SALISBURY BANCORP, INC. - Quarter Report: 2021 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended September 30, 2021

☐

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 November 2, 2021 is 2,861,697.

TABLE OF CONTENTS

PART 1 FINANCIAL INFORMATION		Page
Item 1.	Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2021 (unaudited) AND DECEMBER 31, 2020		3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)		5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited)		7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		9
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47
Item 4.	CONTROLS AND PROCEDURES	48

PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	48
Item 1A.	RISK FACTORS	48
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
Item 3.	DEFAULTS UPON SENIOR SECURITIES	48
Item 4.	MINE SAFETY DISCLOSURES	48
Item 5.	OTHER INFORMATION	48
Item 6.	EXHIBITS	49
SIGNATURES		49

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)		September 30, 2021 (unaudited)			December 31, 2020
ASSETS
Cash and due from banks	$	7,874		$	10,599
Interest bearing demand deposits with other banks		158,421			82,563
Total cash and cash equivalents		166,295			93,162
Interest bearing Time Deposits with Financial Institutions		750			750
Securities
Available-for-sale at fair value		175,568			98,411
CRA mutual fund at fair value		907			917
Federal Home Loan Bank of Boston stock at cost		1,504			1,713
Loans held-for-sale		639			2,735
Loans receivable, net (allowance for loan losses: $13,168 and $13,754)		1,057,451			1,027,738
Bank premises and equipment, net		20,056			20,355
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $5,405 and $5,207)		476			674
Accrued interest receivable		5,932			6,373
Cash surrender value of life insurance policies		25,067			21,182
Deferred taxes		2,776			2,412
Other assets		5,613			3,423
Total Assets	$	1,476,849		$	1,293,660
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	392,322		$	310,769
Demand (interest bearing)		220,533			218,869
Money market		328,392			278,146
Savings and other		224,286			189,776
Certificates of deposit		124,095			131,514
Total deposits		1,289,628			1,129,074
Repurchase agreements		10,450			7,116
Federal Home Loan Bank of Boston advances		8,905			12,639
Subordinated debt		24,460			9,883
Note payable		180			208
Finance lease obligations		1,631			1,673
Accrued interest and other liabilities		8,062			8,315
Total Liabilities		1,343,316			1,168,908
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 5,000,000;
Issued: 2,861,697 and 2,843,292
Outstanding: 2,861,697 and 2,843,292		286			284
Unearned compensation - restricted stock awards		(1,075	)		(774	)
Paid-in capital		46,278			45,264
Retained earnings		86,740			76,974
Accumulated other comprehensive income, net		1,304			3,004
Total Shareholders' Equity		133,533			124,752
Total Liabilities and Shareholders' Equity	$	1,476,849		$	1,293,660

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


		Three months ended					Nine months ended
Periods ended September 30, (in thousands, except per share amounts)		2021			2020		2021			2020
Interest and dividend income
Interest and fees on loans	$	10,264		$	10,362	$	30,642		$	30,662
Interest on debt securities
Taxable		486			396		1,398			1,260
Tax exempt		172			157		506			513
Other interest and dividends		79			87		174			229
Total interest and dividend income		11,001			11,002		32,720			32,664
Interest expense
Deposits		532			764		1,652			3,261
Repurchase agreements		5			6		13			16
Finance lease		33			35		102			106
Note payable		3			3		9			11
Subordinated debt		233			156		767			468
Federal Home Loan Bank of Boston advances		30			113		96			472
Total interest expense		836			1,077		2,639			4,334
Net interest and dividend income		10,165			9,925		30,081			28,330
Provision (release) for loan losses		400			686		(517	)		4,198
Net interest and dividend income after provision (release) for loan losses		9,765			9,239		30,598			24,132
Non-interest income
Trust and wealth advisory		1,286			1,068		3,685			3,129
Service charges and fees		1,211			711		3,536			2,214
Mortgage banking activities, net		108			736		912			1,182
(Losses) gains on CRA mutual fund		(4	)		-		(18	)		22
Gains (losses) on securities, net		7			34		(2	)		216
Bank-owned life insurance ("BOLI") income		135			719		386			986
Gain on sale of assets		73			-		73			-
Other		24			18		81			97
Total non-interest income		2,840			3,286		8,653			7,846
Non-interest expense
Salaries		3,361			3,114		9,664			8,375
Employee benefits		1,322			1,061		3,990			3,244
Premises and equipment		1,060			1,005		3,034			2,897
Write-down of assets		144			-		144			-
Data processing		632			569		1,824			1,666
Professional fees		735			635		2,090			2,020
Collections, OREO, and loan related		120			108		317			212
FDIC insurance		146			123		370			331
Marketing and community support		256			126		552			419
Amortization of intangibles		61			78		198			247
Other		447			440		1,448			1,572
Total non-interest expense		8,284			7,259		23,631			20,983
Income before income taxes		4,321			5,266		15,620			10,995
Income tax provision		868			910		3,288			1,858
Net income	$	3,453		$	4,356	$	12,332		$	9,137
Net income available to common shareholders	$	3,400		$	4,288	$	12,148		$	9,006

Basic earnings per common share	$	1.21		$	1.53	$	4.32		$	3.22
Diluted earnings per common share	$	1.20		$	1.53	$	4.30		$	3.21
Common dividends per share	$	0.31		$	0.29	$	0.90		$	0.87

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)


		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2021			2020			2021			2020
Net income	$	3,453		$	4,356		$	12,332		$	9,137
Other comprehensive income
Net unrealized (losses) gains on securities available-for-sale		(1,199	)		113			(2,153	)		1,912
Reclassification of net realized (gains) losses in net income ⁽¹⁾		(7	)		(34	)		2			(216	)
Unrealized (losses) gains on securities available-for-sale		(1,206	)		79			(2,151	)		1,696
Income tax benefit (expense)		254			(17	)		451			(357	)
Unrealized (losses) gains on securities available-for-sale, net of tax		(952	)		62			(1,700	)		1,339
Comprehensive income	$	2,501		$	4,418		$	10,632		$	10,477

^{(1) Reclassification adjustments include realized
security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income (loss) and have affected
certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains (losses) on securities, net,
the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the
three months ending September 30, 2021 and 2020 are $(1) thousand and $(7) thousand, respectively. The net tax effect for the nine months
ending September 30, 2021 and 2020 were $1 thousand and ($45) thousand, respectively.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)


Three months ended September 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation- restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares			Amount		Capital			Earnings			awards			income			equity
Balances at June 30, 2020		2,843,292		$	284	$	45,096		$	71,461		$	(1,031	)	$	2,634		$	118,444
Net income		-			-		-			4,356			-			-			4,356
Other comprehensive income, net of tax		-			-		-			-			-			62			62
Common stock dividends declared ($0.29 per share)		-			-		-			(822	)		-			-			(822	)
Issuance of restricted common stock		500			-		18			-			(18	)		-			-
Forfeiture of stock awards		(500	)		-		(21	)		-			21			-			-
Stock based compensation-restricted stock awards		-			-		78			-			122			-			200
Balances at September 30, 2020		2,843,292		$	284	$	45,171		$	74,995		$	(906	)	$	2,696		$	122,240
Balances at June 30, 2021		2,861,697		$	286	$	46,217		$	84,174		$	(1,224	)	$	2,256		$	131,709
Net income		-			-		-			3,453			-			-			3,453
Other comprehensive loss, net of tax		-			-		-			-			-			(952	)		(952	)
Common stock dividends declared ($0.31 per share)		-			-		-			(887	)		-			-			(887	)
Stock based compensation-restricted stock awards		-			-		61			-			149			-			210
Balances at September 30, 2021		2,861,697		$	286	$	46,278		$	86,740		$	(1,075	)	$	1,304		$	133,533

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


Nine months ended September 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation- restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares			Amount		Capital			Earnings			awards			income (loss)			equity
Balances at December 31, 2019		2,825,912		$	283	$	44,490		$	68,320		$	(795	)	$	1,357		$	113,655
Net income for period		-			-		-			9,137			-			-			9,137
Other comprehensive income, net of tax		-			-		-			-			-			1,339			1,339
Common stock dividends declared ($0.87 per share)		-			-		-			(2,462	)		-			-			(2,462	)
Stock options exercised		3,105			-		53			-			-			-			53
Issuance of restricted common stock		12,275			1		439			-			(440	)		-			-
Forfeiture of stock awards		(1,200	)		-		(50	)		-			50			-			-
Issuance of director's restricted stock awards		3,200			-		114			-			(114	)		-			-
Stock based compensation-restricted stock awards		-			-		125			-			393			-			518
Balances at September 30, 2020		2,843,292		$	284	$	45,171		$	74,995		$	(906	)	$	2,696		$	122,240
Balances at December 31, 2020		2,843,292		$	284	$	45,264		$	76,974		$	(774	)	$	3,004		$	124,752
Net income for period		-			-		-			12,332			-			-			12,332
Other comprehensive loss, net of tax		-			-		-			-			-			(1,700	)		(1,700	)
Common stock dividends declared ($0.90 per share)		-			-		-			(2,566	)		-			-			(2,566	)
Stock options exercised		1,755			1		30			-			-			-			31
Issuance of restricted common stock		13,850			1		623			-			(624	)		-			-
Issuance of director's restricted stock awards		2,800			-		126			-			(126	)		-			-
Stock based compensation-restricted stock awards		-			-		235			-			449			-			684
Balances at September 30, 2021		2,861,697		$	286	$	46,278		$	86,740		$	(1,075	)	$	1,304		$	133,533

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)		2021			2020
Operating Activities
Net income	$	12,332		$	9,137
Adjustments to reconcile net income to net cash provided by operating activities
(Accretion), amortization and depreciation
Securities		807			388
Bank premises and equipment		1,142			1,071
Core deposit intangible		198			247
Modification fees on Federal Home Loan Bank of Boston advances		17			64
Subordinated debt issuance costs		159			18
Mortgage servicing rights		167			84
Fair value adjustment on deposits		-			(4	)
(Gains) and losses, including write-downs
Sales and calls of securities available-for-sale, net		2			(216	)
CRA Mutual Fund		18			(22	)
Sales of loans, excluding capitalized servicing rights		(653	)		(843	)
Loss on write-down of asset		144			-
Gain on sale of premises and equipment		(73	)		-
(Release) provision for loan losses		(517	)		4,198
Proceeds from loans sold		30,364			45,246
Loans originated for sale		(27,615	)		(46,832	)
(Decrease) increase in deferred loan origination fees and costs, net		(58	)		2,321
Mortgage servicing rights originated		(276	)		(413	)
Decrease (increase) in interest receivable		441			(2,640	)
Decrease (increase) in deferred tax benefit		87			(1,359	)
(Increase) decrease in prepaid expenses		(416	)		295
Increase in cash surrender value of life insurance policies		(386	)		(986	)
Increase in income tax receivable		(429	)		-
(Decrease) increase in income tax payable		(320	)		1,412
(Increase) decrease in other assets		(509	)		42
Decrease in accrued expenses		(290	)		(584	)
(Decrease) increase in interest payable		(9	)		132
Increase (decrease) in other liabilities		366			(144	)
Stock based compensation-restricted stock awards		684			518
Net cash provided by operating activities		15,378			11,130
Investing Activities
Net redemption of Federal Home Loan Bank of Boston stock		209			84
Purchases of securities available-for-sale		(107,811	)		(27,802	)
Proceeds from sales of securities available-for-sale		3,311			12,526
Proceeds from calls of securities available-for-sale		8,500			655
Proceeds from principal payments and maturities of securities available-for-sale		15,883			12,226
Reinvestment of CRA Mutual Fund		(8	)		(12	)
Loan originations and principal collections, net		(29,323	)		(110,743	)
Recoveries of loans previously charged off		185			44
Proceeds from sale/ disposal of premises and equipment		248			314
Capital expenditures		(1,889	)		(2,384	)
Purchase of life insurance policies		(3,500	)		-
Proceeds from life insurance policy		-			3,994
Net cash used by investing activities	$	(114,195	)	$	(111,098	)

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended September 30, (in thousands)		2021			2020
Financing Activities
Increase in deposit transaction accounts, net	$	167,973		$	175,508
(Decrease) increase in time deposits, net		(7,419	)		131
Increase in securities sold under agreements to repurchase, net		3,334			2,355
Federal Home Loan Bank of Boston long term advances		-			46,001
Federal Home Loan Bank of Boston long-term maturities/payments		-			(21,000	)
Federal Home Loan Bank of Boston short-term advances, net change		-			(30,000	)
Principal payments on Amortizing Federal Home Loan Bank of Boston advance		(3,751	)		(2,072	)
Issuance of Sub Debt, net of issuance costs		24,418			-
Repayment of Sub Debt		(10,000	)		-
Principal payments on note payable		(28	)		(28	)
Decrease in finance lease obligation		(42	)		(62	)
Stock options exercised		31			53
Common stock dividends paid		(2,566	)		(2,462	)
Net cash provided by financing activities		171,950			168,424
Net increase in cash and cash equivalents		73,133			68,456
Cash and cash equivalents, beginning of period		93,162			26,885
Cash and cash equivalents, end of period	$	166,295		$	95,341

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Supplemental Cash Flow Information:
Cash paid for interest	$	2,472	$	4,124
Cash paid for income taxes		3,948		1,805
Non cash investing and financing activities:
Transfers from Fixed Assets to Other Assets	$	727	$	-

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

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2020 Annual Report on Form 10-K for the year ended December 31, 2020.

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

Recent Accounting Pronouncements

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

Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.

The Bank is working towards the completion of its ACL methodology. To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, the Bank will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.

Based on the credit quality of Salisbury's existing available for sale debt securities portfolio, which primarily consists of obligations of U.S. government agency and U.S. government-sponsored enterprise securities, including mortgage-backed securities, Salisbury does not expect the adoption of ASU 2016-13, as it relates to debt securities, to be significant. For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.

The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury expects to complete independent model validation and to finalize its documentation of ACL processes and controls by the first quarter of 2023.

In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes." The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. Under current generally accepted accounting principles, entities amortize the premium on purchased callable debt securities to the earliest call date. If a callable debt security contains additional future call dates, entities should consider whether the amortized cost basis exceeded the amount repayable by the issuer at the next call date. If so, the excess or premium should be amortized to the next call date. This ASU clarifies that the next call date is the first date when a call option at a specified price becomes exercisable. Once that date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that the financial statements are available to be issued. Salisbury is currently evaluating the impact of the transition from LIBOR to a new reference rate.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)		Amortized cost basis		Gross un-realized gains		Gross un-realized losses		Fair value
September 30, 2021
Available-for-sale
U.S. Treasury	$	10,397	$	-	$	95	$	10,302
U.S. Government Agency notes		32,093		280		99		32,274
Municipal bonds		38,525		1,331		251		39,605
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		67,059		818		698		67,179
Collateralized mortgage obligations:
U.S. Government agencies		14,844		208		41		15,011
Corporate bonds		11,000		197		-		11,197
Total securities available-for-sale	$	173,918	$	2,834	$	1,184	$	175,568
CRA mutual fund							$	907
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	1,504	$	-	$	-	$	1,504

(in thousands)		Amortized cost basis		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2020
Available-for-sale
U.S. Government Agency notes	$	7,735	$	153	$	37	$	7,851
Municipal bonds		25,831		1,787		1		27,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		35,240		1,376		43		36,573
Collateralized mortgage obligations:
U.S. Government agencies		17,054		400		-		17,454
Corporate bonds		8,750		166		-		8,916
Total securities available-for-sale	$	94,610	$	3,882	$	81	$	98,411
CRA mutual fund							$	917
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	1,713	$	-	$	-	$	1,713

In third quarter 2021, $7.0 million of available-for-sale securities were called, resulting in a pre-tax gain of $7 thousand and a related tax expense of $1.4 thousand. Salisbury did not sell any available-for-sale securities during the three month period ended September 30, 2021. Salisbury sold $3.3 million of available-for-sale securities during the nine month period ended September 30, 2021 realizing a pre-tax loss of $2 thousand and a related tax benefit of $0.4 thousand. Salisbury sold $1.9 million of available-for-sale securities during the three month period ended September 30, 2020 realizing a pre-tax gain of $34 thousand and related tax expense of $7 thousand. Salisbury sold $12.5 million of available-for-sale securities during the nine month period ended September 30, 2020 realizing a pre-tax gain of $216 thousand and a related tax expense of $45 thousand.

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


	Less than 12 Months				12 Months or Longer				Total
September 30, 2021 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	10,302	$	95	$	-	$	-	$	10,302	$	95
U.S. Government Agency notes		20,550		80		1,125		19		21,675		99
Municipal bonds		13,980		251		-		-		13,980		251
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		42,471		647		1,398		26		43,869		698
Collateralized mortgage obligations		4,625		66		-		-		4,625		41
Corporate bonds		-		-		-		-		-		-
Total temporarily impaired securities	$	91,928	$	1,139	$	2,523	$	45	$	94,451	$	1,184


	Less than 12 Months				12 Months or Longer				Total
December 31, 2020 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	2,553	$	36	$	20	$	1	$	2,573	$	37
Municipal bonds		558		1		-		-		558		1
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		3,761		42		45		1		3,806		43
Total temporarily impaired securities	$	6,872	$	79	$	65	$	2	$	6,937	$	81

The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.

September 30, 2021 (in thousands)	Maturity	Amortized cost			Fair value	Yield⁽¹⁾
U.S. Treasury	After 5 year but within 10 years	$	10,397	$	10,302	1.15	%
U.S. Government Agency notes	After 5 year but within 10 years		15,902		15,848	1.23
	Total		26,299		26,150	1.20
Municipal bonds	After 5 year but within 10 years		3,594		3,820	2.80
	After 10 years		34,931		35,785	2.61
	Total		38,525		39,605	2.63
Mortgage-backed securities, Collateralized mortgage obligations,	Securities not due at a single maturity date		98,094		98,616	1.64
Corporate bonds	After 5 years but within 10 years		11,000		11,197	4.61
Securities available-for-sale		$	173,918	$	175,568	2.04	%

⁽¹⁾Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at September 30, 2021.

U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at September 30, 2021, which approximated 0.91% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Nineteen securities had unrealized losses at September 30, 2021, which approximated 0.45% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixteen securities had unrealized losses at September 30, 2021, which approximated 1.77% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.

U.S. Government agency and U.S. Government-sponsored enterprise securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Forty nine securities had unrealized losses at September 30, 2021, which approximated 1.51% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2021.

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2021. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 - LOANS

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

(In thousands)		September 30, 2021			December 31, 2020
Residential 1-4 family	$	368,801		$	352,001
Residential 5+ multifamily		46,237			37,058
Construction of residential 1-4 family		15,429			8,814
Home equity lines of credit		24,001			27,804
Residential real estate		454,468			425,677
Commercial		314,820			310,841
Construction of commercial		47,145			31,722
Commercial real estate		361,965			342,563
Farm land		3,409			3,198
Vacant land		13,698			14,079
Real estate secured		833,540			785,517
Commercial and industrial ex PPP Loans		167,528			140,516
PPP Loans		40,652			86,632
Total Commercial and industrial		208,180			227,148
Municipal		18,061			21,512
Consumer		11,152			7,687
Loans receivable, gross		1,070,933			1,041,864
Deferred loan origination fees, net		(314	)		(372	)
Allowance for loan losses		(13,168	)		(13,754	)
Loans receivable, net	$	1,057,451		$	1,027,738
Loans held-for-sale
Residential 1-4 family	$	639		$	2,735

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

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

At September 30, 2021 and December 31, 2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $79.6 million and $65.3 million, respectively.

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 due to the COVID-19 virus pandemic ("virus"). Approximately 41% of the Bank's commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 13% of the Bank's commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank's commercial loans are to educational institutions and approximately 6% of Salisbury's commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury's commercial real estate exposure as a percentage of the Bank's total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 173% as of September 30, 2021 and 182% at December 31, 2020 compared to the regulatory monitoring guideline of 300%.

Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration ("SBA") guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

In 2021 Salisbury processed 472 applications for loans of approximately $48.2 million under the SBA's Paycheck Protection Program (PPP). Interest income is accrued on the unpaid principal balance of these loans. Deferred loan origination fees and costs on PPP loans are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three and nine months ended September 30, 2021, Salisbury recorded interest income of $0.1 million and $0.6 million, respectively, and net fee income of approximately $0.7 million and $2.3 million, respectively, on PPP loans. Total net fees on PPP loans originated in 2020 and 2021, that will be recognized over the life of the loans, were estimated at $3.1 million and $2.0 million, respectively. In 2020 and the nine-month period ended September 30, 2021, Salisbury recognized essentially all of the net fees on PPP loans originated in 2020. In the nine-month period ended September 30, 2021, Salisbury recognized approximately $0.6 million of the net fees on PPP loans originated in 2021. Salisbury had gross PPP loan balances of $40.7 million on its consolidated balance sheet at September 30, 2021 compared with $86.6 million at December 31, 2020. Approximately $2.9 million of the September 30, 2021 balance related to PPP loans originated in 2020 and $37.8 million related to PPP loans originated in 2021.

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").

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
September 30, 2021
Residential 1-4 family	$	361,116	$	4,139	$	3,546	$	-	$	-	$	368,801
Residential 5+ multifamily		44,484		83		1,670		-		-		46,237
Construction of residential 1-4 family		15,301		128		-		-		-		15,429
Home equity lines of credit		23,706		209		86		-		-		24,001
Residential real estate		444,607		4,559		5,302		-		-		454,468
Commercial		274,004		5,654		35,162		-		-		314,820
Construction of commercial		47,145		-		-		-		-		47,145
Commercial real estate		321,149		5,654		35,162		-		-		361,965
Farm land		1,610		1,223		576		-		-		3,409
Vacant land		13,621		42		35		-		-		13,698
Real estate secured		780,987		11,478		41,075		-		-		833,540
Commercial and industrial		205,140		500		2,540		-		-		208,180
Municipal		18,061		-		-		-		-		18,061
Consumer		11,132		1		19		-		-		11,152
Loans receivable, gross	$	1,015,320	$	11,979	$	43,634	$	-	$	-	$	1,070,933

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2020
Residential 1-4 family	$	342,243	$	5,615	$	4,143	$	-	$	-	$	352,001
Residential 5+ multifamily		35,272		90		1,696		-		-		37,058
Construction of residential 1-4 family		8,814		-		-		-		-		8,814
Home equity lines of credit		27,393		257		154		-		-		27,804
Residential real estate		413,722		5,962		5,993		-		-		425,677
Commercial		276,866		15,565		18,410		-		-		310,841
Construction of commercial		31,493		-		229		-		-		31,722
Commercial real estate		308,359		15,565		18,639		-		-		342,563
Farm land		1,612		-		1,586		-		-		3,198
Vacant land		13,992		50		37		-		-		14,079
Real estate secured		737,685		21,577		26,255		-		-		785,517
Commercial and industrial		224,906		1,271		632		339		-		227,148
Municipal		21,512		-		-		-		-		21,512
Consumer		7,660		-		27		-		-		7,687
Loans receivable, gross	$	991,763	$	22,848	$	26,914	$	339	$	-	$	1,041,864

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


			Past due

									180		30		Accruing
(in thousands)									days		days		90 days
			30-59		60-89		90-179		and		and		and		Non-
	Current		days		days		days		over		over		over		accrual
September 30, 2021
Residential 1-4 family	$	368,034	$	167	$	84	$	442	$	74	$	767	$	-	$	1,235
Residential 5+ multifamily		45,376		-		-		-		861		861		-		861
Construction of residential 1-4 family		15,429		-		-		-		-		-		-		-
Home equity lines of credit		23,831		105		14		-		51		170		-		86
Residential real estate		452,670		272		98		442		986		1,798		-		2,182
Commercial		314,342		200		24		-		254		478		-		1,954
Construction of commercial		47,145		-		-		-		-		-		-		-
Commercial real estate		361,487		200		24		-		254		478		-		1,954
Farm land		3,279		130		-		-		-		130		-		576
Vacant land		13,663		35		-		-		-		35		-		35
Real estate secured		831,099		637		122		442		1,240		2,441		-		4,747
Commercial and industrial		207,792		289		53		-		46		388		11		243
Municipal		18,061		-		-		-		-		-		-		-
Consumer		11,108		4		40		-		-		44		-		-
Loans receivable, gross	$	1,068,060	$	930	$	215	$	442	$	1,286	$	2,873	$	11	$	4,990


			Past due

									180		30		Accruing
(in thousands)									days		days		90 days
			30-59		60-89		90-179		and		and		and		Non-
	Current		days		days		days		over		over		over		accrual
December 31, 2020
Residential 1-4 family	$	349,382	$	1,419	$	308	$	673	$	219	$	2,619	$	-	$	1,508
Residential 5+ multifamily		36,197		-		-		-		861		861		-		861
Construction of residential 1-4 family		8,814		-		-		-		-		-		-		-
Home equity lines of credit		27,522		157		9		-		116		282		-		154
Residential real estate		421,915		1,576		317		673		1,196		3,762		-		2,523
Commercial		307,927		1,855		530		95		434		2,914		-		2,544
Construction of commercial		31,722		-		-		-		-		-		-		-
Commercial real estate		339,649		1,855		530		95		434		2,914		-		2,544
Farm land		2,594		154		450		-		-		604		-		158
Vacant land		14,079		-		-		-		-		-		-		37
Real estate secured		778,237		3,585		1,297		768		1,630		7,280		-		5,262
Commercial and industrial		224,496		2,148		457		1		46		2,652		12		374
Municipal		21,512		-		-		-		-		-		-		-
Consumer		7,677		10		-		-		-		10		-		-
Loans receivable, gross	$	1,031,922	$	5,743	$	1,754	$	769	$	1,676	$	9,942	$	12	$	5,636

Troubled Debt Restructurings (TDRs)

For the three and nine month periods ended September 30, 2021, one residential loan with a loan balance of $74 thousand was modified in a troubled debt restructuring for term extension. For third quarter 2020 one residential loan with a loan balance of $180 thousand was modified in a troubled debt restructuring for term extension. For the nine month period ended September 2020, there were two troubled debt restructurings: one residential loan with a loan balance of $180 thousand was modified for term extension and one CRE loan of $133 thousand was modified for workout refinance, which required an extension of new funds to pay outstanding taxes.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:


	Three months ended September 30, 2021												Three months ended September 30, 2020
(in thousands)	Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,377	$	393		$	(35	)	$	5	$	2,740	$	3,048	$	69		$	(11	)	$	1	$	3,107
Residential 5+ multifamily		545		156			-			-		701		589		14			-			-		603
Construction of residential 1-4 family		95		41			-			-		136		87		10			-			-		97
Home equity lines of credit		190		26			(20	)		-		196		283		(8	)		-			-		275
Residential real estate		3,207		616			(55	)		5		3,773		4,007		85			(11	)		1		4,082
Commercial		6,212		(165	)		-			119		6,166		5,160		317			(14	)		1		5,464
Construction of commercial		668		118			-			-		786		205		195			-			-		400
Commercial real estate		6,880		(47	)		-			119		6,952		5,365		512			(14	)		1		5,864
Farm land		32		(1	)		-			-		31		60		5			-			-		65
Vacant land		87		(1	)		-			1		87		182		(11	)		-			-		171
Real estate secured		10,206		567			(55	)		125		10,843		9,614		591			(25	)		2		10,182
Commercial and industrial		1,256		73			-			3		1,332		1,515		(44	)		-			1		1,472
Municipal		32		(1	)		-			-		31		36		5			-			-		41
Consumer		66		62			(19	)		6		115		74		40			(41	)		7		80
Unallocated		1,148		(301	)		-			-		847		1,132		94			-			-		1,226
Totals	$	12,708	$	400		$	(74	)	$	134	$	13,168	$	12,371	$	686		$	(66	)	$	10	$	13,001


	Nine months ended September 30, 2021													Nine months ended September 30, 2020
(in thousands)	Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries			Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,646	$	129		$	(44	)	$	9		$	2,740	$	2,393	$	716		$	(11	)	$	9	$	3,107
Residential 5+ multifamily		686		15			-			-			701		446		199			(42	)		-		603
Construction of residential 1-4 family		65		71			-			-			136		75		22			-			-		97
Home equity lines of credit		252		(36	)		(20	)		-			196		197		78			-			-		275
Residential real estate		3,649		179			(64	)		9			3,773		3,111		1,015			(53	)		9		4,082
Commercial		6,546		(509	)		(7	)		136			6,166		3,742		1,719			(17	)		20		5,464
Construction of commercial		596		208			(18	)		-			786		104		296			-			-		400
Commercial real estate		7,142		(301	)		(25	)		136			6,952		3,846		2,015			(17	)		20		5,864
Farm land		59		(28	)		-			-			31		47		18			-			-		65
Vacant land		180		(94	)		-			1			87		71		100			-			-		171
Real estate secured		11,030		(244	)		(89	)		146			10,843		7,075		3,148			(70	)		29		10,182
Commercial and industrial		1,397		17			(131	)		49			1,332		1,145		326			-			1		1,472
Municipal		43		(12	)		-			-			31		46		(5	)		-			-		41
Consumer		77		82			(34	)		(10	)		115		60		72			(66	)		14		80
Unallocated		1,207		(360	)		-			-			847		569		657			-			-		1,226
Totals	$	13,754	$	(517	)	$	(254	)	$	185		$	13,168	$	8,895	$	4,198		$	(136	)	$	44	$	13,001

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


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
September 30, 2021
Residential 1-4 family	$	365,721	$	2,737	$	3,080	$	3	$	368,801	$	2,740
Residential 5+ multifamily		45,283		701		954		-		46,237		701
Construction of residential 1-4 family		15,429		136		-		-		15,429		136
Home equity lines of credit		23,915		196		86		-		24,001		196
Residential real estate		450,348		3,770		4,120		3		454,468		3,773
Commercial		310,947		6,123		3,873		43		314,820		6,166
Construction of commercial		47,145		786		-		-		47,145		786
Commercial real estate		358,092		6,909		3,873		43		361,965		6,952
Farm land		2,833		31		576		-		3,409		31
Vacant land		13,663		87		35		-		13,698		87
Real estate secured		824,936		10,797		8,604		46		833,540		10,843
Commercial and industrial		207,859		1,288		321		44		208,180		1,332
Municipal		18,061		31		-		-		18,061		31
Consumer		11,134		115		18		-		11,152		115
Unallocated allowance		-		847		-		-		-		847
Totals	$	1,061,990	$	13,078	$	8,943	$	90	$	1,070,933	$	13,168


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2020
Residential 1-4 family	$	347,695	$	2,445	$	4,306	$	201	$	352,001	$	2,646
Residential 5+ multifamily		36,094		686		964		-		37,058		686
Construction of residential 1-4 family		8,814		65		-		-		8,814		65
Home equity lines of credit		27,650		232		154		20		27,804		252
Residential real estate		420,253		3,428		5,424		221		425,677		3,649
Commercial		305,193		6,298		5,648		248		310,841		6,546
Construction of commercial		31,722		596		-		-		31,722		596
Commercial real estate		336,915		6,894		5,648		248		342,563		7,142
Farm land		3,040		59		158		-		3,198		59
Vacant land		13,912		178		167		2		14,079		180
Real estate secured		774,120		10,559		11,397		471		785,517		11,030
Commercial and industrial		226,662		1,223		486		174		227,148		1,397
Municipal		21,512		43		-		-		21,512		43
Consumer		7,661		59		26		18		7,687		77
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754

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


September 30, 2021 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,025,195	$	9,490	$	-	$	-	$	1,025,195	$	9,490
Potential problem loans ¹		36,795		2,741		-		-		36,795		2,741
Impaired loans		-		-		8,943		90		8,943		90
Unallocated allowance		-		847		-		-		-		847
Totals	$	1,061,990	$	13,078	$	8,943	$	90	$	1,070,933	$	13,168


December 31, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,011,757	$	10,424	$	-	$	-	$	1,011,757	$	10,424
Potential problem loans ¹		18,198		1,460		-		-		18,198		1,460
Impaired loans		-		-		11,909		663		11,909		663
Unallocated allowance		-		1,207		-		-		-		1,207
Totals	$	1,029,955	$	13,091	$	11,909	$	663	$	1,041,864	$	13,754

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

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


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
September 30, 2021
Residential	$	45	$	47	$	1,120	$	3	$	2	$	3,989	$	4,404	$	3,642	$	52
Home equity lines of credit		-		-		22		-		-		86		127		156		-
Residential real estate		45		47		1,142		3		2		4,075		4,531		3,798		52
Commercial		1,007		1,033		1,921		43		33		2,866		3,377		3,002		47
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		576		756		415		-
Vacant land		-		-		73		-		-		35		39		52		-
Real estate secured		1,052		1,080		3,136		46		35		7,552		8,703		7,267		99
Commercial and industrial		221		228		336		44		3		100		270		91		-
Consumer		-		-		8		-		-		18		18		15		1
Totals	$	1,273	$	1,308	$	3,480	$	90	$	38	$	7,670	$	8,991	$	7,373	$	100

Note: The income recognized is for the nine month period ended September 30, 2021.


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
September 30, 2020
Residential	$	3,854	$	3,972	$	4,034	$	383	$	67	$	1,959	$	2,335	$	1,912	$	20
Home equity lines of credit		75		75		77		14		-		158		507		111		1
Residential real estate		3,929		4,047		4,111		397		67		2,117		2,842		2,023		21
Commercial		3,099		3,148		3,401		270		104		1,298		1,940		978		31
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		166		322		177		-
Vacant land		38		40		40		3		-		132		148		136		7
Real estate secured		7,066		7,235		7,552		670		171		3,713		5,252		3,314		59
Commercial and industrial		824		827		422		380		3		52		205		59		2
Consumer		30		30		33		18		1		-		-		-		-
Totals	$	7,920	$	8,092	$	8,007	$	1,068	$	175	$	3,765	$	5,457	$	3,373	$	61

Note: The income recognized is for the nine month period ended September 30, 2020.


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
December 31, 2020
Residential	$	2,971	$	3,040	$	3,862	$	201	$	72	$	2,299	$	2,676	$	1,993	$	27
Home equity lines of credit		75		75		76		20		-		79		117		103		-
Residential real estate		3,046		3,115		3,938		221		72		2,378		2,793		2,096		27
Commercial		3,058		3,117		3,325		248		132		2,590		3,203		1,139		91
Construction of commercial		-		-		-		-		-		-		-		-		-
Farm land		-		-		-		-		-		158		319		173		-
Vacant land		37		40		39		2		-		130		145		134		9
Real estate secured		6,141		6,272		7,302		471		204		5,256		6,460		3,542		127
Commercial and industrial		416		424		482		174		4		70		283		58		2
Consumer		26		26		31		18		2		-		-		-		-
Totals	$	6,583	$	6,722	$	7,815	$	663	$	210	$	5,326	$	6,743	$	3,600	$	129

NOTE 4 - LEASES

The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of September 30, 2021 and December 31, 2020 and consolidated income statements for the nine months and three months ended September 30, 2021 and 2020.

($ in thousands, except lease term and discount rate)	Classification		September 30, 2021		December 31, 2020
Assets
Operating	Other assets	$	1,076	$	1,182
Finance	Bank premises and equipment ¹		1,326		1,402
Total Leased Assets		$	2,402	$	2,584
Liabilities
Operating	Other liabilities	$	1,076	$	1,182
Finance	Finance lease		1,631		1,673
Total Lease Liabilities		$	2,707	$	2,855
1 Net of accumulated depreciation of $471 thousand and $396 thousand, respectively.

Lease Cost	Classification		Nine months ended September 30, 2021		Three months ended September 30, 2021
Operating leases	Premises and equipment	$	221	$	74
Finance leases:
Amortization of leased assets	Premises and equipment		76		25
Interest on finance leases	Interest expense		103		36
Total lease cost		$	400	$	135

Lease Cost	Classification		Nine months ended September 30, 2020		Three months ended September 30, 2020
Operating leases	Premises and equipment	$	188	$	64
Finance leases:
Amortization of leased assets	Premises and equipment		76		25
Interest on finance leases	Interest expense		107		36
Total lease cost		$	371	$	125

Weighted Average Remaining Lease Term	September 30, 2021		December 31, 2020
Operating leases	7.0 years		7.6 years
Financing leases	13.7 years		14.2 years
Weighted Average Discount Rate ¹
Operating leases	3.6	%	3.7	%
Financing leases	8.3	%	8.4	%
1 Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of September 30, 2021.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2021	$	64		$	48
2022		227			195
2023		167			198
2024		130			200
2025		137			203
Thereafter		437			1,752
Total future minimum lease payments		1,162			2,596
Less amount representing interest		(86	)		(965	)
Total present value of net future minimum lease payments	$	1,076		$	1,631

NOTE 5 - ASSETS HELD FOR SALE

The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation process, the Bank has entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. As of September 30, 2021, the current branch location met the accounting guidance criteria to be classified as assets held for sale. There are no liabilities held for sale associated with this location.

Following is a summary of the assets held for sale, which are recorded in other assets within the consolidated balance sheet as of September 30, 2021:

Buildings and leasehold improvements

$700,000

An impairment expense of $144 thousand was recorded in third quarter 2021 as a result of the net book value exceeding the agreed upon sale price. This impairment expense was recorded within the consolidated statement of income within non-interest expense and within write-down of assets on the consolidated statement of cash flows.

NOTE 6 - MORTGAGE SERVICING RIGHTS

(in thousands)		September 30, 2021		December 31, 2020
Residential mortgage loans serviced for others	$	142,873	$	134,428
Fair value of mortgage servicing rights		999		762

Changes in mortgage servicing rights are as follows:


		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2021			2020			2021			2020
Mortgage Servicing Rights
Balance, beginning of period	$	748		$	353		$	621		$	238
Originated		18			270			276			413
Amortization (1)		(36	)		(56	)		(167	)		(84	)
Balance, end of period	$	730		$	567		$	730		$	567
Valuation Allowance
Balance, beginning of period		-			-			(9	)		-
Decrease in impairment reserve ⁽¹⁾		-			-			9			-
Balance, end of period		-			-			-			-
Mortgage servicing rights, net	$	730		$	567		$	730		$	567

⁽¹⁾

Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 7 - PLEDGED ASSETS

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

(in thousands)		September 30, 2021		December 31, 2020
Securities available-for-sale (at fair value)	$	66,877	$	54,581
Loans receivable (at book value)		382,840		420,415
Total pledged assets	$	449,717	$	474,996

At September 30, 2021, securities were pledged as follows: $56.41 million to secure public deposits, $10.45 million to secure repurchase agreements and $0.02 million to secure FHLBB advances. In addition to securities, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 8 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

Salisbury is exposed to certain risk arising from both its business operations and economic conditions. The Bank principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Bank manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Bank enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Bank uses derivative financial instruments to manage differences in the amount, timing, and duration of the Bank's known or expected cash receipts and its known or expected cash payments principally related to its portfolio of loans to first-time home buyers.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

As of September 30, 2021 and December 31, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:


Line Item in the Statement of Financial Position in Which the Hedged Item is Included	Carrying Amount of the Hedged Assets				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(in thousands)	September 30, 2021		December 31, 2020		September 30, 2021			December 31, 2020
Loans receivable⁽¹⁾	$	9,996	$	9,996	$	(4	)	$	(4	)
Total	$	9,996	$	9,996	$	(4	)	$	(4	)

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $39.7 million; the cumulative basis adjustment associated with these hedging relationships was $4 thousand; and the amount of the designated hedged item was $10.0 million.

The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30, 2021 and December 31, 2020.


	As of September 30, 2021					As of December 31, 2020
(in thousands)	Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other assets	$	4	Other Assets	$	4
Total Derivatives designated as hedge instruments				$	4		$	4

The tables below present the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2021 and 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.


		Three months ended September 30, 2021					Nine months ended September 30, 2021
(in thousands)		Interest Income			Interest Expense		Interest Income			Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	1		$	-	$	-		$	-

Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts
Hedged items		4			-		3			-
Derivatives designated as hedging instruments	$	(3	)	$	-	$	(3	)	$	-


		Three months ended September 30, 2020					Nine months ended September 30, 2020
(in thousands)		Interest Income			Interest Expense		Interest Income		Interest Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	-		$	-	$	-	$	-

Gain or (loss) on fair value hedging relationships in Subtopic 815-20 Interest contracts
Hedged items		3			-		-		3
Derivatives designated as hedging instruments	$	(3	)	$	-	$	-	$	(3	)

Credit-Risk Related Contingent Features

Salisbury has an agreement with its derivative counterparty that contains a provision that provides that if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.

The agreement also contains a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then Salisbury could be required to post cash or certain marketable securities issued by the U.S. Treasury or U.S. Government-sponsored enterprises as collateral. The minimum amount that Salisbury would have to post as collateral is $250 thousand.

As of September 30, 2021, the fair value of derivative was $4 thousand in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. As of September 30, 2021, Salisbury has not posted any collateral related to these agreements.

NOTE 9 - 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						Nine months ended
Periods ended September 30, (in thousands, except per share data)		2021			2020			2021			2020
Net income	$	3,453		$	4,356		$	12,332		$	9,137
Less: Undistributed earnings allocated to participating securities		(53	)		(67	)		(184	)		(131	)
Net income allocated to common stock	$	3,400		$	4,288		$	12,148		$	9,006
Weighted-average common shares issued		2,862			2,843			2,853			2,835
Less: Unvested restricted stock awards		(45	)		(44	)		(43	)		(41	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,817			2,799			2,810			2,794
Add: Dilutive effect of stock options		26			8			20			8
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,843			2,807			2,830			2,802
Earnings per common share (basic)	$	1.21		$	1.53		$	4.32		$	3.22
Earnings per common share (diluted)	$	1.20		$	1.53		$	4.30		$	3.21

NOTE 10 - SHAREHOLDERS' EQUITY

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As of September 30, 2021, the Company and the Bank met each of their capital requirements.

The Company and the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as "well capitalized" under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At September 30, 2021, the Bank exceeded the minimum requirement for the capital conservation buffer. As of September 30,2021, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

On March 31, 2021, Salisbury issued $25 million of subordinated debt that matures in 2031. During the first five years, the debt is non-callable, and the coupon is fixed at 3.50%. After year five, the coupon will float at the then three-month Secured Overnight Financing Rate plus 280 basis points. At March 31, 2021, $15 million of the net proceeds was retained at the holding company level and the remainder was allocated to the Bank. On May 28, 2021, Salisbury redeemed in full the $10 million of subordinated debt that was issued in 2015 and retained at the holding company.

As of September 30, 2021, Salisbury did not repurchase any of its common shares pursuant to the Common Stock Repurchase Plan approved by the Board of Directors in March 2021.

The Bank's risk-weighted assets at September 30, 2021 and December 31, 2020 were $1.05 billion and $938.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:


	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021
Total Capital (to risk-weighted assets)	$	149,213		14.20	%	$	84,080		8.0	%	$	110,355		10.5	%	$	105,100		10.0	%

Tier 1 Capital (to risk-weighted assets)		136,074		12.95			63,060		6.0			89,335		8.5			84,080		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		136,074		12.95			47,295		4.5			73,570		7.0			68,315		6.5

Tier 1 Capital (to average assets)	$	136,074		9.31		$	58,451		4.0		$	58,451		4.0		$	73,063		5.0
December 31, 2020
Total Capital (to risk-weighted assets)	$	127,254		13.57	%	$	75,037		8.0	%	$	98,486		10.5	%	$	93,796		10.0	%

Tier 1 Capital (to risk-weighted assets)		115,503		12.31			56,278		6.0			79,727		8.5			75,037		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		115,503		12.31			42,208		4.5			66,657		7.0			60,967		6.5

Tier 1 Capital (to average assets)	$	115,503		8.90		$	51,907		4.0		$	51,907		4.0		$	64,884		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 11 - BENEFITS

401(k)

Salisbury's 401(k) Plan expense was $253 thousand and $229 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $847 thousand and $667 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

ESOP

Salisbury offers an ESOP to eligible employees. Under the ESOP, Salisbury may make discretionary contributions to the ESOP. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $55 thousand and $56 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $184 thousand and $170 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Other Retirement Plans

Salisbury adopted ASC 715-60, "Compensation - Retirement Benefits - Defined Benefit Plans - Other Post-retirement" and recognized a liability for Salisbury's future post-retirement benefit obligations under endorsement split dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $1,031 thousand and $771 thousand at September 30, 2021, and December 31, 2020, respectively. Other post-retirement benefit obligation expense (credit) for endorsement split dollar life insurance arrangements was $86 thousand and $(32) thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $259 thousand and $7 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. A credit was recognized in third quarter 2020 to reflect the payout of insurance proceeds and the corresponding reduction in liability due to the death of a covered former employee.

On September 1, 2021, the Bank and Richard Cantele, President and Chief Executive Officer of the Bank and of the Company, entered into an updated split dollar agreement which superseded and replaced a prior split dollar agreement between the parties. In addition, the Bank and named executive officers Peter Albero and John Davies (together with Mr. Cantele, the "executive(s)"), entered into updated split dollar agreements which superseded and replaced their existing split dollar agreements (collectively with the split dollar agreement for Richard Cantele, the "Updated Agreements"). The Updated Agreements for Messrs. Albero and Davies are identical and substantially similar to the split dollar agreement for Mr. Cantele, except as discussed below. The Updated Agreements provide for a death benefit during employment of each executive equal to the lesser of (i) three times the executive's base salary, not to exceed $800,000, less $50,000 or (ii) the net amount at risk, defined as the difference between the death benefit payable on death and the accrued cash value of the life insurance policy at the time of death. Mr. Cantele's post-retirement death benefit will be 1.5 times his final base salary, not to exceed $800,000. If Messrs. Albero and Davies retire after reaching age 65, the executives will be entitled to a post-retirement death benefit equal to 1.5 times final base salary at age 65 through age 71, 1.0 times final base salary at age 72 through 79, and 0.5 times final base salary at age 80 and later, provided that the death benefit shall not exceed $800,000. In the event of a change in control of the Bank, the executive will become fully vested in the death benefit under the policy, including the post-retirement death benefit, and the policy cannot be terminated or amended without the express written consent of the executive. The Bank is the sole beneficiary of any death proceeds remaining after the aforementioned death proceeds have been paid to the designated beneficiaries.

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $29 thousand and $33 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $86 thousand and $100 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers, including a severance agreement with Mr. Cantele, President and Chief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the New York Region and Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with eleven other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and other benefits. Such agreements, and their subsequent amendments, are designed to allow Salisbury to retain the services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury's operations.

NOTE 12 - LONG TERM INCENTIVE PLANS

Restricted stock

Restricted stock expense was $149 thousand and $122 thousand, respectively, for the three month periods ended September 30, 2021 and 2020, and $449 thousand and $393 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. The tax benefit from restricted stock expense was $27 thousand and $22 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $81 thousand and $71 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020. In second quarter 2021, Salisbury granted a total of 16,650 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 $746 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of September 30, 2021 and 2020 totaled $1,075 thousand and $906 thousand, respectively. There were no forfeitures in the third quarter or year to date for 2021. There were forfeitures of $21 thousand or 500 shares in the third quarter of 2020 and forfeitures of $50 thousand or 1,200 shares for year to date 2020.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan (Phantom). Salisbury paid out the final tranche of these awards in January 2021. The performance goal for awards granted under the RSU plan in 2019 is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. No performance-based restricted stock units were awarded prior to 2019.

On July 29, 2020, the Compensation Committee granted an additional 7,250 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank's tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is achieved, vesting will occur no later than March 15, 2023.

On June 23, 2021, the Compensation Committee granted an additional 7,400 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank's tangible book value by $7.00 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 ($9.00 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 15, 2024.

The fair value of the awards granted under the RSU plan at the grant date was $354 thousand, $264 thousand, and $280 thousand, respectively, for those grants awarded in 2021, 2020 and 2019. Compensation expense of $61 thousand and $80 thousand was recorded with respect to these RSUs for the three months ended September 2021 and 2020, and $236 thousand and $127 thousand for the nine months ended September 30, 2021 and 2020, respectively. The shares noted above are contingently issuable only upon attainment of the minimum performance goal. The tax benefit from performance restricted stock expense was $11 thousand and $14 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $42 thousand and $23 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Short Term Incentive Plan (STIP)

Salisbury offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP expense, which is included in compensation expenses, totaled $210 thousand and $189 thousand for the three months ended September 30, 2021 and 2020, and expenses of $757 thousand and $530 thousand for the first nine months of 2021 and 2020, respectively. The tax benefit from (STIP) expense was $38 thousand and $34 thousand, respectively, for the three month periods ended September 30, 2021 and 2020; and $136 thousand and $95 thousand, respectively, for the nine month periods ended September 30, 2021 and 2020.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In third quarter 2021 and third quarter 2020, no stock options were exercised. In first quarter 2021 and first quarter 2020, a former Riverside Bank executive exercised 1,755 stock options at $17.04 per share. Also, in first quarter 2020, a former Riverside employee exercised 1,350 stock options at $17.04 per share.

NOTE 13 - FAIR VALUE OF ASSETS AND LIABILITIES

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

Salisbury adopted ASC 820-10, "Fair Value Measurement - Overall," which provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs") are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury's market assumptions. These two types of inputs have created the following fair value hierarchy:

•

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

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

•

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

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

•

Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

•

Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

•

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.

•

Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

•

Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.

Assets measured at fair value are as follows:


	Fair Value Measurements Using						Assets and Liabilities at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
September 30, 2021
Assets at fair value on a recurring basis
U.S. Treasury	$	-	$	10,302	$	-	$	10,302
U.S. Government Agency notes		-		32,274		-		32,274
Municipal bonds		-		39,605		-		39,605
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		-		67,179		-		67,179
Collateralized mortgage obligations:
U.S. Government agencies		-		15,011		-		15,011
Corporate bonds		-		11,197		-		11,197
Securities available-for-sale	$	-	$	175,568	$	-	$	175,568
CRA mutual funds	$	907	$	-	$	-	$	907
Derivative financial instruments	$	-	$	4	$	-	$	4
Assets at fair value on a non-recurring basis
Assets held for sale ¹	$	700	$	-	$	-	$	700


December 31, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	-	$	7,851	$	-	$	7,851
Municipal bonds		-		27,617		-		27,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		-		36,573		-		36,573
Collateralized mortgage obligations:
U.S. Government agencies		-		17,454		-		17,454
Corporate bonds		-		8,916		-		8,916
Securities available-for-sale	$	-	$	98,411	$	-	$	98,411
CRA mutual funds	$	917	$	-	$	-	$	917
Derivative financial instruments	$	-	$	4	$	-	$	4

¹ The Bank is in the process of relocating its retail branch in Poughkeepsie, New York to a leased facility nearby. As part of this relocation, the Bank entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch. This agreement resulted in a pre-tax loss of $144 thousand in third quarter 2021. At December 30, 2020, Salisbury did not have any assets measured at fair value on a non-recurring basis.

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


(in thousands)	Carrying		Estimated		Fair value measurements using
	value		fair value		Level 1		Level 2		Level 3
September 30, 2021
Financial Assets
Cash and cash equivalents	$	166,295	$	166,295	$	166,295	$	-	$	-
Interest bearing time deposits with financial institutions		750		750		750		-		-
Securities available-for-sale		175,568		175,568		-		175,568		-
CRA mutual fund		907		907		907		-		-
Federal Home Loan Bank of Boston stock		1,504		1,504		1,504		-		-
Loans held-for-sale		639		649		-		-		649
Loans receivable, net		1,057,451		1,051,127		-		-		1,051,127
Accrued interest receivable		5,932		5,932		5,932		-		-
Derivative financial instruments		4		4		-		4		-
Cash surrender value of life insurance policies		25,067		25,067		25,067		-		-
Financial Liabilities
Demand (non-interest-bearing)	$	392,322	$	392,322	$	-	$	392,322	$	-
Demand (interest-bearing)		220,533		220,533		-		220,533		-
Money market		328,392		328,392		-		328,392		-
Savings and other		224,286		224,286		-		224,286		-
Certificates of deposit		124,095		124,946		-		124,946		-
Deposits		1,289,628		1,290,747		-		1,290,747		-
Repurchase agreements		10,450		10,450		-		10,450		-
FHLBB advances		8,905		9,000		-		9,000		-
Subordinated debt		24,460		24,276		-		24,276		-
Note payable		180		181		-		181		-
Finance lease liability		1,631		1,732		-		-		1,732
Accrued interest payable		34		34		34		-		-


December 31, 2020
Financial Assets
Cash and cash equivalents	$	93,162	$	93,162	$	93,162	$	-	$	-
Interest bearing time deposits with financial institutions		750		750		750		-		-
Securities available-for-sale		98,411		98,411		-		98,411		-
CRA mutual fund		917		917		917		-		-
Federal Home Loan Bank of Boston stock		1,713		1,713		1,713		-		-
Loans held-for-sale		2,735		2,790		-		-		2,790
Loans receivable, net		1,027,738		1,057,234		-		-		1,057,234
Accrued interest receivable		6,373		6,373		6,373		-		-
Cash surrender value of life insurance policies		21,182		21,182		21,182		-		-
Derivative financial instruments		4		4		-		4		-
Financial Liabilities
Demand (non-interest-bearing)	$	310,769	$	310,769	$	-	$	310,769	$	-
Demand (interest-bearing)		218,869		218,869		-		218,869		-
Money market		278,146		278,146		-		278,146		-
Savings and other		189,776		189,776		-		189,776		-
Certificates of deposit		131,514		132,875		-		132,875		-
Deposits		1,129,074		1,130,435		-		1,130,435		-
Repurchase agreements		7,116		7,116		-		7,116		-
FHLBB advances		12,639		12,786		-		12,786		-
Subordinated debt		9,883		10,027		-		10,027		-
Note payable		208		212		-		212		-
Finance lease liability		1,673		1,920		-		-		1,920
Accrued interest payable		43		43		43		-		-

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in other assets and other liabilities. During the three months ended March 31, 2021, Salisbury issued new subordinated debt, and during the three months ended June 30, 2021 paid off its previously issued subordinated debt in its entirety. Salisbury categorized its new subordinated debt within level 2 of the fair value hierarchy.

NOTE 14 - SUBSEQUENT EVENTS

On October 1, 2021, the bank entered into a lease agreement for a new branch in Poughkeepsie, New York. The lease is for an initial period of 10 years with two ten-year optional renewal periods.

On October 20, 2021 the Board of Directors declared a dividend of $0.31 per common share payable on November 26, 2021 to shareholders of record as of November 12, 2021.

Item 2.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. ("Salisbury" or the "Company") and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2020. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the "SEC").

BUSINESS

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

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

Critical Accounting Policies and Estimates

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

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

Allowance for Loan Losses

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

Goodwill and Intangible Assets

Available-For-Sale Securities

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

FINANCIAL CONDITION

Securities and Short Term Funds

During the first nine months of 2021, securities available-for-sale increased $77.2 million to $175.6 million at September 30, 2021. Cash and cash equivalents (non-time interest-bearing deposits with other banks and interest-bearing demand deposits with other banks) increased $73.1 million to $166.3 million at September 30, 2021. The increase in cash and cash equivalents was driven by growth in customer deposits during the nine-month period ended September 30, 2021. Salisbury actively invested a portion of these additional funds into higher yielding securities to enhance net interest margin and earnings.

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at September 30, 2021.

Loans

Net loans receivable increased $29.8 million, or 2.9%, to $1.057 billion at September 30, 2021, compared with $1.028 billion at December 31, 2020. PPP loan balances declined from $86.6 million at December 31, 2020 to $40.7 million at September 30, 2021 due to the forgiveness of PPP loans by the SBA. Excluding PPP loans, net loans receivable increased approximately $75.7 million, or 8.0%, compared with December 31, 2020. The increase reflected broad-based growth across Salisbury's loan portfolio. For the nine months ended September 30, 2021, commercial real estate loan balances increased $19.4 million, or 5.7%, and commercial and industrial loan balances, excluding PPP loans, increased $27.0 million, or 19.2%. Additionally, residential loans receivable increased $28.8 million, or 6.8%, from year end 2020, reflecting continued high demand for homes in less densely populated areas as a result of COVID-19. The allowance for loan losses of $13.2 million at September 30, 2021 declined by $0.6 million from December 2020 due to the improvement in the business environment and the lifting of COVID-19 restrictions in Salisbury's market.

Salisbury continued to experience significant residential mortgage activity both as purchasers relocated from the New York metropolitan area to less populated communities in response to COVID-19, and as a result of the attractive mortgage interest rate environment, which precipitated refinance activity. During the third quarter 2021, Salisbury originated $46.3 million of residential mortgage loans, including refinance activity, compared to $45.5 million of loans during third quarter 2020. For the nine-month period ended September 30, 2021, Salisbury originated $136.1 million of residential mortgage loans, including refinance activity, compared with $106.6 million of loans during the comparable period of 2020. During the third quarter 2021, Salisbury sold approximately $1.8 million of residential mortgage loans to FHLB Boston compared with $26.6 million in third quarter 2020. For the nine-month period ended September 30, 2021 and September 30, 2020, Salisbury sold approximately $29.7 million and $44.4 million of residential mortgage loans, respectively, to FHLB Boston.

Asset Quality

During the first nine months of 2021, non-performing assets decreased $0.6 million to $5.0 million, which primarily reflected a decrease in non-performing real estate secured loans. During the first nine months of 2021, total impaired and potential problem loans increased by $15.6 million to $45.7 million, or 4.27% of gross loans receivable at September 30, 2021, from $30.1 million, or 2.89% of gross loans receivable at December 31, 2020. The increase primarily reflected loans in the hospitality and entertainment and recreation industries which were deemed by management to be a higher risk of default due to COVID-19.

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

On March 22, 2020, the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus". This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the virus. The guidance goes on to explain that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of the relief program are not Troubled Debt Restructurings ("TDRs"). CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied this guidance and implemented a loan payment deferral program which allowed residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. In certain instances, management granted additional loan payment deferrals to borrowers in industries severely impacted by COVID-19, such as hospitality and entertainment and recreation.

As of September 30, 2021, two existing commercial loans with an aggregate balance of $3.1 million to borrowers in the hospitality industry were granted payment deferrals. Both borrowers are expected to resume regular payments in fourth quarter 2021. The loan balance for which payments were deferred represented approximately 0.3% of Salisbury's gross loan balance at September 30, 2021, excluding loans granted under the SBA's Paycheck Protection Program. At September 30, 2021, both loans were deferring principal and interest. There were no outstanding deferrals related to residential and consumer loans as of September 30, 2021. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. Salisbury evaluated each borrower's request for loan payment deferrals on a case-by-case basis. Salisbury also reviewed the credit characteristics and internal risk rating assigned to each borrower that was granted a deferral. This review considered several factors, which included an assessment of COVID-19's impact on the operations of the business, other sources of liquidity available to a borrower for loan payments, the borrower's cooperation, the value of collateral and the number of payment deferrals granted to that borrower. Salisbury also considered a borrower's ability to make partial payments, which represent a subset or combination of principal, interest and mortgage taxes.

The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program. As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. In 2020, Salisbury processed 932 PPP loans for a principal balance of approximately $100 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA") was signed into law. The PPPFA increased the covered period from eight weeks to twenty-four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two-year term. Management funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank ("FHLB") advances, and brokered deposits. Salisbury did not participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF").

On December 27, 2020 the Consolidated Appropriations Act, 2021 was signed into law. Certain provisions of the CARES Act were modified and extended by the Act. One of the features of the Act was the provision of $284 billion in additional funding for the PPP program, including a Second draw Paycheck Protection Program for qualifying businesses for which there was a quarterly revenue reduction of at least 25% compared to the same quarter in 2019. In 2021, Salisbury processed 472 customer PPP applications for loans of approximately $48 million, which the Bank funded through deposits. As of September 30, 2021, approximately $97.0 million of the PPP loans Salisbury originated in 2020 and $10.4 million of the loans originated in 2021 were forgiven by the SBA. Salisbury had gross PPP loans of $40.7 million on its consolidated balance sheet at September 30, 2021 compared with $86.6 million at December 31, 2020.

Past Due Loans

Loans past due 30 days or more decreased $7.0 million for the nine months ended September 30, 2021 to $2.9 million, or 0.27% of gross loans receivable compared with $9.9 million, or 0.95% of gross loans receivable at December 31, 2020.

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

(in thousands)		September 30, 2021		December 31, 2020
Past due 30-59 days	$	708	$	5,263
Past due 60-89 days		201		1,575
Past due 90-179 days		-		1
Past due 180 days and over		10		11
Accruing loans		919		6,850
Past due 30-59 days		222		480
Past due 60-89 days		14		179
Past due 90-179 days		442		768
Past due 180 days and over		1,276		1,665
Non-accrual loans		1,954		3,092
Total loans past due 30 days or greater	$	2,873	$	9,942

Credit Risk Ratings

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

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

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

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

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

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

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments:

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

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

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

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

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

Impaired Loans

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

(in thousands)		September 30, 2021		December 31, 2020
Non-accrual loans, excluding troubled debt restructured loans	$	3,429	$	4,091
Non-accrual troubled debt restructured loans		1,561		1,545
Accruing troubled debt restructured loans		3,953		6,273
Total impaired loans	$	8,943	$	11,909

Non-Performing Assets

Non-performing assets decreased $0.6 million to $5.0 million, or 0.34% of assets for the nine months ended September 30, 2021, from $5.6 million, or 0.44% of assets at December 31, 2020. The 11.5% decrease in non-performing assets in the first nine months 2021 resulted primarily from loan sales of $0.3 million and loan pay-offs of $0.8 million, which were partially offset by $0.5 million of loans placed on non-accrual.

The components of non-performing assets are as follows:

(in thousands)		September 30, 2021		December 31, 2020
Residential 1-4 family	$	1,235	$	1,508
Residential 5+ multifamily		861		861
Home equity lines of credit		86		154
Commercial		1,954		2,544
Farm land		576		158
Vacant land		35		37
Real estate secured		4,747		5,262
Commercial and industrial		243		374
Consumer		-		-
Non-accrual loans		4,990		5,636
Accruing loans past due 90 days and over		11		12
Non-performing loans		5,001		5,648
Foreclosed assets		-		-
Non-performing assets	$	5,001	$	5,648

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

(in thousands)		September 30, 2021		December 31, 2020
Current	$	3,036	$	2,545
Past due 30-59 days		222		480
Past due 60-89 days		14		179
Past due 90-179 days		442		769
Past due 180 days and over		1,287		1,675
Total non-performing loans	$	5,001	$	5,648

At September 30, 2021, 60.71% of non-performing loans were current with respect to loan payments, compared with 45.06% at December 31, 2020.

Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans decreased $2.3 million during first nine months of 2021 to $5.5 million, or 0.52% of gross loans receivable at September 30, 2021, compared to $7.8 million, or 0.75% of gross loans receivable at December 31, 2020. The reduction in loan balance from year end 2020 primarily reflected loan payoffs of $1.0 million, loan sales of $0.6 million, refinanced loans of $0.4 million and other net activity of $0.3 million.

The components of troubled debt restructured loans are as follows:

(in thousands)		September 30, 2021		December 31, 2020
Residential 1-4 family	$	1,845	$	2,798
Residential 5+ multifamily		93		103
Personal		18		26
Vacant land		-		130
Commercial		1,919		3,105
Real estate secured		3,875		6,162
Commercial and industrial		78		111
Accruing troubled debt restructured loans		3,953		6,273
Residential 1-4 family		427		378
Residential 5+ multifamily		861		861
Vacant land		35		37
Commercial		238		269
Real estate secured		1,561		1,545
Commercial and Industrial		-		-
Non-accrual troubled debt restructured loans		1,561		1,545
Troubled debt restructured loans	$	5,514	$	7,818

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

(in thousands)		September 30, 2021		December 31, 2020
Current	$	3,915	$	5,737
Past due 30-59 days		38		536
Past due 60-89 days		-		-
Accruing troubled debt restructured loans		3,953		6,273
Current		590		237
Past due 30-59 days		35		-
Past due 90-179 days		-		178
Past due 180 days and over		936		1,130
Non-accrual troubled debt restructured loans		1,561		1,545
Total troubled debt restructured loans	$	5,514	$	7,818

At September 30, 2021, 81.70% of troubled debt restructured loans were current with respect to loan payments, as compared with 76.41% at December 31, 2020.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $18.6 million during the first nine months of 2021 to $36.8 million, or 3.44% of gross loans receivable at September 30, 2021, compared with $18.2 million, or 1.75% of gross loans receivable at December 31, 2020. The increase primarily reflected internal credit risk rating downgrades on $18.4 million of commercial loans and $1.7 million of commercial and industrial loans to businesses primarily in the hospitality, health care and entertainment and recreation industries due to concerns over the impact of COVID-19. These downgrades were partly offset by internal credit risk rating upgrades on $1.4 million of farm related loans and loan payments of $0.1 million.

The components of potential problem loans are as follows:

(in thousands)		September 30, 2021		December 31, 2020
Residential 1-4 family	$	1,688	$	1,620
Residential 5+ multifamily		715		732
Home equity lines of credit		-		-
Residential real estate		2,403		2,352
Commercial		32,172		13,703
Construction of commercial		-		229
Commercial real estate		32,172		13,932
Farm land		-		1,427
Real estate secured		34,575		17,711
Commercial and industrial		2,219		486
Consumer		1		1
Total potential problem loans	$	36,795	$	18,198

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

(in thousands)		September 30, 2021		December 31, 2020
Current	$	36,733	$	17,598
Past due 30-59 days		14		40
Past due 60-89 days		48		560
Past due 90-179 days		-		-
Total potential problem loans	$	36,795	$	18,198

At September 30, 2021, 99.83% of potential problem loans were current with respect to loan payments, as compared with 96.70% at December 31, 2020. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Goodwill

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Due to COVID-19 and volatility in the market price of bank stocks, the Bank continues to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired at September 30, 2021. At September 30, 2021, Salisbury's stock price closed at $51.02 per share compared with its book value of $46.66 per share. Bank stocks, as measured by the S&P US BMI Banks Index, increased 31.9% since year end 2020 whereas SAL increased 36.9% over the same period. Management performed a qualitative analysis that evaluated several factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price. Management concluded that as of September 30, 2021 it was not more likely than not that goodwill was impaired. As a result, the Bank did not record an impairment charge for goodwill for third quarter 2021.

Deposits and Borrowings

Deposits increased $160.6 million, or 14.2%, to $1.3 billion at September 30, 2021 compared with $1.1 billion at December 31, 2020. The increase reflected the funding and forgiveness of PPP loans, customer receipts of stimulus payments from the U.S. government as well as an increase in retail and business customer balances, which were driven in part by the uncertainty surrounding COVID-19. Retail repurchase agreements increased $3.4 million during 2021 to $10.5 million at September 30, 2021, compared with $7.1 million at December 31, 2020.

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

	September 30, 2021								December 31, 2020
(in thousands)	Average Balance		Percent			Weighted Average Interest Rate			Average Balance		Percent			Weighted Average Interest Rate
Demand deposits	$	355,163		28.33	%		0.00	%	$	294,603		27.94	%		0.00	%
Interest-bearing checking accounts		227,291		18.13			0.19			183,870		17.44			0.24
Regular savings accounts		217,541		17.35			0.11			175,204		16.61			0.26
Money market savings		327,861		26.15			0.17			256,402		24.31			0.45
Certificates of deposit (CD's)¹		125,768		10.03			0.70			144,488		13.70			1.27
Total deposits	$	1,253,624		100.00	%		0.17	%	$	1,054,567		100.00	%		0.37	%

¹CD's also include brokered certificates of deposits of $7.9 million at September 30, 2021 and $18.0 million at December 31, 2020.

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

Interest rates (in thousands)		September 30, 2021		December 31, 2020
Less than 1.00%	$	97,426	$	73,538
1.00% to 1.99%		17,902		25,589
2.00% to 2.99%		8,269		31,889
3.00% to 3.99%		498		498
Total	$	124,095	$	131,514

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

	At September 30, 2021
Interest rates (in thousands)	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
Less than 1.00%	$	79,485	$	10,478	$	1,911	$	5,234	$	97,108		78.25	%
1.00% to 1.99%		8,188		4,457		3,096		2,377		18,118		14.60	%
2.00% to 2.99%		2,684		1,046		4,641		-		8,371		6.75	%
3.00% to 3.99%		498		-		-		-		498		0.40	%
Total	$	90,855	$	15,981	$	9,648	$	7,611	$	124,095		100.00	%

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

September 30, 2021 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	22,828			$	15,518			$	21,998			$	16,199			$	76,543

FHLBB advances decreased $3.7 million during the first nine months of 2021 to $8.9 million at September 30, 2021, compared with $12.6 million at December 31, 2020. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At September 30, 2021, $20 million of letters of credit were outstanding.

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

(dollars in thousands)		September 30, 2021		December 31, 2020
Highest month-end balance during period	$	-	$	15,000
Ending balance		-		-
Average balance during period		-		5,956

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At September 30, 2021, Salisbury's excess borrowing capacity at FHLBB was approximately $252 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

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

Operating activities for the nine-month period ended September 30, 2021 provided net cash of $15.4 million. Investing activities utilized net cash of $114.2 million principally from $29.3 million of net loan originations and principal collections, $107.8 million of purchases of securities available-for-sale, $3.5 million in purchase of Bank Owned Life Insurance (BOLI) and $1.9 million of capital expenditures, partly offset by proceeds of $24.4 million from calls, maturities and principle payments on securities available-for-sale, and $3.3 million from the sale of available-for-sale-securities. Financing activities provided net cash of $172.0 million principally due to an increase in deposit transaction accounts of $168.0 million, an increase of $24.4 million for the issuance of subordinated debt, and $3.3 million for an increase in securities sold under repurchase agreements, partially offset by $7.4 million decrease in time deposits, the redemption of $10 million of subordinated debt issued in 2015, payments of $3.8 million on amortizing FHLBB advances, and the payment of common stock dividends of $2.6 million.

At September 30, 2021, Salisbury had outstanding commitments to fund new loan originations of $40.1 million and unused lines of credit of $196.5 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

RESULTS OF OPERATIONS

For the three-month periods ended September 30, 2021 and 2020

OVERVIEW

Net income allocated to common stock was $3.4 million, or $1.21 per basic common share, for the third quarter ended September 30, 2021 (third quarter 2021), compared with $4.3 million, or $1.53 per basic common share, for the third quarter ended September 30, 2020 (third quarter 2020), and $4.3 million, or $1.53 per basic common share, for the second quarter ended June 30, 2021 (second quarter 2021).

Net Interest Income

Tax equivalent net interest income of $10.3 million for the third quarter 2021 increased $246 thousand, or 2.4%, versus third quarter 2020. Average total earning assets increased $185.6 million, or 15.2%, versus third quarter 2020. Average total interest bearing deposits increased $132.8 million, or 17.3%, versus third quarter 2020. The tax equivalent net interest margin for the third quarter 2021 was 2.92% compared with 3.29% for the third quarter 2020. Excluding PPP loan, the tax equivalent net interest margin for the third quarter 2021 was 2.78% compared with 3.35% for the third quarter 2020. The decline in net interest margin from third quarter 2020 primarily reflected a $118.7 million, or 151.6%, increase in average short term funds, due to higher average customer deposit balances, earning an average yield of 15 basis points, as well as a reduction of 7 basis points in average loan yields, and an increase in subordinated debt interest expense.

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

Three months ended September 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2021		2020		2021		2020		2021		2020
Loans (a)(d)	$	1,056,266	$	1,049,313	$	10,382	$	10,485		3.90	%	3.97	%
Securities (c)(d)		150,841		89,220		720		606		1.91		2.72
FHLBB stock		1,743		3,440		6		34		1.38		3.96
Short term funds (b)		196,997		78,306		73		52		0.15		0.27
Total earning assets		1,405,847		1,220,279		11,181		11,177		3.15		3.64
Other assets		72,547		64,943
Total assets	$	1,478,394	$	1,285,222
Interest-bearing demand deposits	$	227,291	$	195,253		111		110		0.19		0.22
Money market accounts		327,861		258,257		140		195		0.17		0.30
Savings and other		217,541		176,963		58		69		0.11		0.15
Certificates of deposit		125,768		135,238		223		391		0.70		1.15
Total interest-bearing deposits		898,461		765,711		532		765		0.23		0.40
Repurchase agreements		14,296		12,218		5		6		0.15		0.20
Finance lease		2,685		2,928		33		35		4.98		4.80
Note payable		183		221		3		3		6.11		6.08
Subordinated debt (net of issuance costs)		24,452		9,872		233		156		3.82		6.32
FHLBB advances		9,329		44,522		30		113		1.28		0.99
Total interest-bearing liabilities		949,406		835,472		836		1,078		0.35		0.51
Demand deposits		388,557		321,392
Other liabilities		6,965		7,592
Shareholders' equity		133,466		120,766
Total liabilities & shareholders' equity	$	1,478,394	$	1,285,222
Net interest income					$	10,345	$	10,099
Spread on interest-bearing funds										2.80		3.13
Net interest margin (e)										2.92		3.29

(a)

Includes non-accrual loans.

(b)

Includes interest-bearing deposits in other banks and federal funds sold.

(c)

Average balances of securities are based on historical cost.

(d)

Includes tax exempt income benefit of $180,000 and $176,000, respectively, for 2021 and 2020 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2021 and 2020.

(e)

Net interest income divided by average interest-earning assets.

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

Three months ended September 30, (in thousands)	2021 versus 2020
Change in interest due to		Volume			Rate			Net
Loans	$	77		$	(180	)	$	(103	)
Securities		357			(243	)		114
FHLBB stock		(11	)		(17	)		(28	)
Short term funds		63			(42	)		21
Interest-earning assets		486			(482	)		4
Deposits		127			(360	)		(233	)
Repurchase agreements		1			(2	)		(1	)
Finance lease		(3	)		1			(2	)
Note Payable		-			-			-
Subordinated Debt		184			(107	)		77
FHLBB advances		(102	)		19			(83	)
Interest-bearing liabilities		207			(449	)		(242	)
Net change in net interest income	$	279		$	(33	)	$	246

Interest Income

Tax equivalent interest income of $11.2 million for third quarter 2021 was essentially unchanged from third quarter 2020. Loan income decreased $0.1 million, or 1.0%, compared to third quarter 2020 due to a decrease in yield of 7bps, partially offset by a $6.9 million, or 0.7%, increase in average loan balances. Tax equivalent securities income increased $114 thousand, or 18.8%, compared to third quarter 2020 due to a $61.6 million, or 69.0%, increase in average balances, partially offset by an 81 basis point decline in average yield. Income on short-term funds increased $21 thousand, or 40.3%, compared with third quarter 2020 primarily due to a $118.7 million, or 1.52%, increase in average short-term funds, due to higher average customer deposit balances, partially offset by a 12 basis point decrease in the average yield.

Interest Expense

Interest expense of $0.8 million for third quarter 2021 decreased $0.2 million, or 22.4%, compared with third quarter 2020. Interest on deposit accounts decreased $0.2 million, or 30.5%, from third quarter 2020 as a result of a 17 basis points decrease in average deposit rates, partly offset by a $132.7 million, or 17.3%, increase in average balances. Interest expense on FHLBB borrowings decreased $83 thousand, or 73.4%, from third quarter 2020 primarily as a result of a decrease in the average balance of $35.1 million, or 79.0%, partly offset by an increase in the average borrowing rate of 29 basis points. Interest expense on subordinated debt increased $77 thousand, or 49.3%, from third quarter 2020 due to the issuance of $25 million of subordinated debt by Salisbury on March 31, 2021. In May 2021, Salisbury redeemed in full, the $10 million of subordinated debt issued in 2015.

Provision and Allowance for Loan Losses

A provision expense of $0.4 million was recorded for third quarter 2021, compared with $0.7 million for third quarter 2020. The provision expense for third quarter 2021 primarily reflected loan growth during the quarter as well as adjustments to certain qualitative factors due to rising residential housing prices in the Bank's market area, as a result of continued high demand, and an increase in commercial construction lending activity. Net loan (recovery) charge-offs were ($60) thousand for third quarter 2021 compared with $56 thousand for third quarter 2020. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic, which causes a deterioration in economic conditions and an increase in loan payment deferrals or delinquencies, may subsequently necessitate an increase in loan loss reserves.

The reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans excluding PPP loans, was 1.28% for third quarter 2021, versus 1.44% for fourth quarter 2020 and 1.38% for third quarter 2020. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 263% for third quarter of 2021, versus 244% for fourth quarter of 2020 and 278% for third quarter of 2020.

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

Three months ended September 30,	2021		2020
Net charge-offs (recoveries) to average loans receivable, gross	(0.01	%)	0.01	%
Non-performing loans to loans receivable, gross	0.47		0.45
Accruing loans past due 30-89 days to loans receivable, gross	0.08		0.16
Allowance for loan losses to loans receivable, gross	1.23		1.24
Allowance for loan losses to non-performing loans	263.30		277.76
Non-performing assets to total assets	0.34		0.36

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $5.0 million or 0.47% of gross loans receivable at September 30, 2021 compared with $4.7 million, or 0.45%, at September 30, 2020. Accruing loans past due 30-89 days decreased $0.7 million to $0.9 million, or 0.08% of gross loans receivable, from $1.6 million, or 0.16% of gross loans receivable, at September 30, 2020. See "Financial Condition - Loan Credit Quality" above for further discussion and analysis.

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

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

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.

In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19 ("COVID-19 pool"). This COVID-19 pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, in second quarter 2020, management increased the risk weights for loans with an internal risk rating of "4" (Watch), "5" (Special Mention) and "6" (Substandard") to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. In first quarter 2021, management reduced these risk weights back to their pre-COVID-19 levels because the internal risk rating on several loans with a higher degree of credit risk due to the pandemic was downgraded during the quarter. Such downgrades resulted in a higher loan loss reserve for each affected loan. Management believes that this more targeted approach was prudent because loans to borrowers in certain industries, such as hospitality and entertainment and recreation, have a relatively higher degree of credit risk due to COVID-19.

In second quarter 2021, approximately $56 million of loans were moved out of the discrete COVID-19 pool, which carries higher loan loss reserve rates, and back to their pre-pandemic pool. These loans were deemed by management to be a lower risk of default because the level of business activity of these businesses substantially returned to pre-pandemic levels and the borrowers were current on loan payments. Management also updated certain qualitative factors to reflect the overall improvement in local economic conditions since first quarter 2021. Collectively, these factors resulted in a release of credit reserves of $1.4 million for second quarter 2021, which was partially offset by an increase in credit reserves of $0.3 million due to loan growth in the quarter.

In third quarter 2021, management recorded a provision expense of $0.4 million due to loan growth and adjustments to certain qualitative factors reflecting the continued increase in residential housing prices in the Bank's market area and an increase in the Bank's commercial construction loan exposure.

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

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at September 30, 2021.

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

Non-Interest Income

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

Three months ended September 30, (dollars in thousands)		2021			2020		2021 vs. 2020
Trust and wealth advisory	$	1,286		$	1,068	$	218		20.4	%
Service charges and fees		1,211			711		500		70.3
Mortgage banking activities, net		108			736		(628	)	(85.3	)
(Losses) gains on CRA mutual fund		(4	)		-		(4	)	-
Gains on securities, net		7			34		(27	)	(79.4	)
Bank-owned life insurance ("BOLI") income		135			719		(584	)	(81.2	)
Gain on sale of assets		73			-		73		-
Other		24			18		6		33.3
Total non-interest income	$	2,840		$	3,286	($	446	)	(13.6	%)

Non-interest income for third quarter 2021 decreased $446 thousand versus third quarter 2020. Trust and Wealth Advisory income increased $218 thousand versus third quarter 2020 primarily reflecting higher asset management fees. Assets under administration were $973.2 million as of September 30, 2021 compared with $970.3 million at June 30, 2021 and $748.2 million as of September 30, 2020. Discretionary assets under administration of $608.2 million at September 30, 2021 decreased from $614.3 million at June 30, 2021 and increased from $515.0 million at September 30, 2020. The decrease from second quarter 2021 primarily reflected lower market valuations, whereas the increase from third quarter 2020 was primarily due to higher market valuations. Non-discretionary assets under administration of $365.0 million for third quarter 2021 increased from $356.0 million at second quarter 2021 and $233.2 million at third quarter 2020. The increase from comparative periods reflected the addition of partnership assets under administration for an existing client relationship. The trust and wealth business records only a nominal annual fee on this non-discretionary relationship.

Service charges and fees increased $500 thousand versus third quarter 2020 primarily due to higher interchange and deposit fees. During the third quarter 2020, Salisbury waived approximately $289 thousand in various deposit fees, including overdraft and ATM fees. Income from mortgage sales and servicing decreased $628 thousand from third quarter 2020 due to lower sales volume. Third quarter 2021 mortgage loan sales totaled $1.7 million versus $26.6 million for third quarter 2020. BOLI income decreased $584 thousand compared to third quarter 2020, which included a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Non-interest income for third quarter 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury's operations center in Canaan, Connecticut.

Non-Interest Expense

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

Three months ended September 30, (dollars in thousands)		2021		2020		2021 vs. 2020
Salaries	$	3,361	$	3,114	$	247		7.9	%
Employee benefits		1,322		1,061		261		24.6
Premises and equipment		1,060		1,005		55		5.5
Write-down of assets		144		-		144		100.0
Data processing		632		569		63		11.1
Professional fees		735		635		100		15.7
Collections, OREO, and loan related		120		108		12		11.1
FDIC insurance		146		123		23		18.7
Marketing and community support		256		126		130		103.2
Amortization of intangibles		61		78		(17	)	(21.8	)
Other		447		440		7		1.6
Total non-interest expense	$	8,284	$	7,259	$	1,025		14.1	%

Non-interest expense for third quarter 2021 increased $1.0 million versus third quarter 2020. Salaries increased $247 thousand versus third quarter 2020 reflecting higher salary and lower deferred loan origination expenses. Employee benefits expense increased $261 thousand from third quarter 2020 due to higher medical insurance costs, 401K employer match, payroll taxes and BOLI related expenses. Premises and equipment expense increased $55 thousand versus third quarter 2020 due to increased software and maintenance costs. Third quarter 2021 also included a pre-tax loss of $144 thousand on the pending sale of the building housing the Bank's branch in Poughkeepsie, New York, which is expected to close in fourth quarter 2021. Data processing expense increased $63 thousand versus third quarter 2020 mainly due to ATM fees and data processing costs partially offset by lower data communications. Professional fees increased $100 thousand versus third quarter 2020 as higher investment management fees and legal expenses were partly offset by lower consultation fees. Collections, OREO and loan related expenses increased $12 thousand versus third quarter 2020 primarily due to higher appraisal and mortgage recording costs. FDIC insurance increased $23 thousand versus third quarter 2020 on higher deposit balances. Marketing and community support costs increased $130 thousand compared to the prior year third quarter primarily due to Salisbury's ongoing web site redesign and branding initiatives.

Income Taxes

The effective income tax rates for third quarter 2021 and third quarter 2020 were 20.09% and 17.28%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, the lower tax rate in third quarter 2020 reflected the non-taxable BOLI gain of $601 thousand recorded during the quarter.

Salisbury did not incur Connecticut income tax in 2021 (to date) or 2020, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.

For the nine month periods ended September 30, 2021 and 2020

Overview

Net income allocated to common shareholders was $12.1 million, or $4.32 per basic common share, for the nine month period ended September 30, 2021 (nine month period 2021), compared with $9.0 million, or $3.22 per basic common share, for the nine month period ended September 30, 2020 (nine month period 2020).

Net Interest Income

Tax equivalent net interest income of $30.6 million for the nine month period 2021 increased $1.8 million, or 6.1%, versus the nine month period 2020. Average total earning assets increased $191.8 million, or 16.6%, versus the nine month period 2020. Average total interest bearing deposits increased $138.8 million, or 18.7%, versus the nine month period 2020. The net interest margin of 3.01% decreased 31 basis points from 3.32% for the nine month period 2020. Excluding PPP loans, the net interest margin for the nine month period ended September 30, 2021 was approximately 2.90% compared with 3.33% for the same period in 2020. The significant decline in net interest margin for the nine month period ended September 30, 2021 compared to the prior year period primarily reflected a $109.7 million, or 18.8%, increase in short term funds, due to higher average customer deposit balances, earning an average yield of 12 basis points, as well as a reduction of 17 basis points in average loan yields, and an increase in subordinated debt interest expense.

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

Nine months ended September 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2021		2020		2021		2020		2021		2020
Loans (a)(d)	$	1,053,451	$	1,012,070	$	30,989	$	31,010		3.90	%	4.07	%
Securities (c)(d)		130,864		88,603		2,080		1,939		2.12		2.92
FHLBB stock		1.840		3,354		26		106		1.89		4.24
Short term funds (b)		160,055		50,312		148		123		0.12		0.33
Total earning assets		1,346,210		1,154,339		33,243		33,178		3.27		3.82
Other assets		71,421		63,265
Total assets	$	1,417,631	$	1,217,604
Interest-bearing demand deposits	$	224,479	$	174,299		332		331		0.20		0.25
Money market accounts		310,908		245,581		408		994		0.18		0.54
Savings and other		209,180		170,880		173		405		0.11		0.32
Certificates of deposit		134,143		149,080		739		1,530		0.74		1.37
Total interest-bearing deposits		878,710		739,840		1,652		3,260		0.25		0.59
Repurchase agreements		11,608		7,572		13		16		0.15		0.29
Finance lease		2,753		2,988		102		106		4.95		4.74
Note payable		192		231		9		11		6.13		6.08
Subordinated debt (net of issuance costs)		21,851		9,867		767		468		4.68		6.32
FHLBB advances		10,567		45,667		96		473		1.20		1.36
Total interest-bearing liabilities		925,681		806,165		2,639		4,334		0.38		0.72
Demand deposits		355,352		286,608
Other liabilities		6,897		6,847
Shareholders' equity		129,701		117,984
Total liabilities & shareholders' equity	$	1,417,631	$	1,217,604
Net interest income					$	30,604	$	28,844
Spread on interest-bearing funds										2.89		3.11
Net interest margin (e)										3.01		3.32

(a)

Includes non-accrual loans.

(b)

Includes interest-bearing deposits in other banks and federal funds sold.

(c)

Average balances of securities are based on historical cost.

(d)

Includes tax exempt income benefit of $523,000 and $514,000, respectively for 2021 and 2020 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2021 and 2020.

(e)

Net interest income divided by average interest-earning assets.

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

Nine months ended September 30, (in thousands)	2021 versus 2020
Change in interest due to		Volume			Rate			Net
Loans	$	1,717		$	(1,738	)	$	(21	)
Securities		1,019			(878	)		141
FHLBB stock		(19	)		(61	)		(80	)
Short term funds		243			(218	)		25
Interest-earning assets		2,960			(2,895	)		65
Deposits		1,160			(2,768	)		(1,608	)
Repurchase agreements		10			(13	)		(3	)
Finance lease		(10	)		6			(4	)
Note payable		(2	)		-			(2	)
Subordinated Debt		559			(260	)		299
FHLBB advances		(332	)		(45	)		(377	)
Interest-bearing liabilities		1,385			(3,080	)		(1,695	)
Net change in net interest income	$	1,575		$	185		$	1,760

Interest Income

Tax equivalent interest income of $33.2 million for the nine month period 2021 was essentially unchanged compared with the nine month period 2020. Loan income decreased $21 thousand, or 0.1%, compared with the nine months of 2020 primarily due to a 17 basis point decrease in the average yield, partly offset by a $41.3 million, or 4.0%, increase in average loans. Tax equivalent securities income for the nine month period 2021 increased $141 thousand, or 7.2%, compared with the nine month period 2020, primarily due to a $42.3 million, or 47.7%, increase in average balances, partially offset by an 80 basis point decrease in average yield. Income on short-term funds for the nine month period 2021 increased $25 thousand, or 20.3%, compared with the nine months of 2020 primarily due to a $109.7 million, or 218.1%, increase in average short-term funds, due to higher average customer deposit balances, partially offset by a 21 basis point decrease in the average short-term funds yields.

Interest Expense

Interest expense of $2.6 million for the nine month period 2021 decreased $1.7 million, or 39.1%, compared with the nine month period 2020. Interest on deposit accounts decreased $1.6 million, or 49.3%, as a result of a 34 basis point decrease in average deposit rates, partly offset by a $138.9 million, or 18.8%, increase in the average balances. Interest expense on FHLBB borrowings decreased $377 thousand, or 79.7%, due to a $35.1 million, or 76.8%, decrease in average balances and a 16 basis point decrease in the average borrowing rate. Interest expense on subordinated debt for the nine month period 2021 increased $299 thousand, or 63.8%, due to an increase in the average balance, which reflected the issuance of $25 million of subordinated debt by Salisbury on March 31, 2021 and Salisbury's full redemption, in May 2021, of the $10 million of subordinated debt issued in 2015.

Provision and Allowance for Loan Losses

A net credit reserve release of $0.5 million was recorded for the nine month period ended September 30, 2021 compared to a provision of $4.2 million for the nine month period ended September 30, 2020. Net loan charge-offs were $69 thousand and $92 thousand for the respective periods. Management increased the allowance for loan losses in 2020 due to uncertainty surrounding COVID-19. In 2021, however, the business environment in Salisbury's market areas improved significantly due to the rollout out of vaccinations and the lifting of COVID-19 restrictions. In addition, the number of commercial loans, for which payments have been deferred, continued to decline. As a result of these improved conditions, management released $1.1 million of credit reserves in second quarter 2021. This release was partially offset by an increase in reserves in third quarter 2021 due to loan growth and adjustments to certain qualitative factors reflecting the continued increase in residential housing prices in the Bank's market area and an increase in commercial construction loan exposure. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic, which causes a deterioration in economic conditions and an increase in loan payment deferrals or delinquencies, may subsequently necessitate an increase in loan loss reserves.

Reserve coverage at September 30, 2021, as measured by the ratio of allowance for loan losses to gross loans, at 1.23%, compares with 1.24% at September 30, 2020. The decrease in the coverage ratio primarily reflected the reduction in credit reserves noted above as well as loan growth. Excluding PPP loans, the reserve coverage ratio was 1.28% at September 30, 2021 compared with 1.37% at September 30, 2020. During the first nine months of 2021, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $0.6 million to $5.0 million. Non-performing loans represent 0.47% of gross loans receivable compared with 0.54% at December 31, 2020. During the nine months ended September 30, 2021, accruing loans past due 30-89 days decreased $5.9 million to $0.9 million or 0.08% of gross loans receivable from 0.66% at December 31, 2020. See "Financial Condition - Loan Credit Quality" for further discussion and analysis.

Non-interest income

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

Nine months ended September 30, (dollars in thousands)		2021			2020		2021 vs. 2020
Trust and wealth advisory	$	3,685		$	3,129	$	556		17.8	%
Service charges and fees		3,536			2,214		1,322		59.7
Mortgage banking activities, net		912			1,182		(270	)	(22.8	)
(Losses) gains on CRA mutual fund		(18	)		22		(40	)	(181.8	)
(Losses) gains on available-for-sale securities, net		(2	)		216		(218	)	(100.9	)
BOLI income and gains		386			986		(600	)	(60.9	)
Gain on sale of assets		73			-		73		-
Other		81			97		(16	)	16.5
Total non-interest income	$	8,653		$	7,846	$	807		10.3	%

Non-interest income for the nine month period ended September 30, 2021 increased $807 thousand versus the same period in 2020. Trust and wealth advisory revenues increased $556 thousand mainly on higher asset based fees primarily as a result of market appreciation. Service charges and fees increased $1.3 million reflecting higher deposit, interchange and loan prepayment fees. During the nine month period 2020, Salisbury waived approximately $558 thousand in various deposit fees, including overdraft and ATM fees. Income from mortgage sales and servicing decreased $270 thousand due to lower volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $29.7 million for the nine month period ended September 30, 2021 compared with $44.4 million for the nine month period ended September 30, 2020. The nine month periods ended September 30, 2021 and 2020 included mortgage servicing amortization of $167 thousand and $84 thousand, respectively. BOLI income and gains declined $600 thousand versus the same period in 2020. The decline primarily reflected a non-taxable gain of $601 thousand recorded in the prior year related to proceeds received by the Bank from a BOLI policy due to the death of a covered former employee. Non-interest income for nine month period ended September 30, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury's operations center in Canaan, Connecticut. Other income primarily includes rental property income.

Non-interest expense

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

Nine months ended September 30, (dollars in thousands)		2021		2020		2021 vs. 2020
Salaries	$	9,664	$	8,375	$	1,289		15.4	%
Employee benefits		3,990		3,244		746		23.0
Premises and equipment		3,034		2,897		137		4.7
Write-down of assets		144		-		144		100.0
Data processing		1,824		1,666		158		9.5
Professional fees		2,090		2,020		70		3.5
Collections, OREO, and loan related		317		212		105		49.5
FDIC insurance		370		331		39		11.8
Marketing and community support		552		419		133		31.7
Amortization of core deposit intangible assets		198		247		(49	)	(19.8	)
Other		1,448		1,572		(124	)	(7.9	)
Non-interest expense	$	23,631	$	20,983	$	2,648		12.6	%

Non-interest expense for the nine month period ended September 30, 2021 increased $2.6 million versus the same period in 2020. Salaries increased $1.3 million primarily due to higher base salaries, incentive and production accruals as a result of higher loan originations. Benefits increased $746 thousand primarily due higher medical insurance costs, 401K employer match, payroll taxes and BOLI related expenses. Premises and equipment increased $137 thousand mainly due to higher building depreciation and facilities related expenses. The nine month period ended September 30, 2021 also included a pre-tax loss of $144 thousand on the pending sale of the building housing the Bank's branch in Poughkeepsie, New York, which is expected to close in fourth quarter 2021. Data processing increased $158 thousand mainly due to ATM fees, core data processing costs and Trust and Wealth data processing expense. The increase in professional fees of $70 thousand versus the nine month period 2020 primarily reflected higher audit and exam and investment management expenses partially offset by lower consulting expense. Collections, OREO and loan related expense increased $105 thousand primarily due to higher appraisal and mortgage recording costs. FDIC related expense increased $39 thousand compared to the same period in 2020 reflecting higher deposit balances. Marketing and community support costs increased $133 thousand compared to the same period in 2020 primarily due to Salisbury's ongoing web site redesign and branding initiatives. Amortization of intangible assets decreased $49 thousand due to the aging off of expenses related to previous acquisitions. Other expenses decreased $124 thousand primarily due to higher litigation related accruals during the nine month period ended September 30, 2020.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2021 and September 30, 2020 were 21.05% and 16.90%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets. The lower effective tax rate for the nine month period ended September 30, 2020 also reflected the non-taxable BOLI gain of $601 thousand recorded in third quarter 2020.

CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity was $133.5 million at September 30, 2021, up $8.8 million from December 31, 2020. Book value and tangible book value per common share were $46.66 and $41.67, respectively, compared with $43.88 and $38.78, respectively, at December 31, 2020. Contributing to the increase in shareholders' equity for year-to-date 2021 was net income of $12.3 million, and stock based compensation of $0.7 million partially offset by common stock dividends of $2.6 million and unrealized losses on securities available-for-sale, net of tax, of $1.7 million.

Capital Requirements

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

	September 30, 2021			December 31, 2020
Total Capital (to risk-weighted assets)		14.20	%		13.57	%
Tier 1 Capital (to risk-weighted assets)		12.95			12.31
Common Equity Tier 1 Capital (to risk-weighted assets)		12.95			12.31
Tier 1 Capital (to average assets)		9.31			8.90

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

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

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of September 30, 2021, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as "well-capitalized." There are no conditions or events since that notification that management believes have changed the Bank's category.

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

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

Share Repurchases

On March 24, 2021 Salisbury announced that its Board of Directors has adopted a share repurchase program. The share repurchase program provides for the potential repurchase of Salisbury's common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury's common stock from time to time over the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares within the allowable period. During the third quarter 2021, Salisbury did not repurchase any its outstanding common stock pursuant to this program.

Subordinated Debt

On March 31, 2021 Salisbury completed a private placement of $25.0 million in aggregate principal amount of Fixed to Floating Rate Subordinated Notes due 2031 (the "Notes") to various accredited investors. The Notes have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50% per annum, from and including the closing date to, but excluding March 31, 2026 or the earlier redemption date, payable quarterly in arrears. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the rate will be a floating per annum rate expected to be equal to the then current three-month SOFR plus 280 basis points, provided, however, that in the event three-month SOFR is less than zero, three-month term SOFR shall be deemed to be zero, payable quarterly in arrears. On May 28, 2021, Salisbury redeemed in full the $10 million of subordinated debt issued in 2015.

Dividends

Salisbury paid $2.6 million in common stock dividends during the nine month period ended September 30, 2021.

On October 20, 2021, the Board of Directors of Salisbury declared a common stock dividend of $0.31 per common share payable on November 26, 2021 to shareholders of record on November 12, 2021. Common stock dividends, when declared, are generally paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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

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

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

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING STATEMENTS

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

(a)

assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and

(b)

expectations for revenues and earnings for Salisbury and the Bank.

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

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

(a)

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;

(b)

changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;

(c)

increased competition from other financial and non-financial institutions;

(d)

the impact of technological advances and cybersecurity matters;

(e)

interest rate fluctuations; and

(f)

the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the jurisdictions in which Salisbury operates, and the United States, related to the economy and overall financial stability;

(g)

government and regulatory responses to the COVID-19 pandemic; and

(h)

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

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

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury's financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management's September 30, 2021 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At September 30, 2021, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates - immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates - immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel changes in interest rates - the yield curve is assumed to rise throughout 2022 and 2023 with the treasury yield curve ultimately ending up higher as of September 30, 2023. The two year, five year and 10 year treasury as of September 30, 2023 are ultimately 1.44%, 1.70% and 1.51% higher than actual rates as of September 30, 2021 with three Fed Funds rate increases assumed from the second half of 2022 through September 30, 2023. The yield curve is positively sloping over the time period. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of September 30, 2021, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of September 30, 2021.

As of September 30, 2021	Months 1-12			Months 13-24
Immediately rising interest rates + 300bp (static growth assumptions)		4.40	%		14.6	%
Immediately falling interest rates - 100bp (static growth assumptions)		(4.70	)		(9.70	)
Immediately rising interest rates + 400bp (static growth assumptions)		3.70			16.50

The negative exposure of net interest income to immediately falling rates as compared to an unchanged rate scenario results from a greater decline in earning asset yields compared to rates paid on funding liabilities, as a result of faster prepayments on existing assets and lower reinvestment rates on future loans originated and securities purchased.

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

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

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

As of September 30, 2021 (in thousands)		Rates up 100bp			Rates up 200bp
U.S. Treasury	$	(641	)	$	(1,237	)
U.S. Government agency notes		(1,092	)		(2,139	)
Municipal bonds		(1,977	)		(4,065	)
Mortgage backed securities
U.S. Government agencies and U.S. Government- sponsored enterprises		(2,651	)		(5,447	)
Collateralized mortgage obligations
U.S. Government agencies		(563	)		(1,336	)
Corporate bonds		(325	)		(622	)
Total available-for-sale debt securities	$	(7,249	)	$	(14,846	)

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of September 30, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of September 30, 2021.

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

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, Salisbury's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

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

Item 1A.

RISK FACTORS

There were no material changes to the risk factors previously disclosed in Salisbury's Annual Report on Form 10-K for the year ended December 31, 2020.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.

DEFAULTS UPON SENIOR SECURITIES

None

Item 4.

MINE SAFETY DISCLOSURES

Not Applicable

Item 5.

OTHER INFORMATION

None

Item 6.

EXHIBITS

Exhibit No.	Description
3.1	Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1	Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).
3.1.2	Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).
3.1.3	Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).
3.1.4	Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).
3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
4.1	Form of Subordinated Note, dated as of March 31, 2021, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed March 31, 2021).
10.1	Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with Richard Cantele, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed September 2, 2021).
10.2	Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with John Davies, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.2 of Registrant's Form 8-K filed September 2, 2021).
10.2	Salisbury Bank and Trust Company Split Dollar Life Insurance Agreement with Peter Albero, effective as of September 1, 2021 (incorporated by reference to Exhibit 10.3 of Registrant's Form 8-K filed September 2, 2021).
31.1	Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

		SALISBURY BANCORP, INC.

November 5, 2021	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

November 5, 2021	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer