Toggle SGML Header (+)


Section 1: 10-K (FORM 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2019

 

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

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Connecticut  06-1514263
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
5 Bissell Street, Lakeville, CT  06039
(Address of principal executive offices) (Zip code)
   
Registrant's telephone number, including area code: (860) 435-9801

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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” in Rule 12b-2 of the Exchange Act. See definitions of “large accelerated filer,” “accelerated filer,” and “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 Exchange Act Rule 12b-2). ☐ Yes ☑ No

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2019 was $110.1 million based on the closing sales price of $39.00 of such stock. The number of shares of the registrant's Common Stock outstanding as of March 1, 2020, was 2,827,667.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement for the 2019 Annual Meeting of Shareholders to be held on May 13, 2020, which will be filed within 120 days of fiscal year ended December 31, 2019, are incorporated by reference into Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K.

 
 

FORM 10-K

SALISBURY BANCORP, INC.

For the Year Ended December 31, 2019

TABLE OF CONTENTS

 

  Description Page
PART I    
Item 1. BUSINESS 3
Item 1A. RISK FACTORS 12
Item 1B. UNRESOLVED STAFF COMMENTS 15
Item 2. PROPERTIES 15
Item 3. LEGAL PROCEEDINGS 15
Item 4. MINE SAFETY DISCLOSURES 15
     
PART II    
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES 16
Item 6. SELECTED FINANCIAL DATA 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 33
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 35
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 73
Item 9A. CONTROLS AND PROCEDURES 73
Item 9B. OTHER INFORMATION 73
     
PART III    
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 73
Item 11. EXECUTIVE COMPENSATION 73
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 73
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 74
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  74
     
PART IV    
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 74
Item 16. Form 10-K Summary 75

 

 2 

 

PART I

Forward-Looking Statements

This Annual Report on Form 10-K may contain and incorporates by reference statements relating to future results of Salisbury Bancorp, Inc. (the “Company”) and its Subsidiary, Salisbury Bank and Trust Company (the “Bank”) (collectively, "Salisbury"), that are considered “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may,” “plans,” “estimates,” and similar references to future periods; however, such words are not the exclusive means of identifying such statements. These statements relate to, among other things, expectations concerning loan demand, growth and performance, simulated changes in interest rates and the adequacy of the allowance for loan losses.  Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, interest rate fluctuations, competitive product and pricing pressures within Salisbury's markets, equity and fixed income market fluctuations, personal and corporate customers' bankruptcies, inflation, acquisitions and integrations of acquired businesses, technological changes and cybersecurity matters, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, success in gaining  regulatory approvals when required as well as other risks and uncertainties reported from time to time in Salisbury's filings with the Securities and Exchange Commission. See also, the “Risk Factors” set forth below.

Forward-looking statements made by Salisbury in this Annual Report on Form 10-K speak only as of the date they are made. Events or other facts that could cause Salisbury's actual results to differ may arise from time to time, and Salisbury cannot predict all such events and factors. Salisbury undertakes no obligation to publicly update any forward-looking statement, except as may be required by law.

Item 1.BUSINESS

Salisbury Bancorp, Inc.

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).

Abbreviations Used Herein

Bank Salisbury Bank and Trust Company  FRA Federal Reserve Act
BHC Bank Holding Company  FRB Federal Reserve Board
BHCA Bank Holding Company Act  GAAP Generally Accepted Accounting Principles in the United States of America
BOLI Bank Owned Life Insurance  GLBA Gramm-Leach-Bliley Act
CFPB Consumer Financial Protection Bureau  LIBOR London Interbank Offered Rate
CRA Community Reinvestment Act of 1977  OREO Other Real Estate Owned
CTDOB State of Connecticut Department of Banking  OTTI Other Than Temporarily Impaired

Dodd-

Frank Act

Dodd-Frank Wall Street Reform and Consumer Protection Act  PIC Passive Investment Company
ESOP Employee Stock Ownership Plan  Salisbury Salisbury Bancorp, Inc. and Subsidiary
FACT Act Fair and Accurate Credit Transactions Act  SBLF Small Business Lending Fund
FASB Financial Accounting Standards Board  SEC Securities and Exchange Commission
FDIC Federal Deposit Insurance Corporation  SOX Sarbanes-Oxley Act of 2002
FHLBB Federal Home Loan Bank of Boston  Treasury United States Department of the Treasury

 

Lending Activities

The Bank originates commercial loans, commercial real estate loans, residential and commercial construction loans, residential real estate loans collateralized by one-to-four family residences, home equity lines of credit and fixed rate loans and other consumer loans predominately in Connecticut's Litchfield County, New York's Dutchess, Orange and Ulster Counties and Massachusetts' Berkshire County in towns proximate to the Bank's fourteen full service offices.

The majority of the Bank's loans as of December 31, 2019, including some loans classified as commercial loans, were secured by real estate. Interest rates charged on loans are affected principally by the Bank's current asset/liability strategy, the demand for such loans, the cost and supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general economic and credit conditions, monetary policies of the federal government, including the FRB, federal and state tax policies and budgetary matters.

Residential Real Estate Loans

A principal lending activity of the Bank is to originate loans secured by first mortgages on one-to-four family residences. The Bank typically originates residential real estate loans through employees who are commissioned licensed mortgage originators (in accordance with the mortgage lending compensation guidelines issued by the CFPB). The Bank originates both fixed rate and adjustable rate mortgages.

The Bank currently sells the majority of the fixed rate 30 year residential mortgage loans it originates to the FHLBB under the Mortgage Partnership Finance Program. The Bank typically retains loan servicing. The Bank retains some fixed rate residential mortgage loans and those loans originated under its first time home owner program.

The retention of adjustable rate residential mortgage loans in the portfolio and the sale of longer term, fixed rate residential mortgage loans helps reduce the Bank's exposure to interest rate risk. However, adjustable rate mortgages generally pose credit risks different from the credit risks inherent in fixed rate loans primarily because as interest rates rise, the underlying debt service payments of the borrowers rise, thereby increasing the potential for default. Management believes that these risks, which have not had a material adverse effect on the Bank to date, generally are less onerous than the interest rate risks associated with holding long-term fixed rate loans in the loan portfolio.

 3 

 

Commercial Real Estate Loans

The Bank makes commercial real estate loans for the purpose of allowing borrowers to acquire, develop, construct, improve or refinance commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. Office buildings, light industrial, retail facilities or multi-family income properties, normally collateralize commercial real estate loans. Among the reasons for management's continued emphasis on commercial real estate lending is the desire to invest in assets with yields which are generally higher than yields on one-to-four family residential mortgage loans, and are more sensitive to changes in interest rates. These loans typically have terms/amortizations of up to ten and twenty five years, respectively, and interest rates, which adjust over periods of three to ten years, based on one of various rate indices.

Commercial real estate lending generally poses a greater credit risk than residential mortgage lending to owner-occupants. The repayment of commercial real estate loans depends on the business and financial condition of the borrower. Economic events and changes in government regulations, which the Bank and its borrowers do not control, could have an adverse impact on the cash flows generated by properties securing commercial real estate loans and on the market value of such properties.

Construction Loans

The Bank originates both residential and commercial construction loans. Typically, loans are made to owner-borrowers who will occupy the properties as either their primary or secondary residence and to licensed and experienced developers for the construction of single-family homes or commercial properties.

The proceeds of commercial construction loans are disbursed in stages. Bank officers, appraisers and/or independent engineers inspect each project's progress before additional funds are disbursed to verify that borrowers have completed project phases.

Residential construction loans to owner-borrowers generally convert to a fully amortizing long-term mortgage loan upon completion of construction. The typical construction phase is generally twelve months.

Construction lending, particularly commercial construction lending, poses greater credit risk than mortgage lending to owner-occupants. The repayment of commercial construction loans depends on the business, the financial condition of the borrower, and on the economic viability of the project financed. Economic events and changes in government regulations, which the Bank and its borrowers do not control, could have an adverse impact on the value of properties securing construction loans and on the borrower's ability to complete projects financed and sell them for amounts anticipated at the time the projects commenced.

Commercial Loans

Commercial loans are generally made on a secured basis and are primarily collateralized by equipment, inventory, accounts receivable and/or leases. Commercial loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion. The Bank offers both term and revolving commercial loans. Term loans have either fixed or adjustable rates of interest and, generally, terms of between two and seven years. Term loans generally amortize during their life, although some loans require a balloon payment at maturity if the amortization exceeds seven years. Revolving commercial lines of credit typically are renewable annually and have a floating rate of interest normally indexed to the prime rate as published in the Wall Street Journal.

Commercial lending generally poses a higher degree of credit risk than real estate lending. Repayment of both secured and unsecured commercial loans depends substantially on the success of the borrower's underlying business, financial condition and cash flows. Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is primarily dependent upon the success of the borrower's business.

Secured commercial loans are generally collateralized by equipment, inventory, accounts receivable and leases. Compared to real estate, such collateral is more difficult to monitor, its value is more difficult to validate, it may depreciate more rapidly and it may not be as readily saleable if repossessed.

Consumer Loans

The Bank originates various types of consumer loans, including home equity loans and lines of credit, auto and personal installment loans. Home equity loans and lines of credit are generally secured by second mortgages placed on one-to-four family owner-occupied properties. Home equity loans have fixed interest rates, while home equity lines of credit adjust based on the prime rate as published in the Wall Street Journal. Consumer loans are originated through the branch network with the exception of Home Equity Lines of Credit, which are originated by licensed Mortgage Lending Originator staff.

Municipal Loans

The Bank makes commercial loans to municipalities and municipal entities (i.e., fire districts, school districts) located within its geographic market area. The most common loans are one-year interest-only Bond Anticipation Notes. The Bank also makes medium-term amortizing loans (two to seven years) for acquisition of capital equipment. The Bank has also underwritten several long-term amortizing loans to finance municipal buildings and infrastructure. These loans, which are unsecured, are general obligations of each municipality backed by its full faith and credit and taxing authority. Most municipal borrowers maintain a strong deposit relationship with the Bank. Loans to municipalities and municipal entities are bank-qualified tax-exempt loans and are considered to be a lower credit risk relative to most other commercial loans.

Credit Risk Management and Asset Quality

One of the Bank's key objectives is to maintain a high level of asset quality. The Bank utilizes the following general practices to manage credit risk: ensuring compliance with prudent written policies; limiting the amount of credit that individual lenders may extend; establishing a process for credit approval accountability; careful initial underwriting and analysis of borrower, transaction, market and collateral risks; ongoing servicing of individual loans and lending relationships; continuous monitoring and risk rating of the portfolio, market dynamics and the economy; and periodically reevaluating the Bank's strategy and overall exposure as economic, market and other relevant conditions change.

Credit Administration is responsible for determining loan loss reserve adequacy and preparing monthly and quarterly reports regarding the credit quality of the loan portfolio, which are submitted to the Loan Committee to ensure compliance with the credit policy, and managing non-performing and classified assets as well as oversight of all collection activity.

In addition to loan review's performed by Credit Administration, loan review activities are also performed by an independent third-party loan review firm that evaluates the creditworthiness of borrowers and the appropriateness of the Bank's risk rating classifications. The firm's findings are reported to Credit Administration, Senior Management, and the Board level Loan and Audit Committees.

 4 

 

Trust and Wealth Advisory Services

The Bank provides a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, families, businesses and institutions.

Securities

Salisbury's securities portfolio is structured to diversify the earnings, assets and risk structure of Salisbury, provide liquidity consistent with both projected and potential needs, collateralize certain types of deposits, assist with maintaining a satisfactory net interest margin and comply with regulatory capital and liquidity requirements. Types of securities in the portfolio generally include U.S. Government and Agency securities, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and tax-exempt municipal bonds, among others.

Sources of Funds

The Bank uses deposits, proceeds from loan and security maturities, repayments and sales, and borrowings to fund lending, investing and general operations. Deposits represent the Bank's primary source of funds.

Deposits

The Bank offers a variety of deposit accounts with a range of interest rates and other terms, which are designed to meet customer financial needs. Retail and commercial deposits are primarily received through the Bank's banking offices. Additional depositor related services provided to customers include Landlord/Tenant Lease Security Accounts and Services, Merchant Services, Payroll Services, Cash Management (Remote Deposit Capture, ACH Origination, Wire Transfers and Positive Pay), ATM, Bank-by-Phone, Internet Banking, Internet Bill Pay, Person to Person Payments, Bank to Bank Transfers, Mobile Banking with remote deposit, and Online Financial Management with Account Aggregation Services.

The FDIC provides separate insurance coverage of $250 thousand per depositor for each account ownership category. Deposit flows are significantly influenced by economic conditions, the general level of interest rates and the relative attractiveness of competing deposit and investment alternatives. When determining deposit pricing, the Bank considers strategic objectives, competitive market rates, deposit flows, funding commitments and investment alternatives, FHLBB advance rates and rates on other sources of funds.

National, regional and local economic and credit conditions, changes in competitor money market, savings and time deposit rates, prevailing market interest rates and competing investment alternatives all have a significant impact on the level of the Bank's deposits. Deposit generation is a key focus for the Bank as a source of liquidity and to fund continuing asset growth. Competition for deposits has been, and is expected to, remain strong.

Borrowings

The Bank is a member of the FHLBB, which provides credit facilities for regulated, federally insured depository institutions and certain other home financing institutions. Members of the FHLBB are required to own capital stock in the FHLBB and are authorized to apply for advances on the security of their FHLBB stock and certain home mortgages and other assets (principally securities, which are obligations of, or guaranteed by, the United States Government or its agencies) provided certain creditworthiness standards have been met. Under its current credit policies, the FHLBB limits advances based on a member's assets, total borrowings and net worth. Long-term and short-term FHLBB advances may be utilized as a source of funding to meet liquidity and planning needs when the cost of these funds is favorable as compared to deposits or alternate funding sources. During 2015, Salisbury issued $10 million of subordinated debentures; See “Deposits and Borrowings” in Item 7.

Additional funding sources are available through securities sold under agreements to repurchase and the Federal Reserve Bank of Boston.

Acquisitions

In April 2018 the Bank completed its purchase and assumption of the Fishkill, New York branch of Orange Bank & Trust Company, which included approximately $8 million in deposits and $8 million in branch related loans. The Bank did not purchase any additional branches in 2019.

Subsidiaries

Salisbury has one wholly-owned subsidiary, Salisbury Bank and Trust Company. The Bank has two wholly-owned subsidiaries, SBT Mortgage Service Corporation and S.B.T. Realty, Inc. SBT Mortgage Service Corporation is a passive investment company ("PIC") that holds loans collateralized by real estate originated or purchased by the Bank. Income of the PIC and its dividends to Salisbury are exempt from the Connecticut Corporate Business Tax. S.B.T. Realty, Inc. was formed to hold New York state real estate.

Employees

At December 31, 2019, the Bank had 173 full-time employees and 28 part-time employees. The employees are not represented by a collective bargaining group. The Bank maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, an ESOP and an employee 401(k) plan. Management considers relations with its employees to be good.

Market Area

Salisbury and the Bank are headquartered in Lakeville, Connecticut, which is located in the northwestern quadrant of Connecticut's Litchfield County. The Bank has a total of fourteen banking offices, four of which are located in Connecticut's Litchfield County; three of which are located in Massachusetts' Berkshire County; five of which are located in New York's Dutchess County, one of which is located in New York's Ulster County, and one of which is located in New York's Orange County. The Bank's primary deposit gathering and lending area consists of the communities and surrounding towns that are served by its branch network in these counties. The Bank also has deposit, lending and trust relationships outside of these areas.

 5 

 

Competition

The Bank faces strong competition in attracting and retaining deposits and in making loans. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, automated services and office hours. Its most direct competition for deposits and loans has come from other commercial banks, savings institutions and credit unions located in its market area. Competition for deposits also comes from mutual funds and other investment alternatives, which offer a range of deposit and deposit-like products. Although the Bank expects this continuing competition to have an effect upon the cost of funds, it does not anticipate any substantial adverse effect on maintaining the current deposit base. The Bank is competitive within its market area in the various deposit products it offers to depositors. Due to this fact, management believes the Bank has the ability to maintain its deposit base.

The Bank's competition for real estate loans comes primarily from mortgage banking companies, savings banks, commercial banks, insurance companies, and other institutional lenders. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized service. Factors that affect competition include, among others, the general availability of funds and credit, general and local economic conditions, current interest rate levels and volatility in the mortgage markets.

The banking industry is also experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to increase competition by enabling more companies to provide cost effective products and services.

Regulation and Supervision

General

Salisbury is required to file reports and otherwise comply with the rules and regulations of the FRB, the FDIC, the SEC and NASDAQ as well as the state banking supervisory authorities in Connecticut, New York and Massachusetts.

The Bank is subject to extensive regulation by the CTDOB, as its chartering agency, and by the FDIC, as its primary federal supervisory agency. The Bank is required to file reports with, and is periodically examined by, the FDIC and the CTDOB concerning its activities and financial condition. It must obtain regulatory approvals prior to entering into certain transactions, such as mergers.

The following discussion of the laws, regulations and policies material to the operations of Salisbury and the Bank is a summary and is qualified in its entirety by reference to such laws, regulations and policies. Such statutes, regulations and policies are continually under review by Congress and the Connecticut, New York and Massachusetts State Legislatures and federal and state regulatory agencies. Changes in such laws, regulations, or policies could potentially have a material adverse impact on the banking industry, including Salisbury and the Bank.

Bank Holding Company Regulation

SEC and NASDAQ

Salisbury is subject to the rules and regulations of the SEC and is required to comply with the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Salisbury's common stock is listed on the NASDAQ under the trading symbol “SAL” and, accordingly, Salisbury is also subject to the rules of NASDAQ for listed companies.

Federal Reserve Board Regulation

Salisbury is a registered bank holding company under the BHCA and is subject to comprehensive regulation and regular examinations by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

Under FRB policy, a bank holding company must serve as a source of financial and managerial strength for its subsidiary bank. Under this policy, Salisbury is expected to commit resources to support the Bank. The FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank.

Bank holding companies must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of any company, which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities, which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things: (i) operating a savings institution, mortgage company, finance company, credit card company or factoring company; (ii) performing certain data processing operations; (iii) providing certain investment and financial advice; (iv) underwriting and acting as an insurance agent for certain types of credit-related insurance; (v) leasing property on a full-payout, non-operating basis; (vi) selling money orders; (vii) real estate and personal property appraising; (viii) providing tax planning and preparation services; (ix) financing and investing in certain community development activities; and (x) subject to certain limitations, providing securities brokerage services for customers.

Connecticut Bank Holding Company Regulation

Salisbury is a Connecticut corporation and is also subject to the Connecticut Business Corporation Act and Connecticut banking law applicable to Connecticut bank holding companies. Under Connecticut banking law, no person may acquire beneficial ownership of more than 10% of any class of voting securities of a Connecticut-chartered bank, or any bank holding company of such a bank, without prior notification to, and lack of disapproval by, the CTDOB. The CTDOB will disapprove the acquisition if the bank or holding company to be acquired has been in existence for less than five years, unless the CTDOB waives this five-year restriction, or if the acquisition would result in the acquirer controlling 30% or more of the total amount of deposits in insured depository institutions in Connecticut. Similar restrictions apply to any person who holds in excess of 10% of any such class and desires to increase its holdings to 25% or more of such class.

 6 

 

Dividends

Salisbury's dividends to shareholders are substantially dependent upon Salisbury's receipt of dividends from the Bank. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should be a “source of strength” to its bank subsidiary and should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated its view that, generally, it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as “undercapitalized” or if the dividend would violate applicable law or would be an unsafe or unsound banking practice.

Financial Modernization

GLBA permits greater affiliation among banks, securities firms, insurance companies, and other companies under a type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The act also permits the FRB and the Treasury to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is “well capitalized” and “well managed” as defined in the FRB's Regulation Y, and has at least a “satisfactory” Community Reinvestment Act rating. A financial holding company must provide notice to the FRB within 30 days after commencing activities previously determined to be permissible by statute or by the FRB and the Treasury. Salisbury is a registered financial holding company.

All financial institutions are required to establish policies and procedures with respect to the ability of the Bank to share nonpublic customer data with nonaffiliated parties and to protect customer data from unauthorized access. The Bank has developed policies and procedures, and believes it is in compliance with all privacy, information sharing, and notification provisions of GLBA and the FACT Act.

State Banking Laws and Supervision

The Bank is a state-chartered commercial bank under Connecticut law and as such is subject to regulation and examination by the CTDOB. In addition, because the Bank operates branch offices in Massachusetts and New York, the Bank is also subject to certain Massachusetts and New York laws and the supervisory authority of the Massachusetts Division of Banks, and New York Department of Financial Services (“NYDFS”) with respect to its branch offices in Massachusetts and New York, respectively. The approval of the state banking regulators is generally required for, among other things, the establishment of branch offices and business combination transactions. The CTDOB conducts periodic examinations of Connecticut-chartered banks. The FDIC also regulates many of the areas regulated by the CTDOB, and federal law may limit some of the authority provided to Connecticut-chartered banks by Connecticut law.

Lending Activities

Connecticut banking laws grant commercial banks broad lending authority. With certain limited exceptions, total secured and unsecured loans made to any one obligor generally may not exceed 15% of the Bank's equity capital and reserves for loan and lease losses. However, if the loan is fully secured, such limitations generally may be increased by an additional 10%.

Dividends

The Bank may pay cash dividends only out of its net profits. For purposes of this restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by any Connecticut Bank in any year may not exceed the sum of its net profits for the year in question combined with its retained net profits from the preceding two years, unless the CTDOB approves the larger dividend. Federal law also prevents the Bank from paying dividends or making other capital distributions that would cause it to become “undercapitalized.” The FDIC may also limit a bank's ability to pay dividends based upon safety and soundness considerations.

Powers

Connecticut law permits Connecticut banks to sell insurance and fixed and variable-rate annuities if licensed to do so by the Connecticut Insurance Department. With the prior approval of the CTDOB, Connecticut banks are also authorized to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted under the BHCA, other federal statutes, or the regulations promulgated pursuant to these statutes. Connecticut banks generally are also authorized to engage in any activity permitted for a federal bank or upon filing prior written notice of its intention to engage in such activity with the CTDOB, unless the CTDOB disapproves the activity.

Assessments

Connecticut banks are required to pay assessments to the CTDOB based upon a bank's asset size to fund the CTDOB's operations. The assessments are generally made annually.

Enforcement Authority

Under Connecticut law, the CTDOB has extensive enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders, and agents. The CTDOB's enforcement authority includes cease and desist orders, fines, receivership, conservatorship, removal of officers and directors, emergency closures, dissolution and liquidation.

 7 

 

New York and Massachusetts Banking Laws and Supervision

The Bank conducts activities and operates branch offices in New York and Massachusetts as well as Connecticut. Generally, with respect to its business in New York and Massachusetts, the Bank may conduct any activity that is authorized under Connecticut law that is permissible for either New York or Massachusetts state banks or for an out-of-state national bank, at its New York and Massachusetts branch offices, respectively. The New York State Superintendent of Financial Services may exercise regulatory authority with respect to the Bank's New York branch offices. The Bank is subject to certain rules related to community reinvestment, consumer protection, fair lending, establishment of intra-state branches and the conduct of banking activities with respect to its branches located in New York State. The Massachusetts Commissioner of Banks may exercise similar authority, and the Bank is subject to similar rules under Massachusetts Banking Law with respect to the Bank's Massachusetts branch offices. Federal and state laws authorize the interstate merger of banks. Among other things, banks may establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state.

Federal Regulations

Capital Requirements

Under FDIC regulations, federally insured state-chartered banks, such as the Bank, that are not members of the Federal Reserve System (“state non-member banks”) are required to comply with the following minimum leverage capital requirements: common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio. The existing capital requirements became effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act. Common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. The Bank chose the opt-out election. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale securities). Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank's “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to risk-weighted categories ranging from 0% to 1,250%, with higher levels of capital being required for the categories perceived as representing greater risk.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each year until it was fully implemented at 2.5% on January 1, 2019.

In assessing an institution's capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. As a bank holding company, the Company is also subject to regulatory capital requirements, as described in a subsequent section.

As a bank holding company, Salisbury is subject to FRB capital adequacy guidelines for bank holding companies similar to those of the FDIC for state-chartered banks.

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

Prompt Corrective Regulatory Action

Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories:

Well capitalized – at least 5% leverage capital, 6.5% Common Equity Tier 1 capital, 8% Tier 1 risk-based capital and 10% total risk-based capital.
Adequately capitalized – at least 4% leverage capital, 4.5% Common Equity Tier 1 capital, 6% Tier 1 risk-based capital and 8% total risk-based capital.
Undercapitalized – less than 4% leverage capital, 4.5% Common Equity Tier 1 capital, 6% Tier 1 risk-based capital and 8% total risk-based capital. “Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized.
Significantly undercapitalized – less than 3% leverage capital, 3% Common Equity Tier 1 capital, 4% Tier 1 risk-based capital and 6% total risk-based capital. “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company.
Critically undercapitalized – less than 2% tangible capital. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 8 

 

Transactions with Affiliates

Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the FRA. In a holding company structure, at a minimum, the parent holding company of a bank, and any companies that are controlled by such parent holding company, are deemed affiliates of its subsidiary bank. Generally, Sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and by requiring that such transactions be on terms that are consistent with safe and sound banking practices.

The FRA and Regulation O impose restrictions on loans to directors, executive officers, and principal shareholders (“insiders”). Loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution's total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors and must be made on terms substantially the same as offered in comparable transactions to other persons. The FRA imposes additional limitations on loans to executive officers.

Enforcement

The FDIC has extensive enforcement authority over insured banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.

Standards for Safety and Soundness

The FDIC, together with the other federal bank regulatory agencies, prescribe standards of safety and soundness by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards, which establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. The federal bank regulatory agencies have also adopted guidelines for asset quality and earning standards. As a state-chartered bank, the Bank is also subject to state statutes, regulations and guidelines relating to safety and soundness, in addition to the federal requirements.

Insurance of Deposit Accounts

The Bank's deposit accounts are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to applicable legal limits (generally, $250 thousand per depositor for each account ownership category and $250 thousand for certain retirement plan accounts) and are subject to deposit insurance assessments. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that considers a bank's capital level and supervisory rating. The FDIC assigns an institution to one of the following capital categories based on the institution's financial condition consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation by the institution's primary federal regulator and information which the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned.

FDIC insured institutions are required to pay assessments to the FDIC to fund the DIF. The Bank's current annual assessment rate is approximately 4.66 basis points of total assets. Additionally, FDIC insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by The Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The assessment rate is adjusted quarterly to reflect changes in the assessment bases of the DIF based on quarterly Call Report submissions. From time to time, the FDIC may impose a supplemental special assessment in addition to other special assessments and regular premium rates to replenish the DIF during periods of economic difficulty. The amount of an emergency special assessment imposed on a bank will be determined by the FDIC if such amount is necessary to provide sufficient assessment income to repay amounts borrowed from the Treasury; to provide sufficient assessment income to repay obligations issued to and other amounts borrowed from insured depository institutions; or for any other purpose the FDIC may deem necessary.

The FDIC may terminate insurance of deposits, after notice and a hearing, if it finds that the institution is in an unsafe or unsound condition to continue operations, has engaged in unsafe or unsound practices, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)

The Dodd-Frank Act, enacted in July 2010, significantly changed the bank regulatory landscape and has impacted lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act revised the statutory authorities governing the FDIC's management of the DIF. The Dodd-Frank Act granted the FDIC new DIF management tools: maintaining a positive fund balance even during a banking crisis and maintaining moderate, steady assessment rates throughout economic and credit cycles.

Among other things, the Dodd-Frank Act: (1) raised the minimum Designated Reserve Ratio (“DRR”), which the FDIC must set each year, to 1.35% (from the former minimum of 1.15%) and removed the upper limit on the DRR (which was formerly capped at 1.5%) and therefore on the size of the DIF; (2) required that the DIF reserve ratio reach 1.35% by September 30, 2020 (rather than 1.15% by the end of 2016, as formerly required); (3) required that, in setting assessments, the FDIC offset the effect of requiring that the reserve ratio reach 1.35% by September 30, 2020 (rather than 1.15% by the end of 2016) on insured depository institutions with total consolidated assets of less than $10 billion; (4) eliminated the requirement that the FDIC provide dividends from the Fund when the reserve ratio is between 1.35% and 1.50%; and (5) continued the FDIC's authority to declare dividends when the reserve ratio at the end of a calendar year is at least 1.50%, but granted the FDIC sole discretion in determining whether to suspend or limit the declaration or payment of dividends.

 9 

 

The Dodd-Frank Act also required that the FDIC amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. Under the Dodd-Frank Act, the assessment base must, with some possible exceptions, equal average consolidated total assets minus average tangible equity.

The FDIC amended 12 CFR 327 to implement revisions to the Federal Deposit Insurance Act made by the Dodd-Frank Act by modifying the definition of an institution's deposit insurance assessment base; to change the assessment rate adjustments; to revise the deposit insurance assessment rate schedules in light of the new assessment base and altered adjustments; to implement the Dodd-Frank Act's dividend provisions; to revise the large insured depository institution assessment system to better differentiate for risk and better take into account losses from large institution failures that the FDIC may incur; and to make technical and other changes to the FDIC's assessment rules. The FDIC Board of Directors adopted the final rule, which redefined the deposit insurance assessment base as required by the Dodd-Frank Act; made changes to assessment rates; implemented the Dodd-Frank Act's DIF dividend provisions; and revised the risk-based assessment system for all large insured depository institutions, generally, those institutions with at least $10 billion in total assets. Nearly all institutions with assets less than $10 billion, including the Bank, have benefited from a reduction in their assessments as a result of this final rule.

The Dodd-Frank Act requires publicly traded companies to give shareholders a non-binding vote of executive compensation at least every three (3) years. The legislation also authorizes the SEC to prohibit broker discretion on any voting on election of directors, executive compensation matters, and any other significant matter.

The Dodd-Frank Act also adopts various mortgage lending and predatory lending provisions and requires loan originators to retain 5% of any loan sold and securitized, unless it is a “qualified residential mortgage,” which includes standard 30 and 15-year fixed rate loans.

Consumer Protection and the Financial Protection Bureau

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”). As required by the Dodd-Frank Act, jurisdiction for all existing consumer protection laws and regulations has been transferred to the CFPB. In addition, the CFPB is granted authority to promulgate new consumer protection regulations for banks and nonbank financial firms offering consumer financial services or products to ensure that consumers are protected from “unfair, deceptive, or abusive” acts or practices.

Salisbury is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, various state law counterparts, and the Consumer Financial Protection Act of 2010, which constitutes part of the Dodd-Frank Act and establishes the CFPB, as described above.

The CFPB issued a final rule implementing the ability-to-repay and qualified mortgage (“QM”) provisions of the Truth in Lending Act, as amended by the Dodd-Frank Act (the “QM Rule”), which became effective on January 10, 2014. The ability-to-repay provision requires creditors to make reasonable, good faith determinations that borrowers are able to repay their mortgages before extending the credit based on a number of factors and consideration of financial information about the borrower from reasonably reliable third-party documents. Under the Dodd-Frank Act and the QM Rule, loans meeting the definition of “qualified mortgage” are entitled to a presumption that the lender satisfied the ability-to-repay requirements. The presumption is a conclusive presumption/safe harbor for prime loans meeting the QM requirements and a rebuttable presumption for higher-priced/subprime loans meeting the QM requirements. The definition of a “qualified mortgage” incorporates the statutory requirements, such as not allowing negative amortization or terms longer than 30 years. The QM Rule also adds an explicit maximum 43% debt-to-income ratio limit for borrowers if the loan is to meet the QM definition, with some exceptions.

Federal Reserve System

All depository institutions must hold a percentage of certain types of deposits as reserves. Reserve requirements currently are assessed on the depository institution's net transaction accounts (mostly checking accounts). Depository institutions must also regularly submit deposit reports of their deposits and other reservable liabilities. The Bank was in compliance with these requirements.

Federal Home Loan Bank System

The Bank is a member of the Boston region of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The FHLBB provides a central credit facility primarily for member institutions. Member institutions are required to acquire and hold shares of capital stock in the FHLBB calculated periodically based primarily on its level of borrowings from the FHLBB. The Bank was in compliance with this requirement. At December 31, 2019, the Bank had FHLBB stock of $3.2 million and FHLBB advances of $50.9 million.

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.

Other Regulations

Sarbanes-Oxley Act of 2002

The stated goals of SOX are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

SOX includes very specific disclosure requirements and corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC and the Comptroller General. SOX represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

 10 

 

SOX addresses, among other matters, audit committees; certification of financial statements and internal controls by the Chief Executive Officer and Chief Financial Officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement; a prohibition on insider trading during pension plan black-out periods; disclosure of off-balance sheet transactions; a prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a code of ethics and filing a Form 8-K for significant changes or waivers of such code; “real time” filing of periodic reports; the formation of a Public Company Accounting Oversight Board; auditor independence; and various increased criminal penalties for violations of securities laws. The SEC has enacted rules to implement various provisions of SOX.

As of December 31, 2019, the Bank is subject to section 404(b) of SOX, which requires public companies' annual reports to include the company's own assessment of internal control over financial reporting, and an auditor's attestation. See Item 9A “CONTROLS AND PROCEDURES” for management's assessment of internal controls and Item 8 “FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA” for the auditor's attestation.

USA PATRIOT Act

Under the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking regulatory authorities and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking regulators and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions are also required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act or the BHCA. Salisbury has in place a Bank Secrecy Act and USA PATRIOT Act compliance program, and has implemented internal practices, procedures, and controls to comply with anti-money laundering requirements.

Community Reinvestment Act and Fair Lending Laws

The Bank has a responsibility under the CRA to help meet the credit needs of our communities, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. In connection with its examination, the FDIC assesses the Bank's record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of characteristics specified in those statutes. The Bank's failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on our activities. The Bank's failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against the Bank by the FDIC as well as other federal regulatory agencies and the Department of Justice. The Bank's most recent FDIC CRA rating was “satisfactory.”

The Electronic Funds Transfer Act, Regulation E and Related Laws

The Electronic Funds Transfer Act (the “EFTA”) provides a basic framework for establishing the rights, liabilities, and responsibilities of consumers who use electronic funds transfer (“EFT”) systems. The EFTA is implemented by the Federal Reserve's Regulation E, which governs transfers initiated through ATMs, point-of-sale terminals, payroll cards, automated clearing house (“ACH”) transactions, telephone bill-payment plans, or remote banking services. Regulation E requires consumers to opt in (affirmatively consent) to participation in a bank's overdraft service program for ATM and one-time debit card transactions before overdraft fees may be assessed on the consumer's account. Notice of the opt-in right must be provided to all new customers who are consumers, and the customer's affirmative consent must be obtained, before charges may be assessed on the consumer's account for paying such overdrafts.

Regulation E also provides bank customers with an ongoing right to revoke consent to participation in an overdraft service program for ATM and one-time debit card transactions and prohibits banks from conditioning the payment of overdrafts for checks, ACH transactions, or other types of transactions that overdraw the consumer's account on the consumer's opting into an overdraft service for ATM and one-time debit card transactions. For customers who do not affirmatively consent to overdraft service for ATM and one-time debit card transactions, a bank must provide those customers with the same account terms, conditions, and features that it provides to consumers who do affirmatively consent, except for the overdraft service for ATM and one-time debit card transactions. Salisbury does not provide an overdraft service with respect to one time point-of-sale or ATM transactions.

Future Legislative Initiatives

In light of the recent changes in the composition of Congress and many state legislatures, it is anticipated that state legislatures and financial regulatory agencies will introduce various legislative and regulatory initiatives that may impact the financial services industry, generally. Such initiatives may include proposals to expand or contract the powers of bank holding companies and/or depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of Salisbury in significant and unpredictable ways. For example, if enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. Salisbury cannot predict whether any such legislation will be enacted, and, if enacted, what effects that such legislation would have on the financial condition or results of operations of Salisbury. A change in statutes, regulations, or regulatory policies applicable to Salisbury or any of its subsidiaries could have a material effect on the business of Salisbury.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and their Notes presented within this document have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollar amounts without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of Salisbury's operations. Unlike the assets and liabilities of industrial companies, nearly all of the assets and liabilities of Salisbury are monetary in nature. As a result, interest rates have a greater impact on Salisbury's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Availability of Securities and Exchange Commission Filings

 11 

 

Salisbury makes available free of charge on its website (salisburybank.com) under shareholder relations a link to its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable after such reports are electronically filed with or furnished to the SEC. Such reports filed with the SEC are also available on its website (www.sec.gov). Information about accessing company filings can be obtained by calling 1-800-SEC-0330. Information on Salisbury's website is not incorporated by reference into this report. Investors are encouraged to access these reports and the other information about Salisbury's business and operations on its website. Copies of these filings may also be obtained from Salisbury free of charge upon request.

Guide 3 Statistical Disclosure by Bank Holding Companies

The following information required by Securities Act Guide 3 “Statistical Disclosure by Bank Holding Companies” is located on the pages noted below.

    Page
I. Distribution of Assets, Liabilities and Shareholders' Equity; Interest Rates and Interest Differential 19-20, 24-32
II. Investment Portfolio 24, 49-51
III. Loan Portfolio 25-29, 51-56
IV. Summary of Loan Loss Experience 21, 51-56
V. Deposits 29, 59
VI. Return on Equity and Assets 31
VII. Short-Term Borrowings 29-30, 60

Item 1A.RISK FACTORS

Salisbury is the registered bank holding company for the Bank, its wholly-owned subsidiary. Salisbury's business and activity is currently limited to the holding of the Bank's outstanding capital stock, and the Bank is Salisbury's primary investment.

An investment in Salisbury common stock entails certain risks, some of which are inherent in the financial services industry and others of which are more specific to the Bank's business. Salisbury considers the most significant factors of which we are aware affecting risk in Salisbury common stock as those that are set forth below. These are not the only risks to which an investment in Salisbury common stock is subject, and none of the factors set forth below relates to the personal circumstances of individual investors. Investors should read this entire Form 10-K, as well as other documents and exhibits that are incorporated by reference in the 10-K and that have been filed with the SEC, in order to better understand these risks and to evaluate investment in Salisbury common stock.

Changes in interest rates and spreads could have a negative impact on earnings and financial condition.

Salisbury's earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, meaning the difference between interest rates earned on loans and investments, and the interest rates paid on deposits and borrowings, could adversely affect Salisbury's earnings and financial condition. Salisbury cannot predict with certainty or control changes in interest rates. Global, national, regional, and local economic conditions and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. Salisbury has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates.

However, changes in interest rates still may have an adverse effect on Salisbury's profitability. For example, high interest rates could also affect the volume of loans that Salisbury originates, because higher rates could cause customers to apply for fewer mortgages, or cause depositors to shift funds from accounts that have a comparatively lower rate, to accounts with a higher rate, or experience customer attrition due to competitor pricing or disintermediation. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning assets increase, net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower rates. If Salisbury is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then Salisbury's net interest margin will decline.

Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage loan markets, could reduce Salisbury's net income and profitability.

Declines in home prices, increases in delinquency and default rates, and constrained secondary credit markets affect the mortgage industry generally. Salisbury's financial results may be adversely affected by changes in real estate values. Decreases in real estate values could adversely affect the value of property used as collateral for loans and investments. If poor economic conditions result in decreased demand for real estate loans, Salisbury's net income and profits may decrease.

Weakness in the secondary market for residential lending could have an adverse impact upon Salisbury's profitability. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan originations and gains on sale of mortgage loans. Declines in real estate values and home sales volumes, and financial stress on borrowers as a result of job losses, or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods beyond that which is provided for in Salisbury's allowance for loan losses, which would adversely affect Salisbury's financial condition or results of operations.

Fluctuations in economic conditions and collateral values could impact the adequacy of Salisbury's allowance for loan losses.

Salisbury's business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on Salisbury's operations and financial condition. For example, declines in housing activity including declines in building permits, housing sales and home prices may make it more difficult for Salisbury's borrowers to sell their homes or refinance their debt. Slow sales could strain the resources of real estate developers and builders. The ongoing economic uncertainty has affected employment levels and could impact the ability of Salisbury's borrowers to service their debt. Bank regulatory agencies also periodically review Salisbury's allowance for loan losses and may require an increase in the provision for credit losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses Salisbury will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on Salisbury's financial condition and results of operations. Salisbury may suffer higher loan losses as a result of these factors and the resulting impact on its borrowers.

 12 

 

Credit market conditions may impact Salisbury's investments.

Significant credit market anomalies may impact the valuation and liquidity of Salisbury's investment securities. Illiquidity could reduce the market value of Salisbury's investments, even those with no apparent credit exposure. The valuation of Salisbury's investments requires judgment, and as market conditions change investment values may also change.

Salisbury's securities portfolio performance in difficult market conditions could have adverse effects on Salisbury's results of operations.

Under GAAP, Salisbury is required to review Salisbury's investment portfolio periodically for the presence of other-than-temporary impairment of its securities, taking into consideration current market conditions, the extent and nature of changes in fair value, issuer rating changes and trends, volatility of earnings, current analysts' evaluations, Salisbury's ability and intent to hold investments until a recovery of amortized cost, as well as other factors. Adverse developments with respect to one or more of the foregoing factors may require Salisbury to deem particular securities to be other-than-temporarily impaired, with the credit related portion of the reduction in the value recognized as a charge to Salisbury's earnings. Market volatility may make it extremely difficult to value certain securities of Salisbury. Subsequent valuations, in light of factors prevailing at that time, may result in significant changes in the values of these securities in future periods. Any of these factors could require Salisbury to recognize further impairments in the value of Salisbury's securities portfolio, which may have an adverse effect on Salisbury's results of operations in future periods.

If the goodwill that Salisbury has recorded in connection with its acquisitions becomes impaired, it could have a negative impact on Salisbury's profitability.

Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company's net assets, the excess is carried on the acquirer's balance sheet as goodwill. At December 31, 2019, Salisbury had $13.8 million of goodwill on its balance sheet. Salisbury must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on Salisbury's financial condition and results of operations.

Salisbury's ability to pay dividends substantially depends upon its receipt of dividends from the Bank.

Cash dividends from the Bank and Salisbury's liquid assets are the principal sources of funds for paying cash dividends on Salisbury's common stock. Unless Salisbury receives dividends from the Bank or chooses to use its liquid assets, it may not be able to pay dividends. The Bank's ability to pay dividends to Salisbury is subject to its condition and profitability as well as its regulatory requirements.

Strong competition within Salisbury's market areas may limit growth and profitability.

Competition in the banking and financial services industry is intense. Salisbury competes with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. As Salisbury grows, it may expand into contiguous market areas where it may not be as well-known as other institutions that have been operating in those areas for some time. In addition, larger banking institutions may become increasingly active in Salisbury's market areas, may have substantially greater resources and lending limits and may offer certain services that Salisbury does not, or cannot efficiently, provide. Salisbury's profitability depends upon its continued ability to successfully compete in its market areas. The greater resources and deposit and loan products offered by some competitors may limit its ability to grow profitably.

Salisbury and the Bank are subject to extensive federal and state regulation and supervision.

Salisbury and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect Salisbury's lending practices, capital structure, investment practices, and dividend policy and growth, among other things. State and federal legislatures and regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect Salisbury in substantial and unpredictable ways. Such changes could subject Salisbury to additional costs, limit the types of financial services and products it may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on Salisbury's business, financial condition and results of operations. While Salisbury has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned “Regulation and Supervision” in Item 1 of this report for further information.

Salisbury's stock price may be volatile.

Salisbury's stock is inactively traded and its stock price may fluctuate widely in response to a variety of factors including:

Actual or anticipated variations in quarterly operating results
Recommendations by securities analysts
New technology used, or services offered, by competitors
Significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving Salisbury or Salisbury's competitors
Failure to integrate acquisitions or realize anticipated benefits from acquisitions
Operating and stock price performance of other companies that investors deem comparable to Salisbury
News reports relating to trends, concerns and other issues in the financial services industry
Changes in government regulations
Geopolitical conditions such as acts or threats of terrorism or military conflicts
Changes in the economic environment of the market areas the Bank serves

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations could also cause Salisbury's stock price to decrease regardless of Salisbury's operating results.

 13 

 

Salisbury's ability to attract and retain skilled personnel may impact its success.

Salisbury's success depends, in large part, on its ability to attract and retain key people. Competition for people with specialized knowledge and skills can be intense, and Salisbury may not be able to hire people or to retain them. The unexpected loss of services of one or more of Salisbury's key personnel could have a material adverse impact on the business because of their skills, knowledge of the market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Salisbury continually encounters technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services as well as the emergence of online bank competitors. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Salisbury's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of Salisbury's competitors have substantially greater resources to invest in technological improvements. Salisbury may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on Salisbury's business and, in turn, its financial condition and results of operations.

A failure involving controls and procedures may have an adverse effect on Salisbury.

Management regularly reviews and updates Salisbury's internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Salisbury's business, results of operations and financial condition.

If customer information was to be misappropriated and used fraudulently, due to a breach of our systems, or those of third-party vendors or service providers, including as a result of cyberattacks, Salisbury could be exposed to potential liability and reputation risk as well as increased costs.

Risk of theft of customer information resulting from security breaches by third parties exposes banks to reputation risk and potential monetary loss. Like other financial institutions, Salisbury has exposure to fraudulent misuse of its customers' personal information resulting from its general business operations through loss or theft of the information and through misappropriation of information by third parties in connection with customer use of financial instruments, such as debit cards.

In addition, Salisbury relies upon a variety of computing platforms and networks over the internet for the purposes of data processing, communications and information exchange. Despite the safeguards instituted by Salisbury, any system is susceptible to a breach of security. In addition, Salisbury relies on the services of a variety of third-party vendors to meet Salisbury's data processing and communication needs. The occurrence of any failures, interruptions or security breaches of Salisbury's information systems or that of its vendors could damage Salisbury's reputation, result in a loss of customer business or expose Salisbury to civil litigation and possible financial loss. Such costs and/or losses could materially impact Salisbury's earnings.

Changes in accounting standards can materially impact Salisbury's financial statements.

Salisbury's accounting policies and methods are fundamental to how Salisbury records and reports its financial condition and results of operations. From time to time, the Financial Accounting Standards Board or regulatory authorities change the financial accounting and reporting standards that govern the preparation of Salisbury's financial statements. These changes can be hard to predict and can materially impact how Salisbury records and reports its financial condition and results of operations. In some cases, Salisbury could be required to apply a new or revised standard retroactively, resulting in Salisbury restating prior period financial statements.

Changes and interpretations of tax laws and regulations may adversely impact Salisbury's financial statements.

Local, state or federal tax authorities may interpret tax laws and regulations differently than Salisbury and challenge tax positions that Salisbury has taken on its tax returns. This may result in the disallowance of deductions or differences in the timing of deductions and result in the payment of additional taxes, interest or penalties that could materially affect Salisbury's performance.

In addition, changes in tax law, such as the federal tax reform provisions recently enacted, may adversely affect Salisbury's lending business and performance, especially those provisions regarding the deductibility of residential mortgage interest and state property taxes.

The risks presented by recent or future acquisitions could adversely affect our financial condition and results of operations.

Our business strategy has included, and may continue to include, growth through acquisition from time to time. Any recent and future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things: our ability to realize anticipated cost savings; the difficulty of integrating operations and personnel; the loss of key employees; the potential disruption of our or the acquired company's ongoing business in such a way that could result in decreased revenues; the inability of our management to maximize our financial and strategic position; the inability to maintain uniform standards, controls, procedures and policies; and the impairment of relationships with the acquired company's employees and customers as a result of changes in ownership and management.

Salisbury may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for the Company's issued subordinated debentures and other financing agreements.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The Company has subordinated notes in connection with its issuance of subordinated debt in 2015, which in December 2020 transition to variable rates that are indexed to USD-LIBOR. Salisbury is monitoring the transition from LIBOR to a new reference rate and its impact on the repricing of Salisbury's subordinated debt.

 14 

 

Salisbury may be adversely affected by a world-wide pandemic.

Although Salisbury does not generally engage in international business activities directly, certain of our customers may be engaged in international trade, travel and tourism. Their businesses may be adversely affected by quarantines and travel restrictions in countries most affected by the coronavirus or other potential virus outbreaks. In addition, entire industries such as agriculture and aviation, may be adversely impacted due to lower economic activity in the affected countries. As a result, the coronavirus outbreak may have an adverse impact generally on the economy in the United States and on Salisbury.

Salisbury may be adversely affected by the 2020 election.

Uncertainty around the 2020 election may result in reduced economic activity as businesses and individuals wait to evaluate the outcome of elections and control of Congress and the White House. In addition, if enacted, certain proposals of the various candidates may have an adverse impact on the conduct and profitability of businesses, including companies and banks like Salisbury and the Bank through increased regulation.

Item 1B.UNRESOLVED STAFF COMMENTS

None.

Item 2.PROPERTIES

Salisbury does not directly own or lease any properties. The properties described below are owned or leased by the Bank.

The Bank conducts its business at its main office, located at 5 Bissell Street, Lakeville, Connecticut, and through an additional thirteen full service branch offices located in Canaan, Salisbury and Sharon, Connecticut; Great Barrington, South Egremont and Sheffield, Massachusetts; and Dover Plains, Fishkill, Millerton, Newburgh, New Paltz, Poughkeepsie, and Red Oaks Mill, New York. The Bank owns its main office and seven of its branch offices and its Canaan Operations office, and currently leases six branch offices.

In addition, in April 2018 the Bank completed its purchase and assumption of the Fishkill, New York branch of Orange Bank & Trust Company. The Bank also consolidated its previous Fishkill, New York branch with the new Fishkill, New York branch. In March 2018, the Bank relocated its current branch in Newburgh, New York to another location in the same city. The Bank entered into a lease agreement for the new facility and it ceased paying rent for the previous location as of April 1, 2018. In September 2019, the Bank completed the purchase of its New Paltz, New York branch, which had been previously treated as a finance lease. For additional information, see Note 8, “Bank Premises and Equipment,” and Note 5 “Leases” to the Consolidated Financial Statements.

The following table includes all property owned or leased by the Bank, but does not include Other Real Estate Owned.

Offices  Location  Owned/Leased  Lease expiration 
Lakeville Office 1  5 Bissell Street, Lakeville, CT  Owned   
Administrative Office  19 Bissell Street, Lakeville, CT  Owned   
Salisbury Office  18 Main Street, Salisbury, CT  Owned   
Sharon Office  5 Gay Street, Sharon, CT  Owned   
Canaan Operations  94 Main Street, Canaan, CT  Owned   
Canaan Office  100 Main Street, Canaan, CT  Owned   
South Egremont Office  51 Main Street, South Egremont, MA  Leased  9/9/201 
Sheffield Office  640 North Main Street, Sheffield, MA  Owned   
Gt. Barrington Office  210 Main Street, Gt. Barrington, MA  Leased  12/30/28 
Millerton Office  87 Main Street, Millerton, NY  Owned   
Poughkeepsie Office  11 Garden Street, Poughkeepsie, NY  Owned   
Fishkill Office  701 Route 9, Fishkill, NY  Leased  9/29/29 
Red Oaks Mill Office  2064 New Hackensack Road, Poughkeepsie, NY  Leased  8/01/23 
Dover Plains Office  5 Dover Village Plaza, Dover Plains, NY  Leased  7/31/22 
Newburgh Office  801 Auto Park Place, Newburgh, NY  Leased  12/31/21 
New Paltz Office  275 Main Street, New Paltz, NY *  Owned   

1Salisbury has the option to renew this lease for a two year term, which would expire on 9/8/22.

Item 3.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 Salisbury's business, to which Salisbury is a party or any of its subsidiaries is a party or of which any of their property is subject.

Item 4.MINE SAFETY DISCLOSURES

Not applicable.

 15 

 

PART II

Item 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Salisbury's common stock trades on the NASDAQ Capital Market under the symbol “SAL”.

Holders

There were approximately 2,308 holders of record of the common stock of Salisbury as of March 9, 2020. This number includes brokerage firms and other financial institutions that hold stock in their name, but which is actually beneficially owned by third parties.

Dividends

For a discussion of Salisbury's dividend policy and restrictions on dividends see "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption “Dividends.” See also, Note 14 – “Shareholders' Equity” of Notes to Consolidated Financial Statements.

Equity Compensation Plan Information

For the information required by this item see Note 16 – “Long Term Incentive Plans” of Notes to Consolidated Financial Statements.

Recent Sales of Unregistered Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

None.

 16 

 

Item 6.SELECTED FINANCIAL DATA

The following table contains certain information concerning the financial position and results of operations of Salisbury at the dates and for the periods indicated. This information should be read in conjunction with the Consolidated Financial Statements and related notes.

SELECTED CONSOLIDATED FINANCIAL DATA

(in thousands, except ratios and per share amounts)

At or for the years ended December 31,    2019      2018      2017      2016      2015  
Statement of Income                         
Interest and dividend income  $43,413   $40,372   $35,521   $34,454   $34,610 
Interest expense   9,301    7,221    4,238    3,849    3,026 
Net interest and dividend income   34,112    33,151    31,283    30,605    31,584 
Provision for loan losses   955    1,728    1,020    1,835    917 
Gains on securities, net   263    318    178    584    192 
Trust and wealth advisory   3,995    3,700    3,477    3,338    3,265 
Service charges and fees   4,028    3,718    3,718    3,133    2,986 
Gains on sales of mortgage loans, net   116    89    125    229    274 
Mortgage servicing, net   307    308    255    156    47 
Other   541    812    483    451    510 
Non-interest income   9,250    8,945    8,236    7,891    7,274 
Non-interest expense   28,912    29,835    29,329    27,387    25,921 
Income before income taxes   13,495    10,533    9,170    9,274    12,020 
Income tax provision   2,359    1,709    2,914    2,589    3,563 
Net income   11,136    8,824    6,256    6,685    8,457 
Net income allocated to common stock   10,976    8,713    6,201    6,633    8,298 
Financial Condition                         
Total assets  $1,112,448   $1,121,554   $986,984   $935,366   $891,192 
Loans receivable, net   927,413    909,279    801,703    763,184    699,018 
Allowance for loan losses   8,895    7,831    6,776    6,127    5,716 
Securities   95,925    97,150    82,860    82,834    79,870 
Deposits   919,506    926,739    815,495    781,770    754,533 
Federal Home Loan Bank of Boston advances   50,887    67,154    54,422    37,188    26,979 
Repurchase agreements   8,530    4,104    1,668    5,535    3,914 
Subordinated debt, net of issuance costs   9,859    9,835    9,811    9,788    9,764 
Total shareholders' equity   113,655    103,459    97,514    94,007    90,574 
Non-performing assets   3,934    8,324    7,354    12,565    16,264 
Wealth assets under administration   777,503    648,027    610,218    516,350    371,012 
Discretionary wealth assets under administration   498,737    398,287    394,673    366,167    299,148 
Non-discretionary assets under administration   278,766    249,740    215,545    150,183    71,864 
Per Common Share Data                         
Earnings, basic  $3.95   $3.15   $2.25   $2.43   $3.04 
Earnings, diluted   3.93    3.13    2.24    2.41    3.02 
Cash dividends declared and paid   1.12    1.12    1.12    1.12    1.12 
Tangible book value   34.98    31.45    29.39    28.90    27.69 
Statistical Data                         
Net interest margin (taxable equivalent)   3.27%   3.35%   3.58%   3.69%   3.99%
Efficiency ratio (taxable equivalent)   64.12    69.13    66.79    66.74    63.03 
Effective tax rate   17.48    16.23    31.78    27.92    29.64 
Return on average assets   1.00    0.83    0.63    0.72    0.94 
Return on average common shareholders' equity   10.22    8.84    6.42    7.16    9.36 
Dividend payout ratio   28.36    35.56    49.76    46.16    36.82 
Allowance for loan losses to loans receivable, gross   0.95    0.85    0.84    0.80    0.81 
Non-performing assets to total assets   0.35    0.74    0.74    1.34    1.82 
Tier 1 leverage capital (Bank)   9.60    8.83    9.25    9.51    9.37 
Total risk-based capital (Bank)   12.84    12.09    12.54    12.92    13.10 
Weighted average common shares outstanding, basic   2,782    2,763    2,755    2,733    2,706 
Weighted average common shares outstanding, diluted   2,794    2,780    2,774    2,749    2,723 

 

 17 

 

Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS

Salisbury, a Connecticut corporation, formed in 1998, is the bank holding company for the Bank, a Connecticut-chartered and FDIC insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's principal business consists of the business of the Bank. The Bank, formed in 1848, is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and trust and wealth advisory services. The Bank conducts its banking business from fourteen full-service offices in the towns of: Canaan, Lakeville, Salisbury and Sharon, Connecticut; Great Barrington, South Egremont and Sheffield, Massachusetts; and, Fishkill, Newburgh, New Paltz, Poughkeepsie, Red Oaks Mill, Dover Plains and Millerton, New York, and its trust and wealth advisory services from offices in Lakeville, Connecticut.

In June 2017, the Bank completed its acquisition of the New Paltz, New York branch of Empire State Bank. In April 2018, the Bank completed its acquisition of the Fishkill, New York branch of Orange Bank & Trust Company and consolidated its existing Fishkill branch into that new location. In September 2019, the Bank completed the purchase of its New Paltz, New York branch, which had previously treated as a finance lease.

Critical Accounting Policies and Estimates

Salisbury's consolidated financial statements follow U. S. 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.

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. Note 1 describes the methodology used to determine the allowance for loan losses. 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.

Management, with the assistance of a third party, evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve observations and adjustments as to comparable transactions, estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors.

For both goodwill and for the core deposit intangible, the comparable transaction methodology was used to assess, and conclude that there was no impairment at December 31, 2019.

Future events, or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives could have a material adverse impact on the results of operations.

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

The following discussion and analysis of Salisbury's consolidated results of operations should be read in conjunction with the Consolidated Financial Statements and footnotes.

 18 

 

RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2019 and 2018

Net Interest and Dividend Income

Net interest and dividend income (presented on a tax-equivalent basis) increased $1.1 million in 2019 over 2018. The net interest margin decreased 8 basis points to 3.27% from 3.35%, due to a 22 basis point increase in the average cost of interest-bearing liabilities partly offset by a 10 basis point increase in the average yield on interest-earning assets. The net interest margin was affected by changes in the mix of interest-earning assets and funding liabilities, asset and liability growth, and the effects of changes in market interest rates on the pricing and re-pricing of assets and liabilities. The following table sets forth the components of Salisbury's net interest income and yields on average interest-earning assets and interest-bearing funds. Income and yields on tax-exempt securities are presented on a fully taxable equivalent basis.

Years ended December 31,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)    2019      2018      2017      2019      2018      2017      2019      2018      2017  
Loans (a)(d)(f)  $922,906   $871,557   $780,968   $40,176   $37,504   $33,824    4.35%   4.30%   4.33%
Securities (c)(d)   96,150    87,880    79,767    2,940    2,406    2,130    3.06    2.74    2.67 
FHLBB stock   3,287    4,748    3,551    227    238    142    6.91    5.01    4.00 
Short term funds (b)   36,109    41,348    36,351    675    695    343    1.87    1.68    0.94 
Total earning assets   1,058,452    1,005,533    900,637    44,018    40,843    36,439    4.16    4.06    4.05 
Other assets   58,204    53,630    56,859                               
Total assets  $1,116,656   $1,059,163   $957,496                               
Interest-bearing demand deposits  $155,463   $147,751   $135,756    602    460    319    0.39    0.31    0.23 
Money market accounts   222,090    195,741    191,407    2,333    1,391    685    1.05    0.71    0.36 
Savings and other   175,011    171,662    145,779    1,517    1,100    425    0.87    0.64    0.29 
Certificates of deposit   159,862    134,057    116,608    2,872    1,706    1,054    1.80    1.27    0.90 
Total interest-bearing deposits   712,426    649,211    589,550    7,324    4,657    2,483    1.03    0.72    0.42 
Repurchase agreements   4,913    3,340    2,517    24    12    5    0.49    0.36    0.20 
Finance lease   4,010    2,839    1,157    170    178    96    4.24    6.27    8.30 
Note payable   262    296    327    16    18    18    6.11    6.08    5.50 
Subordinated debt (net of issuance costs)   9,847    9,823    9,799    624    624    624    6.34    6.35    6.37 
FHLBB advances   38,303    64,250    35,309    1,143    1,734    1,012    2.98    2.70    2.87 
Total interest-bearing liabilities   769,761    729,759    638,659    9,301    7,223    4,238    1.21    0.99    0.66 
Demand deposits   231,221    223,329    216,151                               
Other liabilities   6,699    6,266    5,937                               
Shareholders' equity   108,975    99,809    96,749                               
Total liabilities & shareholders' equity  $1,116,656   $1,059,163   $957,496                               
Net interest income (d),(f)                 $34,717   $33,620   $32,201                
Spread on interest-bearing funds                                 2.95    3.07    3.39 
Net interest margin (e)                                 3.27    3.35    3.58 
(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 amortized cost.
(d)Includes tax exempt income of $0.6 million, $0.5 million and $0.9 million, respectively for 2019, 2018 and 2017 on tax-exempt securities and loans for which income and yields are calculated on a tax-equivalent basis.
(e)Net interest income divided by average interest-earning assets.
(f)Interest income for 2019, 2018 and 2017 reflects net accretion related to the fair value adjustments of loans acquired in the Riverside Bank acquisition in the amount of $0 million, $0.8 million and $1.2 million, respectively.

 

 19 

 

The following table sets forth the changes in net interest income (presented on a tax-equivalent basis) due to volume and rate.

Years ended December 31, (in thousands)  2019 versus 2018  2018 versus 2017
Change in interest due to  Volume  Rate  Net  Volume  Rate  Net
Loans  $2,222   $450   $2,672   $3,911   $(231)  $3,680 
Securities   240    294    534    219    57    276 
FHLBB stock   (87)   76    (11)   54    42    96 
Short term funds   (93)   73    (20)   66    286    352 
Interest-earning assets   2,282    893    3,175    4,250    154    4,404 
Deposits   552    2,114    2,666    340    1,834    2,174 
Repurchase agreements   7    5    12    2    5    7 
Finance lease   62    (70)   (8)   123    (41)   82 
Note payable   (2)       (2)   (2)   2     
Subordinated Debt   2    (2)       2    (2)    
FHLBB advances   (737)   146    (591)   805    (83)   722 
Interest-bearing liabilities   (116)   2,193    2,077    1,270    1,715    2,985 
Net change in net interest income  $2,398   $(1,300)  $1,098   $2,980   $(1,561)  $1,419 

Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets.

Interest and Dividend Income

Tax equivalent interest and dividend income increased $3.2 million, or 7.8%, to $44.0 million in 2019.

Loan income increased $2.7 million, or 7.1%, to $40.2 million in 2019. The increase was primarily due to a $51.3 million, or 5.9%, increase in average loans, and a 5 basis point increase in average yield. Interest income for 2019 and 2018 reflects purchase accounting adjustments consisting of net accretion related to the fair value adjustments of loans acquired in the Riverside Bank acquisition in the amount of $0 million and $0.8 million, respectively.

Tax equivalent interest and dividend income from securities increased $0.5 million, or 22.2%, to $2.9 million in 2019, as a result of a $8.3 million, or 9.4%, increase in average security balances, and a 32-basis point increase in average yield. Interest from short term funds decreased $20 thousand in 2019 as a result of a 19 basis point increase in average yield, partially offset by a $5.2 million, or 12.7%, decrease in average short term balances.

Interest Expense

Interest expense increased $2.1 million, or 28.8%, to $9.3 million in 2019.

Interest expense on interest bearing deposit accounts increased $2.7 million, or 57.2%, to $7.3 million in 2019, as a result of a $63.2 million, or 9.7%, increase in average interest-bearing deposits and a 31 basis point increase in the average rate to 1.03%. The increase in the average certificate of deposit balance from 2018 reflected higher average brokered certificates of deposits balances of $20.3 million and a $3.0 million increase in average one-way buys executed through the Certificate of Deposit Account Registry Service (“CDARS”). CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to fund operations and to manage liquidity.

Interest expense on FHLBB advances decreased $0.6 million, or 34.1%, due to a $25.9 million, or 40.4%, decrease in average advances, partially offset by a 28 basis point increase in the average borrowing rate to 2.98%.

In December 2015, Salisbury issued $10 million of subordinated debentures. The proceeds of such issuance, along with cash-on-hand, were used by Salisbury to fully redeem $16 million of its outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U.S. Treasury's SBLF program. Interest expense on the subordinated debt for 2019 and 2018 was $0.6 million and $0.6 million, respectively.

 20 

 

Provision and Allowance for Loan Losses

The provision for loan losses was $1.0 million for 2019, compared with $1.7 million for 2018. Net loan charge-offs were $0.6 million and $0.7 million, for the respective years. The lower provision for loan losses in 2019 primarily reflected lower originations. In first quarter 2019, Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer”, gross loans receivable and the allowance for loan losses increased by $0.7 million. The balance of net loans receivable did not change as a result of this transfer.

The following table sets forth changes in the allowance for loan losses and other statistical data:

 

Years ended December 31, (dollars in thousands)    2019      2018      2017      2016      2015  
Balance, beginning of period  $7,831   $6,776   $6,127   $5,716   $5,358 
Acquisition Discount Transfer   663                 
Provision for loan losses   955    1,728    1,020    1,835    917 
Charge–offs                         
Real estate mortgages   (461)   (558)   (733)   (1,031)   (1,061)
Commercial and industrial   (145)   (108)   (162)   (452)   (69)
Consumer   (36)   (81)   (76)   (67)   (82)
Charge-offs   (642)   (747)   (971)   (1,550)   (1,212)
Recoveries                         
Real estate mortgages   5    18    286    32    129 
Commercial and industrial   46    27    296    72    498 
Consumer   37    29    18    22    26 
Recoveries   88    74    600    126    653 
Net charge-offs   (554)   (673)   (371)   (1,424)   (559)
Balance, end of period  $8,895   $7,831   $6,776   $6,127   $5,716 
                          
Loans receivable, gross  $934,946   $915,689   $807,190   $768,064   $703,545 
Non-performing loans   3,620    6,514    6,635    8,792    16,265 
Accruing loans past due 30-89 days   2,077    2,165    3,536    4,537    4,499 
Ratio of allowance for loan losses:                         
to loans receivable, gross   0.95%   0.85%   0.84%   0.80%   0.81%
to non-performing loans   245.65    120.21    102.13    69.69    35.15 
Ratio of non-performing loans to loans receivable, gross   0.39    0.71    0.82    1.14    2.31 
Ratio of accruing loans past due 30-89 days to loans receivable, gross   0.22    0.24    0.44    0.59    0.64 

 

The reserve coverage at December 31, 2019, as measured by the ratio of allowance for loan losses to gross loans, was 0.95%, as compared with 0.85% at December 31, 2018. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $2.9 million to $3.6 million, or 0.39% of gross loans receivable, at December 31, 2019, down from $6.5 million or 0.71% of gross loans receivable at December 31, 2018. The decline in non-performing loans from the prior year end primarily reflected pay-offs of $1.6 million, upgrades to performing status of $0.9 million and write-downs of $0.4 million. Accruing loans past due 30-89 days decreased $0.1 million to $2.1 million, or 0.22% of gross loans receivable at December 31, 2019. See “Overview – Loan Credit Quality” below for further discussion and analysis.

 21 

 

Non-Interest Income

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

Years ended December 31, (dollars in thousands)    2019      2018      2017    2019 vs. 2018  2018 vs. 2017
Trust and wealth advisory  $3,995   $3,700   $3,477   $295    8.0%  $223    6.4%
Service charges and fees   4,028    3,718    3,718    310    8.3         
Gains on sales of mortgage loans, net   116    89    125    27    30.3    (36)   (28.8)
Mortgage servicing, net   307    308    255    (1)   (0.3)   53    20.9 
Gains (Losses) on CRA mutual fund   25    (18)       43    (238.9)   (18)   n/a 
Gains on securities, net   263    318    178    (55)   (17.3)   140    78.7 
Bank-owned life insurance (“BOLI”) income   392    337    343    55    16.3    (6)   (1.7)
Gain on bank-owned life insurance       341        (341)   (100.0)   341    n/a 
Other   124    152    140    (28)   (18.4)   12    8.6 
Total non-interest income  $9,250   $8,945   $8,236   $305    3.4%  $709    8.6%

Non-interest income increased $305 thousand, or 3.4%, in 2019 versus 2018. Trust and Wealth Advisory revenues increased $295 thousand primarily due to increased market values and a higher volume of assets under management. Service charges and fees increased $310 thousand from 2018 on higher interchange and wire fees as well as higher loan prepayment penalties. Gains on sales of mortgage loans increased $27 thousand on higher sales volume. Mortgage loans sales totaled $6.4 million in 2019 versus $4.6 million in 2018. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $106.3 million and $111.4 million at December 31, 2019 and 2018, respectively. In 2018, the Bank recorded a non-taxable gain of $341 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee.

Non-Interest Expense

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

Years ended December 31, (dollars in thousands)    2019      2018      2017    2019 vs. 2018  2018 vs. 2017
Salaries  $12,048   $12,003   $11,135   $45    0.4%  $868    7.8%
Employee benefits   4,384    4,280    3,767    104    2.4    513    13.6 
Premises and equipment   4,016    4,535    3,831    (519)   (11.4)   704    18.4 
Data processing   2,201    2,119    2,057    82    3.9    62    3.0 
Professional fees   2,213    2,236    2,499    (23)   (1.0)   (263)   (10.6)
OREO gains, losses and write-downs, net   408    275    1,716    133    48.4    (1,441)   (84.0)
Collections, OREO, and loan related   436    578    463    (142)   (24.6)   115    24.8 
FDIC insurance   261    579    497    (318)   (54.9)   82    16.5 
Marketing and community support   619    815    793    (196)   (24.0)   22    2.8 
Amortization of intangibles   388    454    533    (66)   (14.5)   (79)   (14.8)
Other   1,938    1,961    2,038    (23)   (1.2)   (77)   (3.8)
Non-interest expense  $28,912   $29,835   $29,329   ($923)   (3.1%)  $506    1.7%

Non-interest expenses decreased $923 thousand, or 3.1%, in 2019 versus 2018. Salaries expense increased $45 thousand due to higher base salaries, merit increases, and short-term incentive accruals partly offset by lower production accruals due to lower loan volume. Employee benefits expense for 2019 included a non-recurring reduction of $328 thousand, which reflected changes to the calculation of death benefits for bank-owned life insurance policies. This credit, as well as lower 401K and ESOP accruals, was mostly offset by higher medical insurance costs and higher deferred compensation accruals. Premises and equipment expense decreased $519 thousand from 2018 as the prior year included a charge of $171 thousand to write-off the remainder of the lease and fixed assets related to the Bank's previously occupied Fishkill, New York branch location as well as a charge of $95 thousand to write-off the remaining term of a third-party software contract. Software maintenance costs and depreciation costs were also lower. Data processing expense increased $82 thousand mainly as a result of higher core data processing costs. The decrease of $23 thousand in professional fees reflected lower consulting and internal audit costs partly offset by higher external audit and regulatory exam costs, as well as higher investment management expenses. OREO losses and write-downs increased $133 thousand from 2018. Collections, OREO and appraisal expenses decreased $142 thousand primarily due to lower appraisal fees, lower carrying costs and lower taxes. The $318 thousand decrease in FDIC insurance reflected $240 thousand in non-recurring assessment credits received by the Bank in 2019. Marketing and community support decreased $196 thousand due to costs incurred in the prior year for the Fishkill, New York branch relocation, the timing of contributions and lower overall marketing spend. Amortization of intangibles and all other operating expenses collectively decreased $89 thousand from 2018.

Income Taxes

The effective income tax rates for 2019 and 2018 were 17.5% and 16.2%, respectively. Salisbury's effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2019, 2018 or 2017, 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. Salisbury avails itself of this benefit through its 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.

 22 

 

Comparison of the Years Ended December 31, 2018 and 2017

Net Interest and Dividend Income

Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets.

Interest and Dividend Income

Tax equivalent interest and dividend income increased $4.4 million, or 12.1%, to $40.8 million in 2018.

Loan income increased $3.7 million, or 10.9%, to $37.5 million in 2018. The increase was primarily due to a $90.6 million, or 11.6%, increase in average loans, partially offset by a 3 basis point decrease in average yield. Interest income for 2018 and 2017 reflects purchase accounting adjustments consisting of net accretion related to the fair value adjustments of loans acquired in the Riverside Bank acquisition in the amount of $0.8 million and $1.2 million, respectively.

Tax equivalent interest and dividend income from securities increased $276 thousand, or 13.0%, to $2.4 million in 2018, as a result of a $8.1 million, or 10.2%, increase in average security balances, and a 7 basis point increase in average yield. Interest from short term funds increased $352 thousand in 2018 as a result of a 74 basis point increase in average yield and $5.0 million, or 13.7%, increase in average short term balances.

Interest Expense

Interest expense increased $3.0 million, or 70.4%, to $7.2 million in 2018.

Interest expense on interest bearing deposit accounts increased $2.2 million, or 87.6%, to $4.7 million in 2018, as a result of a $59.7 million, or 10.1%, increase in average interest-bearing deposits and a 30 basis point increase in the average rate to 0.72%. The increase in the certificate of deposit balance from 2017 included $20 million of brokered certificates of deposits and $19.4 million of one-way buys executed through the Certificate of Deposit Account Registry Service (“CDARS”). CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to fund operations and to manage liquidity.

Interest expense on FHLBB advances increased $722 thousand, or 71.3%, due to a $28.9 million, or 82.0%, increase in average advances, partially offset by a 17 basis point decrease in the average borrowing rate to 2.70%.

In December 2015, Salisbury issued $10 million of subordinated debentures. The proceeds of such issuance, along with cash-on-hand, were used by Salisbury to fully redeem $16 million of its outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U.S. Treasury's SBLF program. Interest expense on the subordinated debt for 2018 and 2017 was $624 thousand and $624 thousand, respectively.

Provision and Allowance for Loan Losses

The provision for loan losses was $1.7 million for 2018, compared with $1.0 million for 2017. Net loan charge-offs were $0.7 million and $0.4 million, for the respective years. The higher provision for loan losses in 2018 reflected lower recoveries partly offset by lower charge-offs.

The reserve coverage at December 31, 2018, as measured by the ratio of allowance for loan losses to gross loans, was 0.85%, as compared with 0.84% at December 31, 2017. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $0.1 million to $6.5 million, or 0.71% of gross loans receivable, at December 31, 2018, down from 0.82% at December 31, 2017. Accruing loans past due 30-89 days decreased $1.4 million to $2.2 million, or 0.24% of gross loans receivable at December 31, 2018. See “Overview – Loan Credit Quality” below for further discussion and analysis.

Non-Interest Income

Non-interest income increased $709 thousand, or 8.6%, in 2018 versus 2017. Trust and Wealth Advisory revenues increased $223 thousand primarily due to increased market values and a higher volume of assets under management, as well as higher estate planning fees. Service charges and fees were unchanged from 2017 as higher interchange fees were offset by lower deposit fees. Gains on sales of mortgage loans decreased $36 thousand on lower sales volume. Mortgage loans sales totaled $4.6 million in 2018 versus $5.4 million in 2017. Income from servicing of mortgage loans increased $53 thousand due primarily to a reduction in the amortization of mortgage servicing rights. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $111.4 million and $117.5 million at December 31, 2018 and 2017, respectively. Gains on the sale of securities increased $140 thousand in 2018 versus 2017. In 2018, the Bank recorded a non-taxable gain of $341 thousand related to proceeds receivable from a BOLI policy due to the death of a covered former employee, and combined with $337 thousand in income on BOLI resulted in a $335 thousand increase over 2017.

Non-Interest Expense

Non-interest expenses of $29.8 million for 2018 included charges of $275 thousand related to the write down of OREO properties compared with OREO charges of $1.7 million in 2017. Excluding OREO related charges, non-interest expenses increased $1.9 million, or 7.05% in 2018 versus 2017. Salaries expense increased $868 thousand due to higher base salaries, merit increases, sales production, as a result of higher loan volume, and short-term incentive accruals. Employee benefits expense increased primarily due to higher 401K, ESOP and deferred compensation expenses. Premises and equipment expense increased $704 thousand from 2017. The increase included a charge of $171 thousand to write-off the remainder of the lease and fixed assets related to the Bank's previously occupied Fishkill, New York branch location as well as a charge of $95 thousand to write-off the remaining term of a third-party software contract. Building maintenance and depreciation costs were also higher. Data processing expense increased $62 thousand mainly as a result of higher core data processing costs. The decrease of $263 thousand in professional fees reflected lower legal, consulting, audit and investment management expenses. Collections, OREO and appraisal expenses decreased $1.3 million primarily due to the decline in OREO charges noted above, which were partly offset by a reduction of accruals in 2017 related to OREO carrying costs and delinquent real estate taxes on bank-owned OREO properties. Marketing and community support increased $22 thousand mainly related to an increase in community donations. Amortization of intangibles and all other operating expenses decreased $79 thousand and $77 thousand respectively, for 2017.

 23 

 

Income Taxes

The effective income tax rates for 2018 and 2017 were 16.23% and 31.78%, respectively. The decline in the effective tax rate from 2017 primarily reflected the enactment of the Tax Cuts and Jobs Act (“TCJA”) in December 2017, which reduced the federal statutory tax rate from 34% to 21% for tax years beginning in 2018, and also included a discrete charge of $445 thousand related to the remeasurement of Salisbury's net deferred tax assets as a result of the enactment of the new law. Salisbury's effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2019, 2018 or 2017, 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. Salisbury avails itself of this benefit through its 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.

Overview

Assets

During 2019, Salisbury's assets decreased by $9.1 million to $1.112 billion, while net loans increased $18.1 million at December 31, 2019. At December 31, 2019, Salisbury's tangible book value and book value per common share were $34.98 and $40.22, respectively. The Bank's Tier 1 leverage and total risk-based capital ratios were 9.60% and 12.84%, respectively. As of December 31, 2019, the Bank was categorized as "well capitalized."

Securities and Short-Term Funds

During 2019, securities decreased $1.2 million to $95.9 million, while short-term funds (cash and due from banks and interest-bearing deposits with other banks) decreased $31.6 million to $26.9 million. The carrying values of securities are as follows:

  December 31, (dollars in thousands)    2019      2018      2017  
  Available-for-Sale               
U.S. Government agency notes  $4,644   $7,670   $ 
Municipal bonds   27,193    5,379    3,486 
  Mortgage-backed securities:               
U.S. Government agencies and U.S. Government- sponsored enterprises   29,357    57,446    56,157 
  Collateralized mortgage obligations:               
U.S. Government agencies   25,499    17,747    15,019 
  Corporate bonds   5,108    3,576    3,550 
  CRA mutual fund   882    836    835 
  Non-Marketable               
FHLBB stock   3,242    4,496    3,813 
  Total Securities  $95,925   $97,150   $82,860 

Salisbury evaluates securities for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers 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.

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 these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. In 2009 Salisbury determined that five non-agency CMO securities reflected OTTI and recognized losses for deterioration in credit quality of $1.1 million. In 2018 Salisbury sold its remaining non-agency CMO securities for a pre-tax gain of $302 thousand. Management does not consider any of its securities to be OTTI at December 31, 2019.

It is possible that future loss assumptions could change necessitating Salisbury to recognize future 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.

The carrying value of such securities judged to be OTTI are as follows:

Available-for-Sale (dollars in thousands)    Par value    Carrying value      Fair value  
Non-agency CMO               
December 31, 2019  $   $   $ 
December 31, 2018            
December 31, 2017   1,055    651    981 

Accumulated other comprehensive income at December 31, 2019 included net unrealized holding gains, net of tax, of $1.4 million, which is an increase of $1.6 million from December 31, 2018.

 24 

 

Loans

During 2019, net loans receivable increased $18.1 million, or 2%, to $927.4 million at December 31, 2019. Salisbury's retail lending department originates residential mortgage, home equity loans and lines of credit, and consumer loans for the portfolio. During 2019, Salisbury originated $53.4 million of residential mortgage loans and $7.5 million of home equity loans for the portfolio, compared with $64.0 million and $7.7 million, respectively, in 2018. During 2019, total residential mortgage and home equity loans receivable declined by $1.4 million to $427.4 million at December 31, 2019, and represent 45.7% of gross loans receivable. The decline from year end 2018 partly reflected the pay-off of a residential mortgage loan of approximately $8.0 million in the first quarter of 2019. During 2019, Salisbury's residential mortgage lending department also originated and sold $6.4 million of residential mortgage loans, compared with $4.6 million during 2018. All such sold loans were sold through the FHLBB Mortgage Partnership Finance Program with servicing retained by Salisbury. Consumer loans, amounted to $6.4 million at December 31, 2019, represent 0.7% of gross loans receivable.

Salisbury's commercial lending department specializes in lending to small and mid-size companies, businesses and municipalities. More specifically, we meet our clients' credit needs by providing short-term and long-term financing, construction loans, commercial mortgages, equipment, working capital, property improvement loans and municipal financing. The department also works with both the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) Government Guaranteed Lending Programs; however, such loans represent a very small percent of the commercial loan portfolio. Salisbury originated $155.4 million of commercial loans during 2019 compared with $198.4 million in 2018. Total commercial loans, which include commercial real estate, commercial and industrial and municipal loans, increased $19.8 million to $489.6 million at December 31, 2019, and represent 52.4% of gross loans receivable.

The principal categories of loans receivable and loans held-for-sale are as follows:

December 31, (in thousands)    2019      2018      2017      2016      2015  
Residential 1-4 family  $346,299   $345,862   $317,639   $301,128   $269,294 
Residential 5+ multifamily   35,455    36,510    18,108    13,625    12,547 
Construction of residential 1-4 family   11,889    12,041    11,197    10,951    7,998 
Home equity lines of credit   33,798    34,433    33,771    35,487    35,017 
Residential real estate   427,441    428,846    380,715    361,191    324,856 
Commercial   289,795    283,599    249,311    235,482    218,275 
Construction of commercial   8,466    8,976    9,988    5,398    11,399 
Commercial real estate   298,261    292,575    259,299    240,880    229,674 
Farm land   3,641    4,185    4,274    3,914    3,193 
Vacant land   7,893    8,322    7,883    6,600    8,563 
Real estate secured   737,236    733,928    652,171    612,585    566,286 
Commercial and industrial   169,411    162,905    132,731    141,473    121,421 
Municipal   21,914    14,344    17,494    8,626    9,566 
Consumer   6,385    4,512    4,794    5,380    6,272 
Loans receivable, gross   934,946    915,689    807,190    768,064    703,545 
Deferred loan origination fees and costs, net   1,362    1,421    1,289    1,247    1,189 
Allowance for loan losses   (8,895)   (7,831)   (6,776)   (6,127)   (5,716)
Loans receivable, net  $927,413   $909,279   $801,703   $763,184   $699,018 
Loans Held-for-sale                         
Residential 1-4 family  $332   $   $669   $   $763 

 

The composition of loans receivable by forecasted maturity distribution is as follows:

December 31, 2019 (in thousands)    Within 1 year    Within 2-5 years      After 5 years      Total  
Residential  $3,411   $7,741   $382,491   $393,643 
Home equity lines of credit   1,153    534    32,111    33,798 
Commercial   16,611    16,071    257,113    289,795 
Construction of commercial       1,189    7,277    8,466 
Land   2,319    192    9,023    11,534 
Real estate secured   23,494    25,727    688,015    737,236 
Commercial and industrial   31,360    36,268    101,783    169,411 
Municipal   6,447    10,056    5,411    21,914 
Consumer   1,267    2,178    2,940    6,385 
Loans receivable, gross  $62,568   $74,229   $798,149   $934,946 

 

 25 

 

The composition of loans receivable with either fixed, variable or adjustable interest rates is as follows:    

December 31, 2019 (in thousands)  Fixed interest rates  Variable or adjustable interest rates  Total Loans
Residential  $179,415   $214,228   $393,643 
Home equity lines of credit       33,798    33,798 
Commercial   83,657    206,138    289,795 
Construction of commercial   7,746    720    8,466 
Land   2,391    9,143    11,534 
Real estate secured   273,209    464,027    737,236 
Commercial and industrial   70,581    98,830    169,411 
Municipal   20,203    1,711    21,914 
Consumer   3,783    2,602    6,385 
Loans receivable, gross  $367,776   $567,170   $934,946 
Percentage of Total   39.3%   60.7%   100.0%

Loan Credit Quality

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 $3.2 million during 2019 to $4.4 million, or 0.47% of gross loans receivable at December 31, 2019, compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018. The components of loans past due 30 days or greater are as follows:

(in thousands)    2019      2018      2017  
Past due 30-59 days  $1,351   $1,435   $2,594 
Past due 60-89 days   726    730    942 
Past due 90-179 days   3    795    31 
Accruing loans   2,080    2,960    3,567 
Past due 30-59 days   290    208    1,186 
Past due 60-89 days       108    684 
Past due 90-179 days   271    812    516 
Past due 180 days and over   1,775    3,517    3,164 
Non-accrual loans   2,336    4,645    5,550 
Total loans past due 30 days and over  $4,416   $7,605   $9,117 

 

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.

 26 

 

Non-Performing Assets

Non-performing assets decreased $4.4 million to $3.9 million at December 31, 2019, or 0.35% of assets, from $8.3 million or 0.74% of assets at December 31, 2018. The components of non-performing assets are as follows:

December 31, (in thousands)    2019      2018      2017      2016      2015  
Residential 1-4 family  $1,551   $2,092   $2,045   $1,920   $6,446 
Residential 5+ multifamily   861    1,000    151    163    89 
Home equity lines of credit   105    411    66    519    601 
Commercial   914    1,640    3,622    4,901    4,611 
Farm land   186    216    250    1,002    1,031 
Vacant land                   2,855 
Real estate secured   3,617    5,359    6,134    8,505    15,633 
Commercial and industrial       360    470    27    461 
Consumer               4    80 
Non-accrual loans   3,617    5,719    6,604    8,536    16,174 
Accruing loans past due 90 days and over   3    795    31    256    90 
Non-performing loans   3,620    6,514    6,635    8,792    16,264 
Foreclosed assets   314    1,810    719    3,773     
Non-performing assets  $3,934   $8,324   $7,354   $12,565   $16,264 

Reductions in interest income associated with non-accrual loans are as follows:

Years ended December 31, (in thousands)    2019      2018      2017  
Income in accordance with original terms  $302   $328   $992 
Income recognized   40    36    673 
Reduction in interest income  $262   $292   $319 

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

December 31, (in thousands)    2019      2018      2017  
Current  $1,281   $1,074   $1,054 
Past due 30-59 days   290    208    1,186 
Past due 60-89 days       108    684 
Past due 90-179 days   274    1,607    546 
Past due 180 days and over   1,775    3,517    3,165 
Total non-performing loans  $3,620   $6,514   $6,635 

At December 31, 2019, 35.39% of non-performing loans were current with respect to loan payments, compared with 16.49% at December 31, 2018. Loans past due 180 days and over are substantially all mortgage loans in the process of foreclosure or litigation.

Salisbury endeavors to work constructively to resolve its non-performing loan issues with 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.

 27 

 

Troubled Debt Restructured Loans

Troubled debt restructured loans increased $0.7 million in 2019 to $8.8 million, or 0.94% of gross loans receivable, from $8.1 million, or 0.88% of gross loans receivable at December 31, 2018. The components of troubled debt restructured loans are as follows:

December 31, (in thousands)    2019      2018      2017  
Residential 1-4 family  $3,901   $2,824   $3,138 
Residential 5+ multifamily   116    675    1,595 
Home equity lines of credit       47    47 
Personal   36         
Vacant land   180    190    199 
Commercial   3,419    2,924    2,454 
Real estate secured   7,652    6,660    7,433 
Commercial and industrial   126    141    49 
Accruing troubled debt restructured loans   7,778    6,801    7,482 
Residential 1-4 family   152    289    269 
Residential 5+ multifamily   861    1,000    151 
Commercial           624 
Real estate secured   1,013    1,289    1,044 
Commercial and Industrial           110 
Non-accrual troubled debt restructured loans   1,013    1,289    1,154 
Troubled debt restructured loans  $8,791   $8,090   $8,636 

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

December 31, (in thousands)    2019      2018      2017  
Current  $7,227   $6,340   $7,293 
Past due 30-59 days   470    461    189 
Past due 60-89 days   81         
Accruing troubled debt restructured loans   7,778    6,801    7,482 
Current   19    359    530 
Past due 30-59 days       67     
Past due 60-89 days           624 
Past due 90-179 days   133    634     
Past due 180 days and over   861    229     
Non-accrual troubled debt restructured loans   1,013    1,289    1,154 
Total troubled debt restructured loans  $8,791   $8,090   $8,636 

At December 31, 2019, 82.43% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.82% at December 31, 2018. As of December 31, 2019, 2018 and 2017, there were specific reserves on troubled debt restructured loans amounting to $582 thousand, $252 thousand, and $245 thousand, respectively.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $2.3 million during 2019 to $9.9 million or 1.06% of gross loans receivable at December 31, 2019, compared with $7.6 million, or 0.83% of gross loans receivable at December 31, 2018. The components of potential problem loans were as follows:

December 31, (in thousands)    2019      2018      2017  
Residential 1-4 family  $2,109   $1,300   $1,432 
Residential 5+ multifamily   760         
Home equity lines of credit       29    104 
Residential real estate   2,869    1,329    1,536 
Commercial   3,886    5,567    7,905 
Construction of commercial   241    141     
Commercial real estate   4,127    5,708    7,905 
Farm land   1,521         
Real estate secured   8,517    7,037    9,441 
Commercial and industrial   1,384    605    457 
Consumer   2         
Total potential problem loans  $9,903   $7,642   $9,898 
 28 

 

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

December 31, (in thousands)    2019      2018      2017  
Current  $9,654   $6,543   $8,520 
Past due 30-59 days   108    78    1,291 
Past due 60-89 days    138    226    56 
Past due 90-179 days   3    795    31 
Total potential problem loans  $9,903   $7,642   $9,898 

At December 31, 2019, 97.49% of potential problem loans were current with respect to loan payments, as compared with 85.62% at December 31, 2018. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits decreased $7.2 million during 2019, or 0.8%, to $919.5 million at December 31, 2019, compared with $926.7 million at December 31, 2018. Retail repurchase agreements increased $4.4 million during 2019 to $8.5 million at December 31, 2019, compared with $4.1 million at December 31, 2018. Total deposits at December 31, 2019 included two separate relationships totaling $51.6 million, or 5.6% of total deposits.

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

 

   December 31, 2019  December 31, 2018
(in thousands)  Average Balance  Percent  Weighted Average  Average Balance  Percent  Weighted Average
Demand deposits  $231,169    24.50%   0.00%  $223,356    25.61%   0.00%
Interest-bearing checking accounts   155,463    16.48    0.39    147,751    16.93    0.31 
Regular savings accounts   175,011    18.55    0.87    171,662    19.67    0.71 
Money market savings   222,090    23.54    1.05    195,741    22.43    0.64 
Certificates of deposit   159,863    16.94    1.80    134,057    15.36    1.27 
Total deposits  $943,596    100.00%   0.78%  $872,567    100.00%   0.31%

 

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

   At December 31,
Interest rates  2019  2018
Less than 1.00%  $34,261   $38,992 
1.00% to 1.99%   46,502    47,175 
2.00% to 2.99%   46,463    75,512 
3.00%   498     
Total  $127,724   $161,679 

  

The decline in certificate of deposit balances of $34.0 million from December 31, 2018 primarily reflected the maturity of $30.0 million of brokered deposits. These funds were replaced with short-term FHLB advances. The distribution of certificates of deposit by interest rate and maturity was as follows:

 

   At December 31, 2019
Interest rates  Less Than or Equal to One Year  More Than One to Two Years  More Than Two to Three Years 

More Than Three Years

  Total  Percent of Total
Less than 1.00%  $30,171   $4,087   $1   $   $34,259    26.82%
1.00% to 1.99%   24,273    7,580    7,714    6,937    46,504    36.41%
2.00% to 2.99%   31,581    7,675    1,536    5,671    46,463    36.38%
3.00% to 3.99%           498        498    0.39%
Total  $86,025   $19,342   $9,749   $12,608   $127,724    100.00%

 

Scheduled maturities of time certificates of deposit in denominations of $100 thousand or more were as follows:

December 31, 2019 (in thousands)  Within
3 months
  Within
3-6 months
  Within
6-12 months
  Over
1 year
  Total
Certificates of deposit $100,000 and over  $18,006   $11,083   $22,682   $22,620   $74,391 

FHLBB advances decreased $16.3 million during 2019 to $50.9 million at December 31, 2019, compared with $67.2 million at December 31, 2018. The net decrease primarily reflected net new borrows of $20.5 million offset by $37.0 million of maturities in 2019. Salisbury also has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans.  The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At December 31, 2019, $18.0 million of letters of credit were outstanding compared with $33.0 million at December 31, 2018. Salisbury's excess borrowing capacity at the FHLB was $233.7 million compared with $143.7 million at December 31, 2018. The increase in capacity reflected the pledging of additional residential and commercial loans as collateral.

 29 

 

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

December 31, (dollars in thousands)    2019    2018  
Highest month-end balance during period  $47,000   $25,000 
Ending balance   30,000    9,500 
Average balance during period   5,670    14,843 

Subordinated Debentures

In December 2015, Salisbury completed the issuance of $10.0 million in aggregate principal amount of 6.00% Fixed to Floating Rate Subordinated Notes Due 2025 (the “Notes”) in a private placement transaction to various accredited investors including $500 thousand to certain of Salisbury's related parties. The Notes have a maturity date of December 15, 2025 and bear interest at an annual rate of 6.00% from and including the original issue date of the Notes to, but excluding, December 15, 2020 or the earlier redemption date payable semi-annually in arrears on June 15 and December 15 of each year. Thereafter, from and including December 15, 2020 to, but excluding, December 15, 2025, the terms of the note payable provide that the annual interest rate will be reset quarterly and equal to the three-month LIBOR, plus 430 basis points, as described in the Notes, payable quarterly, in arrears, on March 15, June 15, September 15 and December 15 of each year during the time that the Notes remain outstanding through December 15, 2025 or earlier redemption date. Salisbury is monitoring the industry's transition from LIBOR as a market reference rate. The notes are redeemable, without penalty, on or after December 15, 2020 and, in certain limited circumstances, prior to that date. As more completely described in the Notes, the indebtedness evidenced by the Notes, including principal and interest, is unsecured and subordinate and junior in right of Salisbury's payments to general and secured creditors and depositors of the Bank. The Notes also contain provisions with respect to redemption features and other matters pertaining to the Notes. The Notes have been structured to qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations.

Subordinated debentures totaled $9.9 million at December 31, 2019, which includes $141 thousand of remaining unamortized debt issuance costs. The debt issuance costs are being amortized to maturity. The effective interest rate of the subordinated debentures is 6.33%.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS

In the normal course of business, Salisbury enters into various contractual obligations that may require future cash payments. Contractual obligations at December 31, 2019 include operating leases, capital leases, contractual purchases and certain other benefit plans. For further discussion regarding leases see Note 5 to the Consolidated Financial Statements.

The accompanying table summarizes Salisbury's off-balance sheet lending-related financial instruments and significant cash obligations, by remaining maturity, at December 31, 2019. Salisbury's lending-related financial instruments include commitments that have maturities over one year. Contractual purchases include commitments for future cash expenditures, primarily for services and contracts that reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both fixed and determinable. Excluded from the following table are a number of obligations to be settled in cash, primarily in under one year. These obligations are reflected in Salisbury's Consolidated Balance Sheets and include deposits, FHLBB advances and repurchase agreements that settle within standard market timeframes.

December 31, 2019 (in thousands)  Within  Within  Within  After   
By Remaining Maturity  1 year  1-3 years  4-5 years  5 years  Total
Residential  $50   $108   $1,090   $4,567   $5,815 
Home equity lines of credit   410        70    27,680    28,160 
Commercial   2,911    1,160    813    9,974    14,858 
Land       1,000        14    1,014 
Real estate secured   3,371    2,268    1,973    42,235    49,847 
Commercial and industrial   22,333    1,168    141    54,644    78,286 
Municipal       2,249        250    2,499 
Consumer   447            1,701    2,148 
Unadvanced portions of loans   26,151    5,685    2,114    98,830    132,780 
Commitments to originate loans   33,781                33,781 
Standby letters of credit   2,739    1,897    20    1    4,657 
Total  $62,671   $7,582   $2,134   $98,831   $171,218 

 

LIQUIDITY

Salisbury manages its liquidity position to ensure it has 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 source of liquidity is deposits and though its preferred funding strategy is to attract and retain low cost deposits, its ability to do so is affected by competitive interest rates and terms in its marketplace, and other financial market conditions. Other sources of funding include cash flows from loan and securities principal payments and maturities, funds provided by operations, and discretionary use of national market certificates of deposit and FHLBB advances. Liquidity can also be provided through sales of securities and loans. Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. Management believes Salisbury's funding sources will meet anticipated funding needs.

Operating activities for 2019 provided net cash of $14.3 million. Investing activities utilized net cash of $23.4 million, principally from purchases of securities of $53.5 million, loan originations and principal collections, net of $19.2 million, a $5.8 million investment in BOLI and capital expenditures of $2.0 million, offset by sales, calls, and maturities of securities of $55.4 million. Financing activities utilized net cash of $22.6 million, principally from the maturity of FHLBB advances of $37.0 million, a net deposit decrease of $7.2 million, and common stock dividends of $3.2 million, partly offset by FHLB advances of $20.5 million and an increase of $4.4 million in securities sold under agreements to repurchase.

 30 

 

Operating activities for 2018 provided net cash of $13.3 million. Investing activities utilized net cash of $118.2 million, principally from loan originations and principal collections, net of $102.3 million and purchases of securities of $41.6 million, offset by sales, calls, and maturities of securities of $27.8 million. Financing activities provided net cash of $114.8 million, principally from a net deposit increase of $103.0 million, FHLBB advances of $37.0 million and an increase of $2.4 million in securities sold under agreements to repurchase, partly offset by net principal payments on FHLB advances of $24.5 million and common stock dividends of $3.1 million.

Operating activities for 2017 provided net cash of $10.2 million. Investing activities utilized net cash of $9.9 million, principally from loan originations and principal collections of $32.5 million and purchases of securities of $36.7 million, offset by sales, calls, and maturities of securities of $36.8 million. Financing activities provided net cash of $12.7 million, principally from a net deposit increase of $2.4 million and FHLBB advances of $17 million, offset by a decrease of $3.9 million in securities sold under agreements to repurchase and common stock dividends of $3.1 million.

CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity increased $10.2 million in 2019 to $113.7 million at December 31, 2019. Contributing to the increase in shareholders' equity was net income of $11.1 million, a gain in other comprehensive income of $1.6 million and restricted stock awards of $0.6 million, partially offset by common stock dividends declared of $3.2 million.

Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. 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 at December 31, 2019 and 2018 under the regulatory capital rules then in effect:

   Minimum Capital Adequacy Requirement  Minimum Ratios to be
Well Capitalized
  Actual Bank Ratios
    2019    2018    2019    2018    2019    2018 
Total Capital (to risk-weighted assets)   8.00%   8.00%   10.00%   10.00%   12.84%   12.09%
Common Equity Tier 1 Capital   4.50    4.50    6.50    6.50    11.83    11.17 
Tier 1 Capital (to risk-weighted assets)   6.00    6.00    8.00    8.00    11.83    11.17 
Tier 1 Capital (to average assets)   4.00    4.00    5.00    5.00    9.60    8.83 

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

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

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of December 31, 2019, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank's category.

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

Dividends

During 2019 and 2018, Salisbury declared and paid four quarterly common stock dividends of $0.28 per common share each quarter, totaling $3.2 million and $3.1 million, respectively. The Board of Directors of Salisbury declared a common stock dividend of $0.29 per common share payable on February 28, 2020 to shareholders of record on February 14, 2020. Common stock dividends, when declared, will generally be paid the last business day of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

 31 

 

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 March 30, 2009, 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1 to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on Salisbury's consolidated financial statements.

IMPACT OF INFLATION AND CHANGING PRICES

Salisbury's consolidated financial statements and related notes thereto presented elsewhere in this Form 10-K are prepared in conformity with U.S. GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury's consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. There is no precise method, however, to measure the effects of inflation on the Company'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.

 32 

 

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Salisbury manages its exposure to interest rate risk through its internal 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 December 31, 2019 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates.  At December 31, 2019, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declines in interest rates – a relatively unchanged interest rate environment over the first nine months of 2020 with interest rates declining during the fourth quarter of 2020 with rates on Fed Funds, two year treasury, five year treasury and ten year treasury ending the year lower than each individual rate at the end of 2019; then in year two the Fed Funds rate is projected to drop 75 basis points with treasury rates increasing modestly. In this non-parallel decline in rate scenario, the yield curve is flat through most of 2020 with the entire treasury curve declining during the fourth quarter 2020 and being flat and below the Fed Funds rate at the end of 2020. In 2021, Fed Funds rate declines and treasury rates increase modestly so that the yield curve slopes upward but at very low overall market interest rates. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of December 31, 2019, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of December 31, 2019.

  December 31, 2019 (in thousands)    Months 1-12      Months 13-24  
Immediately rising interest rates +300bp (static growth assumptions)   (10.6)%   (5.6)%
Immediately falling interest rates -100bp (static growth assumptions)   (0.2)   (2.4)
Immediately rising interest rates +400bp (static growth assumptions)   (14.3)   (7.9)

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

While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the re-pricing, maturity and prepayment characteristics of financial instruments and the composition of Salisbury's balance sheet may change to a different degree than estimated. Simulation modeling assumes Salisbury's expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The relationship between short-term interest rate changes and core deposit rate and balance changes may differ from those used in ALCO's estimates for income simulation. 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.

 33 

 

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:

  December 31, 2019 (in thousands)Rates up 100bp  Rates up 200bp  
U.S. Government agency notes  $(16)  $(206)
Municipal bonds   (1,467)   (3,364)
Mortgage backed securities          
U.S. Government agencies and U.S. Government- sponsored enterprises   (637)   (1,948)
Collateralized mortgage obligations          
U.S. Government agencies   (343)   (1,492)
Corporate bonds   (52)   (156)
Total available-for-sale debt securities  $(2,515)  $(7,166)

 

 34 

 

Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

  Page
Reports of Independent Registered Public Accounting Firms 36
Consolidated Balance Sheets 37
Consolidated Statements of Income 38
Consolidated Statements of Comprehensive Income 39
Consolidated Statements of Changes in Shareholders' Equity 39
Consolidated Statements of Cash Flows 40-41
Notes to Consolidated Financial Statements 42-72

 

 35 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of Salisbury Bancorp, Inc.

 

Opinion on the Financial Statements and Internal Control Over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Salisbury Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the financial statements). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles general accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework issued by COSO in 2013.

 

Basis for Opinions

 

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. 

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/ Baker Newman & Noyes LLC

Portsmouth, New Hampshire

March 13, 2020

 

We have served as the Company's auditor consecutively since 2015.

 

 36 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

  December 31, (dollars in thousands, except par value)    2019      2018  
ASSETS          
Cash and due from banks  $7,406   $7,238 
Interest bearing demand deposits with other banks   19,479    51,207 
Total cash and cash equivalents   26,885    58,445 
Interest bearing Time Deposits with Financial Institutions   750     
Securities          
Available-for-sale at fair value   91,801    91,818 
CRA mutual fund   882    836 
Federal Home Loan Bank of Boston stock at cost   3,242    4,496 
Loans held-for-sale   332     
Loans receivable, net (allowance for loan losses: $8,895 and $7,831)   927,413    909,279 
Other real estate owned   314    1,810 
Bank premises and equipment, net   17,385    18,175 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $4,886 and $4,498)   995    1,383 
Accrued interest receivable   3,415    3,148 
Cash surrender value of life insurance policies   20,580    14,438 
Deferred taxes   1,249    1,276 
Other assets   3,390    2,635 
Total Assets  $1,112,448   $1,121,554 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $237,852   $228,448 
Demand (interest bearing)   153,314    153,586 
Money market   239,504    204,219 
Savings and other   161,112    178,807 
Certificates of deposit   127,724    161,679 
Total deposits   919,506    926,739 
Repurchase agreements   8,530    4,104 
Federal Home Loan Bank of Boston advances   50,887    67,154 
Subordinated debt   9,859    9,835 
Note payable   246    280 
Finance lease obligations   1,718    3,081 
Accrued interest and other liabilities   8,047    6,902 
Total Liabilities   998,793    1,018,095 
Shareholders' Equity          
Common stock - $0.10 per share par value          
Authorized: 5,000,000;          
Issued: 2,825,912 and 2,806,781          
Outstanding: 2,825,912 and 2,806,781   283    281 
Unearned compensation – restricted stock awards   (795)   (711)
Paid-in capital   44,490    43,770 
Retained earnings   68,320    60,339 
Accumulated other comprehensive income (loss) , net   1,357    (220)
Total Shareholders' Equity   113,655    103,459 
Total Liabilities and Shareholders' Equity  $1,112,448   $1,121,554 

 

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

 37 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

  Years ended December 31, (in thousands except per share amounts)   2019      2018      2017  
Interest and dividend income               
Interest and fees on loans  $39,742   $37,072   $33,090 
Interest on debt securities               
Taxable   2,223    2,231    1,566 
Tax exempt   545    136    380 
Other interest and dividends   903    933    485 
Total interest and dividend income   43,413    40,372    35,521 
Interest expense               
Deposits   7,324    4,656    2,483 
Repurchase agreements   24    12    5 
Finance lease   170    178    96 
Note payable   16    18    18 
Subordinated debt   624    624    624 
Federal Home Loan Bank of Boston advances   1,143    1,733    1,012 
    Total interest expense   9,301    7,221    4,238 
Net interest and dividend income   34,112    33,151    31,283 
Provision for loan losses   955    1,728    1,020 
Net interest and dividend income after provision for loan losses   33,157    31,423    30,263 
Non-interest income               
Trust and wealth advisory   3,995    3,700    3,477 
Service charges and fees   4,028    3,718    3,718 
Gains on sales of mortgage loans, net   116    89    125 
Mortgage servicing, net   307    308    255 
Gains (Losses) on CRA mutual fund   25    (18)    
Gains on securities, net   263    318    178 
BOLI income and gains   392    678    343 
Other   124    152    140 
Total non-interest income   9,250    8,945    8,236 
Non-interest expense               
Salaries   12,048    12,003    11,135 
Employee benefits   4,384    4,280    3,767 
Premises and equipment   4,016    4,535    3,831 
Data processing   2,201    2,119    2,057 
Professional fees   2,213    2,236    2,499 
OREO gains, losses and write-downs, net   408    275    1,716 
Collections, OREO, and appraisals   436    578    463 
FDIC insurance   261    579    497 
Marketing and community support   619    815    793 
Amortization of intangibles   388    454    533 
Other   1,938    1,961    2,038 
Total non-interest expense   28,912    29,835    29,329 
Income before income taxes   13,495    10,533    9,170 
Income tax provision   2,359    1,709    2,914 
Net income  $11,136   $8,824   $6,256 
Net income available to common stock  $10,976   $8,713   $6,201 
                
Basic earnings per common share  $3.95   $3.15   $2.25 
Weighted average common shares outstanding, to calculate basic earnings per share   2,782    2,763    2,755 
Diluted earnings per common share  $3.93   $3.13   $2.24 
Weighted average common shares outstanding, to calculate diluted earnings per share   2,794    2,780    2,774 
Common dividends per share  $1.12   $1.12   $1.12 

 

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

 38 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

  Years ended December 31, (in thousands)   2019      2018      2017  
Net income  $11,136   $8,824   $6,256 
Other comprehensive income (loss)               
Net unrealized gains (losses) on securities available-for-sale   2,258    (202)   (318)
Reclassification of net realized gains in net income   (263)   (318)   (178)
Unrealized gains (losses) on securities available-for-sale   1,995    (520)   (496)
Income tax (expense) benefit   (418)   105    198 
Unrealized gains (losses) on securities available-for-sale, net of tax   1,577    (415)   (298)
Other comprehensive income (loss), net of tax   1,577    (415)   (298)
Comprehensive income  $12,713   $8,409   $5,958 

 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

(in thousands,  Common Stock  Paid-in  Retained  Unearned compensation- restricted stock  Accumulated
other comp-
rehensive income
  Total
share-holders'
except share amounts)   Shares    Amount    capital    earnings    awards    (loss)    equity 
Balances at December 31, 2016   2,758,086   $276   $42,085   $51,521   $(352)  $477   $94,007 
Net income for year               6,256            6,256 
Other comprehensive loss, net of tax                       (298)   (298)
Common stock dividends declared ($1.12 per share)               (3,113)           (3,113)
Stock options exercised   12,150    1    315                316 
Issuance of restricted common stock   11,800    2    462        (464)        
Forfeiture of restricted common stock   (900)       (28)       28         
Issuance of common stock for directors fees   2,056        81                81 
Issuance of directors restricted stock awards   2,024        83        (83)        
Stock based compensation-restricted stock awards                   265        265 
Balances at December 31, 2017   2,785,216   $279   $42,998   $54,664   $(606)  $179   $97,514 
Net income for year               8,824            8,824 
Adoption of ASU 2016-01                (16)       16     
Other comprehensive loss, net of tax                       (415)   (415)
Common stock dividends declared ($1.12 per share)               (3,133)           (3,133)
Stock options exercised   9,155    1    221                222 
Issuance of restricted common stock   9,250    1    409        (410)        
Forfeiture of restricted common stock   (800)       (33)       33         
Issuance of directors restricted stock awards   3,960        175        (175)        
Stock based compensation-restricted stock awards                   447        447 
Balances at December 31, 2018   2,806,781   $281   $43,770   $60,339   $(711)  $(220)  $103,459 
Net income for year               11,136            11,136 
Other comprehensive income, net of tax                       1,577    1,577 
Common stock dividends declared ($1.12 per share)               (3,155)           (3,155)
Stock options exercised   4,725        82                82 
Issuance of restricted common stock   11,530    2    457        (459)        
Forfeiture of restricted common stock   (710)       (31)       31         
Issuance of directors restricted stock awards   3,600        142        (142)        
Retired Common Stock   (14)                        
Stock based compensation-restricted stock awards           70        486        556 
Balances at December 31, 2019   2,825,912   $283   $44,490   $68,320   $(795)  $1,357   $113,655 

 

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

 

 39 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Years ended December 31, (in thousands)   2019      2018      2017  
Operating Activities               
Net income  $11,136   $8,824   $6,256 
Adjustments to reconcile net income to net cash provided by operating activities               
(Accretion), amortization and depreciation               
Securities   332    31    145 
Bank premises and equipment   1,591    1,668    1,441 
Core deposit intangible   388    454    533 
Modification fees on Federal Home Loan Bank of Boston advances   232    232    234 
Subordinated debt issuance costs   24    24    23 
Mortgage servicing rights   51    48    169 
Fair value adjustment on loans   (64)   (779)   (1,207)
Fair value adjustment on deposits   (8)   (37)   (78)
(Gains) and losses, including write-downs               
Sales and calls of securities available-for-sale, net   (263)   (318)   (178)
Sales of loans, excluding capitalized servicing rights   (82)   (71)   (95)
CRA Mutual Fund   (25)   18     
Other real estate owned   408    274    1,717 
Sales/disposals of premises and equipment       85    1 
Gain from BOLI       (341)    
Provision for loan losses   955    1,728    1,020 
Proceeds from loans sold   6,447    4,555    5,440 
Loans originated for sale   (6,697)   (3,815)   (6,014)
Decrease (increase) in deferred loan origination fees and costs, net   59    (132)   (42)
Mortgage servicing rights originated   (61)   (43)   (63)
Decrease in mortgage servicing rights impairment reserve           (23)
Increase in interest receivable   (267)   (478)   (229)
Deferred tax (benefit) expense   (391)   (494)   888 
(Increase) decrease in prepaid expenses   (174)   (50)   123 
Increase in cash surrender value of life insurance policies   (392)   (337)   (343)
Decrease (increase) in income tax receivable   137    760    (173)
Increase in income tax payable   235         
Decrease in other assets   846    48    790 
Increase (decrease) in accrued expenses   352    769    (643)
(Decrease) increase in interest payable   (159)   138    10 
(Decrease) increase in other liabilities   (835)   69    240 
Stock based compensation-restricted stock awards   556    447    265 
Net cash provided by operating activities   14,330    13,277    10,207 
Investing Activities               
Redemptions (purchases) of Federal Home Loan Bank of Boston stock, net   1,254    (683)   (602)
Purchases of securities available-for-sale   (53,467)   (41,631)   (36,654)
Purchases of interest-bearing time deposits with financial institutions   (750)        
Proceeds from sales of securities available-for-sale   41,814    10,036    199 
Proceeds from calls of securities available-for-sale   75    695    16,141 
Proceeds from maturities of securities available-for-sale   13,521    17,061    20,427 
Reinvestment of CRA Mutual Fund   (21)   (19)    
Loan originations and principal collections, net   (19,172)   (102,273)   (32,536)
Recoveries of loans previously charged off   88    74    600 
Proceeds from sales of other real estate owned   1,088    289    2,080 
Capital expenditures   (2,055)   (1,393)   (1,954)
Investment in BOLI   (5,750)        
Net cash and cash equivalents (paid) acquired in branch acquisition       (298)   22,396 
Net cash utilized by investing activities   (23,375)   (118,142)   (9,903)

 

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

 

 40 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

  Years ended December 31, (in thousands)   2019      2018      2017  
Financing Activities               
Increase in deposit transaction accounts, net  $26,722   $58,658   $7,578 
(Decrease) increase in time deposits, net   (33,947)   44,300    (5,208)
Increase (decrease) in securities sold under agreements to repurchase, net   4,426    2,436    (3,867)
Short-term Federal Home Loan Bank of Boston advances, net   20,500    (17,500)   17,000 
Long-term Federal Home Loan Bank of Boston advances, net   (37,000)   30,000     
Principal payments on note payable   (34)   (33)   (31)
Decrease in finance lease obligation   (109)   (127)   (59)
Stock options exercised   82    222    316 
Issuance of shares for directors' fees       1    81 
Common stock dividends paid   (3,155)   (3,133)   (3,113)
Net cash (applied to) provided by financing activities   (22,515)   114,824    12,697 
Net (decrease) increase in cash and cash equivalents   (31,560)   9,959    13,001 
Cash and cash equivalents, beginning of year   58,445    48,486    35,485 
Cash and cash equivalents, end of year  $26,885   $58,445   $48,486 
Cash paid during year               
Interest  $9,212   $6,864   $4,049 
Income taxes   2,378    1,443    2,291 
Non-cash transfers               
From loans to other real estate owned       1,654    743 
Finance Lease Obligation       1,373     
Finance Lease Paid-off               
Fixed Asset   (1,158)        
Lease liability   1,254         
    Deferred gain applied to bank premises and equipment   (96)        
Transfer of unearned credit-related discount to allowance for loan losses   663         
Adoption of ASU 2016-02 - Other assets   1,552         
Adoption of ASU 2016-02 – Other  Liabilities   (1,552)        
Adoption of ASU 2016-01       16     
BOLI proceeds included in other assets       621     
Branch acquisition (1)               
Cash and cash equivalents (paid) acquired  $   $(298)  $22,387 
Net loans acquired       7,849    7,097 
Fixed assets acquired (including capital leases)       761    1,605 
Accrued interest receivable acquired       5    12 
Other assets acquired       6    20 
Core deposit intangible           633 
Goodwill           1,263 
Deposits assumed       8,323    31,433 
Capital lease assumed           1,476 
Other liabilities assumed           3 

 

(1)Includes branch acquisitions of Empire State Bank's New Paltz, New York branch in 2017 and Orange Bank & Trust Company's Fishkill, New York branch in 2018.

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

 41 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Salisbury Bancorp, Inc. (“Salisbury” or the “Company”) is the bank holding company for Salisbury Bank (the “Bank”), a State chartered commercial bank. Salisbury's activity is currently limited to the holding of the Bank's outstanding capital stock and the Bank is Salisbury's only subsidiary and its primary investment. The Bank is a Connecticut chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut. The Bank's principal business consists of attracting deposits from the public and using such deposits, with other funds, to make various types of loans and investments. The Bank conducts its business through fourteen full-service offices located in Litchfield, Berkshire and Dutchess, Orange and Ulster Counties in Connecticut, Massachusetts and New York, respectively.

Principles of Consolidation

The consolidated financial statements include those of Salisbury and the Bank after elimination of all inter-company accounts and transactions.

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the financial services industry. In preparing the consolidated 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 statement of condition, 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, potential other-than-temporary impairment of securities and potential impairment of goodwill and intangibles.

Certain reclassifications have been made to the 2018 and 2017 consolidated financial statements to make them consistent with the 2019 presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash and balances due from banks and interest-bearing demand deposits in other banks. Due to the nature of cash and cash equivalents, Salisbury estimated that the carrying amount of such instruments approximated fair value. The nature of the Bank's business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. The Bank has not experienced any losses on such amounts and all amounts are maintained with well-capitalized institutions.

Interest Bearing Time Deposits with Financial Institutions

Interest bearing time deposits are balances held in CD's in a CDARS program. Due to the nature of time deposits, Salisbury estimated that the carrying amount of such instruments are at par.

Securities

Securities that may be sold as part of Salisbury's asset/liability or liquidity management or in response to or in anticipation of changes in interest rates and resulting prepayment risk, or for other similar factors, are classified as available-for-sale and carried at their fair value. Unrealized holding gains and losses on such securities are reported net of related taxes, if applicable, as a separate component of shareholders' equity. Securities that Salisbury has the ability and positive intent to hold to maturity are classified as held-to-maturity and carried at amortized cost. Realized gains and losses on the sales of all securities are reported in earnings and computed using the specific identification cost basis. Securities are reviewed regularly for other-than-temporary impairment (“OTTI”). Premiums and discounts are amortized or accreted utilizing the interest method over the life or call of the term of the investment security. For any debt security with a fair value less than its amortized cost basis, Salisbury will determine whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, Salisbury will recognize a full impairment charge to earnings. For all other debt securities that are considered OTTI and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses.

Federal Home Loan Bank of Boston Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The 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 December 31, 2019. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

Loans

Loans receivable consist of loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off. Loans receivable are reported at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans and unamortized premiums on purchased loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs are amortized as an adjustment to yield over the lives of the related loans.

 42 

 

The Bank's loans collateralized by real estate and all other real estate owned (“OREO”) are located principally in northwestern Connecticut and New York and Massachusetts towns, which constitute Salisbury's service area. Accordingly, the collectability of a substantial portion of the loan portfolio and OREO is susceptible to changes in market conditions in Salisbury's service area. While management uses available information to recognize losses on loans and OREO, future additions to the allowance or write-downs of OREO may be necessary based on changes in local economic conditions, particularly in Salisbury's service area.

Loans held-for-sale consist of residential mortgage loans that management has the intent to sell. Loans held-for-sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, net of deferred loan origination fees and costs. Changes in the carrying value, deferred loan origination fees and costs, and realized gains and losses on sales of loans held-for-sale are reported in earnings as gains and losses on sales of mortgage loans, net, when the proceeds are received from investors.

The accrual of interest on loans, including troubled debt restructured loans, is generally discontinued when principal or interest is past due by 90 days or more, or earlier when, in the opinion of management, full collection of principal or interest is unlikely, except for loans that are well collateralized, in the process of collection and where full collection of principal and interest is assured. When a loan is placed on non-accrual status, interest previously accrued but not collected is reversed against current income. Income on such loans, including impaired loans, is then recognized only to the extent that cash is received and future collection of principal is probable. Loans, including troubled debt restructured loans, are restored to accrual status when principal and interest payments are brought current and future payments are reasonably assured, following a sustained period of repayment performance by the borrower in accordance with the loan's contractual terms.

Troubled debt restructured loans include those 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. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Salisbury by increasing the ultimate probability of collection.

Troubled debt restructured loans are classified as accruing or non-accruing based on management's assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the troubled debt restructuring generally remain on non-accrual status for approximately six months before management considers such loans for return to accruing status. Accruing troubled debt restructured loans are generally placed into non-accrual status if and when the borrower fails to comply with the restructured terms.

Acquired Loans

Loans that Salisbury acquired through business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

For loans that meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” Salisbury recognizes the accretable yield, which is defined as the excess of all cash flows expected to be collected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan's contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. Going forward, Salisbury continues to evaluate whether the timing and the amount of cash to be collected are reasonably expected. Subsequent significant increases in cash flows Salisbury expects to collect will first reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Such decreases may also result in recognition of additional provisions to the allowance for loan losses. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.

For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis according to the anticipated collection plan of these loans. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For ASC 310-30 loans, prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected.

For loans that do not meet the ASC 310-30 criteria, Salisbury accretes interest income on a level yield basis using the contractually required cash flows. Salisbury subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies” by collectively evaluating these loans for an allowance for loan losses.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Salisbury can reasonably estimate the timing and amount of the expected cash flows on such loans and if Salisbury expects to fully collect the new carrying value of the loans. As such, Salisbury may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

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

Allowance for Loan Losses

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 determination of the adequacy of the allowance is based on management's ongoing review of numerous factors, including the growth and composition of the loan portfolio, historical loss experience over an economic cycle, probable credit losses based upon internal and external portfolio reviews, credit risk concentrations, changes in lending policy, current economic conditions, analysis of current levels and asset quality, delinquency levels and trends, estimates of the current value of underlying collateral, the performance of individual loans in relation to contract terms, and other pertinent factors.

 43 

 

While management believes that the allowance for loan losses is adequate, the allowance is an estimate, and ultimate losses may vary from management's estimate. Future additions to the allowance may also be necessary based on changes in assumptions and economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period.

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 based on loan product, collateral type and abundance, 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.

Loans collectively evaluated for impairment

This component of the allowance for loan losses is stratified by the following loan segments: residential real estate secured (residential 1-4 family and 5+ multifamily, construction of residential 1-4 family, and home equity lines of credit), commercial real estate secured (commercial and construction of commercial), secured by land (farm and vacant land), commercial and industrial, municipal and consumer. Management's general loss allocation factors are based on a rolling five-year annual historical loss rate for each loan segment adjusted for qualitative factors and specific risk ratings. Qualitative factors include levels/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. There were no changes in Salisbury's policies or methodology pertaining to the general component of the allowance for loan losses during 2019.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate - Salisbury generally does not originate loans with a loan-to-value ratio greater than 80 percent and generally does not grant subprime loans. Loans in this segment are collateralized primarily by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate - Loans in this segment are primarily owner-occupied businesses or income-producing investment properties throughout Salisbury's market area. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by decreased sales or increased vacancy rates which, in turn, will have an effect on the credit quality in this segment. For commercial loans management annually obtains business and personal financial statements, tax returns, and, where applicable, rent rolls, and continually monitors the repayment of these loans.

Construction loans - Loans in this segment are primarily residential construction loans which typically roll into a permanent residential mortgage loan when construction is completed, or commercial construction which consist primarily of owner-occupied commercial construction projects.

Commercial and industrial loans - Loans in this segment are made to businesses and are generally secured by assets of the business, including equipment and/or inventory. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased retail or wholesale spending, has an effect on the credit quality in this segment.

Farm – Loans in this segment are made to independent agricultural businesses and may be affected by adverse weather conditions or weak commodity prices.

Vacant land – Loans in this segment are primarily dependent on the credit quality of the individual borrowers. Loan-to-value ratios for loans with vacant land for collateral are more conservative than for commercial or residential real estate loans.

Municipal loans – Loans in this segment are extensions of credit to municipal and other governmental entities throughout Salisbury's market area. The bank-qualified, tax-exempt loans are backed by the full faith and credit of the borrowing entity with taxing or appropriating authority, as appropriate. Maturities range from one year for bond anticipation notes to twenty years for long-term project finance. The ability of the borrower to pay may be affected by an economic downturn resulting in a severe reduction in tax or other revenues coupled with the depletion of an entity's reserve liquidity. Historical default rates for bank-qualified (small issuer) general obligation municipal credit facilities are 0% since the asset class was created in 1986.

Consumer loans - Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Loans individually evaluated for impairment

This component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for all portfolio loans (except consumer loans and homogeneous residential real estate loans) by either the present value of expected future cash flows discounted at the loan's effective interest rate, the fair value of the collateral if the loan is collateral dependent or third-party market loan pricing. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that Salisbury will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

In seeking to protect the best interests of the Bank, Salisbury may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are classified as impaired.

 44 

 

Unallocated

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Mortgage Servicing Rights

As part of our growth and risk management strategy, Salisbury from time to time sells whole loans. These are typically fixed rate residential loans. Salisbury's ability to sell whole loans benefits the Bank by freeing up capital and funding to lend to new customers. Additionally, we typically earn a gain on the sale of loans sold and receive a servicing fee while maintaining the customer relationship. Mortgage Servicing Rights (“MSRs”), which the bank evaluates with the assistance of a third party on a quarterly basis, are included in other assets on the consolidated balance sheets and are accounted for under the amortization method. Under that method mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the period of net servicing revenues.

Other Real Estate Owned (“OREO”)

OREO consists of properties acquired through foreclosure or a deed in lieu of foreclosure. These properties are initially transferred at fair value less estimated costs to sell. Any write-down from cost to estimated fair value required at the time of foreclosure is charged to the allowance for loan losses. A valuation allowance is maintained for declines in market value and for estimated selling expenses. Increases to the valuation allowance, expenses associated with ownership of these properties, and gains and losses from their sale are included in OREO expense.

As of December 31, 2019, and 2018, the recorded investment in residential mortgage loans collateralized by residential real estate that were in the process of foreclosure was $0.1 million and $0.5 million, respectively.

Income Taxes

Deferred income taxes are provided for differences arising in the timing of income and expenses for financial reporting and for income tax purposes using the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Salisbury provides deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is assured beyond a reasonable doubt. A valuation allowance is established against deferred tax assets when, based upon all available evidence, it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

Bank Premises and Equipment

Bank premises, furniture and equipment are carried at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized on the straight-line basis over the shorter of the estimated useful lives of the improvements or the term of the related leases. Guidelines for expected useful life are as follows:

Buildings/Improvements – 39 years
Land Improvements – 15 years
Furniture and Fixtures – 7 years
Computer Equipment – 5 years
Software – 3 years

Intangible Assets

Intangible assets consist of core deposit intangibles and goodwill. Intangible assets equal the excess of the purchase price over the fair value of the tangible net assets acquired in business combinations accounted for using the acquisition method of accounting. Salisbury's intangible assets at December 31, 2019, and 2018, include goodwill of $2.4 million arising from the purchase of a branch office in 2001, $7.2 million arising from the 2004 acquisition of Canaan National Bancorp, Inc., $319 thousand arising from the 2007 purchase of a branch office in New York State, $2.7 million arising from the acquisition of Riverside Bank in December 2014 and $1.3 million from the purchase of an additional branch office in New York in 2017. See Note 9.

On an annual basis, management assesses intangible assets for impairment and, for the year ending December 31, 2019, concluded there was no impairment. If a permanent loss in value is indicated, an impairment charge to income will be recognized.

Bank-Owned Life Insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheet at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of operations and are generally not subject to income taxes. The Bank reviews the financial strength of the insurance carriers prior to the purchase of life insurance policies and no less than annually thereafter. A life insurance policy with any individual carrier is limited to 15% of tier one capital and the total cash surrender value of the life insurance policies is limited to 25% of tier one capital.

Stock Based Compensation

Stock based compensation expense is recognized, based on the fair value at the date of grant on a straight-line basis over the period of time between the grant date and vesting date.

Advertising Expense

Advertising costs of $480 thousand and $608 thousand in 2019 and 2018, respectively, are expensed as incurred and not capitalized.

 45 

 

Statements of Cash Flows

For the purpose of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash and due from banks and interest-bearing demand deposits with other financial institutions.

Computation of Earnings per Share

The Company 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.

Revenue Recognition

A significant portion of Salisbury's revenue, including interest income from loans and investments, falls outside the scope of ASC 606. Revenue from Salisbury's Trust and Wealth Advisory business, service charges and fees and interchange fees, however, are within the scope of ASC 606. Revenue for these in-scope services is recognized when, or as, obligations under the terms of a contract are satisfied, which occurs when the services are transferred to customers. Revenue is measured as the amount of consideration Salisbury expects to receive in exchange for providing the services to a customer (“transaction price”). To the extent the transaction price includes variable consideration, Salisbury estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount to which Salisbury expects to be entitled. Variable consideration is included in the transaction price if, in Salisbury's judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of Salisbury's anticipated performance and all information (historical, current, and forecasted) that is reasonably available. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

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

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

Trust and Wealth Advisory

The Trust and Wealth Advisory business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, families, businesses and institutions. Revenue from these services is generally recognized over time and are typically based on the market value of assets under administration and established fee schedules. Certain fees, such as real estate sale fees, asset liquidation fees, special asset fees, and daily money management fees, are recorded as revenue at a point in time at the completion of the service.

Service Charges and Fees

Salisbury offers a variety of deposit accounts with a range of interest rates and other terms, which are designed to meet customer financial needs. Monthly deposit account fees and account research fees are recognized over time using the right to invoice measure of progress. Overdraft protection, ATM services, cash management, bill pay, money transfers, among others, are generally recognized at point in time at the completion of the service.

Interchange Fees

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

 46 

 

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, "Leases (Topic 842)”. Under the new guidance, lessees are required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities. In July 2018, the FASB issued ASU 2018-10 which provided technical corrections to the new lease standard. In August 2018, the FASB issued ASU 2018-11 Leases – Targeted Improvements, to provide entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new lease standard. ASU 2018-11 has the same effective date as ASU 2016-02 (January 1, 2019 for the Company). Salisbury adopted ASU 2018-11 and elected the transition option. In March 2019, the FASB issued ASU 2019-01, the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of AU 2016-02, Salisbury elected to early adopt ASU 2019-01 on January 1, 2019. Salisbury's consolidated assets and liabilities increased by approximately $1.6 million due to the recording of operating leases as a result of adopting ASU 2016-02 effective January 1, 2019. In conformance with ASU 2018-11, Salisbury elected not to recast comparative periods. See also Note 5 to the Consolidated Financial Statement for further information.

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

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Entities should apply the guidance prospectively. Salisbury does not expect the provisions of ASU 2017-04 to have a material impact on its Consolidated Financial Statements.

 47 

 

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

In August 2018, the FASB issued ASU 2018-03, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-03 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU 2018-13 only revises disclosure requirements, it will not have a material impact on Salisbury's Consolidated Financial Statements.

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

NOTE 2 – MERGERS AND ACQUISITIONS

On December 5, 2014, the Company acquired Riverside Bank. Riverside Bank operated four banking offices serving Dutchess, Ulster and Orange Counties in New York, and was merged with and into the Bank. In first quarter 2019, Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan losses.

The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30. 

  (In thousands)    2019      2018  
Balance at beginning of period  $204   $517 
Acquisitions        
Accretion   (204)   (164)
Disposals       (149)
Reclassification from non-accretable to accretable        
Balance at end of period  $   $204 

In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan losses. At December 31, 2018, Salisbury ASC 310-30 loans had an outstanding balance totaling $2.1 million and a carrying value of $1.9 million. 

 48 

 

NOTE 3 - SECURITIES

The composition of securities is as follows:

  (in thousands)  Amortized
cost basis
 

Gross un-

realized gains

 

Gross un-

realized losses

  Fair value
December 31, 2019                    
Available-for-sale                    
U.S. Government Agency notes  $4,520   $125   $1   $4,644 
Municipal bonds   26,562    704    73    27,193 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   28,961    420    24    29,357 
Collateralized mortgage obligations:                    
U.S. Government agencies   25,041    468    10    25,499 
Corporate bonds