3,256    4,905    0.82    1.26 
Demand deposits   269,031    219,825                     
Other liabilities   6,460    6,504                     
Shareholders' equity   116,579    106,092                     
Total liabilities & shareholders' equity  $1,183,421   $1,112,454                     
Net interest income            $18,742   $17,049           
Spread on interest-bearing funds                       3.10    2.90 
Net interest margin (e)                       3.33    3.22 
(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 $337,000 and $268,000, respectively for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e)Net interest income divided by average interest-earning assets.

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

Six months ended June 30, (in thousands) 2020 versus 2019
Change in interest due to   Volume    Rate    Net 
Loans  $1,535   $(1,032)  $503 
Securities   (143)   21    (122)
FHLBB stock   (12)   (54)   (66)
Short term funds   17    (288)   (271)
Interest-earning assets   1,397    (1,353)   44 
Deposits   55    (1,353)   (1,298)
Repurchase agreements   5    (2)   3 
Capital lease   (29)   8    (21)
Note payable   (1)       (1)
Subordinated Debt   1    (1)    
FHLBB/FRB borrowings   (25)   (307)   (332)
Interest-bearing liabilities   6    1,655    1,649 
Net change in net interest income  $1,391   $302   $1,693 

Interest Income

Tax equivalent interest income of $22.0 million was essentially unchanged for the six month periods 2020 and 2019. Loan income, as compared to the six months of 2019, increased $503 thousand, or 2.5%, primarily due to a $72.4 million, or 7.9%, increase in average loans, which was partly offset by a 22 basis point decrease in the average yield. Tax equivalent securities income decreased $122 thousand, or 8.4%, for the six month period 2020 as compared with the six month period 2019, primarily due to a $9.5 million decrease in average volume, which was partly offset by a 5 basis point increase in average yield. Income on short-term funds as compared to six month period 2019 decreased $271 thousand, or 79.5%, primarily due to a 165 basis point decrease in the average short-term funds yields, partly offset by a $2.8 million, or 8.2%, increase in average short-term funds.

Interest Expense

Interest expense decreased $1.6 million, or 33.6%, to $3.3 million for the six month period 2020 compared with $4.9 million for the six month period 2019. Interest on deposit accounts decreased $1.3 million, or 34.2%, as a result of a decrease in average deposit rates of 37 basis points compared with the six month period 2019, which was partially offset by a $12.7 million increase in the average balance. Interest expense on FHLBB/FRB borrowings decreased $332 thousand, or 48.0%, as a result of an average balance decrease of $2.3 million compared with the six month period 2019 and a 130 basis point decrease in the average borrowings rate. Interest expense on subordinated debt totaled $312 thousand for the six month periods 2020 and 2019.

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Provision and Allowance for Loan Losses

The provision for loan losses was $3.5 million for the six month period ended June 30, 2020 as compared to $445 thousand for the six month period ended June 30, 2019. Net loan charge-offs were $36 thousand and $53 thousand for the respective periods.

Reserve coverage at June 30, 2020, as measured by the ratio of allowance for loan losses to gross loans, at 1.18%, compares with 0.97% a year ago at June 30, 2019. The increase in the coverage ratio primarily reflected higher reserves due to management's assessment of the impact of COVID-19 as well as loan growth. During the first six months of 2020, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $1.2 million to $4.8 million. Non-performing loans represent 0.46% of gross loans receivable, an increase from 0.39% at December 31, 2019. At June 30, 2020, accruing loans past due 30-89 days increased $0.6 million to $2.7 million or 0.25% of gross loans receivable from 0.22% at December 31, 2019. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

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

Six months ended June 30, (dollars in thousands) 2020      2019      2020 vs. 2019  
Trust and wealth advisory  $2,061   $1,950   $111    5.7%
Service charges and fees   1,503    1,932    (429)   (22.2)
Gains on sales of mortgage loans, net   313    8    305    3,812.5 
Mortgage servicing, net   133    156    (23)   (14.7)
Losses on CRA mutual fund   22    23    (1)   (4.3)
Gain(Losses) on available-for-sale securities, net   182    272    (90)   (33.1)
BOLI income and gains   266    166    100    60.2 
Other   80    68    12    17.6 
Total non-interest income  $4,560   $4,575   $(15)   (0.3)%

Non-interest income for the six month period ended June 30, 2020 decreased $15 thousand versus the same period in 2019. Trust and wealth advisory revenues increased $111 thousand mainly due to growth in asset based fees. Service charges and fees decreased $429 thousand. During the six month period 2020, Salisbury waived approximately $269 thousand in various deposit fees, including overdraft and ATM fees. Salisbury will continue to waive such fees to help its customers and surrounding communities until economic conditions improve. Income from sales of mortgage loans increased $305 thousand substantially due to higher gains on sales of fixed rate residential mortgage loans to FHLB Boston. Mortgage loans sales totaled $17.8 million for the six month period ended June 30, 2020 compared with $0.5 million for the six month period ended June 30, 2019. The six month periods ended June 30, 2020 and 2019 included mortgage servicing amortization of $28 thousand and $24 thousand, respectively.

Non-interest expense

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

Six months ended June 30, (dollars in thousands) 2020      2019      2020 vs. 2019  
Salaries  $5,261   $5,952   ($691)   (11.6)%
Employee benefits   2,183    2,227    (44)   (2.0)
Premises and equipment   1,891    1,976    (85)   (4.3)
Data processing   1,098    1,086    12    1.1 
Professional fees   1,385    1,118    267    23.9 
OREO gains, losses and write-downs       322    (322)   (100.0)
Collections and other real estate owned   104    209    (105)   (50.2)
FDIC insurance   208    303    (95)   (31.4)
Marketing and community support   293    307    (14)   (4.6)
Amortization of core deposit intangible assets   170    203    (33)   (16.3)
Other   1,133    947    186    19.6 
Non-interest expense  $13,726   $14,650   ($924)   (6.3)%

Non-interest expense for the six month period ended June 30, 2020 decreased $924 thousand versus the same period in 2019. Salaries decreased $691 thousand primarily reflecting the deferral of compensation costs associated with originating loans, including PPP loans. Benefits decreased $44 thousand primarily due to lower medical premiums. Premises and equipment decreased $85 thousand primarily due to lower depreciation, building maintenance and utilities partially offset by increased software expense. Data processing increased $12 thousand mainly due to higher ATM fees and data processing costs partially offset by lower Trust and Wealth data processing expense. The increase in professional fees of $267 thousand versus the six month period 2019 primarily reflected higher consulting and investment management expenses. Collections, OREO and loan related expense decreased $322 thousand due to OREO losses in the six month period 2019. Marketing and community support decreased $14 thousand primarily due to timing of current marketing campaigns. Other expenses increased $186 thousand and primarily reflected litigation related accruals.

Income taxes

The effective income tax rates for the six month periods ended June 30, 2020 and June 30, 2019 were 16.54% and 17.95%, 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 2020 (to date) or 2019, 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.

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CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity was $118.4 million at June 30, 2020, up $4.8 million from December 31, 2019. Book value and tangible book value per common share were $41.66 and $36.51, respectively, compared with $40.22 and $34.98, respectively, at December 31, 2019. Contributing to the increase in shareholders' equity for year-to-date 2020 was net income of $4.8 million, unrealized gains on securities available-for-sale, net of tax, of $1.3 million and issued stock of $0.3 million partially offset by common stock dividends of $1.6 million.

Capital Requirements

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

   June 30, 2020  December 31, 2019
Total Capital (to risk-weighted assets)   12.97%   12.84%
Tier 1 Capital (to risk-weighted assets)   11.90    11.83 
Common Equity Tier 1 Capital (to risk-weighted assets)   11.90    11.83 
Tier 1 Capital (to average assets)   8.95    9.60 

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

The FRB's final rules implementing the Basel Committee on Banking Supervision's capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of June 30, 2020, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank's category.

On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a “Community Bank Leverage Ratio” (“CBLR”) that simplifies capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) (“qualifying community banking organizations”) will be required to report the components of its tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that “elects to use the CBLR framework” will not be subject to other risk-based and leverage capital requirements and will be considered to have met the well-capitalized ratio requirements for purposes of the agencies' Prompt Corrective Action (“PCA”) framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria, but continues to report a leverage ratio of greater than 8%, the bank may continue to use the framework and will be deemed “well capitalized” for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period( including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be well capitalized if it elected to utilize such methodology.

On April 6, 2020, the regulators announced that the CBLR will be modified so that: (1) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (2) community banks will have until January 1, 2022 before the CBLR requirement is re-established at greater than 9%. Under the interim final rules, the CBLR will be 8% beginning in the second quarter 2020 and for the remainder of the calendar year, 8.5% for calendar year 2021 and 9% thereafter. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy.

Dividends

Salisbury paid $1.640 million in common stock dividends during the six month period ended June 30, 2020.

On July 31, 2020, the Board of Directors of Salisbury declared a common stock dividend of $0.29 per common share payable on August 28, 2020 to shareholders of record on August 14, 2020. Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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

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

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

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING STATEMENTS

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

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

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

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

(a)the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
(b)changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;
(c)increased competition from other financial and non-financial institutions;
(d)the impact of technological advances and cybersecurity matters;
(e)interest rate fluctuations;
(f)the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the State of Connecticut and the United States, related to the economy and overall financial stability;
(g)government and regulatory responses to the COVID-19 pandemic; 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 June 30, 2020 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.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At June 30, 2020, 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 – an increase in the treasury yield curve beginning in the fourth quarter 2020 and into 2021 with the treasury yield curve ultimately ending up higher as of June 30, 2022 and the Federal Reserve conducting its first rate increase in the second quarter 2022. The two year, five year and ten year treasury as of June 30, 2022 ultimately 0.89%, 1.08% and 0.99% higher than actual rates as of June 30, 2020 and the Federal Funds rate is increased by 25 basis points during the second quarter 2022. The yield curve is ultimately positive sloping as treasury yields increased while the Federal Funds rate has not yet increased materially. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of June 30, 2020, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of June 30, 2020.

As of June 30, 2020  Months 1-12    Months 13-24  
Immediately rising interest rates + 300bp (static growth assumptions)   (8.20)%   (3.60)%
Immediately falling interest rates - 100bp (static growth assumptions)   (1.50)   (2.60)
Immediately rising increase rates + 400bp (static growth assumptions)   (10.90)   (5.20)

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

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

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

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

As of June 30, 2020 (in thousands)    Rates up 100bp      Rates up 200bp  
U.S. Government Agency notes  $86   $(12)
Municipal bonds   (849)   (2,697)
Mortgage backed securities:          
U.S. Government agencies and U.S. Government-sponsored enterprises   292    (899)
Collateralized mortgage obligations:          
U.S. Government agencies   655    257 
Corporate bonds   (33)   (169)
Total available-for-sale debt securities  $151   $(3,520)

  

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Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of June 30, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 2020.

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 Salisbury in its reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended June 30, 2020 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

Except as stated below, during the three months ended June 30, 2020, 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, 2019.

The virus has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and significant effects on national and local economies. The ultimate effect of the virus on Salisbury's and the Bank's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with certainty.  At this time, it is unknown how long the pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities.  Further, additional information may emerge regarding the severity of the virus and additional actions may be taken by federal, state, and local governments to contain it or treat its impact.  Changes in the behavior of customers, businesses and their employees as a result of the pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown.  As a result of the pandemic and the actions taken to contain it or reduce its impact, Salisbury may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms.  These and similar factors and events may have substantial negative effects on the business, financial condition, ability to pay dividends and results of operations of Salisbury, the Bank and its customers.

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

None

Item 3.DEFAULTS UPON SENIOR SECURITIES

None

Item 4.MINE SAFETY DISCLOSURES

Not Applicable

Item 5.OTHER INFORMATION

None

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Item 6.EXHIBITS

Exhibit No. Description
3.1  Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1   Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).
3.1.2   Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).
3.1.3   Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).
3.1.4   Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).
3.2  Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
4.1  Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed December 10, 2015).
10.1  Amendment One (the “Amendment”) to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan, effective as of March 9, 2020 (incorporated by reference to Exhibit 10.16 of Form 10-K filed on March 13, 2020).
10.2  Severance Agreement between Salisbury Bank and Trust Company and Mr. Richard J. Cantele, Jr. dated January 24, 2020 (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed January 30, 2020).
10.3  Severance Agreement between Salisbury Bank and Trust Company and John M. Davies dated January 24, 2020 (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 30, 2020).
10.4  Change in Control Agreement with Peter Albero dated January 24, 2020 (incorporated by reference to Exhibit 10.3 of Form 8-K filed January 30, 2020).
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.
     
August 7, 2020 By:   /s/ Richard J. Cantele, Jr.  
    Richard J. Cantele, Jr.,
    President and Chief Executive Officer
     
August 7, 2020 By:   /s/ Peter Albero  
    Peter Albero,
    Executive Vice President and Chief Financial Officer

 

 

 

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