SALISBURY BANCORP, INC. - Quarter Report: 2022 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, 2022

☐

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 001-14854

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, 2022 is 5,783,966.

TABLE OF CONTENTS

	Page
PART I.	FINANCIAL INFORMATION	3
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2022 (unaudited) AND DECEMBER 31,2021		3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (unaudited)		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 and 2021 (unaudited)		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 and 2021 (unaudited)		5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 and 2021 (unaudited)		7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		9
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41
Item 4.	CONTROLS AND PROCEDURES	43
PART II.	OTHER INFORMATION	43
Item 1.	LEGAL PROCEEDINGS	43
Item 1A.	RISK FACTORS	43
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43
Item 3.	DEFAULTS UPON SENIOR SECURITIES	43
Item 4.	MINE SAFETY DISCLOSURES	43
Item 5.	OTHER INFORMATION	43
Item 6.	EXHIBITS	43
SIGNATURES		44

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share data)		September 30, 2022 (unaudited)			December 31, 2021
ASSETS
Cash and due from banks	$	6,314		$	6,404
Interest bearing demand deposits with other banks		49,983			168,931
Total cash and cash equivalents		56,297			175,335
Interest bearing Time Deposits with Financial Institutions		—			750
Securities
Available-for-sale at fair value		189,161			202,396
Mutual funds at fair value		1,882			901
Federal Home Loan Bank of Boston stock at cost		1,487			1,397
Loans held-for-sale		—			2,684
Loans receivable, net (allowance for loan losses: $14,334 and $12,962)		1,176,493			1,066,750
Bank premises and equipment, net		22,502			22,625
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $5,612 and $5,462)		269			418
Accrued interest receivable		6,012			6,260
Cash surrender value of life insurance policies		30,187			27,738
Deferred taxes		8,882			2,588
Other assets		5,151			5,527
Total Assets	$	1,512,138		$	1,529,184
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	413,584		$	416,073
Demand (interest bearing)		241,236			233,600
Money market		313,987			330,436
Savings and other		246,538			237,075
Certificates of deposit		109,859			119,009
Total deposits		1,325,204			1,336,193
Repurchase agreements		7,109			11,430
Federal Home Loan Bank of Boston advances		20,000			7,656
Subordinated debt		24,517			24,474
Note payable		139			170
Finance lease obligations		4,296			4,107
Accrued interest and other liabilities		7,712			8,554
Total Liabilities		1,388,977			1,392,584
Shareholders' Equity¹
Common stock - $0.10 per share par value
Authorized: 10,000,000;
Issued: 5,783,966 and 5,723,394
Outstanding: 5,783,966 and 5,723,394		578			286
Unearned compensation – restricted stock awards		(1,328	)		(925	)
Paid-in capital		47,252			46,374
Retained earnings		98,980			89,995
Accumulated other comprehensive (loss) income, net		(22,321	)		870
Total Shareholders' Equity		123,161			136,600
Total Liabilities and Shareholders' Equity	$	1,512,138		$	1,529,184

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

¹ The number of shares for all periods has been adjusted to reflect the two-for-one forwards stock split effective June 30, 2022.

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)		2022			2021			2022			2021
Interest and dividend income
Interest and fees on loans	$	11,541		$	10,264		$	32,280		$	30,642
Interest on debt securities
Taxable		903			486			2,486			1,398
Tax exempt		213			172			575			506
Other interest and dividends		352			79			517			174
Total interest and dividend income		13,009			11,001			35,858			32,720
Interest expense
Deposits		883			532			1,938			1,652
Repurchase agreements		4			5			11			13
Finance lease		41			33			122			102
Note payable		2			3			7			9
Subordinated debt		233			233			699			767
Federal Home Loan Bank of Boston advances		2			30			57			96
Total interest expense		1,165			836			2,834			2,639
Net interest and dividend income		11,844			10,165			33,024			30,081
Provision (release) for loan losses		695			400			2,158			(517	)
Net interest and dividend income after provision (release) for loan losses		11,149			9,765			30,866			30,598
Non-interest income
Trust and wealth advisory		1,228			1,286			3,762			3,685
Service charges and fees		1,219			1,211			4,080			3,536
Mortgage banking activities, net		64			108			497			912
Losses on mutual fund		(47	)		(4	)		(119	)		(18	)
Gains (losses) on securities, net		—			7			165			(2	)
Bank-owned life insurance (“BOLI”) income		201			135			615			386
Gain on sale of assets		—			73			—			73
Other		28			24			84			81
Total non-interest income		2,693			2,840			9,084			8,653
Non-interest expense
Salaries		3,802			3,361			10,938			9,664
Employee benefits		1,224			1,322			3,789			3,990
Premises and equipment		1,117			1,060			3,200			3,034
Write-down of assets		—			144			3			144
Information processing and services		711			632			2,098			1,824
Professional fees		689			735			2,297			2,090
Collections, OREO and loan related		67			120			300			317
FDIC insurance		98			146			391			370
Marketing and community support		214			256			661			552
Amortization of intangibles		46			61			150			198
Other		544			447			1,872			1,448
Total non-interest expense		8,512			8,284			25,699			23,631
Income before income taxes		5,330			4,321			14,251			15,620
Income tax provision		994			868			2,501			3,288
Net income	$	4,336		$	3,453		$	11,750		$	12,332
Net income available to common shareholders	$	4,264		$	3,400		$	11,543		$	12,148
Basic earnings per common share ¹	$	0.75		$	0.60		$	2.04		$	2.16
Diluted earnings per common share ¹	$	0.75		$	0.60		$	2.03		$	2.15
Common dividends per share ¹	$	0.16		$	0.16		$	0.48		$	0.45

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

¹The number of shares for all periods has been adjusted to reflect the two-for-one forward stock split effective June 30,2022.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)


		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2022			2021			2022			2021
Net income	$	4,336		$	3,453		$	11,750		$	12,332
Other comprehensive (loss) income
Net unrealized losses on securities available-for-sale		(9,855	)		(1,199	)		(29,191	)		(2,153	)
Reclassification of net realized (gains) losses in net income ⁽¹⁾		—			(7	)		(165	)		2
Unrealized losses on securities available-for-sale		(9,855	)		(1,206	)		(29,356	)		(2,151	)
Income tax benefit		2,070			254			6,165			451
Unrealized losses on securities available-for-sale, net of tax		(7,785	)		(952	)		(23,191	)		(1,700	)
Comprehensive (loss) income	$	(3,449	)	$	2,501		$	(11,441	)	$	10,632

^{(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 sales and calls
of available-for-sale securities, net, the tax effect is included in the income tax provision and the after tax amount is included in
net income. The net tax effect for the three months ending September 30, 2022 and 2021 are $0 thousand and $(1) thousand, respectively.
The net tax effect for the nine months ending September 30, 2022 and 2021 were $(34) thousand and $1 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'
	Shares¹		Amount		Capital		Earnings			awards			(loss) income			equity
Balances at June 30, 2021		5,723,394	$	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		—		—		—		(887	)		—			—			(887	)
Stock based compensation-restricted stock awards		—		—		61		—			149			—			210
Balances at September 30, 2021		5,723,394	$	286	$	46,278	$	86,740		$	(1,075	)	$	1,304		$	133,533
Balances at June 30, 2022		5,783,966	$	578	$	47,205	$	95,568		$	(1,512	)	$	(14,536	)	$	127,303
Net income		—		—		—		4,336			—			—			4,336
Other comprehensive loss, net of tax		—		—		—		—			—			(7,785	)		(7,785	)
Common stock dividends declared		—		—		—		(924	)		—			—			(924	)
Stock based compensation-restricted stock awards		—		—		47		—			184			—			231
Balances at September 30, 2022		5,783,966	$	578	$	47,252	$	98,980		$	(1,328	)	$	(22,321	)	$	123,161

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

¹The number of shares for all periods has been adjusted to reflect the two-for-one forward stock split effective June 30,2022.


Nine months ended September 30, (dollars in thousands)	Common Stock				Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares¹		Amount		Capital			Earnings			awards			(loss) income			equity
Balances at December 31, 2020		5,686,584	$	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		—		—		—			(2,566	)		—			—			(2,566	)
Stock options exercised		3,510		1		30			—			—			—			31
Issuance of restricted common stock		27,700		1		623			—			(624	)		—			—
Issuance of director’s restricted stock awards		5,600		—		126			—			(126	)		—			—
Stock based compensation-restricted stock awards		—		—		235			—			449			—			684
Balances at September 30, 2021		5,723,394	$	286	$	46,278		$	86,740		$	(1,075	)	$	1,304		$	133,533
Balances at December 31, 2021		5,723,394	$	286	$	46,374		$	89,995		$	(925	)	$	870		$	136,600
Net income for period		—		—		—			11,750			—			—			11,750
Other comprehensive loss, net of tax		—		—		—			—			—			(23,191	)		(23,191	)
Common stock dividends declared		—		—		—			(2,765	)		—			—			(2,765	)
Issuance of restricted stock awards		28,700		2		811			—			(813	)		—			—
Stock options exercised		11,070		1		94			—			—			—			95
Issuance of performance based stock awards		12,822		—		(183	)		—			—			—			(183	)
Issuance of director’s restricted stock awards		7,980		—		205			—			(205	)		—			—
Transfer due to 2-for-1 forward stock split		—		289		(289	)		—			—			—			—
Stock based compensation-restricted stock awards		—		—		240			—			615			—			855
Balances at September 30, 2022		5,783,966	$	578	$	47,252		$	98,980		$	(1,328	)	$	(22,321	)	$	123,161

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

¹The number of shares for all periods has been adjusted to reflect the two-for-one forward stock split effective June 30,2022.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


Nine months ended September 30, (in thousands)		2022			2021
Operating Activities
Net income	$	11,750		$	12,332
Adjustments to reconcile net income to net cash provided by operating activities
(Accretion), amortization and depreciation
Securities		1,082			807
Bank premises and equipment		1,202			1,142
Core deposit intangible		149			198
Modification fees on Federal Home Loan Bank of Boston advances		21			17
Subordinated debt issuance costs		43			159
Mortgage servicing rights		117			167
(Gains) and losses, including write-downs
Sales and calls of securities available-for-sale, net		(165	)		2
CRA Mutual Fund		119			18
Sales of loans, excluding capitalized servicing rights		(306	)		(653	)
Loss on write-down of asset		3			144
Gain on sale of premises and equipment		—			(73	)
Gain on redemption of Bank Owen Life Insurance		(89	)		—
Provision (release) for loan losses		2,158			(517	)
Proceeds from loans sold		11,343			30,364
Loans originated for sale		(4,444	)		(27,615	)
Increase in deferred loan origination costs, net		(717	)		(58	)
Mortgage servicing rights originated		(72	)		(276	)
Decrease in interest receivable		248			441
(Increase) decrease in deferred tax benefit		(129	)		87
Increase in prepaid expenses		(71	)		(416	)
Increase in cash surrender value of life insurance policies		(526	)		(386	)
Decrease (increase) in income tax receivable		452			(429	)
Increase (decrease) in income tax payable		101			(320	)
Increase in other assets		(50	)		(509	)
Decrease in accrued expenses		(904	)		(290	)
Decrease in interest payable		(31	)		(9	)
Increase in other liabilities		122			365
Stock based compensation-restricted stock awards		855			684
Net cash provided by operating activities		22,263			15,378
Investing Activities
Net (purchases) redemption of Federal Home Loan Bank of Boston stock		(90	)		209
Maturity of Interest-Bearing Time Deposits with Financial Institutions		750			0
Purchases of securities available-for-sale		(52,176	)		(107,811	)
Proceeds from sales of securities available-for-sale		22,012			3,311
Proceeds from calls of securities available-for-sale		1,500			8,500
Proceeds from principal payments and maturities of securities available-for-sale		11,626			15,883
Reinvestment of CRA Mutual Fund		(1,100	)		(8	)
Loan originations and principal collections, net		(115,135	)		(29,323	)
Recoveries of loans previously charged off		42			185
Proceeds from sale/ disposal of premises and equipment		—			248
Capital expenditures		(793	)		(1,889	)
Purchase of life insurance policies		(2,507	)		(3,500	)
Proceeds from life insurance policy		672			—
Net cash used by investing activities	$	(135,199	)	$	(114,195	)

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)		2022			2021
Financing Activities
Increase in deposit transaction accounts, net	$	(1,839	)	$	167,973
Decrease in time deposits, net		(9,150	)		(7,419	)
(Decrease) increase in securities sold under agreements to repurchase, net		(4,321	)		3,334
Federal Home Loan Bank of Boston long-term maturities/payments		(6,000	)		—
Federal Home Loan Bank of Boston short-term advances, net change		20,000			—
Principal payments on Amortizing Federal Home Loan Bank of Boston advance		(1,677	)		(3,751	)
Issuance of Sub Debt, net of issuance costs		—			24,418
Repayment of Sub Debt		—			(10,000	)
Principal payments on note payable		(31	)		(28	)
Decrease in finance lease obligation		(230	)		(42	)
Stock options exercised		95			31
Net settlement of restricted stock units		(183	)		—
Common stock dividends paid		(2,766	)		(2,566	)
Net cash (used by) provided by financing activities		(6,102	)		171,950
Net (decrease) increase in cash and cash equivalents		(119,038	)		73,133
Cash and cash equivalents, beginning of period		175,335			93,162
Cash and cash equivalents, end of period	$	56,297		$	166,295

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	$	2,801		$	2,472
Cash paid for income taxes		2,077			3,948
Non cash investing and financing activities:
Fixed Assets	$	419		$	—
Finance lease liability		(419	)		—
Transfers from Fixed Assets to Other Assets		—			727
Loans transferred to Loans Held for Sale		3,909			—

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 (loss) income, changes in shareholders’ equity and cash flows for the interim periods presented (collectively, the financial statements).

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 and unrealized gains and losses related to available-for-sale securities.

Salisbury increased the number of issued and authorized common shares and effected a two-for-one forward stock split of the Company’s common stock on June 30, 2022. The par value of common stock was not adjusted as a result of the forward stock split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this forward stock split.

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, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

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. 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 removes all recognition thresholds and requires 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 clarifies 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 clarifies 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 clarifies or addresses specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarify 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. In March 2022, the FASB issued ASU 2022-02, which clarifies the treatment of accrued interest when measuring credit losses. The amendments in this Update eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.

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, Salisbury 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.

The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury estimates that under the CECL framework, the ACL would be $14.2 million compared with the allowance for loan losses of $14.3 million reported on the consolidated balance sheet at September 30, 2022. In addition, Salisbury estimates that the ACL for unfunded commitments would be approximately $1.1 million compared with the allowance of $0.2 million recorded on its consolidated balance sheet as of September 30, 2022. Salisbury will continue to refine its ACL methodology prior to implementation of CECL on January 1, 2023. In addition, the estimated ACL and allowance for unfunded commitments under both the Incurred Loss method and CECL will be affected by various factors, which include but are not limited to, changes in the composition and balance of Salisbury’s loan portfolio and unfunded commitments, changes to internal risk ratings of borrowers, changes to the risk-profile of the loan portfolio, changes in various macro-economic indicators, the impact of geo-political events on the business environment, and other factors.

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.

In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815) Fair Value Hedging – Portfolio Layer Method.” The amendments in this update clarified the following: (1) The current last-of-layer method that permits only one hedged layer has been expanded to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method; (2) The scope of the portfolio layer method has been expanded to include non-pre-payable financial assets; (3) Eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot-or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated; (4) Additional guidance is provided on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method whether a single hedged layer or multiple hedged layers are designated; and (5) How hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. Salisbury does not expect the implementation of ASU 2022-01 to have a material impact on its consolidated financial statements.

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, 2022
Available-for-sale
U.S. Treasury	$	19,266	$	—	$	2,289	$	16,977
U.S. Government Agency notes		30,552		114		2,742		27,924
Municipal bonds		55,260		—		10,650		44,610
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		72,163		30		8,713		63,480
Collateralized mortgage obligations:
U.S. Government agencies		25,925		—		3,334		22,591
Corporate bonds		14,250		—		671		13,579
Total securities available-for-sale	$	217,416	$	144	$	28,399	$	189,161
Mutual fund							$	1,882
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	1,487	$	—	$	—	$	1,487

(in thousands)		Amortized cost basis		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2021
Available-for-sale
U.S. Treasury	$	15,301	$	12	$	182	$	15,131
U.S. Government Agency notes		31,623		237		256		31,604
Municipal bonds		46,469		1,557		204		47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		74,703		643		805		74,541
Collateralized mortgage obligations:
U.S. Government agencies		20,948		135		185		20,898
Corporate bonds		12,250		158		8		12,400
Total securities available-for-sale	$	201,294	$	2,742	$	1,640	$	202,396
Mutual fund							$	901
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	1,397	$	—	$	—	$	1,397

Salisbury did not sell any available-for-sale securities during the three month periods ended September 30, 2022 and September 30, 2021. Salisbury sold $22.0 million of available-for-sale securities during the nine month period ended September 30, 2022 realizing a pre-tax gain of $165 thousand and a related tax expense of $35 thousand. 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.

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, 2022 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	8,091	$	763	$	8,886	$	1,526	$	16,977	$	2,289
U.S. Government Agency notes		4,804		589		15,151		2,153		19,955		2,742
Municipal bonds		37,026		8,290		7,584		2,360		44,610		10,650
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		28,503		3,960		29,335		4,753		57,838		8,713
Collateralized mortgage obligations		21,173		3,056		1,418		278		22,591		3,334
Corporate bonds		8,579		671		—		—		8,579		671
Total temporarily impaired securities	$	108,176	$	17,329	$	62,374	$	11,070	$	170,550	$	28,399


	Less than 12 Months				12 Months or Longer				Total
December 31, 2021 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	12,155	$	182	$	—	$	—	$	12,155	$	182
U.S. Government Agency notes		22,137		235		2,019		21		24,156		256
Municipal bonds		12,496		204		552		—		13,048		204
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		52,619		740		3,195		65		55,814		805
Collateralized mortgage obligations		11,554		185		—		—		11,554		185
Corporate bonds		1,742		8		—		—		1,742		8
Total temporarily impaired securities	$	112,703	$	1,554	$	5,766	$	86	$	118,469	$	1,640

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, 2022 (in thousands)	Maturity	Amortized cost			Fair value	Yield⁽¹⁾
U.S. Treasury	After 1 year but within 5 years	$	7,871	$	7,239	1.32	%
	After 5 year but within 10 years		11,395		9,738	1.18
	Total		19,266		16,977	1.24
U.S. Government Agency notes	After 1 year but within 5 years		4,979		4,319	0.97
	After 5 year but within 10 years		10,938		9,189	1.35
	Total		15,917		13,508	1.23
Municipal bonds	After 1 year but within 5 years		511		459	1.74
	After 5 year but within 10 years		15,282		12,445	2.31
	After 10 years but within 15 years		12,842		10,382	2.53
	After 15 years		26,625		21,324	2.84
	Total		55,260		44,610	2.61
Mortgage-backed securities and Collateralized mortgage obligations	Securities not due at a single maturity date		112,723		100,487	2.29
	Total		112,723		100,487	2.29
Corporate bonds	After 5 years but within 10 years		13,250		12,596	4.32
	After 10 years but within 15 years		1,000		983	6.25
	Total		14,250		13,579	4.46
Securities available-for-sale		$	217,416	$	189,161	2.45	%

⁽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, 2022.

U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Ten securities had unrealized losses at September 30, 2022, which approximated 11.88% 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, 2022.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Twenty two securities had unrealized losses at September 30, 2022, which approximated 12.08% 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, 2022.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixty six securities had unrealized losses at September 30, 2022, which approximated 19.27% 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, 2022.

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. Ninety two securities had unrealized losses at September 30, 2022, which approximated 13.03% 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, 2022.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Eleven securities had unrealized losses at September 30, 2022, which approximated 7.26% 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, 2022.

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, 2022. 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, 2022			December 31, 2021
Residential 1-4 family	$	414,957		$	373,131
Residential 5+ multifamily		70,459			52,325
Construction of residential 1-4 family		21,527			19,738
Home equity lines of credit		24,895			23,270
Residential real estate		531,838			468,464
Commercial		367,257			310,923
Construction of commercial		45,762			58,838
Commercial real estate		413,019			369,761
Farm land		4,225			2,807
Vacant land		14,796			14,182
Real estate secured		963,878			855,214
Commercial and industrial ex PPP Loans		186,527			169,543
PPP Loans		469			25,589
Total Commercial and industrial		186,996			195,132
Municipal		18,607			16,534
Consumer		20,344			12,547
Loans receivable, gross		1,189,825			1,079,427
Deferred loan origination costs, net		1,002			285
Allowance for loan losses		(14,334	)		(12,962	)
Loans receivable, net	$	1,176,493		$	1,066,750
Loans held-for-sale
Residential 1-4 family	$	—		$	2,684

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, 2022 and December 31, 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $58.5 million and $77.5 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 36% 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 9% 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 4% 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 192% as of September 30, 2022 and 179% at December 31, 2021 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. Rising interest rates, unemployment and an economic recession may cause the Bank to experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

At September 30, 2022 Salisbury had PPP loan balances, net of deferred fees, of $0.4 million on its consolidated balance sheet compared with approximately $25 million at December 31, 2021. The PPP loans are reported on Salisbury’s balance sheet at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs on the loans are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three months ended September 30, 2022, Salisbury recorded interest income and net origination fees of $3 thousand and $69 thousand, respectively, on PPP loans compared with $133 thousand and $711 thousand, respectively, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, Salisbury recorded interest income and net origination fees of $71 thousand and $740 thousand, respectively, on PPP loans compared with $569 thousand and $2.5 million, respectively, for the comparable period ended September 30, 2021. As of September 30, 2022, Salisbury has substantially recognized all of the origination fees on PPP loans.

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, 2022
Residential 1-4 family	$	410,458	$	3,030	$	1,469	$	—	$	—	$	414,957
Residential 5+ multifamily		70,308		72		79		—		—		70,459
Construction of residential 1-4 family		21,527		—		—		—		—		21,527
Home equity lines of credit		24,730		165		—		—		—		24,895
Residential real estate		527,023		3,267		1,548		—		—		531,838
Commercial		348,824		13,079		5,354		—		—		367,257
Construction of commercial		45,762		—		—		—		—		45,762
Commercial real estate		394,586		13,079		5,354		—		—		413,019
Farm land		2,402		1,426		397		—		—		4,225
Vacant land		14,764		32		—		—		—		14,796
Real estate secured		938,775		17,804		7,299		—		—		963,878
Commercial and industrial		184,584		696		1,716		—		—		186,996
Municipal		18,607		—		—		—		—		18,607
Consumer		20,344		—		—		—		—		20,344
Loans receivable, gross	$	1,162,310	$	18,500	$	9,015	$	—	$	—	$	1,189,825

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2021
Residential 1-4 family	$	367,225	$	3,543	$	2,363	$	—	$	—	$	373,131
Residential 5+ multifamily		50,588		79		1,658		—		—		52,325
Construction of residential 1-4 family		19,738		—		—		—		—		19,738
Home equity lines of credit		23,037		212		21		—		—		23,270
Residential real estate		460,588		3,834		4,042		—		—		468,464
Commercial		271,821		16,034		23,068		—		—		310,923
Construction of commercial		58,838		—		—		—		—		58,838
Commercial real estate		330,659		16,034		23,068		—		—		369,761
Farm land		1,162		1,214		431		—		—		2,807
Vacant land		14,143		39		—		—		—		14,182
Real estate secured		806,552		21,121		27,541		—		—		855,214
Commercial and industrial		191,857		688		2,587		—		—		195,132
Municipal		16,534		—		—		—		—		16,534
Consumer		12,547		—		—		—		—		12,547
Loans receivable, gross	$	1,027,490	$	21,809	$	30,128	$	—	$	—	$	1,079,427

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, 2022
Residential 1-4 family	$	414,910	$	20	$	12	$	—	$	15	$	47	$	—	$	137
Residential 5+ multifamily		70,459		—		—		—		—		—		—		—
Construction of residential 1-4 family		21,527		—		—		—		—		—		—		—
Home equity lines of credit		24,778		117		—		—		—		117		—		—
Residential real estate		531,674		137		12		—		15		164		—		137
Commercial		367,172		—		85		—		—		85		—		1,199
Construction of commercial		45,762		—		—		—		—		—		—		—
Commercial real estate		412,934		—		85		—		—		85		—		1,199
Farm land		4,225		—		—		—		—		—		—		397
Vacant land		14,796		—		—		—		—		—		—		—
Real estate secured		963,629		137		97		—		15		249		—		1,733
Commercial and industrial		186,861		23		12		100		—		135		100		27
Municipal		18,607		—		—		—		—		—		—		—
Consumer		20,223		116		5		—		—		121		—		—
Loans receivable, gross	$	1,189,320	$	276	$	114	$	100	$	15	$	505	$	100	$	1,760


			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, 2021
Residential 1-4 family	$	372,620	$	223	$	135	$	63	$	90	$	511	$	—	$	750
Residential 5+ multifamily		51,464		—		—		—		861		861		—		861
Construction of residential 1-4 family		19,668		—		70		—		—		70		—		—
Home equity lines of credit		23,000		165		98		—		7		270		—		21
Residential real estate		466,752		388		303		63		958		1,712		—		1,632
Commercial		310,331		87		251		—		254		592		—		1,924
Construction of commercial		58,838		—		—		—		—		—		—		—
Commercial real estate		369,169		87		251		—		254		592		—		1,924
Farm land		2,807		—		—		—		—		—		—		432
Vacant land		14,182		—		—		—		—		—		—		—
Real estate secured		852,910		475		554		63		1,212		2,304		—		3,988
Commercial and industrial		194,838		250		32		1		11		294		11		200
Municipal		16,534		—		—		—		—		—		—		—
Consumer		12,503		40		4		—		—		44		—		—
Loans receivable, gross	$	1,076,785	$	765	$	590	$	64	$	1,223	$	2,642	$	11	$	4,188

Troubled Debt Restructurings (TDRs)

For the three and nine month periods ended September 30, 2022, there were no troubled debt restructurings. 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.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

		Three months ended September 30, 2022												Three months ended September 30, 2021
		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	3,286	$	127		$	(45	)	$	25	$	3,393	$	2,377	$	393		$	(35	)	$	5	$	2,740
Residential 5+ multifamily		1,157		71			—			—		1,228		545		156			—			—		701
Construction of residential 1-4 family		333		(103	)		(25	)		—		205		95		41			—			—		136
Home equity lines of credit		205		14			—			—		219		190		26			(20	)		—		196
Residential real estate		4,981		109			(70	)		25		5,045		3,207		616			(55	)		5		3,773
Commercial		5,169		598			—			—		5,767		6,212		(165	)		—			119		6,166
Construction of commercial		872		(115	)		—			—		757		668		118			—			—		786
Commercial real estate		6,041		483			—			—		6,524		6,880		(47	)		—			119		6,952
Farm land		27		11			—			—		38		32		(1	)		—			—		31
Vacant land		108		4			—			—		112		87		(1	)		—			—		87
Real estate secured		11,157		607			(70	)		25		11,719		10,206		567			(55	)		125		10,843
Commercial and industrial		1,480		5			—			—		1,485		1,256		73			—			3		1,332
Municipal		35		4			—			—		39		32		(1	)		—			—		31
Consumer		130		11			(25	)		6		122		66		62			(19	)		6		115
Unallocated		901		68			—			—		969		1,148		(301	)		—			—		847
Totals	$	13,703	$	695		$	(95	)	$	31	$	14,334	$	12,708	$	400		$	(74	)	$	134	$	13,168

		Nine months ended September 30, 2022												Nine months ended September 30, 2021
		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries			Ending balance
Residential 1-4 family	$	2,846	$	595		$	(73	)	$	25	$	3,393	$	2,646	$	129		$	(44	)	$	9		$	2,740
Residential 5+ multifamily		817		642			(231	)		—		1,228		686		15			—			—			701
Construction of residential 1-4 family		186		44			(25	)		—		205		65		71			—			—			136
Home equity lines of credit		198		32			(11	)		—		219		252		(36	)		(20	)		—			196
Residential real estate		4,047		1,313			(340	)		25		5,045		3,649		179			(64	)		9			3,773
Commercial		5,416		722			(372	)		1		5,767		6,546		(509	)		(7	)		136			6,166
Construction of commercial		1,025		(268	)		—			—		757		596		208			(18	)		—			786
Commercial real estate		6,441		454			(372	)		1		6,524		7,142		(301	)		(25	)		136			6,952
Farm land		21		17			—			—		38		59		(28	)		—			—			31
Vacant land		95		17			—			—		112		180		(94	)		—			1			87
Real estate secured		10,604		1,801			(712	)		26		11,719		11,030		(244	)		(89	)		146			10,843
Commercial and industrial		1,364		166			(46	)		1		1,485		1,397		17			(131	)		49			1,332
Municipal		31		8			—			—		39		43		(12	)		—			—			31
Consumer		82		95			(70	)		15		122		77		82			(34	)		(10	)		115
Unallocated		881		88			—			—		969		1,207		(360	)		—			—			847
Totals	$	12,962	$	2,158		$	(828	)	$	42	$	14,334	$	13,754	$	(517	)	$	(254	)	$	185		$	13,168

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, 2022
Residential 1-4 family	$	413,456	$	3,393	$	1,501	$	—	$	414,957	$	3,393
Residential 5+ multifamily		70,380		1,228		79		—		70,459		1,228
Construction of residential 1-4 family		21,527		205		—		—		21,527		205
Home equity lines of credit		24,895		219		—		—		24,895		219
Residential real estate		530,258		5,045		1,580		—		531,838		5,045
Commercial		364,729		5,745		2,528		22		367,257		5,767
Construction of commercial		45,762		757		—		—		45,762		757
Commercial real estate		410,491		6,502		2,528		22		413,019		6,524
Farm land		3,828		38		397		—		4,225		38
Vacant land		14,796		112		—		—		14,796		112
Real estate secured		959,373		11,697		4,505		22		963,878		11,719
Commercial and industrial		186,969		1,485		27		—		186,996		1,485
Municipal		18,607		39		—		—		18,607		39
Consumer		20,344		122		—		—		20,344		122
Unallocated allowance		—		969		—		—		—		969
Totals	$	1,185,293	$	14,312	$	4,532	$	22	$	1,189,825	$	14,334


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2021
Residential 1-4 family	$	370,558	$	2,845	$	2,573	$	1	$	373,131	$	2,846
Residential 5+ multifamily		51,376		817		949		—		52,325		817
Construction of residential 1-4 family		19,738		186		—		—		19,738		186
Home equity lines of credit		23,249		198		21		—		23,270		198
Residential real estate		464,921		4,046		3,543		1		468,464		4,047
Commercial		307,377		5,388		3,546		28		310,923		5,416
Construction of commercial		58,838		1,025		—		—		58,838		1,025
Commercial real estate		366,215		6,413		3,546		28		369,761		6,441
Farm land		2,375		21		432		—		2,807		21
Vacant land		14,182		95		—		—		14,182		95
Real estate secured		847,694		10,575		7,520		29		855,214		10,604
Commercial and industrial		194,856		1,297		276		67		195,132		1,364
Municipal		16,534		31		—		—		16,534		31
Consumer		12,547		82		—		—		12,547		82
Unallocated allowance		—		881		—		—		—		881
Totals	$	1,071,630	$	12,866	$	7,797	$	96	$	1,079,427	$	12,962

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


September 30, 2022 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	1,178,589	$	12,928	$	—	$	—	$	1,178,589	$	12,928
Potential problem loans ¹		6,704		415		—		—		6,704		415
Impaired loans		—		—		4,532		22		4,532		22
Unallocated allowance		—		969		—		—		—		969
Totals	$	1,185,293	$	14,312	$	4,532	$	22	$	1,189,825	$	14,334


December 31, 2021 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
Performing loans	$	1,046,614	$	10,456	$	—	$	—	$	1,046,614	$	10,456
Potential problem loans ¹		25,016		1,529		—		—		25,016		1,529
Impaired loans		—		—		7,797		96		7,797		96
Unallocated allowance		—		881		—		—		—		881
Totals	$	1,071,630	$	12,866	$	7,797	$	96	$	1,079,427	$	12,962

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
		Recorded Investment		Note		Average		allowance		recognized		Recorded Investment		Note		Average		recognized
September 30, 2022
Residential	$	—	$	—	$	398	$	—	$	—	$	1,580	$	1,677	$	2,321	$	40
Home equity lines of credit		—		—		—		—		—		—		—		11		—
Residential real estate		—		—		398		—		—		1,580		1,677		2,332		40
Commercial		572		572		616		22		22		1,956		2,467		2,397		32
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		397		447		415		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		572		572		1,014		22		22		3,933		4,591		5,144		72
Commercial and industrial		—		—		84		—		—		27		30		55		—
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	572	$	572	$	1,098	$	22	$	22	$	3,960	$	4,621	$	5,199	$	72

Note: The income recognized is for the nine month period ended September 30, 2022.


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Recorded Investment		Note		Average		allowance		recognized		Recorded Investment		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.

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the year ended December 31, 2021:


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Recorded Investment		Note		Average		allowance		recognized		Recorded Investment		Note		Average		recognized
December 31, 2021
Residential	$	43	$	44	$	872	$	1	$	3	$	3,480	$	3,817	$	3,689	$	75
Home equity lines of credit		—		—		17		—		—		21		23		131		—
Residential real estate		43		44		889		1		3		3,501		3,840		3,820		75
Commercial		608		608		1,678		28		32		2,938		3,493		2,974		62
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		431		447		440		—
Vacant land		—		—		56		—		—		—		—		45		—
Real estate secured		651		652		2,623		29		35		6,870		7,780		7,279		137
Commercial and industrial		216		224		309		67		3		60		72		90		—
Consumer		—		—		6		—		—		—		—		13		—
Totals	$	867	$	876	$	2,938	$	96	$	38	$	6,930	$	7,852	$	7,382	$	137

NOTE 4 – LEASES

The Bank leases facilities and equipment with various expiration dates. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance expenses are to be paid by Salisbury. The following table provides the assets and liabilities as of September 30, 2022 and December 31, 2021, as well as the costs of operating and financial leases, which are included in the Bank’s consolidated income statement for the nine months ended September 30, 2022 and 2021.

($ in thousands, except lease term and discount rate)	Classification		September 30, 2022		December 31, 2021
Assets
Operating	Other assets	$	1,231	$	1,021
Finance	Bank premises and equipment ¹		3,912		3,791
Total Leased Assets		$	5,143	$	4,812
Liabilities
Operating	Other liabilities	$	1,231	$	1,021
Finance	Finance lease		4,296		4,107
Total Lease Liabilities		$	5,527	$	5,128
¹ Net of accumulated depreciation of $664 thousand and $496 thousand, respectively.

Lease cost	Classification		Nine months ended		Three months ended
			September 30, 2022		September 30, 2022
Operating leases	Premises and equipment	$	218	$	72
Finance leases:
Amortization of leased assets	Premises and equipment		167		55
Interest on finance leases	Interest expense		41		41
Total lease cost		$	426	$	168

Lease cost	Classification		Nine months ended		Three months ended
			September 30, 2021		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

Weighted Average Remaining Lease Term	September 30, 2022		December 31, 2021
Operating leases	6.1 years		6.9 years
Financing leases	21.7 years		23.5 years
Weighted Average Discount Rate ¹
Operating leases	3.6	%	3.6	%
Financing leases	3.7	%	5.0	%
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, 2022.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2022	$	80		$	74
2023		241			304
2024		204			314
2025		213			324
2026		137			334
Thereafter		507			4,968
Total future minimum lease payments		1,382			6,317
Less amount representing interest		(151	)		(2,022	)
Total present value of net future minimum lease payments	$	1,231		$	4,295

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)		September 30, 2022		December 31, 2021
Residential mortgage loans serviced for others	$	135,656	$	140,623
Fair value of mortgage servicing rights		1,401		1,043

Changes in mortgage servicing rights are as follows:


		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2022			2021			2022			2021
Mortgage Servicing Rights
Balance, beginning of period	$	694		$	748		$	700		$	621
Originated		—			18			72			276
Amortization ⁽¹⁾		(39	)		(36	)		(117	)		(167	)
Balance, end of period	$	655		$	730		$	655		$	730
Valuation Allowance
Balance, beginning of period		—			—			—			(9	)
Decrease in impairment reserve ⁽¹⁾		—			—			—			9
Balance, end of period		—			—			—			—
Mortgage servicing rights, net	$	655		$	730		$	655		$	730

⁽¹⁾

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

NOTE 6 - PLEDGED ASSETS

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

(in thousands)		September 30, 2022		December 31, 2021
Securities available-for-sale (at fair value)	$	78,001	$	75,737
Loans receivable (at book value)		375,645		378,845
Total pledged assets	$	453,646	$	454,582

At September 30, 2022, securities were pledged as follows: $70.88 million to secure public deposits, $7.10 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 7 – 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.

Salisbury’s fair value hedge matured in third quarter 2022. As of December 31, 2021, 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)	December 31, 2021		December 31, 2021
Loans receivable⁽¹⁾	$	9,982	$	(18	)
Total	$	9,982	$	(18	)

⁽¹⁾ These amounts include the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship.

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


	As of December 31, 2021
(in thousands)	Notional Amount		Balance Sheet Location
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other assets	$	18
Total Derivatives designated as hedge instruments				$	18

The tables below present the effect of the Company’s derivative financial instruments on the Income Statement for the three and nine months ended September 30, 2022 and 2021.


		Three months ended September 30, 2022				Nine months ended September 30, 2022
(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	$	45	$	—	$	64	$	—

Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items		45		—		18		—
Derivatives designated as hedging instruments	$	—	$	—	$	46	$	—


		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	)	$	—

NOTE 8 – 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. All per share data has been adjusted to reflect the two-for-one forward common stock split, which was effective on June 30, 2022.


		Three months ended						Nine months ended
Periods ended September 30, (in thousands, except per share data)		2022			2021			2022			2021
Net income	$	4,336		$	3,453		$	11,750		$	12,332
Less: Undistributed earnings allocated to participating securities		(72	)		(53	)		(207	)		(184	)
Net income allocated to common stock	$	4,264		$	3,400		$	11,543		$	12,148
Weighted-average common shares issued		5,784			5,724			5,765			5,706
Less: Unvested restricted stock awards		(97	)		(90	)		(101	)		(85	)
Weighted average common shares outstanding used to calculate basic earnings per common share		5,687			5,634			5,663			5,621
Add: Dilutive effect of stock options		26			52			33			39
Weighted-average common shares outstanding used to calculate diluted earnings per common share		5,713			5,686			5,696			5,660
Earnings per common share (basic)	$	0.75		$	0.60		$	2.04		$	2.16
Earnings per common share (diluted)	$	0.75		$	0.60		$	2.03		$	2.15

NOTE 9 – CONTINGENCIES

In July 2022, Salisbury management discovered that the Bank’s trust department terminated a trust account in May 2020 and distributed approximately $1.0 million that should have been retained in continuance of the trust account. Salisbury has engaged legal counsel and is currently evaluating the Company’s potential financial exposure. At this time, management believes that Salisbury’s exposure is not yet known or knowable and could potentially range from zero to approximately $1.0 million depending upon the facts and circumstances and the scope of Salisbury’s insurance coverage.

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, 2022, 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, 2022, the Bank exceeded the minimum requirement for the capital conservation buffer. As of September 30,2022, 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, 2022, 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, 2022 and December 31, 2021 were $1,241.1 million and $1,085.4 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, 2022

Total Capital (to risk-weighted assets)	$	164,325		13.24	%	$	99,290		8.0	%	$	130,318		10.5	%	$	124,112		10.0	%

Tier 1 Capital (to risk-weighted assets)		149,805		12.07			74,467		6.0			105,495		8.5			99,290		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		149,805		12.07			55,850		4.5			86,878		7.0			80,673		6.5

Tier 1 Capital (to average assets)	$	149,805		9.83		$	60,933		4.0		$	60,933		4.0		$	76,166		5.0
December 31, 2021

Total Capital (to risk-weighted assets)	$	152,789		14.08	%	$	86,832		8.0	%	$	113,968		10.5	%	$	108,541		10.0	%

Tier 1 Capital (to risk-weighted assets)		139,681		12.87			65,124		6.0			92,259		8.5			86,832		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		139,681		12.87			48,843		4.5			75,978		7.0			70,551		6.5

Tier 1 Capital (to average assets)	$	139,681		9.42		$	59,285		4.0		$	59,285		4.0		$	74,106		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 $311 thousand and $253 thousand, respectively, for the three month periods ended September 30, 2022 and 2021, and $862 thousand and $847 thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.

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 $85 thousand and $55 thousand, respectively, for the three month periods ended September 30, 2022 and 2021, and $168 thousand and $184 thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.

Other Retirement Plans

Salisbury adopted ASC 715-60, “Compensation - Retirement Benefits - Defined Benefit Plans - Other Postretirement" and recognized a liability for Salisbury’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $702 thousand and $779 thousand at September 30, 2022, and December 31, 2021, respectively. The Bank realized a credit of $69 thousand for the three months ended September 30, 2022 and recorded an expense of $86 thousand for the three months ended September 30, 2021. The Bank realized a credit of $77 thousand for the nine months ended September 30, 2022 and an expense of $259 thousand for the nine months ended September 30, 2021.

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. In 2022 and 2021, the Bank awarded seven (7) Executives with discretionary contributions to the plan.

On December 27, 2021, the Board of Directors of Salisbury Bank and Trust Company executed the Salisbury Bank and Trust Company Amended and Restated Non-Qualified Deferred Compensation Plan (the “Plan”), effective as of January 1, 2022. The Plan permits the Board to select certain key employees of the Bank to participate in the Plan, provided that such employees also evidence their participation by execution of a Participation Agreement. Before amendment and restatement, the Plan provided solely for discretionary bank contributions to selected participant’s accounts. The participation agreement sets forth the vesting terms of the discretionary contributions and the “benefit age” at which a participant could retire with a fully vested benefit. The participation agreement also sets forth how a participant’s benefit would be distributed (i.e., in a lump sum or in annual installments over a period of up to 10 years, as selected by the participant). Until distribution, a participant’s account would earn interest as of the last day of the plan year at the highest certificate of deposit rate for that year, compounded annually. The participant’s benefits under the Plan are subject to the vesting schedule set forth in the participant’s participation agreement. Notwithstanding the vesting schedule, the participant’s account balance will become automatically 100% vested upon involuntary termination without cause, death, disability or a change in control.

The amended and restated Plan allows participant deferrals and provides greater flexibility in participant elections and investment options. The amended and restated Plan also provides additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified date before separation from service, and allows a participant to elect for each year’s contributions the manner in which such distributions will be paid. Installment distributions can be made in monthly, quarterly or annual installments. Payment of benefits under the Plan, other than benefits payable as a result of base salary deferrals, are conditioned on the participant’s covenant to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one year following the participant’s separation from service. The Bank has established a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally owned by the participants. In second quarter 2022, Salisbury contributed $100 thousand to the amended and restated Plan for Mr. Cantele, President and Chief Executive Officer. Salisbury’s expense for this plan was $47 thousand and $29 thousand, respectively, for the three-month periods ended September 30, 2022 and 2021, and $141 thousand and $86 thousand, respectively, for the nine-month periods ended September 30, 2022 and 2021.

Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers (“NEOs”), 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 ten 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 $184 thousand and $149 thousand, respectively, for the three month periods ended September 30, 2022 and 2021, and $615 thousand and $449 thousand, respectively, for the nine month periods ended September 30, 2022 and 2021. The tax benefit from restricted stock expense was $33 thousand and $27 thousand, respectively, for the three month periods ended September 30, 2022 and 2021; and $111 thousand and $81 thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.

In second quarter 2022, Salisbury granted a total of 18,340 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 $1.0 million. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of September 30, 2022 and 2021 totaled $1,328 thousand and $1,075 thousand, respectively. There were no forfeitures in the third quarter or year to date for 2022 or 2021.

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 was based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. The vesting ranged 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 This tranche of awards vested in second quarter 2022 at 150% for achieving tangible book value per share growth in excess of target payout performance. The vesting of these awards occurred prior to June 30, 2022 and was not affected by the two-for-one forward stock split.

On July 29, 2020, the Compensation Committee granted an additional 14,500 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. The number of units awarded for this tranche has been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.

On June 23, 2021, the Compensation Committee granted an additional 14,800 units under the RSU plan. The performance goal for this tranche 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 ($4.50 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 number of units awarded and the performance goals for this tranche have been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.

On February 28, 2022, the Compensation Committee granted an additional 13,900 units under the RSU plan. The performance goal for this tranche 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 ($4.50 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, 2025. The number of units awarded and the performance goals for this tranche have been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.

The fair value of the awards granted under the RSU plan at the grant date was $462 thousand and $622 thousand, respectively, for those grants awarded in 2022 and 2021. Compensation expense of $47 thousand and $61 thousand was recorded with respect to these RSUs for the three months ended September 2022 and 2021, and $240 thousand and $235 thousand for the nine months ended September 30, 2022 and 2021, respectively. No performance-based restricted stock units were awarded prior to 2019. The shares noted above are contingently issuable only upon attainment of the minimum performance goal.

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 $276 thousand and $210 thousand for the three months ended September 30, 2022 and 2021, and expenses of $814 thousand and $757 thousand for the first nine months of 2022 and 2021, respectively. The tax benefit from (STIP) expense was $50 thousand and $38 thousand, respectively, for the three-month periods ended September 30, 2022 and 2021; and $147 thousand and $136 thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In third quarter 2022 and third quarter 2021, no stock options were exercised.

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 at
(in thousands)	Level 1		Level 2		Level 3		fair value
September 30, 2022
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	16,977	$	—	$	16,977
U.S. Government Agency notes		—		27,924		—		27,924
Municipal bonds		—		44,610		—		44,610
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		63,480		—		63,480
Collateralized mortgage obligations:
U.S. Government agencies		—		22,591		—		22,591
Corporate bonds		—		13,579		—		13,579
Securities available-for-sale	$	—	$	189,161	$	—	$	189,161
Mutual funds		1,882		—		—		1,882
Derivative financial instruments		—		—		—		—


December 31, 2021
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	15,131	$	—		$ 15,131
U.S. Government Agency notes		—		31,604		—		31,604
Municipal bonds		—		47,822		—		47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		74,541		—		74,541
Collateralized mortgage obligations:
U.S. Government agencies		—		20,898		—		20,898
Corporate bonds		—		12,400		—		12,400
Securities available-for-sale	$	—	$	202,396	$	—	$	202,396
Mutual fund		901		—		—		901
Derivative financial instruments		—		18		—		18
Assets at fair value on a non-recurring basis
Assets held for sale ¹	$	700	$	—	$	—	$	700

¹ Prior to December 31, 2021, the Bank entered into an agreement with a third party to sell the building that housed its Poughkeepsie, New York retail branch and relocate the branch to leased space nearby. This sale was completed in January 2022. At September 30, 2022, 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, 2022
Financial Assets
Cash and cash equivalents	$	56,297	$	56,297	$	56,297	$	—	$	—
Securities available-for-sale, net		189,161		189,161		—		189,161		—
Mutual funds		1,882		1,882		1,882		—		—
Federal Home Loan Bank of Boston stock		1,487		1,487		—		1,487		—
Loans receivable, net		1,176,493		1,154,834		—		—		1,154,834
Accrued interest receivable		6,012		6,012		—		6,012		—
Cash surrender value of life insurance policies		30,187		30,187		—		30,187		—
Financial Liabilities
Demand (non-interest-bearing)	$	413,584	$	413,584	$	—	$	413,584	$	—
Demand (interest-bearing)		241,236		241,236		—		241,236		—
Money market		313,987		313,987		—		313,987		—
Savings and other		246,538		246,538		—		246,538		—
Certificates of deposit		109,859		109,536		—		109,536		—
Deposits		1,325,204		1,324,881		—		1,324,881		—
Repurchase agreements		7,109		7,109		—		7,109		—
FHLBB advances		20,000		20,000		—		20,000		—
Subordinated debt		24,517		21,514		—		21,517		—
Note payable		139		135		—		135		—
Finance lease obligation		4,296		3,916		—		—		3,916
Accrued interest payable		18		18		—		18		—


December 31, 2021
Financial Assets
Cash and cash equivalents	$	175,335	$	175,335	$	175,335	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		202,396		202,396		—		202,396		—
Mutual funds		901		901		901		—		—
Federal Home Loan Bank of Boston stock		1,397		1,397		—		1,397		—
Loans held-for-sale		2,684		2,721		—		—		2,721
Loans receivable, net		1,066,750		1,066,733		—		—		1,066,733
Accrued interest receivable		6,260		6,260		—		6,260		—
Cash surrender value of life insurance policies		27,738		27,738		—		27,738		—
Derivative financial instruments		18		18		—		18		—
Financial Liabilities
Demand (non-interest-bearing)	$	416,073	$	416,073	$	—	$	416,073	$	—
Demand (interest-bearing)		233,600		233,600		—		233,600		—
Money market		330,436		330,436		—		330,436		—
Savings and other		237,075		237,075		—		237,075		—
Certificates of deposit		119,009		119,716		—		119,716		—
Deposits		1,336,193		1,336,900		—		1,336,900		—
Repurchase agreements		11,430		11,430		—		11,430		—
FHLBB advances		7,656		7,714		—		7,714		—
Subordinated debt		24,474		24,409		—		24,409		—
Note payable		170		171		—		171		—
Finance lease liability		4,107		4,223		—		—		4,223
Accrued interest payable		49		49		—		49		—

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

NOTE 14 – SUBSEQUENT EVENTS

On October 19, 2022 the Board of Directors declared a dividend of $0.16 per common share payable on November 25, 2022 to shareholders of record as of November 11, 2022.

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, 2021. 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.

FINANCIAL CONDITION

Securities and Short Term Funds

The fair market value of Salisbury’s investment portfolio decreased $12.2 million from year end 2021 to $192.5 million at September 30, 2022. The fair market value included net unrealized pre-tax losses of $28.3 million at September 30, 2022 compared with net unrealized pre-tax gains of $1.1 million at December 31, 2021. The net unrealized losses reflected the sharp increase in market interest rates that has occurred in the last nine months. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $119.0 million, or 67.9%, to $56.3 million at September 30, 2022. This decrease was driven by strong loan growth and normal customer activity during the nine-month period ended September 30, 2022.

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, 2022.

Loans

Net loans receivable increased $109.7 million, or 10.3%, to $1.18 billion at September 30, 2022, compared with $1.07 billion at December 31, 2021. PPP loan balances declined from $25.6 million at December 31, 2021 to $0.4 million at September 30, 2022 due to the forgiveness of such loans by the SBA. Excluding PPP loans, net loans receivable increased by $136.2 million, or 12.9%, compared with December 31, 2021. The increase in net loans receivable was broad-based and reflected growth in residential, consumer, commercial and commercial & industrial loans. The allowance for loan losses increased by $1.4 million from December 2021 primarily due to significant loan growth, management’s current assessment of certain qualitative and environmental factors and charge-off activity during the nine-month period ending September 30, 2022.

Asset Quality

During the first nine months of 2022, overall asset quality continued to improve. Non-performing assets of $1.9 million, or 0.16% of gross loans receivable declined $2.3 million or 55.7% from year end 2021. In addition, total impaired and potential problem loans declined $21.6 million, or 65.8%, from $32.8 million, or 3.04% of gross loans receivable to $11.2 million, or 0.9% of gross loans receivable at September 30, 2022. The decrease in the balance from year end 2021 primarily reflected management’s upgrade of the internal risk rating on loans to businesses in the hospitality and entertainment and recreation industries, which were previously downgraded due to concerns over COVID-19. Such businesses have demonstrated a return to pre-pandemic levels of activity and liquidity. As of September 30, 2022, Salisbury did not have any outstanding loan payment deferrals and the Bank had approximately $0.4 million of PPP loans on its balance sheet compared with approximately $26 million at December 31, 2021.

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

Past Due Loans

Loans past due 30 days or more decreased $2.1 million for the nine months ended September 30, 2022 to $0.5 million, or 0.04% of gross loans receivable compared with $2.6 million, or 0.24% of gross loans receivable at December 31, 2021. The decline in past due loans from year end 2021 primarily reflected the sale and charge-off of certain non-performing loans during the nine-month period ending September 30, 2022.

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

(in thousands)		September 30, 2022		December 31, 2021
Past due 30-59 days	$	276	$	751
Past due 60-89 days		114		590
Past due 90-179 days		100		1
Past due 180 days and over		—		10
Accruing loans		490		1,352
Past due 30-59 days		—		14
Past due 60-89 days		—		—
Past due 90-179 days		—		63
Past due 180 days and over		15		1,213
Non-accrual loans		15		1,290
Total loans past due 30 days or greater	$	505	$	2,642

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, 2022		December 31, 2021
Non-accrual loans, excluding troubled debt restructured loans	$	1,692	$	2,838
Non-accrual troubled debt restructured loans		68		1,350
Accruing troubled debt restructured loans		2,772		3,609
Total impaired loans	$	4,532	$	7,797

Non-Performing Assets

Non-performing assets decreased $2.3 million to $1.9 million, or 0.12% of assets for the nine months ended September 30, 2022, from $4.2 million, or 0.27% of assets at December 31, 2021. The 55.7% decrease in non-performing assets in the first nine months 2022 resulted primarily from the sale and charge-off of certain non-performing loans during the period.

The components of non-performing assets are as follows:

(in thousands)		September 30, 2022		December 31, 2021
Residential 1-4 family	$	137	$	750
Residential 5+ multifamily		—		861
Home equity lines of credit		—		21
Commercial		1,199		1,924
Farm land		397		432
Vacant land		—		—
Real estate secured		1,733		3,988
Commercial and industrial		27		200
Consumer		—		—
Non-accrual loans		1,760		4,188
Accruing loans past due 90 days and over		100		11
Non-performing loans		1,860		4,199
Foreclosed assets		—		—
Non-performing assets	$	1,860	$	4,199

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

(in thousands)		September 30, 2022		December 31, 2021
Current	$	1,745	$	2,898
Past due 30-59 days		—		14
Past due 60-89 days		—		—
Past due 90-179 days		100		64
Past due 180 days and over		15		1,223
Total non-performing loans	$	1,860	$	4,199

At September 30, 2022, 93.82% of non-performing loans were current with respect to loan payments, compared with 69.02% at December 31, 2021.

Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans decreased $2.1 million, or 42.7%, during the first nine months of 2022 to $2.8 million, or 0.24% of gross loans receivable at September 30, 2022, compared to $5.0 million, or 0.46% of gross loans receivable at December 31, 2021. The reduction in loan balance from year end 2021 primarily reflected the sale and charge-off of loans during the nine month period ended September 30, 2022.

The components of troubled debt restructured loans are as follows:

(in thousands)		September 30, 2022		December 31, 2021
Residential 1-4 family	$	1,364	$	1,824
Residential 5+ multifamily		79		87
Commercial		1,329		1,622
Real estate secured		2,772		3,533
Commercial and industrial		—		76
Accruing troubled debt restructured loans		2,772		3,609
Residential 1-4 family		68		256
Residential 5+ multifamily		—		861
Commercial		—		233
Real estate secured	$	68	$	1,350
Non-accrual troubled debt restructured loans		68		1,350
Troubled debt restructured loans	$	2,840	$	4,959

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

(in thousands)		September 30, 2022		December 31, 2021
Current	$	2,772	$	3,540
Past due 30-59 days		—		37
Past due 60-89 days		—		32
Accruing troubled debt restructured loans		2,772		3,609
Current		68		414
Past due 180 days and over		—		936
Non-accrual troubled debt restructured loans		68		1,350
Total troubled debt restructured loans	$	2,840	$	4,959

At September 30, 2022, 100.00% of troubled debt restructured loans were current with respect to loan payments, as compared with 79.73% at December 31, 2021.

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 decreased $18.3 million during the first nine months of 2022 to $6.7 million, or 0.56% of gross loans receivable at September 30, 2022, compared with $25.0 million, or 2.32% of gross loans receivable at December 31, 2021. The decrease primarily reflected internal credit risk rating upgrades on loans to businesses primarily in the hospitality, health care and entertainment and recreation industries which were previously downgraded due to concerns over the impact of COVID-19. These businesses have demonstrated a return to pre-pandemic levels of activity and liquidity, warranting the improvement in risk rating.

The components of potential problem loans are as follows:

(in thousands)		September 30, 2022		December 31, 2021
Residential 1-4 family	$	858	$	999
Residential 5+ multifamily		—		709
Residential real estate		858		1,708
Commercial		4,156		20,998
Construction of commercial		—		—
Commercial real estate		4,156		20,998
Farm land		—		—
Real estate secured		5,014		22,706
Commercial and industrial		1,690		2,310
Consumer		—		—
Total potential problem loans	$	6,704	$	25,016

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

(in thousands)		September 30, 2022		December 31, 2021
Current	$	6,672	$	24,977
Past due 30-59 days		20		23
Past due 60-89 days		12		16
Total potential problem loans	$	6,704	$	25,016

At September 30, 2022, 99.52% of potential problem loans were current with respect to loan payments, as compared with 99.84% at December 31, 2021. Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits decreased $11.0 million, or 0.1%, to $1.325 billion at September 30, 2022 compared with $1.336 billion at December 31, 2021. The decrease reflected normal customer activity as deposit levels returned to pre-pandemic levels. Retail repurchase agreements decreased $4.3 million during 2022 to $7.1 million at September 30, 2022, from $11.4 million at December 31, 2021.

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


	September 30, 2022								December 31, 2021
(in thousands)	Average Balance		Percent			Weighted Average Interest Rate			Average Balance		Percent			Weighted Average Interest Rate
Demand deposits	$	391,492		29.58	%		0.00	%	$	366,953		29.28	%		0.00	%
Interest-bearing checking accounts		233,547		17.64			0.18			224,763		17.93			0.19
Regular savings accounts		246,101		18.59			0.29			315,469		25.17			0.17
Money market savings		320,552		24.22			0.44			215,300		17.18			0.11
Certificates of deposit (CD’s)¹		131,918		9.97			0.73			130,879		10.44			0.72
Total deposits	$	1,323,610		100.00	%		0.26	%	$	1,253,364		100.00	%		0.17	%

¹CD’s also include brokered certificates and there were none at September 30, 2022 and $7.9 million at December 31, 2021.

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

Interest rates (in thousands)		September 30, 2022		December 31, 2021
Less than 1.00%	$	79,245	$	97,099
1.00% to 1.99%		14,589		14,919
2.00% to 2.99%		15,787		6,493
3.00% to 3.99%		238		498
Total	$	109,859	$	119,009

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


	At September 30, 2022
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%	$	58,315	$	11,841	$	3,764	$	5,325	$	79,245		72.13	%
1.00% to 1.99%		8,530		3,814		2,245		—		14,589		13.28
2.00% to 2.99%		8,274		5,016		2,497		—		15,787		14.37
3.00% to 3.99%		238		—		—		—		238		0.22
Total	$	75,357	$	20,671	$	8,506	$	5,325	$	109,859		100.00	%

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

September 30, 2022 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	23,015			$	6,479			$	18,252			$	19,351			$	67,097

Salisbury had $20.0 million of outstanding FHLBB advances at September 30, 2022 compared with an outstanding balance of $7.7 million at December 31, 2021. 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, 2022, $20.0 million of letters of credit were outstanding.

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At September 30, 2022, Salisbury’s excess borrowing capacity at FHLBB was approximately $233.0 million. 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 a deterioration in economic conditions or other factors cause depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

Operating activities for the nine-month period ended September 30, 2022 provided net cash of $22.3 million. Investing activities utilized net cash of $135.2 million principally from $115.1 million of net loan originations and principal collections, $52.2 million of purchases of securities available-for-sale, $2.5 million in purchase of Bank Owned Life Insurance (BOLI) and $0.8 million of capital expenditures, partly offset by proceeds of $13.1 million from calls, maturities and principle payments on securities available-for-sale, and $22.0 million from the sale of available-for-sale-securities. Financing activities utilized net cash of $6.1million principally due to a decrease in deposit transaction accounts of $1.8 million, a decrease of $9.2 million in time deposits, a decrease of $4.3 million for securities sold under repurchase agreements, payments of $6.0 million for long-term FHLB borrowings, payments of $1.7 million on amortizing FHLBB advances, and the payment of common stock dividends of $2.8 million, partially offset by $20.0 million in FHLB short term advances.

At September 30, 2022, Salisbury had outstanding commitments to fund new loan originations of $57.6 million and unused lines of credit of $250.2 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, 2022 and 2021

OVERVIEW

Net income allocated to common stock was $4.3 million, or $0.75 per basic common share, for the third quarter ended September 30, 2022 (third quarter 2022), compared with $3.4 million, or $0.60 per basic common share, for the third quarter ended September 30, 2021 (third quarter 2021), and $3.8 million, or $0.67 per basic common share, for the second quarter ended June 30, 2022 (second quarter 2022).

Net Interest Income

Tax equivalent net interest income of $12.1 million for the third quarter 2022 increased $1.7 million, or 16.5%, versus third quarter 2021. Average total earning assets increased $53.8 million, or 3.8%, versus third quarter 2021. Average total interest bearing deposits increased $33.6 million, or 3.7%, versus third quarter 2021. The tax equivalent net interest margin for the third quarter 2022 was 3.27% compared with 2.92% for the third quarter 2021. Excluding PPP loan, the tax equivalent net interest margin for the third quarter 2022 was 3.25% compared with 2.78% for the third quarter 2021. The increase in net interest margin from third quarter 2021 primarily reflected a $111.7 million, or 10.6%, increase in average loans and an increase of 5 basis points in average loan yields as well as a $70.7 million, or 46.9% increase in average securities balances and an increase of 24 basis points in average yields.

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)		2022		2021		2022		2021		2022		2021
Loans (a)(d)	$	1,168,037	$	1,056,266	$	11,675	$	10,382		3.95	%	3.90	%
Securities (c)(d)		221,620		150,841		1,192		720		2.15		1.91
FHLBB stock		1,191		1,743		8		6		2.92		1.38
Short term funds (b)		68,818		196,997		344		73		1.98		0.15
Total earning assets		1,459,666		1,405,847		13,219		11,181		3.58		3.15
Other assets		60,283		72,547
Total assets	$	1,519,949	$	1,478,394
Interest-bearing demand deposits	$	233,547	$	227,291		106		111		0.18		0.19
Money market accounts		320,552		327,861		356		140		0.44		0.17
Savings and other		246,101		217,541		179		58		0.29		0.11
Certificates of deposit		131,918		125,768		242		223		0.73		0.70
Total interest-bearing deposits		932,118		898,461		883		532		0.38		0.23
Repurchase agreements		9,684		14,296		4		5		0.18		0.15
Finance lease		5,318		2,685		41		33		3.05		4.98
Note payable		142		183		2		3		6.15		6.11
Subordinated debt (net of issuance costs)		24,508		24,452		233		233		3.80		3.82
FHLBB advances		217		9,329		2		30		3.15		1.28
Total interest-bearing liabilities		971,987		949,406		1,165		836		0.48		0.35
Demand deposits		410,861		388,557
Other liabilities		7,065		6,965
Shareholders’ equity		130,036		133,466
Total liabilities & shareholders’ equity	$	1,519,949	$	1,478,394
Net interest income					$	12,054	$	10,345
Spread on interest-bearing funds										3.11		2.80
Net interest margin (e)										3.27		2.92

(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 $211,000 and $180,000, respectively, for 2022 and 2021 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 2022 and 2021.

(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)	2022 versus 2021
Change in interest due to		Volume			Rate			Net
Loans	$	1,159		$	134		$	1,293
Securities		360			112			472
FHLBB stock		(4	)		6			2
Short term funds		(337	)		608			271
Interest-earning assets		1,178			860			2,038
Deposits		10			341			351
Repurchase agreements		(2	)		1			(1	)
Finance lease		27			(19	)		8
Note Payable		(1	)		—			(1	)
Subordinated Debt		1			(1	)		—
FHLBB advances		(50	)		22			(28	)
Interest-bearing liabilities		(15	)		344			329
Net change in net interest income	$	1,193		$	516		$	1,709

Interest Income

Tax equivalent interest income of $13.2 million for third quarter 2022 increased $2.0 million, or 18.2% from third quarter 2021. Loan income increased $1.3 million, or 12.5%, compared to third quarter 2021 due to a increase in yield of 5bps, and a $111.7 million, or 10.6%, increase in average loan balances. Tax equivalent securities income increased $472 thousand, or 65.6%, compared to third quarter 2021 due to a $70.7 million, or 46.9%, increase in average balances and a 24 basis point increase in average yield. Income on short-term funds increased $271 thousand, or 371.2%, compared with third quarter 2021 primarily due to a 183 basis point increase in the average yield, partially offset by a decrease of $128.1 million, or 65.0%, in average short-term funds due to the funding of loans and normal customer activity.

Interest Expense

Interest expense of $1.2 million for third quarter 2022 increased $329 thousand, or 39.4%, compared with third quarter 2021. Interest on deposit accounts increased $351 thousand, or 66.0%, from third quarter 2021 as a result of a 15 basis points increase in average deposit rates and a $33.7 million, or 3.7%, increase in average balances. Interest expense on FHLBB borrowings decreased $28 thousand, or 93.3%, from third quarter 2021 primarily as a result of a decrease in the average balance of $9.1 million, or 97.6%, partly offset by an increase in the average borrowing rate of 187 basis points. Interest expense on subordinated debt remained unchanged at $233 thousand, for third quarter 2022 and third quarter 2021.

Provision and Allowance for Loan Losses

A provision expense of $0.7 million was recorded for third quarter 2022, compared with $0.4 million for third quarter 2021. The provision expense for third quarter 2022 primarily reflected loan growth during the quarter as well as adjustments to certain qualitative factors due to rising interest rates, persistent inflation and the increased risk of an economic recession. Net loan charge-offs (recoveries) were $64 thousand for third quarter 2022 compared with ($60) thousand for third quarter 2021. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A deterioration in economic conditions may result in an increase in delinquencies, which 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 1.20% for third quarter 2022, versus 1.20% for second quarter 2022 and 1.28% for third quarter 2021. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 770% for third quarter of 2022, versus 324% for second quarter of 2022 and 263% for third quarter of 2021.

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

Three months ended September 30,	2022		2021
Net charge-offs (recoveries) to average loans receivable, gross	0.07	%	(0.01	%)
Non-performing loans to loans receivable, gross	0.16		0.47
Accruing loans past due 30-89 days to loans receivable, gross	0.03		0.08
Allowance for loan losses to loans receivable, gross	1.20		1.23
Allowance for loan losses to non-performing loans	770.49		263.30
Non-performing assets to total assets	0.12		0.34

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $1.9 million or 0.16% of gross loans receivable at September 30, 2022 compared with $5.0 million, or 0.47%, at September 30, 2021. Accruing loans past due 30-89 days decreased $0.5 million to $0.4 million, or 0.03% of gross loans receivable, from $0.9 million, or 0.08% of gross loans receivable, at September 30, 2021. 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.

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)		2022			2021			2022 vs. 2021
Trust and wealth advisory	$	1,228		$	1,286		($	58	)	(4.5	%)
Service charges and fees		1,219			1,211			8		0.7
Mortgage banking activities, net		64			108			(44	)	(40.7	)
Losses on mutual fund		(47	)		(4	)		(43	)	1,075.0
Gains on securities, net		—			7			(7	)	(100.0	)
Bank-owned life insurance (“BOLI”) income		201			135			66		48.9
Gain on sale of assets		—			73			(73	)	(100.0	)
Other		28			24			4		16.7
Total non-interest income	$	2,693		$	2,840		($	147	)	(5.2	%)

Non-interest income for third quarter 2022 decreased $147 thousand versus third quarter 2021. Trust and Wealth Advisory income decreased $58 thousand versus third quarter 2021 primarily due to lower asset management fees. Assets under administration were $1.2 billion as of September 30, 2022 compared with $973.2 million as of September 30, 2021. Discretionary assets under administration of $522.1 million at September 30, 2022 decreased from $608.2 million at September 30, 2021 primarily due to lower equity valuations. Non-discretionary assets under administration of $710.2 million for third quarter 2022 increased from $365.0 million at third quarter 2021 due to a higher valuation of certain partnership assets for an existing client relationship. The trust and wealth business records only a nominal annual fee on this relationship.

Service charges and fees of $1.2 million for third quarter 2022 were essentially unchanged from third quarter 2021. Net fees from mortgage banking activities were slightly below third quarter 2021 due to lower sales volume. Salisbury did not sell any residential loans to FHLBB during third quarter 2022 compared with sales of $1.7 million in third quarter 2021.

Non-Interest Expense

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


Three months ended September 30, (dollars in thousands)		2022		2021		2022 vs. 2021
Salaries	$	3,802	$	3,361	$	441		13.1	%
Employee benefits		1,224		1,322		(98	)	(7.4	)
Premises and equipment		1,117		1,060		57		5.4
Write-down of assets		—		144		(144	)	(100.0	)
Information processing and services		711		632		79		12.5
Professional fees		689		735		(46	)	(6.3	)
Collections, OREO, and loan related		67		120		(53	)	(44.2	)
FDIC insurance		98		146		(48	)	(32.9	)
Marketing and community support		214		256		(42	)	(16.4	)
Amortization of intangibles		46		61		(15	)	(24.6	)
Other		544		447		97		21.7
Total non-interest expense	$	8,512	$	8,284	$	228		2.8	%

Non-interest expense for third quarter 2021 increased $228 thousand versus third quarter 2021. Salaries increased $441 thousand versus third quarter 2021 primarily reflecting higher base salary expense as well as higher production and incentive accruals. Employee benefits expense decreased $98 thousand from third quarter 2021 primarily due to a reduction of deferred compensation expense, partially offset by higher 401k and ESOP accruals. Premises and equipment expense increased $57 thousand versus third quarter 2021 due to increased finance lease and software 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. Data processing expense increased $79 thousand versus third quarter 2021 mainly due to higher data processing, ATM and debit card processing fees and increased website expense. Professional fees decreased $46 thousand versus third quarter 2021 as higher legal, audit & exam fees and internal audit fees offset by lower consulting and investment management fees. Collections, OREO and loan related expenses decreased $53 thousand versus third quarter 2021 primarily due to lower litigation and appraisal costs. FDIC insurance decreased $48 thousand versus third quarter 2021 on lower deposit balances. Marketing and community support costs decreased $42 thousand compared to the prior year third quarter primarily due to timing of current marketing campaigns and contributions as well as branding related costs incurred in the prior year.

Other Matters

Income Taxes

The effective income tax rates for third quarter 2022 and third quarter 2021 were 18.65% and 20.09%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income.

Salisbury did not incur Connecticut income tax in 2022 (to date) or 2021, 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, 2022 and 2021

Overview

Net income allocated to common shareholders was $11.5 million, or $2.04 per basic common share, for the nine month period ended September 30, 2022 (nine month period 2022), compared with $12.1 million, or $2.16 per basic common share, for the nine month period ended September 30, 2021 (nine month period 2021).

Net Interest Income

Tax equivalent net interest income of $33.6 million for the nine month period 2022 increased $3.0 million, or 9.8%, versus the nine month period 2021. Average total earning assets increased $75.8 million, or 5.6%, versus the nine month period 2021. Average total interest bearing deposits increased $39.0 million, or 4.4%, versus the nine month period 2021. The net interest margin of 3.12% increased 11 basis points from 3.01% for the nine month period 2021. Excluding PPP loans, the net interest margin for the nine month period ended September 30, 2022 was approximately 3.06% compared with 2.90% for the same period in 2021. The increase in net interest margin for the nine month period ended September 30, 2022 compared to the prior year period primarily reflected a $66.8 million, or 6.3%, increase in average loan balances, partially offset by a 5 basis point decline in average yield. This increase in interest income was partially offset by a $0.3 million increase in deposit costs due to a $39.1 million increase in average interest-bearing balances and a 3 basis point increase in average deposit costs.

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)		2022		2021		2022		2021		2022		2021
Loans (a)(d)	$	1,120,246	$	1,053,451	$	32,646	$	30,989		3.85	%	3.90	%
Securities (c)(d)		218,455		130,864		3,270		2,080		2.00		2.12
FHLBB stock		1.281		1.840		26		26		2.69		1.89
Short term funds (b)		82,075		160,055		491		148		0.80		0.12
Total earning assets		1,422,057		1,346,210		36,433		33,243		3.39		3.27
Other assets		65,570		71,421
Total assets	$	1,487,627	$	1,417,631
Interest-bearing demand deposits	$	231,883	$	224,479		313		332		0.18		0.20
Money market accounts		313,871		310,908		639		408		0.27		0.18
Savings and other		238,688		209,180		339		173		0.19		0.11
Certificates of deposit		133,339		134,143		647		739		0.65		0.74
Total interest-bearing deposits		917,781		878,710		1,938		1,652		0.28		0.25
Repurchase agreements		9,024		11,608		11		13		0.16		0.15
Finance lease		5,233		2,753		122		102		3.12		4.95
Note payable		153		192		7		9		6.14		6.13
Subordinated debt (net of issuance costs)		24,495		21,851		699		767		3.80		4.68
FHLBB advances		1,054		10,567		57		96		7.16		1.20
Total interest-bearing liabilities		957,740		925,681		2,834		2,639		0.40		0.38
Demand deposits		391,537		355,352
Other liabilities		6,818		6,897
Shareholders’ equity		131,532		129,701
Total liabilities & shareholders’ equity	$	1,487,627	$	1,417,631
Net interest income					$	33,599	$	30,604
Spread on interest-bearing funds										3.00		2.89
Net interest margin (e)										3.12		3.01

(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 $575,000 and $523,000, respectively for 2022 and 2021 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 2022 and 2021.

(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)	2022 versus 2021
Change in interest due to		Volume			Rate			Net
Loans	$	2,200		$	(543	)	$	1,657
Securities		1,400			(210	)		1,190
FHLBB stock		(12	)		12			—
Short term funds		(480	)		823			343
Interest-earning assets		3,108			82			3,190
Deposits		17			269			286
Repurchase agreements		(3	)		1			(2	)
Finance lease		93			(73	)		20
Note payable		(2	)		—			(2	)
Subordinated Debt		136			(204	)		(68	)
FHLBB advances		(385	)		346			(39	)
Interest-bearing liabilities		(144	)		339			195
Net change in net interest income	$	3,252		$	(257	)	$	2,995

Interest Income

Tax equivalent interest income of $36.4 million for the nine month period 2022 increased $3.2 million or 9.6%, compared with the nine month period 2021. Loan income increased $1.7 million, or 5.3%, compared with the nine months of 2021 primarily due to a $66.7 million, or 6.3%, increase in average loan balances, partially offset by a 5 basis point decrease in the average yield. Tax equivalent securities income for the nine month period 2022 increased $1.2 million, or 57.2%, compared with the nine month period 2021, primarily due to a $87.6 million, or 66.9%, increase in average balances, partially offset by an 12 basis point decrease in average yield. Income on short-term funds for the nine month period 2022 increased $343 thousand, or 231.8%, compared with the nine months of 2021 primarily due to a 68 basis point increase in the average short-term funds yields, partially offset by a $78.0 million, or 48.7%, decrease in average short-term funds, due to due to the funding of loans, the investment of cash into securities and normal customer activity.

Interest Expense

Interest expense of $2.8 million for the nine month period 2022 increased $195 thousand, or 7.4%, compared with the nine month period 2021. Interest on deposit accounts increased $286 thousand, or 17.3%, as a result of a $39.0 million, or 4.4%, increase in the average balances and a 3 basis point increase in average deposit rates. Interest expense on FHLBB borrowings decreased $39 thousand, or 40.6%, due to a $9.5 million, or 90.0%, decrease in average balances, partially offset by a 596 basis point increase in the average borrowing rate. Interest expense on subordinated debt for the nine month period 2022 decreased $68 thousand, or 8.9%, due to a 88 basis point decrease in average yield, partially offset by a $2.6 million, or 12.1% increase in the average balance.

Provision and Allowance for Loan Losses

A provision of $2.2 million was recorded for the nine-month period ended September 30, 2022 compared to a net credit reserve release of $0.5 million for the nine-month period ended September 30, 2021. Net loan charge-offs were $786 thousand and $69 thousand for the respective periods. The provision expense for nine-month period of 2022 reflected significant loan growth and adjustments to qualitative factors due to the uncertain macro-economic environment. The provision expense also reflected a release of credit reserves of $0.6 million due to management’s upgrade of the internal risk rating on certain loans related to the hospitality and entertainment and recreation industries. In 2021 management reduced credit reserves as a result of an improvement in the business environment in Salisbury’s market areas due to the rollout out of vaccinations and the lifting of COVID-19 restrictions.

Charge-off’s for the nine-month period in 2022 included a write-down of $374 thousand in first quarter 2022 to reduce the carrying value on $3.8 million of non-performing and under-performing residential and commercial loans, which Salisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately $239 thousand due to higher final bids. This increase was recorded as a pre-tax gain on sale in Salisbury’s consolidated statement of income in first quarter 2022. In second quarter 2022, Salisbury charged off $312 thousand, which primarily related to a discrete commercial loan. Net charge-offs were $64 thousand for third quarter 2022.

Reserve coverage at September 30, 2022, as measured by the ratio of allowance for loan losses to gross loans, at 1.20%, compares with 1.23% a year ago at September 30, 2021. Excluding PPP loans, the reserve coverage ratio was 1.20% for September 30, 2022 compared with 1.28% for September 30, 2021. 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 or a deterioration in economic conditions due to high inflation and rising interest rates, which results in loan payment delinquencies, may subsequently necessitate an increase in loan loss reserves.

Non-interest income

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


Nine months ended September 30, (dollars in thousands)		2022			2021			2022 vs. 2021
Trust and wealth advisory	$	3,762		$	3,685		$	77		2.1	%
Service charges and fees		4,080			3,536			544		15.4
Mortgage banking activities, net		497			912			(415	)	(45.5	)
Losses on mutual fund		(119	)		(18	)		(101	)	561.1
Gains (losses) gains on securities, net		165			(2	)		167		(8350.0	)
Bank-owned life insurance (“BOLI”) income		615			386			229		59.3
Gain on sale of assets		—			73			(73	)	(100.0	)
Other		84			81			3		3.7
Total non-interest income	$	9,084		$	8,653		$	431		5.0	%

Non-interest income for the nine month period ended September 30, 2022 increased $431 thousand versus the same period in 2021. Trust and wealth advisory revenues increased $77 thousand mainly on higher estate planning fees. Service charges and fees increased $544 thousand primarily due to non-recurring loan prepayment fees. Net fees from mortgage banking activities decreased $415 thousand due to lower volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $7.5 million for the nine month period ended September 30, 2022 compared with $29.7 million for the nine month period ended September 30, 2021. The nine month periods ended September 30, 2022 and 2021 included mortgage servicing amortization of $117 thousand and $167 thousand, respectively. BOLI income and gains increased $229 thousand versus the same period in 2021. The increase included a non-recurring non-taxable gain of $89 thousand related to proceeds receivable from a bank-owned life insurance policy (“BOLI”) due to the death of a former covered employee. Non-interest income for the nine month period ended September 30, 2021 also included a one-time 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)		2022		2021		2022 vs. 2021
Salaries	$	10,938	$	9,664	$	1,274		13.2	%
Employee benefits		3,789		3,990		(201	)	(5.0	)
Premises and equipment		3,200		3,034		166		5.5
Write-down of assets		3		144		(141	)	(97.9	)
Information processing and services		2,098		1,824		274		15.0
Professional fees		2,297		2,090		207		9.9
Collections, OREO, and loan related		300		317		(17	)	(5.4	)
FDIC insurance		391		370		21		5.7
Marketing and community support		661		552		109		19.7
Amortization of intangibles		150		198		(48	)	(24.2	)
Other		1,872		1,448		424		29.3
Total non-interest expense	$	25,699	$	23,631	$	2,068		8.8	%

Non-interest expense for the nine month period ended September 30, 2022 increased $2.1 million versus the same period in 2021. Salaries increased $1.3 million primarily due to higher base salaries and incentives. Benefits decreased $201 thousand primarily due lower medical insurance costs, 401K employer match and deferred compensation related expenses. Premises and equipment increased $166 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 sale of the building housing the Bank’s branch in Poughkeepsie, New York. Data processing increased $274 thousand mainly due to ATM fees, data processing costs and website costs. The increase in professional fees of $207 thousand versus the nine month period 2021 primarily reflected higher legal, consulting and investment management expenses. Collections, OREO and loan related expense decreased $17 thousand primarily due to lower mortgage recording costs. FDIC related expense increased $21 thousand compared to the same period in 2021 reflecting higher deposit balances. Marketing and community support costs increased $109 thousand compared to the same period in 2021 primarily due to Salisbury’s ongoing branding initiatives and marketing campaigns. Amortization of intangible assets decreased $48 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $424 thousand primarily due fraud charges incurred in 2022 as well as higher Director fees and training costs.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2022 and September 30, 2021 were 17.55% and 21.05%, 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.

Salisbury did not incur Connecticut income tax in 2022 (to date) or 2021, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.

CAPITAL RESOURCES

Shareholders’ Equity

Shareholders’ equity decreased $13.4 million in nine months to $123.2 million at September 30, 2022 as unrealized after-tax losses in the available-for-sale securities (“AFS”) portfolio of $23.2 million and common stock dividends paid of $2.8 million were partially offset by net income of $11.8 million and issued stock and stock-based compensation totaling of $0.6 million. The unrealized losses in the AFS portfolio, which reflected the sharp increase in market interest rates during first nine months of 2022, reduced both book value and tangible book value at September 30, 2022. Book value per common share of $21.29 at September 30, 2022 decreased $0.72 from second quarter 2022 and decreased $2.04 from third quarter 2021. Tangible book value per common share of $18.86 at September 30, 2022 decreased $0.71 from second quarter 2022 and decreased $1.97 from third quarter 2021.

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, 2022			December 31, 2021
Total Capital (to risk-weighted assets)		13.24	%		14.08	%
Tier 1 Capital (to risk-weighted assets)		12.07			12.87
Common Equity Tier 1 Capital (to risk-weighted assets)		12.07			12.87
Tier 1 Capital (to average assets)		9.83			9.42

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. As of September 30, 2022, 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”) may elect 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. The Bank continues to evaluate the benefits of transitioning to this simplified methodology for assessing capital adequacy.

Stock Repurchase Plan

On March 23, 2022 Salisbury announced that its Board of Directors has renewed its share repurchase program that was established in March 2021. 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 a period of 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 over the next twelve (12) months. Salisbury did not repurchase any shares during the nine-month period ended September 30, 2022.

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 $10.0 million of subordinated debt issued in 2015.

Dividends

Salisbury paid $2.8 million in common stock dividends during the nine month period ended September 30, 2022. On October 19, 2022, the Board of Directors of Salisbury declared a common stock dividend of $0.16 per common share payable on November 25, 2022 to shareholders of record on November 11, 2022. 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;

(f)

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

(g)

the risk of adverse changes in business conditions due to geo-political tensions;

(h)

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

(i)

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, 2022 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 consider 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, 2022, 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 200 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 into the first half of 2023 with the treasury yield curve then declining in the second half of 2023 and into 2024. The Fed Funds rate increases through March 2023 and then declines in the second half of the year so that the Fed Funds rate is 0.75% higher at September 30, 2023 than it was at September 30, 2022. As of September 30, 2023, the two-year, five year and 10 year treasury rates are projected to be 0.30%, 0.40% and 0.50% higher than actual rates as of September 30, 2022. The Fed Funds rate is then projected to decline 1.50% from September 30, 2023 to September 30, 2024 with the two-year, five year and 10 year treasury declining by 1.66%, 1.45% and 1.15% respectively, over that time period. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of September 30, 2022, 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, 2022.

As of September 30, 2022	Months 1-12			Months 13-24
Immediately rising interest rates + 200bp (static growth assumptions)		(2.40	)%		2.30	%
Immediately rising interest rates + 100bp (static growth assumptions)		(1.00	)		1.40
Immediately falling interest rates - 100bp (static growth assumptions)		(1.70	)		(4.30	)

The negative exposure of net interest income to immediately and gradually rising rates as compared to the unchanged rate scenario results from a faster projected rise in the cost of funds versus income from earning assets, as relatively rate-sensitive money market and time deposits re-price faster than longer duration earning assets. The positive exposure of net interest income to immediately and gradually rising rates as compared to the unchanged rate scenario results from a faster projected rise in income from earning assets versus the projected increase in the Bank’s cost of funds. 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. 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, 2022(in thousands)		Rates up 100bp			Rates up 200bp
U.S. Treasury	$	(715	)	$	(1,392	)
U.S. Government agency notes		(944	)		(1,739	)
Municipal bonds		(3,292	)		(6,306	)
Mortgage backed securities
U.S. Government agencies and U.S. Government- sponsored enterprises		(2,953	)		(5,763	)
Collateralized mortgage obligations
U.S. Government agencies		(1,444	)		(2,901	)
Corporate bonds		(515	)		(931	)
Total available-for-sale debt securities	$	(9,863	)	$	(19,032	)

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, 2022. 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, 2022.

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, 2022 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

Please refer to the note on forward-looking statements in this Quarterly Report on Form 10-Q. In addition, please consider the risk factors discussed in Salisbury’s Annual Report on Form 10-K for the year ended December 31, 2021. There were no material changes to the risk factors previously disclosed in such Annual Report.

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., as amended (incorporated by reference to Exhibit 3.1 of Form 10-Q filed on August 15, 2022).

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 4.1 of Registrant’s Form 8-K filed March 31, 2021).

10.1	Amendment Number Two to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed June 23, 2022).

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 4, 2022	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

November 4, 2022	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer