SALISBURY BANCORP, INC. - Quarter Report: 2022 June (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended June 30, 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 August 3, 2022 is 5,783,966.

TABLE OF CONTENTS

	Page
PART I.	FINANCIAL INFORMATION	3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2022 (unaudited) AND DECEMBER 31,2021		3
CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2022 AND 2021 (unaudited)		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2022 and 2021 (unaudited)		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2022 and 2021 (unaudited)		5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 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	28
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	42
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	44
SIGNATURES		44

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share data)		June 30, 2022			December 31, 2021
ASSETS		(unaudited)
Cash and due from banks	$	8,611		$	6,404
Interest bearing demand deposits with other banks		62,856			168,931
Total cash and cash equivalents		71,467			175,335
Interest bearing Time Deposits with Financial Institutions		750			750
Securities
Available-for-sale at fair value		203,110			202,396
Mutual funds at fair value		1,672			901
Federal Home Loan Bank of Boston stock at cost		945			1,397
Loans held-for-sale		—			2,684
Loans receivable, net (allowance for loan losses: $13,703 and $12,962)		1,135,758			1,066,750
Bank premises and equipment, net		22,710			22,625
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $5,567 and $5,463)		314			418
Accrued interest receivable		6,123			6,260
Cash surrender value of life insurance policies		28,063			27,738
Deferred taxes		6,460			2,588
Other assets		5,334			5,527
Total Assets	$	1,496,521		$	1,529,184
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	383,674		$	416,073
Demand (interest bearing)		233,947			233,600
Money market		314,244			330,436
Savings and other		231,322			237,075
Certificates of deposit		153,352			119,009
Total deposits		1,316,539			1,336,193
Repurchase agreements		16,574			11,430
Federal Home Loan Bank of Boston advances		—			7,656
Subordinated debt		24,502			24,474
Note payable		149			170
Finance lease obligations		4,329			4,107
Accrued interest and other liabilities		7,125			8,554
Total Liabilities		1,369,218			1,392,584
Shareholders' Equity ¹
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		(1,512	)		(925	)
Paid-in capital		47,205			46,374
Retained earnings		95,568			89,995
Accumulated other comprehensive (loss) income, net		(14,536	)		870
Total Shareholders' Equity		127,303			136,600
Total Liabilities and Shareholders' Equity	$	1,496,521		$	1,529,184

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

¹The number of authorized, issued and outstanding shares has been adjusted to reflect the two-for-one forward stock split effective on June 30, 2022.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)


		Three months ended						Six months ended
Periods ended June 30, (in thousands, except per share amounts)		2022			2021			2022			2021
Interest and dividend income
Interest and fees on loans	$	10,576		$	9,901		$	20,740		$	20,377
Interest on debt securities
Taxable		859			488			1,583			912
Tax exempt		187			172			362			334
Other interest and dividends		107			61			164			95
Total interest and dividend income		11,729			10,622			22,849			21,718
Interest expense
Deposits		577			567			1,055			1,121
Repurchase agreements		4			4			6			8
Finance lease		41			36			82			69
Note payable		2			3			5			6
Subordinated debt		233			415			466			534
Federal Home Loan Bank of Boston advances		—			32			55			65
Total interest expense		857			1,057			1,669			1,803
Net interest and dividend income		10,872			9,565			21,180			19,915
Provision (release) for loan losses		1,100			(1,075	)		1,463			(917	)
Net interest and dividend income after provision (release) for loan losses		9,772			10,640			19,717			20,832
Non-interest income
Trust and wealth advisory		1,293			1,254			2,533			2,399
Service charges and fees		1,723			1,374			2,861			2,325
Mortgage banking activities, net		77			196			432			804
(Losses) gains on mutual fund		(30	)		3			(72	)		(14	)
(Losses) gains on sales and calls of available -for-sale securities, net		(45	)		(9	)		165			(9	)
BOLI income and gains		252			125			414			251
Other		27			28			57			57
Total non-interest income		3,297			2,971			6,390			5,813
Non-interest expense
Salaries		3,657			3,403			7,135			6,304
Employee benefits		1,288			1,356			2,565			2,668
Premises and equipment		973			1,019			2,086			1,973
Information processing and services		702			628			1,387			1,193
Professional fees		821			644			1,609			1,355
Collections, OREO, and loan related		116			113			232			197
FDIC insurance		122			80			293			225
Marketing and community support		262			214			447			296
Amortization of intangibles		50			65			104			137
Other		541			564			1,328			999
Total non-interest expense		8,532			8,086			17,186			15,347
Income before income taxes		4,537			5,525			8,921			11,298
Income tax provision		692			1,172			1,507			2,419
Net income	$	3,845		$	4,353		$	7,414		$	8,879
Net income available to common shareholders	$	3,772		$	4,287		$	7,280		$	8,749
Basic earnings per common share ¹	$	0.67		$	0.76		$	1.29		$	1.56
Diluted earnings per common share ¹	$	0.66		$	0.76		$	1.28		$	1.55
Common dividends per share ¹	$	0.16		$	0.15		$	0.32		$	0.30

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

¹ Per share amounts for all periods have been adjusted to reflect the two-for-one forward stock split effective on June 30, 2022.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)


		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2022			2021			2022			2021
Net income	$	3,845		$	4,353		$	7,414		$	8,879
Other comprehensive (loss) income
Net unrealized (losses) gains on securities available-for-sale		(7,788	)		874			(19,337	)		(954	)
Reclassification of net realized losses (gains) in net income ¹		45			9			(165	)		9
Unrealized (losses) gains on securities available-for-sale		(7,743	)		883			(19,502	)		(945	)
Income tax benefit (expense)		1,626			(186	)		4,096			197
Unrealized (losses) gains on securities available-for-sale, net of tax		(6,117	)		697			(15,406	)		(748	)
Comprehensive (loss) income	$	(2,272	)	$	5,050		$	(7,992	)	$	8,131

¹Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as sales and calls of available for sale securities, net, the tax effect is included in the income tax provision and the after-tax amount is included in net income. The net tax effect for the three months ending June 30, 2022 and 2021 are $9 thousand and $2 thousand, respectively. The net tax effect for the six-month periods ending June 30, 2022 and 2021 are ($35) thousand and $2 thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)


Three months ended June 30, (dollars in thousands)	Common Stock				Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares¹		Amount		Capital			Earnings			awards			(loss) income			equity
Balances at March 31, 2021		5,690,294	$	285	$	45,369		$	80,675		$	(646	)	$	1,559		$	127,242
Net income		—		—		—			4,353			—			—			4,353
Other comprehensive income, net of tax		—		—		—			—			—			697			697
Common stock dividends declared		—		—		—			(854	)		—			—			(854	)
Issuance of restricted stock awards		27,500		1		619			—			(620	)		—			—
Issuance of director’s restricted stock awards		5,600		—		126			—			(126	)		—			—
Stock based compensation-restricted stock awards		—		—		103			—			168			—			271
Balances at June 30, 2021		5,723,394	$	286	$	46,217		$	84,174		$	(1,224	)	$	2,256		$	131,709
Balances at March 31, 2022		5,764,916	$	288	$	47,099		$	92,648		$	(1,550	)	$	(8,419	)	$	130,066
Net income		—		—		—			3,845			—			—			3,845
Other comprehensive loss, net of tax		—		—		—			—			—			(6,117	)		(6,117	)
Common stock dividends declared		—		—		—			(925	)		—			—			(925	)
Stock options exercised		11,070		1		94			—			—			—			95
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		—		—		96			—			243			—			339
Balances at June 30, 2022		5,783,966	$	578	$	47,205		$	95,568		$	(1,512	)	$	(14,536	)	$	127,303

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

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


Six months ended June 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		—		—		—			8,879			—			—			8,879
Other comprehensive loss, net of tax		—		—		—			—			—			(748	)		(748	)
Common stock dividends declared		—		—		—			(1,679	)		—			—			(1,679	)
Issuance of restricted stock awards		27,700		1		623			—			(624	)		—			—
Stock options exercised		3,510		1		30			—			—			—			31
Issuance of director’s restricted stock awards Stock based compensation-restricted		5,600		—		126			—			(126	)		—			—
Stock based compensation-restricted stock awards		—		—		174			—			300			—			474
Balances at June 30, 2021		5,723,394	$	286	$	46,217		$	84,174		$	(1,224	)	$	2,256		$	131,709
Balances at December 31, 2021		5,723,394	$	286	$	46,374		$	89,995		$	(925	)	$	870		$	136,600
Net income		—		—		—			7,414			—			—			7,414
Other comprehensive loss, net of tax		—		—		—			—			—			(15,406	)		(15,406	)
Common stock dividends declared		—		—		—			(1,841	)		—			—			(1,841	)
Issuance of restricted stock awards		28,700		2		811			—			(813	)		—			—
Issuance of performance based stock awards		12,822		—		(183	)		—			—			—			(183	)
Stock options exercised		11,070		1		94			—			—			—			95
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		—		—		193			—			431			—			624
Balances at June 30, 2022		5,783,966	$	578	$	47,205		$	95,568		$	(1,512	)	$	(14,536	)	$	127,303

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

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


Six months ended June 30, (in thousands)		2022			2021
Operating Activities
Net income	$	7,414		$	8,879
Adjustments to reconcile net income to net cash provided by operating activities
Amortization(accretion) and depreciation
Securities		723			463
Bank premises and equipment		801			756
Core deposit intangible		104			136
Modification fees on Federal Home Loan Bank of Boston advances		21			11
Subordinated debt issuance costs		28			144
Mortgage servicing rights		78			131
(Gain) loss on sales and calls of securities available-for-sale, net		(165	)		9
Loss on mutual funds		72			14
Gain on sales of loans, excluding capitalized servicing rights		(292	)		(621	)
Loss (gain) on sale of disposed assets		3			(6	)
Provision (release) for loan losses		1,463			(917	)
Proceeds from loans sold		11,119			28,546
Loans originated for sale		(4,459	)		(25,605	)
(Increase) decrease in deferred loan origination fees and costs, net		(733	)		517
Increase in mortgage servicing rights originated		(72	)		(258	)
Decrease in mortgage impairment charge		—			(9	)
Decrease in interest receivable		137			16
Decrease in deferred tax benefit		224			219
Decrease (increase) in prepaid expenses		202			(97	)
Increase in cash surrender value of life insurance policies		(414	)		(251	)
Decrease in income tax receivable		37			—
(Increase) decrease in other assets		(52	)		80
Increase in income taxes payable		—			631
Decrease in accrued expenses		(1,442	)		(188	)
Decrease in interest payable		(5	)		(1,174	)
Increase in other liabilities		19			80
Stock based compensation-restricted stock awards		624			474
Net cash provided by operating activities	$	15,435		$	11,982
Investing Activities
Net redemptions of Federal Home Loan Bank of Boston stock		452			209
Purchases of securities available-for-sale		(52,175	)		(72,654	)
Proceeds from sales of securities available-for-sale		22,012			2,407
Proceeds from calls of securities available-for-sale		—			1,500
Proceeds from maturities of securities available-for-sale		9,389			14,306
Reinvestment/purchase of mutual funds		(843	)		(6	)
Loan originations and principal collections, net		(73,434	)		(4,258	)
Recoveries of loans previously charged off		12			51
Proceeds from life insurance		89			—
Proceeds from sales of disposed assets		—			18
Capital expenditures		(601	)		(1,788	)
Net cash utilized by investing activities	$	(95,099	)	$	(60,215	)

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


Six months ended June 30, (in thousands)		2022			2021
Financing Activities
(Decrease) increase in deposit transaction accounts, net	$	(53,997	)	$	109,153
Increase in time deposits, net		34,343			5,142
Increase in securities sold under agreements to repurchase, net		5,144			10,376
Payments Federal Home Loan Bank of Boston advances		(6,000	)		—
Principal payments on amortizing FHLB advances		(1,677	)		(2,498	)
Issuance of Subordinated debt, net of issuance costs		—			24,418
Repayment of Subordinated debt		—			(10,000	)
Principal payments on note payable		(21	)		(19	)
Decrease in finance lease obligation		(67	)		(27	)
Stock options exercised		95			31
Net settlement of restricted stock units		(183	)		—
Common stock dividends paid		(1,841	)		(1,679	)
Net cash (utilized) provided by financing activities		(24,204	)		134,897
Net (decrease) increase in cash and cash equivalents		(103,868	)		86,664
Cash and cash equivalents, beginning of period		175,335			93,162
Cash and cash equivalents, end of period	$	71,467		$	179,826
Cash paid during period
Interest	$	1,625		$	1,649
Income taxes		1,310			1,563
Non-cash supplemental
Available for Sale Security Due from Broker	$	—		$	904
Fixed Asset		289			—
Finance lease liability		(289	)		—
Loans transferred to Loans Held for Sale		3,684			—

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

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses 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 June 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 $13.6 million compared with the allowance for loan losses of $13.7 million reported on the consolidated balance sheet at June 30, 2022. In addition, Salisbury estimates that the ACL for unfunded commitments would be approximately $1.2 million compared with the allowance of $0.2 million recorded on its consolidated balance sheet as of June 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 COVID-19 and 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 January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848).” In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that the financial statements are available to be issued. The transition from LIBOR is not expected to have a material impact on Salisbury’s Consolidated Financial Statements.

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
June 30, 2022
Available-for-sale
U.S. Treasury	$	19,250	$	—	$	1,578	$	17,672
U.S. Government Agency notes		31,301		128		1,711		29,718
Municipal bonds		55,339		2		7,074		48,267
Mortgage-backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		77,339		52		5,924		71,467
Collateralized mortgage obligations:
U.S. Government agencies		24,531		—		1,979		22,552
Corporate bonds		13,750		10		326		13,434
Total securities available-for-sale	$	221,510	$	192	$	18,592	$	203,110
Mutual fund							$	1,672
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	945	$	—	$	—	$	945

(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 sold $22.0 million of available-for-sale securities during the six-month period ended June 30, 2022 realizing gains of $458 thousand and losses of $293 thousand resulting in a net gain of $165 thousand and related tax expense of $35 thousand. Salisbury sold $4.0 million of available-for-sale securities during the three-month period ended June 30, 2022 realizing gains of $3 thousand and losses of $48 thousand resulting in a net loss of $45 thousand and related tax benefit of $9 thousand. Salisbury sold $3.3 million of available-for-sale securities during the three and six-month periods ended June 30, 2021 realizing a pre-tax loss of $9 thousand and a related tax benefit of $2 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
June 30, 2022 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	17,672	$	1,578	$	—	$	—	$	17,672	$	1,578
U.S. Government Agency notes		14,998		1,367		9,267		344		24,265		1,711
Municipal bonds		45,603		6,717		1,518		357		47,121		7,074
Mortgage- backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		50,249		4,679		14,709		1,245		64,958		5,924
Collateralized mortgage obligations:
U.S. Government agencies		22,552		1,979		—		—		22,552		1,979
Corporate bonds		7,424		326		—		—		7,424		326
Total temporarily impaired securities	$	158,498	$	16,646	$	25,494	$	1,946	$	183,992	$	18,592


	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.

June 30, 2022 (in thousands)	Maturity	Amortized cost			Fair value	Yield⁽¹⁾
U.S. Treasury	After 1 year but within 5 years	$	7,859	$	7,444	1.32	%
	After 5 year but within 10 years		11,391		10,228	1.18
	Total		19,250		17,672	1.24
U.S. Government Agency notes	After 1 year but within 5 years		3,990		3,666	0.92
	After 5 year but within 10 years		11,923		10,721	1.34
	Total		15,913		14,387	1.23
Municipal bonds	After 1 year but within 5 years		512		478	1.74
	After 5 year but within 10 years		12,792		11,179	2.38
	After 10 years but within 15 years		12,971		11,282	2.36
	After 15 years		29,064		25,328	2.84
	Total		55,339		48,267	2.61
Mortgage-backed securities and Collateralized mortgage obligations	Securities not due at a single maturity date		117,258		109,350	2.00
	Total		117,258		109,350	2.00
Corporate bonds	After 5 years but within 10 years		13,750		13,434	4.35
	Total		13,750		13,434	4.35
Securities available-for-sale		$	221,510	$	203,110	2.27	%

⁽¹⁾Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2022.

U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Ten securities had unrealized losses at June 30, 2022, which approximated 8.20% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2022.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Twenty-three securities had unrealized losses at June 30, 2022, which approximated 6.59% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2022.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixty-five securities had unrealized losses at June 30, 2022, which approximated 13.05% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2022.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Ninety securities had unrealized losses at June 30, 2022, which approximated 8.28% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at June 30, 2022.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Ten securities had unrealized losses at June 30, 2022, which approximated 4.20% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 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 June 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)		June 30, 2022			December 31, 2021
Residential 1-4 family	$	398,556		$	373,131
Residential 5+ multifamily		69,272			52,325
Construction of residential 1-4 family		22,379			19,738
Home equity lines of credit		23,763			23,270
Residential real estate		513,970			468,464
Commercial		338,091			310,923
Construction of commercial		49,696			58,838
Commercial real estate		387,787			369,761
Farm land		3,668			2,807
Vacant land		15,397			14,182
Real estate secured		920,822			855,214
Commercial and industrial ex PPP Loans		189,086			169,543
PPP Loans		2,894			25,589
Total Commercial and industrial		191,980			195,132
Municipal		17,486			16,534
Consumer		18,155			12,547
Loans receivable, gross		1,148,443			1,079,427
Deferred loan origination costs, net		1,018			285
Allowance for loan losses		(13,703	)		(12,962	)
Loans receivable, net	$	1,135,758		$	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 June 30, 2022 and December 31, 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $83.4 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 are subject to operating challenges due to the COVID-19 virus pandemic (“virus”). Approximately 40% 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 10% 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 5% 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 187% as of June 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. Due to the COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

At June 30, 2022 Salisbury had gross PPP loan balances of $3 million on its consolidated balance sheet compared with approximately $26 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 June 30, 2022, Salisbury recorded interest income and net origination fees of $22 thousand and $236 thousand, respectively, on PPP loans compared with $204 thousand and $582 thousand, respectively, for the three months ended June 30, 2021. For the six months ended June 30, 2022, Salisbury recorded interest income and net origination fees of $68 thousand and $671 thousand, respectively, on PPP loans compared with $436 thousand and $1.6 million, respectively, for the comparable period ended June 30, 2021.

Credit Quality

Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are considered not criticized and are aggregated as pass rated, 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. Salisbury sold approximately $3.7 million of non-performing and under-performing loans during the six-month period ended June 30, 2022 to further manage the Bank’s credit risk proactively.

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

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

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

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

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

The composition of loans receivable by risk rating grade is presented in the table below. The decrease in substandard loans from year end 2021 primarily reflected management’s upgrade of the internal risk rating on approximately $17 million of loans that were mostly related to the hospitality and entertainment and recreation industries. These loans were previously downgraded due to concerns over COVID-19 but the businesses have since demonstrated a return to pre-pandemic levels of activity and liquidity.

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2022
Residential 1-4 family	$	393,642	$	3,093	$	1,821	$	—	$	—	$	398,556
Residential 5+ multifamily		69,117		75		80		—		—		69,272
Construction of residential 1-4 family		20,279		—		2,100		—		—		22,379
Home equity lines of credit		23,592		171		—		—		—		23,763
Residential real estate		506,630		3,339		4,001		—		—		513,970
Commercial		312,206		20,455		5,430		—		—		338,091
Construction of commercial		49,696		—		—		—		—		49,696
Commercial real estate		361,902		20,455		5,430		—		—		387,787
Farm land		1,963		1,296		409		—		—		3,668
Vacant land		15,362		35		—		—		—		15,397
Real estate secured		885,857		25,125		9,840		—		—		920,822
Commercial and industrial		189,228		920		1,832		—		—		191,980
Municipal		17,486		—		—		—		—		17,486
Consumer		18,155		—		—		—		—		18,155
Loans receivable, gross	$	1,110,726	$	26,045	$	11,672	$	—	$	—	$	1,148,443

(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
June 30, 2022
Residential 1-4 family	$	398,234	$	152	$	155	$	—	$	15	$	322	$	—	$	350
Residential 5+ multifamily		69,272		—		—		—		—		—		—		—
Construction of residential 1-4 family		22,310		—		—		69		—		69		69		2,100
Home equity lines of credit		23,437		326		—		—		—		326		—		—
Residential real estate		513,253		478		155		69		15		717		69		2,450
Commercial		338,006		—		85		—		—		85		—		1,228
Construction of commercial		49,696		—		—		—		—		—		—		—
Commercial real estate		387,702		—		85		—		—		85		—		1,228
Farm land		3,668		—		—		—		—		—		—		409
Vacant land		15,397		—		—		—		—		—		—		—
Real estate secured		920,020		478		240		69		15		802		69		4,087
Commercial and industrial		191,780		189		—		—		11		200		11		62
Municipal		17,486		—		—		—		—		—		—		—
Consumer		18,061		87		7		—		—		94		—		—
Loans receivable, gross	$	1,147,347	$	754	$	247	$	69	$	26	$	1,096	$	80	$	4,149


			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)

There were no troubled debt restructurings during the second quarter of 2022 or second quarter of 2021 or for the six months ended June 30, 2022 and June 30, 2021, respectively.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

		Three months ended June 30, 2022												Three months ended June 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	$	3,063	$	232		$	(9	)	$	—	$	3,286	$	2,430	$	(55	)	$	(1	)	$	3	$	2,377
Residential 5+ multifamily		820		337			—			—		1,157		622		(77	)		—			—		545
Construction of residential 1-4 family		195		138			—			—		333		77		18			—			—		95
Home equity lines of credit		198		16			(9	)		—		205		195		(5	)		—			—		190
Residential real estate		4,276		723			(18	)		—		4,981		3,324		(119	)		(1	)		3		3,207
Commercial		5,196		241			(269	)		1		5,169		7,080		(875	)		—			7		6,212
Construction of commercial		1,139		(267	)		—			—		872		584		102			(18	)		—		668
Commercial real estate		6,335		(26	)		(269	)		1		6,041		7,664		(773	)		(18	)		7		6,880
Farm land		19		8			—			—		27		50		(18	)		—			—		32
Vacant land		110		(2	)		—			—		108		109		(22	)		—			—		87
Real estate secured		10,740		703			(287	)		1		11,157		11,147		(932	)		(19	)		10		10,206
Commercial and industrial		1,176		304			—			—		1,480		1,369		(27	)		(131	)		45		1,256
Municipal		27		8			—			—		35		43		(11	)		—			—		32
Consumer		105		51			(30	)		4		130		52		22			(11	)		3		66
Unallocated		867		34			—			—		901		1,275		(127	)		—			—		1,148
Totals	$	12,915	$	1,100		$	(317	)	$	5	$	13,703	$	13,886	$	(1,075	)	$	(161	)	$	58	$	12,708

		Six months ended June 30, 2022												Six months ended June 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	$	468		$	(28	)	$	—	$	3,286	$	2,646	$	(264	)	$	(10	)	$	5		$	2,377
Residential 5+ multifamily		817		571			(231	)		—		1,157		686		(141	)		—			—			545
Construction of residential 1-4 family		186		147			—			—		333		65		30			—			—			95
Home equity lines of credit		198		18			(11	)		—		205		252		(62	)		—			—			190
Residential real estate		4,047		1,204			(270	)		—		4,981		3,649		(437	)		(10	)		5			3,207
Commercial		5,416		125			(373	)		1		5,169		6,546		(345	)		(6	)		17			6,212
Construction of commercial		1,025		(153	)		—			—		872		596		90			(18	)		—			668
Commercial real estate		6,441		(28	)		(373	)		1		6,041		7,142		(255	)		(24	)		17			6,880
Farm land		21		6			—			—		27		59		(27	)		—			—			32
Vacant land		95		13			—			—		108		180		(93	)		—			—			87
Real estate secured		10,604		1,195			(643	)		1		11,157		11,030		(812	)		(34	)		22			10,206
Commercial and industrial		1,364		161			(46	)		1		1,480		1,397		(55	)		(131	)		45			1,256
Municipal		31		4			—			—		35		43		(11	)		—			—			32
Consumer		82		83			(45	)		10		130		77		20			(15	)		(16	)		66
Unallocated		881		20			—			—		901		1,207		(59	)		—			—			1,148
Totals	$	12,962	$	1,463		$	(734	)	$	12	$	13,703	$	13,754	$	(917	)	$	(180	)	$	51		$	12,708

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
June 30, 2022
Residential 1-4 family	$	396,703	$	3,286	$	1,853	$	—	$	398,556	$	3,286
Residential 5+ multifamily		69,192		1,157		80		—		69,272		1,157
Construction of residential 1-4 family		20,279		192		2,100		141		22,379		333
Home equity lines of credit		23,763		205		—		—		23,763		205
Residential real estate		509,937		4,840		4,033		141		513,970		4,981
Commercial		335,508		5,145		2,583		24		338,091		5,169
Construction of commercial		49,696		872		—		—		49,696		872
Commercial real estate		385,204		6,017		2,583		24		387,787		6,041
Farm land		3,259		27		409		—		3,668		27
Vacant land		15,397		108		—		—		15,397		108
Real estate secured		913,797		10,992		7,025		165		920,822		11,157
Commercial and industrial		191,844		1,478		136		2		191,980		1,480
Municipal		17,486		35		—		—		17,486		35
Consumer		18,155		130		—		—		18,155		130
Unallocated allowance		—		901		—		—		—		901
Totals	$	1,141,282	$	13,536	$	7,161	$	167	$	1,148,443	$	13,703


(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:


June 30, 2022 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,134,514	$	12,228	$	—	$	—	$	1,134,514	$	12,228
Potential problem loans ¹		6,768		407		—		—		6,768		407
Impaired loans		—		—		7,161		167		7,161		167
Unallocated allowance		—		901		—		—		—		901
Totals	$	1,141,282	$	13,536	$	7,161	$	167	$	1,148,443	$	13,703


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
June 30, 2022
Residential	$	2,100	$	2,106	$	568	$	141	$	24	$	1,933	$	2,056	$	2,531	$	29
Home equity lines of credit		—		—		—		—		—		—		—		15		—
Residential real estate		2,100		2,106		568		141		24		1,933		2,056		2,546		29
Commercial		584		584		633		24		15		1,999		2,494		2,579		21
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		409		447		420		—
Vacant land		—		—		—		—		—		—		—		—		—
Real estate secured		2,684		2,690		1,201		165		39		4,341		4,997		5,545		50
Commercial and industrial		73		73		115		2		2		63		60		62		1
Consumer		—		—		—		—		—		—		—		—		—
Totals	$	2,757	$	2,763	$	1,316	$	167	$	41	$	4,404	$	5,057	$	5,607	$	51

Note: The income recognized is for the six-month period ended June 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
June 30, 2021
Residential	$	47	$	49	$	1,580	$	3	$	1	$	4,326	$	4,776	$	3,401	$	40
Home equity lines of credit		—		—		32		—		—		147		188		168		—
Residential real estate		47		49		1,612		3		1		4,473		4,964		3,569		40
Commercial		1,140		1,164		2,294		45		25		3,341		3,984		3,024		44
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		594		764		344		—
Vacant land		—		—		104		—		—		160		178		60		4
Real estate secured		1,187		1,213		4,010		48		26		8,568		9,890		6,997		88
Commercial and industrial		364		377		365		115		2		86		243		92		1
Consumer		—		—		11		—		—		21		21		13		1
Totals	$	1,551	$	1,590	$	4,386	$	163	$	28	$	8,675	$	10,154	$	7,102	$	90

Note: The income recognized is for the six-month period ended June 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 June 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 six months ended June 30, 2022 and 2021.

($ in thousands, except lease term and discount rate)	Classification		June 30, 2022		December 31, 2021
Assets
Operating	Other assets	$	910	$	1,021
Finance	Bank premises and equipment ¹		3,968		3,791
Total Leased Assets		$	4,878	$	4,812
Liabilities
Operating	Other liabilities	$	910	$	1,021
Finance	Finance lease		4,330		4,107
Total lease liabilities		$	5,240	$	5,128
¹ Net of accumulated depreciation of $608 thousand and $496 thousand, respectively.

Lease cost	Classification		Six months ended		Three months ended
			June 30, 2022		June 30, 2022
Operating leases	Premises and equipment	$	147	$	73
Finance leases:
Amortization of leased assets	Premises and equipment		112		77
Interest on finance leases	Interest expense		82		41
Total lease cost		$	341	$	191

Lease cost	Classification		Six months ended		Three months ended
			June 30, 2021		June 30, 2021
Operating leases	Premises and equipment	$	147	$	68
Finance leases:
Amortization of leased assets	Premises and equipment		51		25
Interest on finance leases	Interest expense		69		36
Total lease cost		$	267	$	129

Weighted Average Remaining Lease Term	June 30, 2022		December 31, 2021
Operating leases	6.8 years		6.9 years
Financing leases	22.0 years		23.5 years
Weighted Average Discount Rate ¹
Operating leases	3.7	%	3.60	%
Financing leases	3.40	%	5.00	%
¹ Salisbury uses the FHLBB five-year Advance rate as the discount rate, as its leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of June 30, 2022.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2022	$	99		$	149
2023		167			304
2024		129			314
2025		137			324
2026		137			324
Thereafter		379			4,978
Total future minimum lease payments		1,048			6,393
Less amount representing interest		(138	)		(2,064	)
Total present value of net future minimum lease payments	$	910		$	4,329

NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)		June 30, 2022		December 31, 2021
Residential mortgage loans serviced for others	$	140,344	$	140,623
Fair value of mortgage servicing rights		1,338		1,043

Changes in mortgage servicing rights are as follows:


		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2022			2021			2022			2021
Mortgage Servicing Rights
Balance, beginning of period	$	716		$	739		$	700		$	621
Originated		17			64			72			258
Amortization ⁽¹⁾		(39	)		(55	)		(78	)		(131	)
Balance, end of period	$	694		$	748		$	694		$	748
Valuation Allowance
Balance, beginning of period		—			—			—			(9	)
Decrease in impairment reserve ⁽¹⁾		—			—			—			9
Balance, end of period		—			—			—			—
Mortgage servicing rights, net	$	694		$	748		$	694		$	748

⁽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)		June 30, 2022		December 31, 2021
Securities available-for-sale (at fair value)	$	79,241	$	75,737
Loans receivable (at book value)		369,717		378,845
Total pledged assets	$	448,958	$	454,582

At June 30, 2022, securities were pledged as follows: $62.65 million to secure public deposits, $16.57 million to secure repurchase agreements and $0.02 million to secure FHLBB advances. Additionally, 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.

As of June 30, 2022 and December 30, 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/(Liabilities)				Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)	June 30, 2022		December 31, 2021		June 30, 2022			December 31, 2021
Loans receivable⁽¹⁾	$	9,955	$	9,982	$	(45	)	$	(18	)
Total	$	9,955	$	9,982	$	(45	)	$	(18	)

(1)

These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At June 30, 2022, the amortized cost basis of the closed portfolios used in these hedging relationships was $35.6 million; the cumulative basis adjustment associated with these hedging relationships was $45 thousand; and the amount of the designated hedged item was $10.0 million.

The table below presents the fair value of Salisbury’s derivative financial instrument and its classification on the Balance Sheet as of June 30, 2022 and December 31, 2021.


	As of June 30, 2022					As of December 31, 2021
(in thousands)	Notional Amount		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other assets	$	49	Other Assets	$	18
Total Derivatives designated as hedge instruments				$	49		$	18

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement for the three and six months ended June 30, 2022 and June 30, 2021.


		Three months ended June 30, 2022				Six months ended June 30, 2022
(in thousands)		Interest Income		Interest Expense		Interest Income			Interest Expense
Total amounts of interest income and expense line items presented in the income statement in which the effects of fair value or cash flow hedges are recorded	$	18	$	—	$	19		$	—

Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items		2		—		(27	)		—
Derivatives designated as hedging instruments	$	16	$	—	$	46		$	—


		Three months ended June 30, 2021					Six months ended June 30, 2021
(in thousands)		Interest Income			Interest Expense		Interest Income			Interest Expense
Total amounts of interest income and expense line items presented in the income statement 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		(2	)		—		(4	)		—
Derivatives designated as hedging instruments	$	2		$	—	$	5		$	—

Credit-Risk Related Contingent Features

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

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

As of June 30, 2022, the fair value of the derivative was $49 thousand in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements. As of June 30, 2022, Salisbury has not posted any collateral related to these agreements.

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 share split, which was effective on June 30, 2022.


		Three months ended						Six months ended
Periods ended June 30, (in thousands, except per share data)		2022			2021			2022			2021
Net income	$	3,845		$	4,353		$	7,414		$	8,879
Less: Undistributed earnings allocated to participating securities		(73	)		(66	)		(134	)		(130	)
Net income allocated to common stock	$	3,772		$	4,287		$	7,280		$	8,749
Weighted-average common shares issued		5,776			5,704			5,755			5,698
Less: Unvested restricted stock awards		(110	)		(86	)		(104	)		(84	)
Weighted average common shares outstanding used to calculate basic earnings per common share		5,666			5,620			5,651			5,614
Add: Dilutive effect of stock options		33			38			48			36
Weighted-average common shares outstanding used to calculate diluted earnings per common share		5,699			5,658			5,699			5,650
Earnings per common share (basic)	$	0.67		$	0.76		$	1.29		$	1.56
Earnings per common share (diluted)	$	0.66		$	0.76		$	1.28		$	1.55

NOTE 9 – 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 discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The 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 June 30, 2022, the Bank exceeded the minimum requirement for the capital conservation buffer. As of June 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 June 30, 2022, Salisbury had not repurchased any of its common shares pursuant to the Common Stock Repurchase Plan approved by the Board of Directors in March 2022.

The Bank’s risk-weighted assets at June 30, 2022 and December 31, 2021 were $1,204.7 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
June 30, 2022

Total Capital (to risk-weighted assets)	$	160,002		13.28	%	$	96,377		8.0	%	$	126,495		10.5	%	$	120,471		10.0	%

Tier 1 Capital (to risk-weighted assets)		146,112		12.13			72,283		6.0			102,401		8.5			96,377		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		146,112		12.13			54,212		4.5			84,330		7.0			78,306		6.5

Tier 1 Capital (to average assets)	$	146,112		10.04		$	58,231		4.0		$	58,231		4.0		$	72,788		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 July 24, 2020, 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 10 – BENEFITS

401(k)

Salisbury’s 401(k) Plan expense was $257 thousand and $308 thousand, respectively, for the three-month periods ended June 30, 2022 and 2021, and $551 thousand and $594 thousand, respectively, for the six-month periods ended June 30, 2022 and 2021.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury’s ESOP expense was $49 thousand and $73 thousand, respectively, for the three-month periods ended June 30, 2022 and 2021, and $84 thousand and $129 thousand, respectively, for the six-month periods ended June 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 $771 thousand and $779 thousand at June 30, 2022, and December 31, 2021, respectively. The Bank did not record an expense for the three months ended June 30, 2022 and recorded an expense of $86 thousand for the three months ended June 30, 2021. The Bank realized a credit of $8 thousand for the six months ended June 30, 2022 and an expense of $173 thousand for the six months ended June 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 2021 and 2020, 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 June 30, 2022 and 2021, and $94 thousand and $57 thousand, respectively, for the six-month periods ended June 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 11 – LONG TERM INCENTIVE PLANS

Restricted stock

Restricted stock expense was $243 thousand and $168 thousand, respectively; for the three-month periods ended June 30, 2022 and 2021, and $431 thousand and $300 thousand, respectively, for the six-month periods ended June 30, 2022 and 2021. The second quarter of 2022 and 2021 included an expense of $17 thousand and $32 thousand, respectively for the accelerated vesting of restricted stock awards previously granted to certain Directors, who retired from Salisbury’s Board of Directors during the quarter. The tax benefit from restricted stock expense was $44 thousand and $30 thousand, respectively, for the three-month periods ended June 30, 2022 and 2021, and $78 thousand and $54 thousand, respectively; for the six-month periods ended June 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 dollars. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of June 30, 2022 and 2021 totaled $1.5 million and $1.2 million, respectively. There were no forfeitures in the second quarter or year to date for 2022 and 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 $394 thousand and $354 thousand, respectively, for those grants awarded in 2022 and 2021. Compensation expense of $96 thousand and $103 thousand was recorded with respect to these RSUs for the three months ended June 2022 and 2021, and $193 thousand and $174 thousand for the six months ended June 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 $271 thousand and $310 thousand for the three months ended June 30, 2022 and 2021, and year to date expenses of $538 thousand and $548 thousand for 2022 and 2021, respectively.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In second quarter 2022, a former Riverside employee exercised 4,050 stock options at $8.52 per share and in the second quarter 2021, no stock options were exercised. A former Riverside Bank executive exercised 7,020 and 3,510 stock options at $8.52 per share in second quarter 2022 and 2021, respectively.

NOTE 12 – 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 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 measured at fair value are as follows:


	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair value
June 30, 2022
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	17,672	$	—	$	17,672
U.S. Government Agency notes		—		29,718		—		29,718
Municipal bonds		—		48,267		—		48,267
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		71,467		—		71,467
Collateralized mortgage obligations:
U.S. Government agencies		—		22,552		—		22,552
Corporate bonds		—		13,434		—		13,434
Securities available-for-sale	$	—	$	203,110	$	—	$	203,110
Mutual funds		1,672		—		—		1,672
Derivative financial instruments		—		49		—		49


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 June 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
June 30, 2022
Financial Assets
Cash and cash equivalents	$	71,467	$	71,467	$	71,467	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale, net		203,110		203,110		—		203,110		—
Mutual funds		1,672		1,672		1,672		—		—
Federal Home Loan Bank of Boston stock		945		945		—		945		—
Loans held-for-sale		—		—		—		—		—
Loans receivable, net		1,135,758		1,112,258		—		—		1,112,258
Accrued interest receivable		6,123		6,123		—		6,123		—
Cash surrender value of life insurance policies		28,063		28,063		—		28,063		—
Derivative financial instruments		49		49		—		49		—
Financial Liabilities
Demand (non-interest-bearing)	$	383,674	$	383,674	$	—	$	383,674	$	—
Demand (interest-bearing)		233,947		233,947		—		233,947		—
Money market		314,244		314,244		—		314,244		—
Savings and other		231,322		231,322		—		231,322		—
Certificates of deposit		153,352		153,321		—		153,321		—
Deposits		1,316,539		1,316,508		—		1,316,508		—
Repurchase agreements		16,574		16,574		—		16,574		—
FHLBB advances		—		—		—		—		—
Subordinated debt		24,502		22,428		—		22,428		—
Note payable		149		151		—		151		—
Finance lease obligation		4,329		4,267		—		—		4,267
Accrued interest payable		44		44		—		44		—


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 13 – SUBSEQUENT EVENTS

On July 20, 2022 the Board of Directors of Salisbury approved a quarterly cash dividend of $0.16 per common share is payable on August 26, 2022 to shareholders of record as of August 12, 2022.

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 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. Salisbury has engaged legal counsel to advise the Company with respect to the proper actions to be taken to address this matter.

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 increased $1.0 million from year end 2021 to $205.7 million at June 30, 2022. The fair market value included net unrealized pre-tax losses of $18.4 million at June 30, 2022 compared with net unrealized pre-tax gains of $1.0 million at December 31, 2021. The net unrealized losses reflected the sharp increase in market interest rates that has occurred in the last six months. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased $103.9 million, or 59.2%, to $71.5 million at June 30, 2022. This decrease was driven by record loan growth and normal customer activity during the six-month period ended June 30, 2022.

Salisbury evaluates securities for OTTI when the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at June 30, 2022.

Loans

Net loans receivable increased $69.0 million, or 6.5%, to $1.14 billion at June 30, 2022, compared with $1.07 billion at December 31, 2021. PPP loan balances declined from $25.6 million at December 31, 2021 to $2.9 million at June 30, 2022 due to the forgiveness of such loans by the SBA. Excluding PPP loans, net loans receivable increased by a record $91.7 million, or 8.8%, 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. Commercial and industrial loan growth for second quarter 2022 included the purchase of two syndicated loans, which aggregated $6.8 million. The allowance for loan losses increased by $0.7 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 six-month period ending June 30, 2022.

Asset Quality

During the first six months of 2022, overall asset quality continued to improve. Non-performing assets of $4.2 million, or 0.37% of gross loans receivable were essentially unchanged from year end 2021 and total impaired and potential problem loans declined $18.9 million from $32.8 million, or 3.04% of gross loans receivable to $13.9 million, or 1.2% of gross loans receivable at June 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 June 30, 2022, Salisbury did not have any outstanding loan payment deferrals and the Bank had approximately $3 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 $1.5 million for the six months ended June 30, 2022 to $1.1 million, or 0.10% 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 or charge-off of non-performing loans during the six-month period ending June 30, 2022.

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

(in thousands)		June 30, 2022		December 31, 2021
Past due 30-59 days	$	754	$	751
Past due 60-89 days		247		590
Past due 90-179 days		69		1
Past due 180 days and over		11		10
Accruing loans		1,081		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	$	1,096	$	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)		June 30, 2022		December 31, 2021
Non-accrual loans, excluding troubled debt restructured loans	$	4,080	$	2,838
Non-accrual troubled debt restructured loans		69		1,350
Accruing troubled debt restructured loans		3,012		3,609
Total impaired loans	$	7,161	$	7,797

Non-Performing Assets

Non-performing assets of $4.2 million, or 0.28% of total assets at June 30, 2022, were essentially unchanged from December 31, 2021, and decreased $1.3 million from $5.5 million, or 0.39% of total assets, at June 30, 2021. Non-performing assets at June 30, 2022 included a residential real estate loan of approximately $1.5 million on a property that was sold in July 2022. The components of non-performing assets are as follows:

(in thousands)		June 30, 2022		December 31, 2021
Residential 1-4 family	$	2,450	$	750
Residential 5+ multifamily		—		861
Home equity lines of credit		—		21
Commercial		1,228		1,924
Farm land		409		432
Vacant land		—		—
Real estate secured		4,087		3,988
Commercial and industrial		62		200
Consumer		—		—
Non-accrual loans		4,149		4,188
Accruing loans past due 90 days and over		80		11
Non-performing loans		4,229		4,199
Foreclosed assets		—		—
Non-performing assets	$	4,229	$	4,199

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

(in thousands)		June 30, 2022		December 31, 2021
Current	$	4,134	$	2,898
Past due 30-59 days		—		14
Past due 60-89 days		—		—
Past due 90-179 days		69		64
Past due 180 days and over		26		1,223
Total non-performing loans	$	4,229	$	4,199

At June 30, 2022, 97.75% of non-performing loans were current with respect to loan payments, compared with 69.02% at December 31, 2021.

Troubled Debt Restructured Loans

Troubled debt restructured loans declined during the first six months of 2022 to $3.1 million, or 0.27% of gross loans receivable at June 30, 2022, compared to $5.0 million, or 0.46% of gross loans receivable at December 31, 2021. The decline in the balance of troubled debt restructured loans since year end 2021 primarily reflected the sale or charge-off of $1.6 million of certain residential and commercial loans, an internal risk rating upgrade of a $0.2 million residential loan and $0.1 million of amortization.

The components of troubled debt restructured loans are as follows:

(in thousands)		June 30, 2022		December 31, 2021
Residential 1-4 family	$	1,504	$	1,824
Residential 5+ multifamily		80		87
Commercial		1,355		1,622
Real estate secured		2,939		3,533
Commercial and industrial		73		76
Accruing troubled debt restructured loans		3,012		3,609
Residential 1-4 family		69		256
Residential 5+ multifamily		—		861
Commercial		—		233
Real estate secured	$	69	$	1,350
Non-accrual troubled debt restructured loans		69		1,350
Troubled debt restructured loans	$	3,081	$	4,959

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

(in thousands)		June 30, 2022		December 31, 2021
Current	$	2,976	$	3,540
Past due 30-59 days		36		37
Past due 60-89 days		—		32
Accruing troubled debt restructured loans		3,012		3,609
Current		69		414
Past due 180 days and over		—		936
Non-accrual troubled debt restructured loans		69		1,350
Total troubled debt restructured loans	$	3,081	$	4,959

At June 30, 2022, 98.83% 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 $18.2 million to $6.8 million, or 0.59% of gross loans receivable at June 30, 2022, compared with $25.0 million, or 2.32% of gross loans receivable at December 31, 2021. The decrease in potential problem loans from year end 2021 primarily reflected management’s upgrade of the internal risk rating on approximately $17 million of loans that were mostly related to the hospitality and entertainment and recreation industries. These loans were previously downgraded due to concerns over COVID-19 but the businesses have since demonstrated a return to pre-pandemic levels of activity and liquidity.

The components of potential problem loans are as follows:

(in thousands)		June 30, 2022		December 31, 2021
Residential 1-4 family	$	869	$	999
Residential 5+ multifamily		—		709
Home equity lines of credit		—		—
Residential real estate		869		1,708
Commercial		4,203		20,998
Construction of commercial		—		—
Commercial real estate		4,203		20,998
Farm land		—		—
Real estate secured		5,072		22,706
Commercial and industrial		1,696		2,310
Consumer		—		—
Total potential problem loans	$	6,768	$	25,016

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

(in thousands)		June 30, 2022		December 31, 2021
Current	$	6,746	$	24,977
Past due 30-59 days		—		23
Past due 60-89 days		22		16
Past due 90-179 days		—		—
Total potential problem loans	$	6,768	$	25,016

At June 30, 2022, 99.67% 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 $19.7 million, or 1.5%, during the first six months of 2022 to $1.32 billion at June 30, 2022, compared with $1.34 billion at December 31, 2021. The decrease primarily reflected normal business activity. Deposit balances at second quarter 2022 included $15.0 million which Salisbury received on June 29, 2022 from a wholesale source to fund loan growth during the quarter. These funds were included in a money market account at June 30, 2022. Retail repurchase agreements increased $5.1 million during 2022 to $16.6 million at June 30, 2022, compared with $11.4 million at December 31, 2021.

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

	June 30, 2022								December 31, 2021
(in thousands)	Average Balance		Percent			Weighted Average Interest Rate			Average Balance		Percent			Weighted Average Interest Rate
Demand deposits	$	381,796		29.71	%		0.00	%	$	366,953		29.28	%		0.00	%
Interest-bearing checking accounts		229,625		17.87			0.19			224,763		17.93			0.19
Money market savings		299,870		23.34			0.21			315,469		25.17			0.17
Regular savings accounts		236,728		18.42			0.16			215,300		17.18			0.11
Certificates of deposit (CD’s)¹		137,034		10.66			0.63			130,879		10.44			0.72
Total deposits	$	1,285,053		100.00	%		0.18	%	$	1,253,364		100.00	%		0.17	%

¹CD’s included brokered certificates of deposit of $35.0 million at June 30, 2022 and $7.9 million at December 31, 2021.

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

Interest rates		June 30, 2022		December 31, 2021
Less than 1.00%	$	128,848	$	97,099
1.00% to 1.99%		15,964		14,919
2.00% to 2.99%		8,540		6,493
3.00% to 3.99%		—		498
Total	$	153,352	$	119,009

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

	At June 30, 2022
Interest rates	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
Less than 1.00%	$	105,194	$	13,184	$	4,591	$	5,879	$	128,848		84.02	%
1.00% to 1.99%		9,306		3,552		3,106		—		15,964		10.41	%
2.00% to 2.99%		168		5,875		2,497		—		8,540		5.57	%
3.00% to 3.99%		—		—		—		—		—		0.00	%
Total	$	114,668	$	22,611	$	10,194	$	5,879	$	153,352		100.00	%

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

June 30, 2022 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	56,090			$	19,533			$	11,064			$	22,591			$	109,278

Salisbury did not have any outstanding FHLBB advances at June 30, 2022 compared with an outstanding balance of $7.7 million at December 31, 2021. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreements with the FHLBB, whereby upon the Bank’s request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At June 30, 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 June 30, 2022, Salisbury’s excess borrowing capacity at FHLBB was approximately $253.0 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 six-month period ended June 30, 2022 provided net cash of $15.4 million. Investing activities utilized net cash of $95.1 million principally from $52.2 million of purchases of available-for-sale securities and mutual funds, $73.4 million of net loan originations and principal collections, and $0.6 million of capital expenditures, partly offset by proceeds of $9.4 million from calls and maturities of available-for-sale securities and proceeds of $22.0 million from the sale of available-for-sale-securities. Financing activities utilized net cash of $24.2 million principally due to a decrease of deposit transaction accounts of $54.0 million, the repayment of FHLBB term advances of $6.0 million, the repayment of FHLBB amortizing term advances of $1.7 million and the payment of common stock dividends of $1.8 million, partially offset by an increase in time deposits of $34.3 million and a $5.1 million increase in repurchase agreements

At June 30, 2022, Salisbury had outstanding commitments to fund new loan originations of $63.0 million and unused lines of credit of $246.6 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 June 30, 2022 and 2021

OVERVIEW

On June 30, 2022, Salisbury effected a two-for-one forward stock split of its outstanding shares. As a result, all share and per share metrics included herein have been adjusted to reflect this event. Net income allocated to common shareholders was $3.8 million, or $0.67 per basic earnings per common share, for the second quarter ended June 30, 2022 (second quarter 2022), compared with $4.3 million, or $0.76 per basic common share, for the second quarter ended June 30, 2021 (second quarter 2021), and $3.5 million, or $0.62 per basic common share, for the first quarter ended March 31, 2022 (first quarter 2022).

Net Interest Income

Tax equivalent net interest income for the second quarter 2022 increased $1.3 million, or 1.4%, versus second quarter 2021. Average earning assets increased $20.3 million, or 1.5%, versus second quarter 2021. Average total interest bearing deposits increased slightly compared with second quarter 2021. Average loan balances for second quarter 2022 included an average PPP loan balance of $8.8 million compared with $80.4 million for second quarter 2021. The net interest margin for the second quarter 2022 was 3.15% compared with 2.82% for the second quarter 2021. Excluding PPP loans, the net interest margin for the second quarter 2022 was approximately 3.10% compared with 2.76% for second quarter 2021. The increase in net interest margin in second quarter 2022 primarily reflected a $59.7 million, or 5.7%, increase in average loan balances earning an average yield of 3.81% and a reduction in short term fund balances of $126.2 million, or 69.8%, earning an average yield of 0.73%, and a decrease in subordinated debt interest expense compared to 2021, which included approximately $180 thousand for interest expense as amortized costs on subordinated debt that Salisbury had issued in 2015 and fully redeemed in May of 2021.

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

Three months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2022		2021		2022		2021		2022		2021
Loans (a)(d)	$	1,112,120	$	1,052,381	$	10,693	$	10,015		3.81	%	3.78	%
Securities (c)(d)		225,458		138,164		1,117		720		1.98		2.08
FHLBB stock		1,221		1,830		10		11		3.20		2.41
Short term funds (b)		54,553		180,716		98		50		0.73		0.11
Total interest-earning assets		1,393,352		1,373,091		11,918		10,796		3.40		3.13
Other assets		61,790		70,447
Total assets	$	1,455,142	$	1,443,538
Interest-bearing demand deposits	$	229,625	$	227,623		108		117		0.19		0.21
Money market accounts		299,870		315,665		156		138		0.21		0.18
Savings and other		236,728		212,253		97		59		0.16		0.11
Certificates of deposit		137,034		147,103		216		252		0.63		0.69
Total interest-bearing deposits		903,257		902,644		577		566		0.26		0.25
Repurchase agreements		10,216		12,010		4		4		0.15		0.15
Finance lease		5,283		2,751		41		36		3.09		5.26
Note payable		153		192		2		3		6.13		6.09
Subordinated Debt (net of issuance costs)		24,494		30,789		233		415		3.80		5.39
FHLBB advances		—		10,576		—		33		—		1.21
Total interest-bearing liabilities		943,403		958,962		857		1,057		0.36		0.44
Demand deposits		376,694		348,561
Other liabilities		6,258		6,786
Shareholders’ equity		128,787		129,229
Total liabilities & shareholders’ equity	$	1,455,142	$	1,443,538
Net interest income (d)					$	11,061	$	9,739
Spread on interest-bearing funds										3.03		2.69
Net interest margin (e)										3.15		2.82

(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 cost.

(d)

Includes tax exempt income benefit of $187,000 and $174,000, 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 June 30, (in thousands)	2022 versus 2021
Change in interest due to		Volume			Rate			Net
Loans	$	608		$	70		$	678
Securities		442			(45	)		397
FHLBB stock		(4	)		3			(1	)
Short term funds		(134	)		182			48
Interest-earning assets		912			210			1,122
Deposits		(1	)		12			11
Repurchase agreements		—			—			—
Finance lease		27			(22	)		5
Note payable		(1	)		—			(1	)
Subordinated Debt		(72	)		(110	)		(182	)
FHLBB advances		(17	)		(16	)		(33	)
Interest-bearing liabilities		(64	)		(136	)		(200	)
Net change in net interest income	$	976		$	346		$	1,322

Interest Income

Tax equivalent interest income increased $1.1 million, or 10.4%, to $11.9 million for second quarter 2022 as compared with $10.8 million in second quarter 2021. Loan income as compared to second quarter 2021 increased $678 thousand, or 6.8%, primarily due to a $59.7 million, or 5.67%, increase in average loan balances and a 3 basis point increase in the average loan yield. Tax equivalent securities income increased $397 thousand, or 55.1%, for second quarter 2022 as compared with second quarter 2021, primarily due to a $87.2 million, or 63.1%, increase in average volume, partly offset by a 10 basis point decrease in average yield. Income on short-term funds as compared to second quarter 2021 increased $48 thousand, or 96.0%, primarily due to a 62 basis point increase in the average short-term funds yield, partly offset by a $126.2 million, or 69.8%, decrease in average balance.

Interest Expense

Interest expense decreased $200 thousand, or 18.9%, to $0.9 million for second quarter 2022 as compared with $1.1 million in second quarter 2021. Interest on deposit accounts increased slightly from second quarter 2021. Interest expense on subordinated debt decreased $182 thousand, or 43.9%, as the second quarter 2021 included approximately $180 thousand for interest and the amortization of issuance costs on subordinated debt, which Salisbury issued in 2015 and fully redeemed in May 2021.

Provision and Allowance for Loan Losses

The allowance for loan losses was $13.7 million at June 30, 2022 compared with $13.0 million at December 31, 2021. The provision for loan loss expense for second quarter 2022 was $1.1 million compared with a provision of $363 thousand for first quarter 2022 and a provision release of $1.1 million for second quarter 2021. The provision expense for second quarter 2022 reflected record quarterly loan growth and adjustments to qualitative factors due to the uncertain macro-economic environment. The provision expense for second quarter 2022 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 industry. Net loan charge-offs (recoveries) were $312 thousand for the second quarter 2022, $410 thousand for first quarter 2022 and $103 thousand for the second quarter 2021. Charge-offs for second quarter 2022 primarily related to a discrete commercial loan.

As a result of these factors, reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans excluding PPP loans, was 1.20% for the second quarter 2022, versus 1.21% for first quarter 2022 and 1.29% for the second quarter 2021. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 324% for the second quarter of 2022, versus 467% for the first quarter of 2022 and 229% for the second quarter of 2021.

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

Three months ended June 30,	2022		2021
Net charge-offs (recoveries) to average loans receivable, gross	0.03	%	0.01	%
Non-performing loans to loans receivable, gross	0.37		0.53
Accruing loans past due 30-89 days to loans receivable, gross	0.09		0.13
Allowance for loan losses to loans receivable, gross	1.19		1.22
Allowance for loan losses to non-performing loans	324.03		229.42
Non-performing assets to total assets	0.28		0.39

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $4.2 million or 0.37% of gross loans receivable at June 30, 2022 as compared to $5.5 million, or 0.53%, at June 30, 2021. Accruing loans past due 30-89 days decreased $0.4 million to $1.0 million, or 0.09% of gross loans receivable at June 30, 2022 from $1.4 million, or 0.13% of gross loans receivable, at June 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 June 30, 2022.

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

Non-Interest Income

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

Three months ended June 30, (dollars in thousands)		2022			2021			2022 vs. 2021
Trust and wealth advisory	$	1,293		$	1,254		$	39		3.1	%
Service charges and fees		1,723			1,374			349		25.4
Mortgage banking activities, net		77			196			(119	)	(60.7	)
(Losses) gains on mutual fund		(30	)		3			(33	)	N/A
(Losses) gains on available-for-sale securities, net		(45	)		(9	)		(36	)	400.0
BOLI income and gains		252			125			127		101.6
Other		27			28			(1	)	(3.6	)
Total non-interest income	$	3,297		$	2,971		$	326		11.0	%

Non-interest income increased $326 thousand, or 11.0% in the second quarter 2022 versus second quarter 2021. Trust and wealth advisory revenues increased $39 thousand versus second quarter 2021. Assets under administration were $1.3 billion at June 30, 2022 compared with $1.0 billion at March 31, 2022 and $970.3 million at June 30, 2021. Discretionary assets under administration of $546.5 million at June 30, 2022 decreased from $625.3 million at March 31, 2022 and $614.3 million at June 30, 2021. Non-discretionary assets under administration of $714.7 million increased from $423.9 million at first quarter 2022 and increased from $356.0 million in second quarter 2021. The increase in non-discretionary assets from the comparative quarters primarily reflected 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 increased $349 thousand versus second quarter 2021 primarily due to non-recurring loan prepayment fees of $425 thousand as well as higher interchange and deposit fees. Second quarter 2022 income from mortgage sales and servicing decreased $119 thousand due to lower sales volume. Mortgage sales to FHLB Boston in second quarter 2022 were $2.0 million compared with $7.1 million for second quarter 2021. Mortgage banking activities, net for first quarter 2022 also included a pre-tax gain of $239 thousand on the sale of $3.4 million of non-performing and under-performing commercial and residential loans.

Non-interest income for second quarter 2022 included a pre-tax loss of $45 thousand on the sale of available-for-sale securities (“AFS”) compared with $9 thousand in second quarter 2021. BOLI income for second quarter 2022 included a non-recurring non-taxable gain of $89 thousand related to proceeds receivable due to the death of a former covered employee.

Non-Interest Expense

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

Three months ended June 30, (dollars in thousands)		2022		2021		2022 vs. 2021
Salaries	$	3,657	$	3,403	$	254		7.5	%
Employee benefits		1,288		1,356		(68	)	(5.0	)
Premises and equipment		973		1,019		(46	)	(4.5	)
Information processing and services		702		628		74		11.8
Professional fees		821		644		177		27.5
Collections, OREO, and loan related		116		113		3		2.7
FDIC insurance		122		80		42		52.5
Marketing and community support		262		214		48		22.4
Amortization of intangibles		50		65		(15	)	(23.1	)
Other		541		564		(23	)	(4.1	)
Total non-interest expense	$	8,532	$	8,086	$	446		5.5	%

Non-interest expense for second quarter 2022 increased $446 thousand versus second quarter 2021. Total compensation expense increased $186 thousand versus the second quarter 2021. The increase from the comparative quarters primarily reflected higher salary expense, partially offset by lower benefits expense. Deferred loan origination expenses in second quarter 2022 declined $57 thousand versus second quarter 2021. Premises and equipment expense decreased $46 thousand versus second quarter 2021 primarily due to decreased depreciation expense and software maintenance. Information processing and services expense increased $74 thousand versus second quarter 2021 primarily due to higher ATM network processing fees, core data processing and website expenses. Professional fees increased $177 thousand versus second quarter 2021 primarily due to higher consulting, legal expenses and investment management fees. Marketing and community support expense increased $48 thousand versus second quarter 2021 primarily due to timing of current marketing campaigns and contributions. The decrease in other expenses of $23 thousand primarily reflected fraud insurance recovery. During second quarter 2022, Salisbury recovered approximately $50 thousand related to fraud losses recorded in first quarter 2022.

Income Taxes

The effective income tax rates for second quarter 2022 and second quarter 2021 were 15.3% and 21.2%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax-exempt income. The tax provision for second quarter 2022 included a non-recurring credit of $63 thousand to adjust for an over statement of the Bank’s 2021 tax liability to New York state. The lower tax rate in second quarter 2022 also reflected a higher mix of tax-exempt income from municipal bonds and tax advantaged loans as well as the BOLI proceeds receivable noted above. Additionally, Salisbury’s effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

Salisbury did not incur Connecticut income tax in 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 six-month periods ended June 30, 2022 and 2021

Overview

Net income allocated to common shareholders was $7.3 million, or $1.29 basic earnings per common share, for the six-month period ended June 30, 2022 (six-month period 2022), compared with $8.7 million, or $1.56 basic earnings per common share, for the six-month period ended June 30, 2021 (six month period 2021). The reduction in net income allocated to common shareholders for the six-month period in 2022 primarily reflected a higher provision for loan losses and higher non-interest expenses, which were partially offset by higher net interest and non-interest income.

Net Interest Income

Tax equivalent net interest income for the six-month period 2022 of $21.5 million increased $1.3 million, or 6.3%, versus the six-month period 2021. Average earning assets of $1.4 billion at June 30, 2022 increased $87.0 million, or 6.6%, versus the six-month period 2021. Average total interest bearing deposits of $0.9 million increased $41.8 million, or 4.8%, versus the six-month period 2021. The net interest margin of 3.05% decreased 1 basis point compared with the six-month period 2021. Excluding PPP loans, the net interest margin for the six-month period ended June 30, 2022 was approximately 2.98% compared with 2.94% for the same period in 2021.

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

Six months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2022		2021		2022		2021		2022		2021
Loans (a)(d)	$	1,095,955	$	1,052,020	$	20,971	$	20,605		3.80	%	3.90	%
Securities (c)(d)		216,847		120,710		2,079		1,360		1.92		2.25
FHLBB stock		1,327		1,889		17		20		2.58		2.13
Short term funds (b)		88,813		141,278		146		76		0.33		0.11
Total earning assets		1,402,942		1,315,897		23,213		22,061		3.29		3.34
Other assets		68,256		70,848
Total assets	$	1,471,198	$	1,386,745
Interest-bearing demand deposits	$	231,037	$	223,049		207		223		0.18		0.20
Money market accounts		310,475		302,290		283		267		0.18		0.18
Savings and other		234,920		204,930		160		115		0.14		0.11
Certificates of deposit		134,063		138,402		405		516		0.61		0.75
Total interest-bearing deposits		910,495		868,671		1,055		1,121		0.23		0.26
Repurchase agreements		8,689		10,241		6		8		0.15		0.15
Finance lease		5,190		2,787		82		69		3.16		4.93
Note payable		158		196		5		6		6.13		6.14
Subordinated Debt (net of issuance costs)		24,488		20,529		466		534		3.81		5.20
FHLBB advances		1,479		11,197		55		65		7.46		1.17
Total interest-bearing liabilities		950,499		913,621		1,669		1,803		0.35		0.40
Demand deposits		381,731		338,486
Other liabilities		6,675		6,851
Shareholders’ equity		132,293		127,787
Total liabilities & shareholders’ equity	$	1,471,198	$	1,386,745
Net interest income (d)					$	21,544	$	20,258
Spread on interest-bearing funds										2.94		2.95
Net interest margin (e)										3.05		3.06

(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 cost.

(d)

Includes tax exempt income benefit of $364,000 and $343,000, 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.

Six months ended June 30, (in thousands)	2022 versus 2021
Change in interest due to		Volume			Rate			Net
Loans	$	1,440		$	(1,074	)	$	366
Securities		1,276			(557	)		719
FHLBB stock		(10	)		7			(3	)
Short term funds		(183	)		253			70
Interest-earning assets		2,523			(1,371	)		1,152
Deposits		201			(267	)		(66	)
Repurchase agreements		(2	)		—			(2	)
Finance lease		84			(71	)		13
Note payable		(1	)		—			(1	)
Subordinated Debt		245			(313	)		(68	)
FHLBB advances		(409	)		399			(10	)
Interest-bearing liabilities		118			(252	)		(134	)
Net change in net interest income	$	2,405		$	(1,119	)	$	1,286

Interest Income

Tax equivalent interest income of $23.2 million for the six-month period ended June 30, 2022 increased $1.2 million, or 5.2%, from $22.1 million for the six-month period ended June 30, 2021. Loan income, as compared to the six months of 2021, increased $366 thousand, or 1.8%, primarily due to a $43.9 million, or 4.1%, increase in average loan balances, which was partly offset by a 10 basis point decrease in the average yield. Tax equivalent securities income increased $719 thousand, or 52.9%, for the six-month period 2022 as compared with the six-month period 2021, primarily due to a $96.1 million, or 79.6%, increase in average balances, which was partly offset by a 33 basis point decrease in average yield. Income on short-term funds as compared to six-month period 2021 increased $70 thousand, or 92.1%, primarily due to a $52.5 million, or 37.1%, decrease in average balances, partly offset by a 22 basis point increase in the average short-term funds yields.

Interest Expense

Interest expense decreased $134 thousand, or 7.4%, to $1.7 million for the six-month period 2022 compared with $1.8 million for the six-month period 2021. Interest on deposit accounts decreased $66 thousand, or 5.9%, as a result of a 3 basis point reduction in the average deposit rate, which was partly offset by an increase in the average total deposit balance of $41.8 million compared with the six-month period 2021. Interest expense on subordinated debt for the six-month period 2021 included approximately $180 thousand for interest and the amortization of issuance costs on $10.0 million of subordinated debt, which Salisbury issued in 2015 and fully redeemed in May 2021. In March 2021, Salisbury issued $25.0 million of subordinated debt at a coupon of 3.5%.

Provision and Allowance for Loan Losses

A provision of $1.5 million was recorded for the six-month period ended June 30, 2022 compared to a net credit reserve release of $0.9 million for the six-month period ended June 30, 2021. Net loan charge-offs were $722 thousand and $129 thousand for the respective periods. The provision expense for six-month period of 2022 reflected significant loan growth and adjustments to qualitative factors due to the uncertain macro-economic environment. The provision expense for quarter 2022 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 six-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.

Reserve coverage at June 30, 2022, as measured by the ratio of allowance for loan losses to gross loans, at 1.19%, compares with 1.22% a year ago at June 30, 2021. Excluding PPP loans, the reserve coverage ratio was 1.20% for June 30, 2022 compared with 1.29% for June 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.

Six months ended June 30, (dollars in thousands)		2022			2021			2022 vs. 2021
Trust and wealth advisory	$	2,533		$	2,399		$	134		5.6	%
Service charges and fees		2,861			2,325			536		23.1
Mortgage banking activities, net		432			804			(372	)	(46.3	)
(Losses) gains on mutual fund		(72	)		(14	)		(58	)	414.3
(Losses) gains on sales and calls of available -for-sale securities, net		165			(9	)		174		N/A
BOLI income and gains		414			251			163		64.9
Other		57			57			0		0.0
Total non-interest income	$	6,390		$	5,813		$	577		9.9	%

Non-interest income for the six-month period ended June 30, 2022 increased $577 thousand versus the same period in 2021. Trust and wealth advisory revenues increased $134 thousand mainly due to higher asset-based fees. Service charges and fees increased $536 thousand during the six-month period ended June 30, 2022. The increase primarily reflected loan prepayment fees recorded in second quarter 2022 as well as higher deposit fees. Income from sales of mortgage loans decreased $372 thousand due to decreased gains on sales of fixed rate residential mortgage loans to FHLB Boston. Mortgage loan sales totaled $7.5 million for the six-month period ended June 30, 2022 compared with $28.5 million for the six-month period ended June 30, 2021. The six-month periods ended June 30, 2022 and 2021 included mortgage servicing amortization of $78 thousand and $131 thousand, respectively. BOLI income for the six-month period ended June 30, 2022 included a non-recurring non-taxable gain of $89 thousand related to proceeds receivable due to the death of a former covered employee.

Non-interest expense

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

Six months ended June 30, (dollars in thousands)		2022		2021		2022 vs. 2021
Salaries	$	7,135	$	6,304	$	831		13.2	%
Employee benefits		2,565		2,668		(103	)	(3.9	)
Premises and equipment		2,086		1,973		113		5.7
Information processing and services		1,387		1,193		194		16.3
Professional fees		1,609		1,355		254		18.7
Collections, OREO, and loan related		232		197		35		17.8
FDIC insurance		293		225		68		30.2
Marketing and community support		447		296		151		51.0
Amortization of intangibles		104		137		(33	)	(24.1	)
Other		1,328		999		329		32.9
Non-interest expense	$	17,186	$	15,347	$	1,839		12.0	%

Non-interest expense for the six-month period ended June 30, 2022 increased $1.8 million versus the same period in 2021. Salaries increased $831 thousand due to higher base salaries and production accruals. Benefits decreased $103 thousand primarily due one-time health insurance credit recorded in 2022. Premises and equipment increased $113 thousand primarily due to higher lease, utilities expense and software maintenance partially offset by maintenance and repair expense. Information processing and services increased $194 thousand mainly due to higher core data processing costs, website and ATM and debit card network fees. Professional fees increased $254 thousand versus the six-month period 2021 primarily due to higher consulting, investment management and legal costs partially offset by lower audit and exam expenses. Collections, OREO and loan related expense increased $35 thousand primarily on higher appraisal and litigation costs and higher mortgage taxes. Marketing and community support increased $151 thousand primarily due to brand refresh incentives and additional marketing campaigns and contributions. Other expenses increased $329 thousand primarily due to two isolated instances of debit card or check cashing net fraud-related losses aggregating $200 thousand incurred in 2022.

Income taxes

The effective income tax rates for the six-month periods ended June 30, 2022 and June 30, 2021 were 16.9% and 21.4%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax-exempt income. The tax provision for the six-month period of 2022 included a non-recurring credit of $63 thousand to adjust for an over statement of the Bank’s 2021 tax liability to New York state. The lower tax rate in 2022 also reflected a higher mix of tax-exempt income from municipal bonds and tax advantaged loans as well as the BOLI proceeds receivable noted above. Additionally, Salisbury’s effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

Salisbury did not incur Connecticut income tax in 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 $9.3 million in six months to $127.3 million at June 30, 2022 as unrealized after-tax losses in the available-for-sale securities (“AFS”) portfolio of $15.4 million and common stock dividends paid of $1.8 million were partially offset by net income of $7.4 million and issued stock and stock-based compensation totaling of $0.5 million. The unrealized losses in the AFS portfolio, which reflected the sharp increase in market interest rates during first six months of 2022, reduced both book value and tangible book value at June 30, 2022. Book value per common share of $22.01 at June 30, 2022 decreased $0.55 from first quarter 2022 and decreased $1.00 from second quarter 2021. Tangible book value per common share of $19.57 at June 30, 2022 decreased $0.53 from first quarter 2022 and decreased $0.93 from second 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:

	June 30, 2022			December 31, 2021
Total Capital (to risk-weighted assets)		13.28	%		14.08	%
Tier 1 Capital (to risk-weighted assets)		12.13			12.87
Common Equity Tier 1 Capital (to risk-weighted assets)		12.13			12.87
Tier 1 Capital (to average assets)		10.04			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.

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

As of June 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 six-month period ended June 30, 2022.

Stock Split

At Salisbury’s annual shareholder meeting on May 18, 2022, shareholders approved a recommendation by Salisbury’s Board of Directors to amend Salisbury’s Certificate of Incorporation to increase Salisbury’s authorized shares of Common Stock from 5,000,000 to 10,000,000 shares. On June 30, 2022, Salisbury’s Board implemented a two for one forward split of the shares of the Company’s Common Stock as a means of enhancing the liquidity and marketability of the Company’s securities in the best interests of shareholders.

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 $1.8 million in common stock dividends during the six-month period ended June 30, 2022. On July 22, 2022, the Board of Directors of Salisbury approved a quarterly cash dividend of $0.16 per common share is payable on August 26, 2022 to shareholders of record as of August 12, 2022.

Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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

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

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

IMPACT OF INFLATION AND CHANGING PRICES

Salisbury’s consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. 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 March 31, 2021 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At June 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 2023 with the treasury yield curve then declining late in 2023 and into 2024. At June 30, 2023 the two year, five year and 10 year treasury are 0.80%, 0.70% and 0.70% higher than actual rates as of June 30, 2022 with the Fed Funds rate increasing 1.75% from June 30, 2022 to June 30, 2023. The Fed Funds rate is then projected to decline 1.75% from June 30, 2023 to June 30, 2024 with the two year, five year and 10 year treasury declining by 1.46%, 1.30% and 1.05% over that time period. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of June 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 June 30, 2022.

As of June 30, 2022	Months 1-12			Months 13-24
Immediately rising interest rates + 200bp (static growth assumptions)		(2.70	%)		2.40	%
Immediately falling interest rates + 100bp (static growth assumptions)		(1.10	)		1.60
Immediately rising interest rates - 100bp (static growth assumptions)		(3.70	)		(7.10	)

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 June 30, 2022(in thousands)		Rates up 100bp			Rates up 200bp
U.S. Treasury	$	(789	)	$	(1,536	)
U.S. Government agency notes		(1,566	)		(2,305	)
Municipal bonds		(3,585	)		(6,916	)
Mortgage backed securities
U.S. Government agencies and U.S. Government- sponsored enterprises		(3,388	)		(6,650	)
Collateralized mortgage obligations
U.S. Government agencies		(1,572	)		(3,175	)
Corporate bonds		(424	)		(801	)
Total available-for-sale debt securities	$	(11,324	)	$	(21,383	)

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury’s disclosure controls and procedures as of June 30, 2022. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 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 Salisbury in its reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

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

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	Change in Control Agreement with Stephen Scott dated May 18, 2022 (incorporated by reference to Exhibit 10.1 of Form 8-K filed May 20, 2022).

10.2	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.

August 15, 2022	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

August 15, 2022	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer