SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission
file number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company | |
| Emerging growth
company | |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of Common Stock outstanding as of August 2, 2023 is .
TABLE OF CONTENTS
| PART I FINANCIAL INFORMATION | Page |
| Item 1. Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2023 (unaudited) and DECEMBER 31, 2022 | 3 |
| CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited) | 4 |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited) | 5 |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited) | 5 |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited) | 7 |
| NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | 9 |
| Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 26 |
| Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 39 |
| Item 4. CONTROLS AND PROCEDURES | 40 |
| PART II. OTHER INFORMATION | 40 |
| Item 1. LEGAL PROCEEDINGS | 40 |
| Item 1A. RISK FACTORS | 40 |
| Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 40 |
| Item 3. DEFAULTS UPON SENIOR SECURITIES | 40 |
| Item 4. MINE SAFETY DISCLOSURES | 40 |
| Item 5. OTHER INFORMATION | 40 |
| Item 6. EXHIBITS | 41 |
| SIGNATURES | 42 |
| 2 |
PART I - FINANCIAL INFORMATION
| Item 1. | FINANCIAL STATEMENTS |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (unaudited)
| (in thousands, except share data) | June 30, 2023 | December 31, 2022 | ||||||
| ASSETS | (unaudited) | |||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing demand deposits with other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Securities | ||||||||
| Available-for-sale, at fair value | ||||||||
| Mutual funds at fair value | ||||||||
| Federal Home Loan Bank of Boston stock at cost | ||||||||
| Loans receivable, net (allowance for credit losses:
$ | ||||||||
| Bank premises and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets (net of accumulated amortization:
$ | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of life insurance policies | ||||||||
| Deferred taxes | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES and SHAREHOLDERS' EQUITY | ||||||||
| Deposits | ||||||||
| Demand (non-interest bearing) | $ | $ | ||||||
| Demand (interest bearing) | ||||||||
| Money market | ||||||||
| Savings and other | ||||||||
| Certificates of deposit | ||||||||
| Total deposits | ||||||||
| Repurchase agreements | ||||||||
| Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt | ||||||||
| Note payable | ||||||||
| Finance lease obligations | ||||||||
| Accrued interest and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Common stock - $ per share par value | ||||||||
| Authorized: ; | ||||||||
| Issued: and | ||||||||
| Outstanding: and | ||||||||
| Unearned compensation – restricted stock awards | ( | ) | ( | ) | ||||
| Paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss, net | ( | ) | ( | ) | ||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ |
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
| 3 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
| Three months ended | Six months ended | |||||||||||||||
| Periods ended June 30, (in thousands, except per share amounts) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Interest and dividend income | ||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest on debt securities | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax exempt | ||||||||||||||||
| Other interest and dividends | ||||||||||||||||
| Total interest and dividend income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Deposits | ||||||||||||||||
| Repurchase agreements | ||||||||||||||||
| Finance lease | ||||||||||||||||
| Note payable | ||||||||||||||||
| Subordinated debt | ||||||||||||||||
| Federal Home Loan Bank of Boston advances | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest and dividend income | ||||||||||||||||
| (Release) provision for credit losses | ( | ) | ||||||||||||||
| Net interest and dividend income after (release) provision for loan losses | ||||||||||||||||
| Non-interest income | ||||||||||||||||
| Trust and wealth advisory | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Mortgage banking activities, net | ( | ) | ( | ) | ||||||||||||
| (Losses) gains on mutual fund | ( | ) | ( | ) | ( | ) | ||||||||||
| (Losses) gains on securities, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Bank-owned life insurance (“BOLI”) income | ||||||||||||||||
| Gain on bank-owned life insurance | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-interest expense | ||||||||||||||||
| Salaries | ||||||||||||||||
| Employee benefits | ||||||||||||||||
| Premises and equipment | ||||||||||||||||
| Loss on write-down and sale of assets | ||||||||||||||||
| Information processing and services | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Collections, OREO, and loan related | ||||||||||||||||
| FDIC insurance | ||||||||||||||||
| Marketing and community support | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||||
| Common dividends per share | $ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 4 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
| Three months ended | Six months ended | |||||||||||||||
| Periods ended June 30, (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss) | ||||||||||||||||
| Net unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ( | ) | ||||||||||
| Reclassification of net realized losses (income) in net income 1 | ( | ) | ||||||||||||||
| Unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax benefit (expense) | ( | ) | ||||||||||||||
| Unrealized (losses) gains on securities available-for-sale, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
1 Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as (losses) gains on securities, net, the tax effect is included in the income tax provision and the after-tax amount is included in net income. The net tax effect for the three months ending June 30, 2023 and 2022 are $3 thousand and $9 thousand, respectively. The net tax effect for the six-month periods ending June 30, 2023 and 2022 are $3 thousand and $(35) thousand, respectively.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Three months ended June 30, (dollars in thousands) | Common Stock | Paid-in | Retained | Unearned compensation restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares 1 | Amount | Capital | Earnings | awards | (loss) income | equity | ||||||||||||||||||||||
| Balances at March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock dividends declared | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||
| Issuance of director’s restricted stock awards | ( | ) | ||||||||||||||||||||||||||
| Transfer due to 2-for-1 forward stock split | — | ( | ) | |||||||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | |||||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Balances at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock dividends declared | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Forfeiture of restricted stock awards | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | |||||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
1 The number of shares for all periods have been adjusted to reflect the two-for-one forward stock split effective on June 30, 2022.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Six months ended June 30, (dollars in thousands) | Common Stock | Paid-in | Retained | Unearned compensation restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares 1 | Amount | Capital | Earnings | awards | (loss) income | equity | ||||||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Common stock dividends declared | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of restricted stock awards | ( | ) | ||||||||||||||||||||||||||
| Issuance of performance based stock awards | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock options exercised | ||||||||||||||||||||||||||||
| Issuance of director’s restricted stock awards | ( | ) | ||||||||||||||||||||||||||
| Transfer due to 2-for-1 forward stock split | — | ( | ) | |||||||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | |||||||||||||||||||||||||||
| Balances at June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Balances at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Cumulative effect of accounting changes (Note 1) | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income | — | |||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | |||||||||||||||||||||||||||
| Common stock dividends declared | — | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of restricted stock units upon vesting | ||||||||||||||||||||||||||||
| Net settlement impact for vesting of performance restricted stock units | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Forfeiture of restricted stock units | ( | ) | ( | ) | ||||||||||||||||||||||||
| Stock based compensation-restricted stock awards | — | |||||||||||||||||||||||||||
| Balances at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
1 The number of shares for all periods have been adjusted to reflect the two-for-one forward stock split effective on June 30, 2022.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 6 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Six months ended June 30, (in thousands) | 2023 | 2022 | ||||||
| Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| Amortization(accretion) and depreciation | ||||||||
| Securities | ||||||||
| Bank premises and equipment | ||||||||
| Core deposit intangible | ||||||||
| Modification fees on Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt issuance costs | ||||||||
| Mortgage servicing rights | ||||||||
| Loss (gain) on sales and calls of securities available-for-sale, net | ( | ) | ||||||
| (Gain) loss on mutual funds | ( | ) | ||||||
| Loss (gain) on sales of loans, excluding capitalized servicing rights | ( | ) | ||||||
| Loss on sale of disposed assets | ||||||||
| Provision for loan losses | ||||||||
| Proceeds from loans sold | ||||||||
| Loans originated for sale | ( | ) | ||||||
| Decrease(increase) in deferred loan origination fees and costs, net | ( | ) | ||||||
| Increase in mortgage servicing rights originated | ( | ) | ||||||
| Decrease in interest receivable | ||||||||
| (Increase) decrease in deferred tax benefit | ( | ) | ||||||
| Decrease in prepaid expenses | ||||||||
| Increase in cash surrender value of life insurance policies and gain on bank owned life insurance | ( | ) | ( | ) | ||||
| Decrease in income tax receivable | ||||||||
| Increase in other assets | ( | ) | ( | ) | ||||
| Increase in income taxes payable | ||||||||
| Decrease in accrued expenses | ( | ) | ( | ) | ||||
| Increase (decrease) in interest payable | ( | ) | ||||||
| Increase in other liabilities | ||||||||
| Stock based compensation-restricted stock awards | ||||||||
| Net cash provided by operating activities | $ | $ | ||||||
| Investing Activities | ||||||||
| Net redemptions of Federal Home Loan Bank of Boston stock | ( | ) | ||||||
| Purchases of securities available-for-sale | ( | ) | ||||||
| Proceeds from sales of securities available-for-sale | ||||||||
| Proceeds from maturities of securities available-for-sale | ||||||||
| Reinvestment/purchase of mutual funds | ( | ) | ( | ) | ||||
| Loan originations and principal collections, net | ( | ) | ( | ) | ||||
| Recoveries of loans previously charged off | ||||||||
| Proceeds from life insurance | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Net cash utilized by investing activities | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
| 7 |
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| Six months ended June 30, (in thousands) | 2023 | 2022 | ||||||
| Financing Activities | ||||||||
| Decrease in deposit transaction accounts, net | $ | ( | ) | $ | ( | ) | ||
| Increase in time deposits, net | ||||||||
| Increase in securities sold under agreements to repurchase, net | ||||||||
| Short-term Federal Home Loan Bank of Boston advances, net | ( | ) | ||||||
| Principal payments on amortizing FHLB advances | ( | ) | ||||||
| Principal payments on note payable | ( | ) | ( | ) | ||||
| Decrease in finance lease obligation | ( | ) | ( | ) | ||||
| Stock options exercised | ||||||||
| Net settlement of restricted stock units | ( | ) | ( | ) | ||||
| Common stock dividends paid | ( | ) | ( | ) | ||||
| Net cash provided (utilized) by financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Cash paid during period | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | ||||||||
| Non-cash supplemental | ||||||||
| Fixed Asset | ||||||||
| Finance lease liability | ( | ) | ( | ) | ||||
| Loans transferred to Loans Held for Sale |
The accompanying
notes are an integral part of these unaudited consolidated financial statements.
| 8 |
Salisbury Bancorp, Inc. and Subsidiary
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for the interim periods presented.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In preparing the financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet, and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses and unrealized gains and losses related to available-for-sale securities.
Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2022 Annual Report on Form 10-K for the year ended December 31, 2022.
In June 2016, the FASB issued Accounting Standards Update (ASU) ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related subsequent amendments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected losses under the CECL methodology is applicable to financial assets measured at amortized cost, as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts. Financial Institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The update requires enhanced disclosures to help investors and other financial statements users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets.
Salisbury adopted CECL on January 1, 2023. Under CECL, the Bank determines its allowance for credit losses on loans using pools of assets with similar risk characteristics. The Bank segments its loan portfolio by loan type, to evaluate loans with similar risk characteristics for credit risk. The Bank’s lifetime credit loss models are based on historical data and incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Non-economic qualitative factors are also evaluated for each loan segment. A four-quarter reasonable and supportable forecast period is currently used for all loan portfolios. When the risk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, non-accrual loans and collateral dependent loans are individually assessed.
The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually assessed and the expected credit loss is based on the fair value of the collateral. The fair value is reduced for estimated costs to sell if the value of the collateral is expected to be realized through sale.
The Bank has elected to present accrued interest receivable separately from the amortized cost basis on the balance sheet and is not estimating an allowance for credit loss on accrued interest. This election applies to loans as well as debt securities. The Bank’s non-accrual polices have not changed as a result of adopting CECL.
On January
1, 2023 Salisbury adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost.
Results for the reporting periods after January 1, 2023 are presented under Topic 326 while prior period amounts continue to be reported
in accordance with previously applicable GAAP. On the adoption date, the Bank increased the allowance for credit losses for loans by $
| (in thousands) | December
31, 2022 Pre-ASC 326 Adoption | Impact
of ASC 326 Adoption | January
1, 2023 Post-ASC Adoption | |||||||||
| Assets: | ||||||||||||
| Loans | $ | $ | $ | |||||||||
| Allowance for credit losses on loans | ( | ) | ( | ) | ( | ) | ||||||
| Deferred tax assets, net | ||||||||||||
| Liabilities and shareholders’ equity: | ||||||||||||
| Other liabilities (ACL unfunded loan commitments) | ||||||||||||
| Retained Earnings | ( | ) | ||||||||||
The federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of adopting CECL. Salisbury has elected to phase in the adjustment over a three-year period.
| 9 |
Allowance for Credit Losses – Available-For-Sale Securities: For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Recent Accounting Pronouncements
In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848).” In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this Update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in this ASU were effective upon issuance.
NOTE 2 – ACQUISITIONS AND DISPOSITIONS
Pending Acquisition
On December 5, 2022, Salisbury and NBT Bancorp
Inc. (“NBT”) announced that they entered into a definitive agreement under which Salisbury will merge with and into NBT,
with NBT as the surviving entity, in an all-stock transaction. Immediately thereafter, the Bank will merge with and into NBT Bank, with
NBT Bank as the surviving bank. Under the terms of the agreement, each share of Salisbury common stock will be converted into the right
to receive 0.745 shares of NBT common stock. Merger-related expenses totaling $
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 | ||||||||||||
| June 30, 2023 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency notes | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
| (in thousands) | Amortized cost basis | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency notes | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
| 10 |
Salisbury
sold $
The following tables summarize the aggregate fair value and gross unrealized losses of securities that have been in a continuous unrealized loss position as of the date presented:
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| June 30, 2023 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agency notes | ||||||||||||||||||||||||
| Municipal bonds | ||||||||||||||||||||||||
| Mortgage- backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||||||||||
| U.S. Government agencies | ||||||||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| December 31, 2022 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| U.S. Government Agency notes | ||||||||||||||||||||||||
| Municipal bonds | ||||||||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government-sponsored enterprises | ||||||||||||||||||||||||
| Collateralized mortgage obligations | 14,333 | 1,782 | 7,603 | 1,652 | 21,936 | 3,434 | ||||||||||||||||||
| Corporate bonds | ||||||||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.
| June 30, 2023 (in thousands) | Maturity | Amortized cost | Fair value | Yield(1) | ||||||||||
| U.S. Treasury | Within 1 year | $ | $ | % | ||||||||||
| After 1 year but within 5 years | ||||||||||||||
| After 5 year but within 10 years | ||||||||||||||
| Total | ||||||||||||||
| U.S. Government Agency notes | After 1 year but within 5 years | |||||||||||||
| After 5 year but within 10 years | ||||||||||||||
| Total | ||||||||||||||
| Municipal bonds | After 1 year but within 5 years | |||||||||||||
| After 5 year but within 10 years | ||||||||||||||
| After 10 years but within 15 years | ||||||||||||||
| After 15 years | ||||||||||||||
| Total | ||||||||||||||
| Mortgage-backed securities and Collateralized mortgage obligations | Securities not due at a single maturity date | |||||||||||||
| Total | ||||||||||||||
| Corporate bonds | After 5 years but within 10 years | |||||||||||||
| Total | ||||||||||||||
| Securities available-for-sale | $ | $ | % | |||||||||||
(1) Yield is based on amortized cost.
During
second quarter 2023, Salisbury realized a pre-tax loss of approximated $
| 11 |
At
June 30, 2023 and December 31, 2022, total accrued interest receivable on available-for-sale debt securities, which has been excluded
from the reported amortized cost basis on available-for-sale debt securities, was $
NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES
Salisbury segregates its loan portfolio into discrete loan pools for purposes of evaluating credit risk. Each loan pool possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of June 30, 2023, the Company aggregated the individual loan pools as follows:
Commercial & Industrial - Commercial loans consist of revolving and term loan obligations extended to businesses, municipalities and educational facilities for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Commercial Real Estate – Commercial real estate loans include non-owner-occupied and owner-occupied properties as well as loans for agricultural purposes and land development. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Residential Real Estate - Residential real estate loans are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one-to four-family residences, including for investment purposes.
Consumer - Home equity loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one-to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable. Consumer loans may be secured or unsecured.
The table below provides the composition of loans receivable. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.
| (In thousands) | June 30, 2023 | December 31, 20221 | ||||||
| Commercial & Industrial | $ | $ | ||||||
| Commercial real estate | ||||||||
| Residential real estate | ||||||||
| Consumer | ||||||||
| Total Loans | ||||||||
| Deferred loan origination costs, net | ||||||||
| Allowance for credit losses | ( | ) | ( | ) | ||||
| Loans receivable, net | $ | $ |
1 Certain loan categories were reclassified from prior filings based on loan type.
On January 1, 2023, the Bank adopted ASU 326 to calculate the allowance for credit losses. The impact of adopting this standard during first quarter 2023 was a net increase in the allowance for credit losses of $0.3 million. See Note 1 for a summary of the impact of adopting this standard during first quarter 2023.
Also included within scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process”, which reflect loans that are not in Salisbury’s gross loans receivable balance as of the balance sheet date but rather negotiated loan/line of credit terms and rates that the Bank has offered to customers and is committed to honoring. In reference to “in-process” credits, the Bank defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable.
The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.
At
June 30, 2023, the allowance for off-balance-sheet credit losses was $
Salisbury has entered into loan participation agreements with other banks and transferred a portion of its originated loans to the participating banks. Transferred amounts are accounted for as sales and excluded from Salisbury’s loans receivable. Salisbury and its participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. Salisbury services the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties.
| 12 |
Salisbury also has entered into loan participation agreements with other banks and purchased a portion of the other banks’ originated loans. Purchased amounts are accounted for as loans without recourse to the originating bank. Salisbury and its originating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The originating banks service the loans on behalf of the participating lenders and, as such, collect cash payments from the borrowers, remit payments (net of servicing fees) to participating lenders and disburse required escrow funds to relevant parties.
At June
30, 2023 and December 31, 2022, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $
Concentrations of Credit Risk
Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, installment loans and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.
Salisbury’s commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges due to the COVID-19 virus pandemic (“virus”). Approximately 33% of the Bank’s commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 10% of the Bank’s commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank’s commercial loans are to educational institutions and approximately 4% of Salisbury’s commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury’s commercial real estate exposure as a percentage of the Bank’s total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 210% as of June 30, 2023 and 198% at December 31, 2022 compared to the regulatory monitoring guideline of 300%. Salisbury’s commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors.
Credit Quality
Salisbury uses credit risk ratings as part of its determination of the allowance for credit losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are considered not criticized and are aggregated as pass rated, and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.
Loans rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management’s close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date.
Loans rated as "substandard" (6) are loans where the Bank’s position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.
Loans rated "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined.
Loans classified as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future.
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank’s loan portfolio is examined periodically by its regulatory agencies, the FDIC and the CTDOB.
Based on the most recent analysis performed, the risk category of loans by segment and by vintage, reported under the CECL methodology, is presented below. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.
| 13 |
| (in thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total | |||||||||||||||||||||||||||
| As of June 30, 2023 | ||||||||||||||||||||||||||||||||||||
| Commercial & industrial | ||||||||||||||||||||||||||||||||||||
| Risk rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||||||
| Total commercial & industrial | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Risk rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||||||
| Total commercial real estate | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Risk rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||||||
| Total residential real estate | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Risk rating | ||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Special mention | ||||||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||||||
| Doubtful | ||||||||||||||||||||||||||||||||||||
| Loss | ||||||||||||||||||||||||||||||||||||
| Total consumer | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total loans | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Total Gross Charge-offs | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||||||||
| Total Recoveries | ||||||||||||||||||||||||||||||||||||
| Total Net Charge-offs | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||||||||||
The composition of loans receivable by risk rating grade, under the incurred loss methodology is as follows:
| (in thousands) | Pass | Special mention | Substandard | Doubtful | Loss | Total | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
A financial asset is considered collateral dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of individually analyzed collateral-dependent loans by loan portfolio segment:
| 14 |
The following table presents the amortized cost basis of collateral-dependent non-accrual loans as of June 30, 2023. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.
| ||||||||||||
| Collateral Type | ||||||||||||
| (in thousands) |
Real Estate | Business Assets | Total Collateral-Dependent Non-Accrual Loans | |||||||||
| June 30, 2023 | ||||||||||||
| Commercial & industrial | $ | $ | $ | |||||||||
| Commercial real estate | ||||||||||||
| Residential real estate | ||||||||||||
| Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
The following is a summary of loans by past due status at June 30, 2023:
| Past due | ||||||||||||||||||||||||||||
| (in thousands) | Current | 30-59 days | 60-89 days | 90 days or Greater Past Due | Total Past Due | Total Loans Outstanding | Loans Greater than 90 Days Past Due and Accruing | |||||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total | $ | 1,250,883 | $ | 671 | $ | 115 | $ | 420 | $ | 1,206 | $ | 1,252,089 | $ | 300 | ||||||||||||||
The following is a summary of the amortized cost basis of loans on non-accrual status.
| June 30, 2023 | December 31, 2022 | |||||||||||||||
| (in thousands) | Non-Accrual Loans with an Allowance | Non-Accrual Loans without an Allowance | Total Non-Accrual Loans | Total Non-Accrual Loans | ||||||||||||
| Commercial & industrial | $ | $ | $ | $ | ||||||||||||
| Commercial real estate | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| Consumer | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Past due | ||||||||||||||||||||||||||||||||
| 180 | 30 | Accruing | ||||||||||||||||||||||||||||||
| (in thousands) | days | days | 90 days | |||||||||||||||||||||||||||||
| 30-59 | 60-89 | 90-179 | and | and | and | Non- | ||||||||||||||||||||||||||
| Current | days | days | days | over | over | over | accrual | |||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||
| Loans receivable, gross | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. Salisbury uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses as a result of the measurement methodologies used to estimate the allowance, a change in the allowance for credit losses is generally not recorded upon modification. In certain instances, Salisbury will modify a loan by providing multiple types of concessions. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction, may be granted. Salisbury did not restructure any troubled debt in the second quarter of 2023 or 2022.
| 15 |
The components of troubled debt restructured loans at December 31, 2022 are as follows:
| (in thousands) | December 31, 2022 | |||
| Commercial & industrial | $ | |||
| Commercial real estate | ||||
| Residential real estate | ||||
| Consumer | ||||
| Accruing troubled debt restructured loans | ||||
| Commercial & industrial | ||||
| Commercial real estate | ||||
| Residential real estate | ||||
| Consumer | ||||
| Non-accrual troubled debt restructured loans | ||||
| Troubled debt restructured loans | $ |
The past due status of troubled debt restructured loans at December 31, 2022 is as follows:
| (in thousands) | December 31, 2022 | |||
| Current | $ | |||
| Past due 30-59 days | ||||
| Past due 60-89 days | ||||
| Accruing troubled debt restructured loans | ||||
| Current | ||||
| Past due 30-59 days | ||||
| Past due 180 days and over | ||||
| Non-accrual troubled debt restructured loans | ||||
| Total troubled debt restructured loans | $ |
Allowance for Credit Losses for Loans
The ACL on loans at June 30, 2023, was $
The net decrease in the ACL for the commercial & industrial loan segment was primarily driven by the release of reserves associate with the sale of shared national credit loans noted above as well as changes in current and forecasted economic conditions between reporting periods.
The activity in Salisbury’s allowance for credit losses for loans is presented below. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.
| Three months ended June 30, 2023 | ||||||||||||||||||||
| (in thousands) | Beginning balance | (Release) provision for Credit Losses | Charge-offs | Recoveries | Ending balance | |||||||||||||||
| Commercial & industrial | $ | $ | ( | ) | $ | $ | $ | |||||||||||||
| Commercial real estate | ( | ) | ||||||||||||||||||
| Residential real estate | ||||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||
| Totals | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||
| Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||
| (in thousands) | Beginning balance | Impact of Adopting ASC 326 | Subtotal | Provision for Credit Losses | Charge-offs | Recoveries | Ending balance | |||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Commercial real estate | ( | ) | ||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||||||||||
| Total allowance for credit losses | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||
| 16 |
| Three months ended June 30, 2022 | ||||||||||||||||||||
| (in thousands) | Beginning balance | Provision | Charge-offs | Recoveries | Ending balance | |||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | |||||||||||||||
| Commercial real estate | ( | ) | ||||||||||||||||||
| Residential real estate | ( | ) | ||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||
| Unallocated | ||||||||||||||||||||
| Totals | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Six months ended June 30, 2022 | ||||||||||||||||||||
| (in thousands) | Beginning balance | Provision | Charge-offs | Recoveries | Ending balance | |||||||||||||||
| Commercial & industrial | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
| Commercial real estate | ( | ) | ||||||||||||||||||
| Residential real estate | ( | ) | ||||||||||||||||||
| Consumer | ( | ) | ||||||||||||||||||
| Unallocated | ||||||||||||||||||||
| Totals | $ | $ | $ | ( | ) | $ | $ | |||||||||||||
The Bank’s allowance for credit losses on unfunded commitments is recognized as a liability (in other liabilities on consolidated balance sheet), with adjustments to the reserve recognized in the provision for credit losses in the consolidated income statement. The Bank’s activity in the allowance for credit losses on unfunded commitments for the three and six month periods ended June 30, 2023 and 2022 was as follows:
| Six
months ended June 30, 2023 | Three
months ended June 30, 2023 | |||||||
| Balance at the beginning of period | $ | $ | ||||||
| Impact of adopting ASC 326 | ||||||||
| Subtotal | ||||||||
| Provision (release) for credit losses | ( | ) | ||||||
| Balance at the end of period June 30, 2023 | $ | $ | ||||||
| Six
months ended June 30, 2022 | Three
months ended June 30, 2022 | |||||||
| Balance at the beginning of period | $ | $ | ||||||
| Other expense – unfunded commitments | ||||||||
| Balance at the end of period June 30, 2022 | $ | $ | ||||||
The composition of loans receivable and the allowance for credit losses is presented in the tables below. The loan categories for previously reported periods have been updated to conform to the current presentation.
| (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (in thousands) | Collectively evaluated | Individually evaluated | Total portfolio | |||||||||||||||||||||
| Loans | Allowance | Loans | Allowance | Loans | Allowance | |||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||
| Unallocated allowance | ||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 17 |
Certain data with respect to loans individually evaluated for impairment is presented as follows as of and for the six months ended June 30, 2023. The loan categories for previously reported periods have been updated to conform to the current presentation.
| Loans with no specific allowance | ||||||||||||||||
| Loan balance | Income | |||||||||||||||
| Book | Note | Average | Recognized | |||||||||||||
| June 30, 2023 | ||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | ||||||||||||
| Commercial real estate | ||||||||||||||||
| Residential real estate | ||||||||||||||||
| Consumer | ||||||||||||||||
| Totals | $ | $ | $ | $ | ||||||||||||
Certain data with respect to loans individually evaluated for impairment is as follows as of and for the six months ended June 30, 2022:
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Specific | Income | Loan balance | Income | |||||||||||||||||||||||||||||||
| Book | Note | Average | allowance | recognized | Book | Note | Average | recognized | ||||||||||||||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
Certain data with respect to loans individually evaluated for impairment is as follows as of and for the twelve months ended December 31, 2022:
| Impaired loans with specific allowance | Impaired loans with no specific allowance | |||||||||||||||||||||||||||||||||||
| (in thousands) | Loan balance | Specific | Income | Loan balance | Income | |||||||||||||||||||||||||||||||
| Book | Note | Average | allowance | recognized | Book | Note | Average | recognized | ||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||||||
| Commercial & industrial | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||||||||||
| Residential real estate | ||||||||||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||||||||||
| Totals | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
NOTE 5 – LEASES
The Bank leases facilities and equipment with various expiration dates. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance expenses are to be paid by Salisbury. On April 30, 2023, Salisbury closed its Red Oaks Mill, New York, branch and terminated the lease, which would have expired on July 31, 2023. The following table provides the assets and liabilities as of June 30, 2023 and December 31, 2022, as well as the costs of operating and financial leases, which are included in the Bank’s consolidated income statement for the six months ended June 30, 2023 and 2022.
| (in thousands, except lease term and discount rate) | Classification | June 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||||
| Operating | Other assets | $ | $ | |||||||
| Finance | Bank premises and equipment 1 | |||||||||
| Total Leased Assets | $ | $ | ||||||||
| Liabilities | ||||||||||
| Operating | Other liabilities | $ | $ | |||||||
| Finance | Finance lease | |||||||||
| Total lease liabilities | $ | $ | ||||||||
| 1 Net of accumulated depreciation of $832 thousand and $720 thousand, respectively. | ||||||||||
| Lease cost | Classification | Six Months Ended June 30, 2023 |
Three Months Ended June 30, 2023 |
|||||||
| Operating leases | Premises and equipment | $ | $ | |||||||
| Finance leases: | ||||||||||
| Amortization of leased assets | Premises and equipment | |||||||||
| Interest on finance leases | Interest expense | |||||||||
| Total lease cost | $ | $ |
| 18 |
| Lease cost | Classification | Six Months Ended June 30, 2022 |
Three Months Ended June 30, 2022 |
|||||||
| Operating leases | Premises and equipment | $ | $ | |||||||
| Finance leases: | ||||||||||
| Amortization of leased assets | Premises and equipment | |||||||||
| Interest on finance leases | Interest expense | |||||||||
| Total lease cost | $ | $ |
| Weighted Average Remaining Lease Term | June 30, 2023 | December 31, 2022 | ||||||
| Operating leases | ||||||||
| Financing leases | ||||||||
| Weighted Average Discount Rate 1 | ||||||||
| Operating leases | % | % | ||||||
| Financing leases | % | % | ||||||
| 1 Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate. | ||||||||
The following is a schedule by years of the present value of the net minimum lease payments as of June 30, 2023.
| Future minimum lease payments (in thousands) | Operating Leases | Finance Leases | ||||||||
| 2023 | $ | $ | ||||||||
| 2024 | ||||||||||
| 2025 | ||||||||||
| 2026 | ||||||||||
| 2027 | ||||||||||
| Thereafter | ||||||||||
| Total future minimum lease payments | ||||||||||
| Less amount representing interest | ( | ) | ( | ) | ||||||
| Total present value of net future minimum lease payments | $ | $ | ||||||||
NOTE 6 - MORTGAGE SERVICING RIGHTS
| (in thousands) | June 30, 2023 | December 31, 2022 | ||||||
| Residential mortgage loans serviced for others | $ | $ | ||||||
| Fair value of mortgage servicing rights |
Changes in mortgage servicing rights are as follows:
| Three months ended | Six months ended | |||||||||||||||
| Periods ended June 30, (in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Mortgage Servicing Rights | ||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | ||||||||||||
| Originated | ||||||||||||||||
| Amortization (1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Balance, end of period | $ | $ | $ | $ | ||||||||||||
| Valuation Allowance | ||||||||||||||||
| Balance, beginning of period | ||||||||||||||||
| Decrease in impairment reserve (1) | ||||||||||||||||
| Balance, end of period | ||||||||||||||||
| Mortgage servicing rights, net | $ | $ | $ | $ | ||||||||||||
| (1) | Amortization expense and changes in the impairment reserve are recorded in mortgage banking activities, net. |
| 19 |
NOTE 7 - PLEDGED ASSETS
The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.
| (in thousands) | June 30, 2023 | December 31, 2022 | ||||||
| Securities available-for-sale (at fair value) | $ | $ | 74,303 | |||||
| Loans receivable (at book value) | 380,787 | |||||||
| Total pledged assets | $ | $ | 455,090 |
At June 30, 2023, securities were pledged as follows: $
Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.
The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:
| Three months ended | Six months ended | |||||||||||||||
| Periods ended June 30, (in thousands, except per share data) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less: Undistributed earnings allocated to participating securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income allocated to common stock | $ | $ | $ | $ | ||||||||||||
| Weighted-average common shares issued | ||||||||||||||||
| Less: Unvested restricted stock awards | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted average common shares outstanding used to calculate basic earnings per common share | ||||||||||||||||
| Add: Dilutive effect of stock options and restricted stock units | ||||||||||||||||
| Weighted-average common shares outstanding used to calculate diluted earnings per common share | ||||||||||||||||
| Earnings per common share (basic) | $ | $ | $ | $ | ||||||||||||
| Earnings per common share (diluted) | $ | $ | $ | $ | ||||||||||||
NOTE 9 – SHAREHOLDERS’ EQUITY
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as “well capitalized” under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At June 30, 2023, the Bank exceeded the minimum requirement for the capital conservation buffer. As of June 30, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.
| 20 |
The Bank’s risk-weighted assets at June 30, 2023 and December
31, 2022 were $
| Actual | Minimum Capital Required For Capital Adequacy | Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
June 30, 2023 | ||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets) | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Tier 1 Capital (to average assets) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets) | $ | % | $ | % | $ | % | $ | % | ||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Common
Equity Tier 1 Capital (to risk-weighted assets) | ||||||||||||||||||||||||||||||||
| Tier 1 Capital (to average assets) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Restrictions on Cash Dividends to Common Shareholders
Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.
FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, notes that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital structure.
NOTE 10 – BENEFITS
401(k)
Salisbury offers a 401(k) Plan to eligible employees.
Under the 401(k) Plan, eligible participants may contribute a percentage of their pay subject to IRS limitations. Salisbury may make discretionary
contributions to the Plan. The Plan includes a safe harbor contribution of 3% for all qualifying employees. The Bank’s safe harbor
contribution percentage is reviewed annually and, under provisions of the 401(k) Plan, is subject to change in the future. An additional
discretionary match may also be made for all employees that meet the 401(k) Plan’s qualifying requirements for such a match. This
discretionary matching percentage, if any, is also subject to review under the provisions of the 401(k) Plan. Both the safe harbor and
additional discretionary match, if any, vest immediately. Salisbury’s 401(k) Plan expense was $
ESOP
Salisbury
offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary
contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20%
per year thereafter, vesting at 100% after six full years of service. Salisbury’s ESOP expense was $
| 21 |
Other Retirement Plans
Split-Dollar Life Insurance
Salisbury
adopted ASC 715-60, “Compensation - Retirement Benefits - Defined Benefit Plans - Other Postretirement" and recognized a liability
for Salisbury’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The total
liability for the arrangements included in other liabilities was $
Supplemental Retirement Agreement
The Bank
assumed a Supplemental Retirement Plan Agreement with a former Chief Executive Officer of Riverside Bank that provides for supplemental
post retirement payments for a fifteen-year period ending in 2025 as described in the agreement. The related liability was $
Non-Qualified Deferred Compensation Plan
A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section
On December 27, 2021, the Board of Directors of Salisbury Bank and Trust Company executed the Salisbury Bank and Trust Company Amended and Restated Non-Qualified Deferred Compensation Plan (the “Plan”), effective as of January 1, 2022. The Plan permits the Board to select certain key employees of the Bank to participate in the Plan, provided that such employees also evidence their participation by execution of a Participation Agreement. Before amendment and restatement, the Plan provided solely for discretionary bank contributions to selected participant’s accounts. The participation agreement sets forth the vesting terms of the discretionary contributions and the “benefit age” at which a participant could retire with a fully vested benefit. The participation agreement also sets forth how a participant’s benefit would be distributed (i.e., in a lump sum or in annual installments over a period of up to 10 years, as selected by the participant). Until distribution, a participant’s account would earn interest as of the last day of the plan year at the highest certificate of deposit rate for that year, compounded annually. The participant’s benefits under the Plan are subject to the vesting schedule set forth in the participant’s participation agreement. Notwithstanding the vesting schedule, the participant’s account balance will become automatically 100% vested upon involuntary termination without cause, death, disability or a change in control.
The amended and restated Plan allows participant
deferrals and provides greater flexibility in participant elections and investment options. The amended and restated Plan also provides
additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified
date before separation from service, and allows a participant to elect for each year’s contributions the manner in which such distributions
will be paid. Installment distributions can be made in monthly, quarterly or annual installments. Payment of benefits under the Plan,
other than benefits payable as a result of base salary deferrals, are conditioned on the participant’s covenant to comply with
non-compete, non-solicitation and non-disclosure provisions for a period of one year following the participant’s separation from
service. The Bank has established a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally
owned by the participants. In first quarter 2023, the Bank awarded one (1) Executive with a discretionary
contribution of $100 thousand to the plan. In first quarter 2022, the Bank awarded seven (7) Executives with discretionary contributions
to the plan. Salisbury’s expense for this plan was $
Management Agreements
Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers (“NEOs”), including a severance agreement with Mr. Cantele, President and Chief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the New York Region and Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with ten other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and other benefits. Such agreements, and their subsequent amendments, are designed to allow Salisbury to retain the services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury’s operations.
NOTE 11 – LONG TERM INCENTIVE PLANS
Restricted stock
Restricted stock expense was $
Unrecognized compensation cost relating to the
awards as of June 30, 2023 and 2022 totaled $
million and $
million, respectively. There were forfeitures of $
| 22 |
Performance-based restricted stock units
On July 29, 2020, the Compensation Committee granted
an additional
On June 23, 2021, the Compensation Committee granted
an additional
On February 28, 2022, the Compensation Committee
granted an additional
No performance-based restricted stock units were
awarded in 2023 and prior to 2019. The fair value of the awards granted under the RSU plan at the grant date was $394 thousand for those
grants awarded in 2022. Compensation expense of $
Short Term Incentive Plan (STIP)
Salisbury
offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury
may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP
expense, which is included in compensation expenses, totaled $
Options
Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In second quarter 2022, a former Riverside employee exercised stock options and a former Riverside Bank executive exercised stock options at $ per share. All unexercised stock options issued in conjunction with the acquisition of Riverside Bank expired in January 2023.
NOTE 12 - CONTINGENT LIABILITIES
Contingent Liabilities
In July 2022, Salisbury management discovered that the Bank’s trust department terminated a trust account in May 2020 and distributed approximately $1.0 million that should have been retained in continuance of the trust account. In March 2023, Salisbury filed an amended complaint against the beneficiaries to recover the distributed proceeds and to reinstate the trust account. Management believes that Salisbury’s exposure could possibly range from approximately $0.0 million to $0.4 million depending upon the amount the beneficiaries contribute toward the reinstatement of the trust and potential insurance coverage.
NOTE 13 – FAIR VALUE OF ASSETS AND LIABILITIES
Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and mutual funds are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.
Salisbury adopted ASC 820-10, “Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.
In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
| 23 |
GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:
| • | Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
| • | Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities. |
| • | Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities. |
The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.
| • | Securities available-for-sale and mutual funds. Securities available-for-sale and mutual funds are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. |
| • | Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3. |
| • | Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3. |
Assets measured at fair value are as follows:
| Fair Value Measurements Using | Assets at | |||||||||||||||
| (in thousands) | Level 1 | Level 2 | Level 3 | fair | ||||||||||||
| value | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||
| Assets at fair value on a recurring basis | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency notes | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government-sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Mutual funds | ||||||||||||||||
| December 31, 2022 | ||||||||||||||||
| Assets at fair value on a recurring basis | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| U.S. Government Agency notes | ||||||||||||||||
| Municipal bonds | ||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||
| U.S. Government agencies and U.S. Government-sponsored enterprises | ||||||||||||||||
| Collateralized mortgage obligations: | ||||||||||||||||
| U.S. Government agencies | ||||||||||||||||
| Corporate bonds | ||||||||||||||||
| Securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| Mutual funds |
| 24 |
At June 30, 2023 and December 31, 2022, Salisbury did not have any
assets measured at fair value on a non-recurring basis.
Carrying values and estimated fair values of financial instruments are as follows:
| (in thousands) | Carrying | Estimated | Fair value measurements using | |||||||||||||||||
| value | fair value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| June 30, 2023 | ||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities available-for-sale, net | ||||||||||||||||||||
| Mutual funds | ||||||||||||||||||||
| Federal Home Loan Bank of Boston stock | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Loans receivable, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Cash surrender value of life insurance policies | ||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Demand (non-interest-bearing) | $ | $ | $ | $ | $ | |||||||||||||||
| Demand (interest-bearing) | ||||||||||||||||||||
| Money market | ||||||||||||||||||||
| Savings and other | ||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Repurchase agreements | ||||||||||||||||||||
| FHLBB advances | ||||||||||||||||||||
| Subordinated debt | ||||||||||||||||||||
| Note payable | ||||||||||||||||||||
| Finance lease obligation | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||
| Financial Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Securities available-for-sale | ||||||||||||||||||||
| Mutual fund | ||||||||||||||||||||
| Federal Home Loan Bank of Boston stock | ||||||||||||||||||||
| Loans held-for-sale | ||||||||||||||||||||
| Loans receivable, net | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Cash surrender value of life insurance policies | ||||||||||||||||||||
| Financial Liabilities | ||||||||||||||||||||
| Demand (non-interest-bearing) | $ | $ | $ | $ | $ | |||||||||||||||
| Demand (interest-bearing) | ||||||||||||||||||||
| Money market | ||||||||||||||||||||
| Savings and other | ||||||||||||||||||||
| Certificates of deposit | ||||||||||||||||||||
| Deposits | ||||||||||||||||||||
| Repurchase agreements | ||||||||||||||||||||
| FHLBB advances | ||||||||||||||||||||
| Subordinated debt | ||||||||||||||||||||
| Note payable | ||||||||||||||||||||
| Finance lease liability | ||||||||||||||||||||
| Accrued interest payable | ||||||||||||||||||||
The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in accrued interest and other liabilities.
NOTE 14 – SUBSEQUENT EVENTS
In July 2023, the Office of the Comptroller of the Currency and the Connecticut State Banking Department both approved the merger of Salisbury with and into NBT, and NBT received an application waiver from the Federal Reserve Bank of New York. The merger is expected to be consummated after the close of business on August 11, 2023, subject to the satisfaction of customary closing conditions. A weekend systems conversion will follow with locations of Salisbury Bank opening as NBT Bank offices beginning on August 14, 2023.
After second quarter 2023, Salisbury sold $57.3 million of securities in its AFS portfolio for a pre-tax loss of approximately $9.6 million in preparation for its pending merger with NBT Bancorp, which is scheduled to close on August 11, 2023. Salisbury intends to use the sales proceeds to primarily pay down and reduce borrowings prior to the merger. This loss did not result in a material change to Salisbury’s shareholders’ equity because these securities were recorded at fair value on the Bank’s consolidated balance sheet at June 30, 2023. The loss reduced Salisbury’s total capital ratio of 13.66% and tier one common equity ratio of 12.41% at June 30, 2023 by approximately 26 basis points and 29 basis points, respectively. After adjusting for these losses, Salisbury remained well-capitalized according to regulatory guidelines.
Certain legal claims related to the pending merger with NBT were settled by Salisbury in the amount of $220,000 subsequent to June 30, 2023. Salisbury considered this amount to be immaterial to the results presented for the three and six month periods ended June 30, 2023.
| 25 |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. (“Salisbury” or the “Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2022. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).
BUSINESS
Salisbury Bancorp, Inc., a Connecticut corporation, formed in 1998, is the bank holding company for Salisbury Bank and Trust Company (the "Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut. Salisbury’s common stock is traded on the NASDAQ Capital Market under the symbol “SAL.” Salisbury's principal business consists of its operation and control of the business of the Bank.
The Bank, formed in 1848, currently provides commercial banking, consumer financing, retail banking and trust and wealth advisory services through a network of fourteen banking offices and ten ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).
Critical Accounting Policies and Estimates
Salisbury’s consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.
Salisbury’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements, which, along with this Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Allowance for Credit Losses on Loans (“ACL”)
Effective January 1, 2023, the Company adopted the new accounting standard for credit losses, ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13). This new accounting standard, commonly referred to as "CECL," significantly changed our methodology for accounting for reserves on loans, unfunded off-balance sheet credit exposures, including certain unfunded loan commitments and standby guarantees. ASU 2016-13 replaced the "incurred loss" methodology used to establish an allowance on loans and off-balance sheet credit exposures, with an "expected loss" approach. Under CECL, the ACL at each reporting period serves as our best estimate of projected credit losses over the contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and forecasts as of the valuation date.
The recorded ACL on loans is determined based on the amortized cost basis of the assets and may be determined at various levels, including homogeneous loan pools and individual credits with unique risk factors. Salisbury has elected to use a discounted cash flow approach to calculate the ACL for each loan segment. Within the discounted cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the expected loss for each loan segment. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. PD and LGD data are derived from internal historical default and loss experience as well as the use of external data where there are not statistically meaningful loss events for a loan segment.
CECL may create more volatility in the Bank’s ACL for loans and for off-balance sheet credit exposures. Under CECL, Salisbury’s ACL may increase or decrease period to period based on many factors, including, but not limited to: (i) macroeconomic forecasts and conditions; (ii) forecast period and reversion speed; (iii) prepayment speed assumption; (iv) loan portfolio volumes and changes in mix; (v) credit quality; and (vi) various qualitative factors outlined in ASU 2016-13.
ASU 2016-13 also changed the methodology and accounting for credit losses within Salisbury’s investment portfolio designated as AFS. To the extent the fair value of a security designated as AFS is less than its amortized cost and the Bank either (i) intends to sell the security or (ii) it is more-likely-than-not that the Bank will be required to sell the security before recovery of its amortized cost basis, then the investment is permanently impaired and the amortized cost basis is written down to fair value and a corresponding impairment charge is recorded within the consolidated statement of income. If neither of the above is true, but the fair value of the investment is below its amortized cost basis at the reporting date, then an allowance is established on the AFS investment for the portion of the impairment that is due to credit reasons (e.g. credit rating downgrades, past due receivables, and/or other macro- or micro-adverse trends). The allowance established on an AFS investment due to credit losses is limited to the amount the fair value of the investment is below its amortized cost basis as of the reporting date. If the fair value of the investment is below its amortized cost basis for non-credit-related reasons (e.g. interest rate environment), then the impairment continues to be recognized within shareholders' equity through AOCI, as it did prior to the adoption of ASU 2016-13.
Management considers the ACL on loans to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key management function that requires significant judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in future periods. While our current evaluation indicates that the ACL is appropriate, the allowance may need to be increased under adversely different conditions or assumptions.
| 26 |
The allowance for credit losses represents management’s estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for credit 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 individually evaluated 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.
The significant key assumptions used with the ACL calculation at June 30, 2023 using the CECL methodology, included:
• Macroeconomic factors (loss drivers): Salisbury monitors and assesses National Unemployment, changes in National GDP and changes in National Housing Price Index at least annually to determine if these macroeconomic factors continue to be the most predictive indicator of losses within our loan portfolio. Factors considered in determining the ACL may change from time to time.
• Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable is four quarters. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. "reversion speed"), management considers factors, which include but are not limited to, historical loan loss experience over previous economic cycles, as well as what stage of the economic cycle management believes the economy is in.
• Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing industry benchmark data due to the stability and increased number of observations. The prepayment speed assumption is utilized with the discounted cash flow model (i.e. the CECL model) to forecast expected cashflows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.
• Qualitative factors: As within previous accounting guidance used for the "incurred loss" model, ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. Salisbury continues to consider qualitative factors in determining and arriving at the ACL each reporting period.
As of June 30, 2023, the recorded ACL was $15.6 million and represented management’s best estimate. However, management may adjust its assumptions to account for differences between expected and actual losses from period to period. A future change of management’s assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in key CECL assumptions and asset quality and consider their impact on the Company's financial condition. A discussion of the factors driving changes in the amount of the allowance for credit losses is included in the “Provision and Allowance for Credit Losses” section of Management’s Discussion and Analysis.
Refer to Note 1 of the consolidated financial statements for further details on the Company's policies and accounting elections made.
Salisbury considers the ACL for off-balance sheet credit exposures to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses on expected future loan advances of primarily, unfunded loan commitments for those that are not unconditionally cancellable by the Company. The expected credit loss factors for each loan segment determined using the ACL on loans methodology described above, as well as within Note 1 of the consolidated financial statements, is used to calculate the ACL on off-balance sheet credit exposures for each applicable loan segment, and, thus, are subject to the same level of estimation risk and volatility previously described. In addition, one other key assumption is used to derive the ACL on off-balance sheet credit exposures and that is the expected funding rate. The expected funding rate is derived using historical loan-level data for credit line usage, and is applied to total off-balance sheet credit exposures at each reporting date, excluding any that are unconditionally cancellable by the Company, to determine the expected funding amount. As unfunded loan commitments are funded, the allowance migrates from that provided for off-balance sheet credit exposures to the ACL on loans. If the expected funding rate or any other key assumption used is not reasonable, then this could have an adverse impact on the total ACL upon funding.
As of June 30, 2023, the recorded ACL on off-balance sheet credit exposures of $1.2 million is recorded within accrued interest and other liabilities on Salisbury’s consolidated balance sheet. Increases (decreases) to the allowance are presented within provision (credit) for credit losses on the consolidated statements of income. The allowance at June 30, 2023, represented management’s best estimate, however, management may adjust various assumptions to account for differences between expected and actual losses from period to period. A future change to certain assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on off-balance sheet credit exposures is reviewed on a quarterly basis by the Company's Loan Committee, and subsequently ratified by the Company’s Board of Directors.
As of June 30, 2023, the Company had not identified indications of credit risk and did not carry any allowance for credit losses on its AFS portfolio, nor did it record any permanent impairments during three and six month periods ended June 30, 2023.
FINANCIAL CONDITION
Securities and Short-Term Funds
As of June 30, 2023, the market value of Salisbury’s available-for-sale (AFS) investment portfolio was $177.5 million or 11.4% of total assets compared with $187.4 million, or 12.2% of total assets at December 31, 2022. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) of $54.1 million at June 30, 2023 increased $3.5 million, or 7.0% from December 31, 2022.
Inception-to-date after-tax unrealized losses in Salisbury’s AFS portfolio were $20.0 million at June 30, 2023 compared with an after-tax unrealized losses of $20.7 million at December 31, 2022. These unrealized losses and gains are recorded in accumulated other comprehensive loss, net on Salisbury’s consolidated balance sheet. Salisbury evaluates securities for impairment when the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an impairment 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 impairment. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be impaired at June 30, 2023.
| 27 |
Loans
Gross loans receivable increased $24.6 million, or 2.3%, to $1.25 billion at June 30, 2023, compared with $1.21 billion at December 31, 2022. PPP loan balances declined from $0.3 million at December 31, 2022 to $0.2 million at June 30, 2023 due to the forgiveness of such loans by the SBA. During the six month period ended June 30, 2023, Salisbury originated $53.2 million of commercial loans, $29.8 million of residential loans and $1.7 million of consumer loans. This growth was mostly offset by amortization, loan payments and net refinancing activity of $51.9 million. In addition, Salisbury sold three shared national credit commercial loans, which aggregated $8.2 million, during the quarter. The allowance for credit losses increased by $0.7 million from December 2022 primarily due to the adoption of CECL and net loan growth during the period.
Asset Quality
During the first six months of 2023, overall asset quality remained strong. Non-performing assets decreased $1.4 million to $1.3 million, or 0.08% of assets at June 30, 2023, from $2.7 million, or 0.17% of assets at December 31, 2022. 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 $0.3 million for the six months ended June 30, 2023 to $1.2 million, or 0.10% of gross loans receivable compared with $1.5 million, or 0.12% of gross loans receivable at December 31, 2022.
The components of loans past due 30 days or greater are as follows:
| (in thousands) | June 30, 2023 | December 31, 2022 | ||||||
| Past due 30-59 days | $ | 671 | $ | 1,195 | ||||
| Past due 60-89 days | 19 | 115 | ||||||
| Past due 90-179 days | 300 | — | ||||||
| Past due 180 days and over | — | — | ||||||
| Accruing loans | 990 | 1,310 | ||||||
| Past due 30-59 days | — | 68 | ||||||
| Past due 60-89 days | 96 | — | ||||||
| Past due 90-179 days | 27 | 90 | ||||||
| Past due 180 days and over | 93 | 15 | ||||||
| Non-accrual loans | 216 | 173 | ||||||
| Total loans past due 30 days or greater | $ | 1,206 | $ | 1,483 |
Credit Risk Ratings
Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for credit losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury’s rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings (special mention, substandard, doubtful, and loss) defined by the bank’s regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.
| · | Loans risk rated as "special mention" (5) possess credit deficiencies or potential weaknesses deserving management’s close attention that if left uncorrected may result in deterioration of the repayment prospects for the loans at some future date. |
| · | Loans risk rated as "substandard" (6) are loans where the Bank’s position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection. |
| · | Loans risk rated as "doubtful" (7) have the same weaknesses as substandard loans with the added characteristic that the weakness makes collection or liquidation in full, given current facts, conditions, and values, to be highly improbable. The possibility of loss is high, but due to certain important and reasonably specific pending factors, which may work to strengthen the loan, its reclassification as an estimated loss is deferred until its exact status can be determined. |
| · | Loans risk rated as "loss" (8) are considered uncollectible and of such little value that continuance as Bank assets is unwarranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather, it is not practical or desirable to defer writing off this loan even though partial recovery may be made in the future. |
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank’s loan portfolio and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, the FDIC and CTDOB.
Deposits and Borrowings
Total deposits of $1.36 billion at June 30, 2023 increased $1.6 million, or 0.1%, from December 31, 2022 and increased $43.4 million, or 3.3%, from June 30, 2022. Salisbury accumulates deposits from a diverse customer base. At June 30, 2023, the composition of Salisbury’s deposit balances was as follows: retail: 42%; commercial: 39%; municipalities: 8%; brokered funds: 6%; Wealth Advisory: 5%; and educational institutions: 1%. At June 30, 2023, the balance of Salisbury’s deposits that were not insured by the FDIC and not collateralized by marketable securities owned by Salisbury was approximately $340 million, or 25%, of total deposits.
| 28 |
At June 30, 2023, Salisbury had outstanding brokered deposits balances of $80.1 million compared with balances of $45.0 million at December 31, 2022 and balances of $35.0 million at June 30, 2022. Brokered deposits are included in the certificates of deposit balances on Salisbury’s consolidated balance sheet. Management utilized brokered deposits to fund loan growth and as a source of liquidity. Excluding brokered funds, Salisbury’s deposits increased $40.0 million, or 3.2%, from first quarter 2023. Average total deposits were $1.4 billion for second quarter 2023 and first quarter 2023 compared with $1.3 billion for second quarter 2022. Average total deposits for second quarter 2023 included average brokered deposits of $75.0 million compared with $47.9 million for first quarter 2023 and $18.0 million for second quarter 2022.
Salisbury has access to various sources of liquidity, including the FHLBB and the Federal Reserve Bank. Salisbury had $20.0 million of outstanding advances from FHLBB at June 30, 2023 compared with $10.0 million at December 31, 2022 and $100.0 million at March 31, 2023, respectively. Salisbury’s excess borrowing capacity at FHLBB was approximately $218 million at June 30, 2023. Additionally, at June 30, 2023, Salisbury had approximately $76 million of eligible collateral that could be posted to the Federal Reserve to secure funds under the Bank Term Funding Program. Salisbury has not borrowed funds under this program.
The distribution of average total deposits by account type is as follows:
| June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| (in thousands) | Average Balance | Percent | Weighted-Average Interest Rate | Average Balance | Percent | Weighted-Average Interest Rate | ||||||||||||||||||
| Demand deposits | $ | 370,057 | 27.82 | % | 0.00 | % | $ | 395,848 | 30.01 | % | 0.00 | % | ||||||||||||
| Interest-bearing checking accounts | 219,722 | 16.52 | 0.25 | 231,970 | 17.59 | 0.18 | ||||||||||||||||||
| Regular savings accounts | 230,085 | 17.30 | 0.99 | 240,695 | 18.25 | 0.26 | ||||||||||||||||||
| Money market savings | 331,348 | 24.91 | 2.47 | 318,302 | 24.13 | 0.49 | ||||||||||||||||||
| Certificates of deposit (CD’s) | 178,954 | 13.45 | 2.99 | 132,192 | 10.02 | 0.84 | ||||||||||||||||||
| Total deposits | $ | 1,330,166 | 100.00 | % | 1.23 | % | $ | 1,319,007 | 100.00 | % | 0.28 | % | ||||||||||||
The classification of certificates of deposit by interest rates is as follows:
| Interest rates | June 30, 2023 | December 31, 2022 | ||||||
| Less than 1.00% | $ | 42,275 | $ | 104,261 | ||||
| 1.00% to 1.99% | 6,439 | 11,739 | ||||||
| 2.00% to 2.99% | 17,379 | 19,907 | ||||||
| 3.00% to 3.99% | 29,749 | 17,463 | ||||||
| 4.00% to 4.99% | 111,488 | — | ||||||
| Total | $ | 207,330 | $ | 153,370 |
The distribution of certificates of deposit by interest rate and maturity is as follows:
| At June 30, 2023 | ||||||||||||||||||||||||
| 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% | $ | 26,710 | $ | 8,354 | $ | 3,237 | $ | 3,974 | $ | 42,275 | 20.39 | % | ||||||||||||
| 1.00% to 1.99% | 3,314 | 3,030 | 95 | — | 6,439 | 3.11 | % | |||||||||||||||||
| 2.00% to 2.99% | 14,671 | 2,708 | — | — | 17,379 | 8.38 | % | |||||||||||||||||
| 3.00% to 3.99% | 29,749 | — | — | — | 29,749 | 14.35 | % | |||||||||||||||||
| 4.00% to 4.99% | 105,763 | 5,725 | — | — | 111,488 | 53.77 | % | |||||||||||||||||
| Total | $ | 180,207 | $ | 19,817 | $ | 3,332 | $ | 3,974 | $ | 207,330 | 100.00 | % | ||||||||||||
Scheduled maturities of time certificates of deposit in denominations of $100,000 or more are as follows:
| June 30, 2023 (in thousands) | Within
3 months | 3-6 months | 6-12 months | Over
1 year | Total | |||||||||||||||
| Certificates of deposit $100,000 and over | $ | 9,404 | $ | 70,896 | $ | 63,576 | $ | 13,608 | $ | 157,484 | ||||||||||
Salisbury had outstanding FHLBB advances of $20.0 million and $10.0 million at June 30, 2023 and December 31, 2022, respectively. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank’s request, an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At June 30, 2022, $20.0 million of letters of credit were outstanding.
Liquidity
Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. During second quarter 2023, Salisbury increased its utilization of brokered deposits by $26.9 million and reduced its borrowings from FHLBB by $80.0 million. At June 30, 2023, Salisbury’s outstanding borrowings and excess borrowing capacity at FHLBB were $20 million and $218 million, respectively. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury’s net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.
Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. Management believes Salisbury’s funding sources will meet anticipated funding needs.
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Operating activities for the six-month period ended June 30, 2023 provided net cash of $16.6 million. Investing activities utilized net cash of $22.8 million principally from $33.5 million of net loan originations and principal collections, and $0.2 for redemptions of FHLB stock, partly offset by proceeds of $6.2 million from calls and maturities of available-for-sale securities, proceeds of $4.0 million from the sale of available-for-sale-securities and $ 0.8 million from proceeds of life insurance. Financing activities provided net cash of $9.8 million principally due to an increase in time deposits of $54.0 million, net FHLB short term advances of $10.0 million and a $0.2 million increase in repurchase agreements partially offset by a decrease in deposit transaction accounts of $52.4 million, and the payment of common stock dividends of $1.9 million.
At June 30, 2023, Salisbury had outstanding commitments to fund new loan originations of $60.3 million and unused lines of credit of $254.8 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.
RESULTS OF OPERATIONS
For the three-month periods ended June 30, 2023 and 2022
OVERVIEW
Net income allocated to common shareholders was $3.4 million, or $0.59 per basic earnings per common share, for the second quarter ended June 30, 2023 (second quarter 2023), compared with $3.8 million, or $0.67 per basic common share, for the second quarter ended June 30, 2022 (second quarter 2022), and $3.0 million, or $0.52 per basic common share, for the first quarter ended March 31, 2023 (first quarter 2023).
Net Interest Income
Tax equivalent net interest income for the second quarter 2023 decreased $1.6 million, or 14.0%, versus second quarter 2022. Average earning assets increased $106.9 million, or 7.7%, versus second quarter 2022. Average total interest bearing liabilities increased $111.2 million, or 11.8%, versus second quarter 2022. Average loan balances for second quarter 2023 included an average PPP loan balance of $0.2 million, net of deferred fees, compared with $8.8 million in second quarter 2022. The tax equivalent net interest margin for the second quarter 2023 was 2.50% compared with 3.15% for the second quarter 2022. The decrease in net interest margin in second quarter 2023 primarily reflected an increase in average total interest bearing deposits of $79.4 million or 8.8%, an increase in FHLBB advances of $36.7 million with an average borrowing cost of 4.78%, and a reduction in short term fund balances of $6.8 million, or 12.5%, earning an average yield of 4.18%, partially offset by a $129.7 million, or 11.6%, increase in average loan balances earning an average yield of 4.38%.
The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest income and yields on average interest-earning assets and interest-bearing liabilities.
| Three months ended June 30, | Average Balance | Income / Expense | Average Yield / Rate | |||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||
| Loans (a)(d) | $ | 1,241,813 | $ | 1,112,120 | $ | 13,709 | $ | 10,693 | 4.38 | % | 3.81 | % | ||||||||||||
| Securities (c)(d) | 207,885 | 225,458 | 1,279 | 1,117 | 2.46 | 1.98 | ||||||||||||||||||
| FHLBB stock | 2,771 | 1,221 | 64 | 10 | 9.21 | 3.20 | ||||||||||||||||||
| Short term funds (b) | 47,733 | 54,553 | 498 | 98 | 4.18 | 0.73 | ||||||||||||||||||
| Total interest-earning assets | 1,500,202 | 1,393,352 | 15,550 | 11,918 | 4.12 | 3.40 | ||||||||||||||||||
| Other assets | 53,758 | 61,790 | ||||||||||||||||||||||
| Total assets | $ | 1,553,960 | $ | 1,455,142 | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 215,746 | $ | 229,625 | 158 | 108 | 0.29 | 0.19 | ||||||||||||||||
| Money market accounts | 342,555 | 299,870 | 2,786 | 156 | 3.26 | 0.21 | ||||||||||||||||||
| Savings and other | 228,031 | 236,728 | 727 | 97 | 1.28 | 0.16 | ||||||||||||||||||
| Certificates of deposit | 196,416 | 137,034 | 1,625 | 216 | 3.32 | 0.63 | ||||||||||||||||||
| Total interest-bearing deposits | 982,748 | 903,257 | 5,296 | 577 | 2.16 | 0.26 | ||||||||||||||||||
| Repurchase agreements | 5,101 | 10,216 | 25 | 4 | 1.98 | 0.15 | ||||||||||||||||||
| Finance lease | 5,354 | 5,283 | 40 | 41 | 2.96 | 3.09 | ||||||||||||||||||
| Note payable | 110 | 153 | 2 | 2 | 6.19 | 6.13 | ||||||||||||||||||
| Subordinated Debt (net of issuance costs) | 24,551 | 24,494 | 233 | 233 | 3.80 | 3.80 | ||||||||||||||||||
| FHLBB advances | 36,758 | — | 444 | — | 4.78 | — | ||||||||||||||||||
| Total interest-bearing liabilities | 1,054,622 | 943,403 | 6,040 | 857 | 2.29 | 0.36 | ||||||||||||||||||
| Demand deposits | 357,690 | 376,694 | ||||||||||||||||||||||
| Other liabilities | 8,268 | 6,258 | ||||||||||||||||||||||
| Shareholders’ equity | 133,380 | 128,787 | ||||||||||||||||||||||
| Total liabilities & shareholders’ equity | $ | 1,553,960 | $ | 1,455,142 | ||||||||||||||||||||
| Net interest income (d) | $ | 9,510 | $ | 11,061 | ||||||||||||||||||||
| Spread on interest-bearing funds | 1.85 | 3.03 | ||||||||||||||||||||||
| Net interest margin (e) | 2.50 | 3.15 | ||||||||||||||||||||||
| (a) | Includes non-accrual loans. |
| (b) | Includes interest-bearing deposits in other banks and federal funds sold. |
| (c) | Average balances of securities are based on cost. |
| (d) | Includes tax exempt income benefit of $169,000 and $187,000, respectively, for 2023 and 2022 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2023 and 2022. |
| (e) | Net interest income divided by average interest-earning assets. |
| 30 |
The following table sets forth the changes in FTE interest due to volume and rate.
| Three months ended June 30, (in thousands) | 2023 versus 2022 | |||||||||||
| Change in interest due to | Volume | Rate | Net | |||||||||
| Loans | $ | 1,351 | $ | 1,665 | $ | 3,016 | ||||||
| Securities | (99 | ) | 261 | 162 | ||||||||
| FHLBB stock | 24 | 30 | 54 | |||||||||
| Short term funds | (42 | ) | 442 | 400 | ||||||||
| Interest-earning assets | 1,234 | 2,398 | 3,632 | |||||||||
| Deposits | 250 | 4,469 | 4,719 | |||||||||
| Repurchase agreements | (14 | ) | 35 | 21 | ||||||||
| Finance lease | 1 | (2 | ) | (1 | ) | |||||||
| Note payable | — | — | — | |||||||||
| Subordinated Debt | — | — | — | |||||||||
| FHLBB advances | 224 | 220 | 444 | |||||||||
| Interest-bearing liabilities | 460 | 4,722 | 5,183 | |||||||||
| Net change in net interest income | $ | 774 | $ | (2,324 | ) | $ | (1,551 | ) | ||||
Interest Income
Tax equivalent interest income increased $3.6 million, or 30.5%, to $15.6 million for second quarter 2023 as compared with $11.9 million in second quarter 2022. Loan income as compared to second quarter 2022 increased $3.0 million, or 28.2%, primarily due to a $129.7 million, or 11.7%, increase in average loan balances and a 57 basis point increase in the average loan yield. Tax equivalent securities income increased $162 thousand, or 14.5%, for second quarter 2023 as compared with second quarter 2022, primarily due to a 48 basis point increase in average yield, partly offset by a $17.6 million, or 7.8%, decrease in average balance. Income on short-term funds as compared to second quarter 2022 increased $400 thousand, or 408.1%, primarily due to a 345 basis point increase in the average short-term funds yield, partly offset by a $6.8 million, or 12.5%, decrease in the average balance.
Interest Expense
Interest expense increased $5.2 million, or 604.7%, to $6.0 million for second quarter 2023 as compared with $0.9 million in second quarter 2022. Interest on deposit accounts increased $4.7 million or 817.9% from second quarter 2022. Interest expense on FHLBB advances increased $444 thousand from zero in the second quarter of 2022.
Provision and Allowance for Credit Losses
During second quarter 2023, the allowance for credit losses on loans decreased by $0.5 million compared with an increase of $1.2 million for first quarter 2023 and an increase of $0.8 million for second quarter 2022. The decline in second quarter 2023 primarily reflected a release of reserves associated with the sale of $8.2 million of shared national credit loans during the quarter and an improvement in the forecast of certain macro-economic factors, which underpin the Bank’s CECL model. This benefit was partially offset by an increase in reserves for loans originated during the quarter. Net loan charge-offs were $47 thousand for second quarter 2023, $32 thousand first quarter 2023 and $312 thousand for second quarter 2022.
| (in thousands) | June 30, 2023 | June 30, 2022 | ||||||
| At or For the Three Months Ended | (CECL) | (Incurred Loss) | ||||||
| ACL on loans, beginning of period | $ | 16,009 | $ | 12,915 | ||||
| Provision for credit losses | (403 | ) | 1,100 | |||||
| Charge-offs: | ||||||||
| Commercial & industrial | — | — | ||||||
| Commercial real estate | — | (39 | ) | |||||
| Residential real estate | — | (239 | ) | |||||
| Consumer | (50 | ) | (39 | ) | ||||
| Total loan charge-offs | (50 | ) | (317 | ) | ||||
| Recoveries: | ||||||||
| Commercial & industrial | — | — | ||||||
| Commercial real estate | — | 1 | ||||||
| Residential real estate | — | — | ||||||
| Consumer | 2 | 4 | ||||||
| Total loan recoveries | 2 | 5 | ||||||
| Net charge-offs | $ | (48 | ) | $ | (312 | ) | ||
| ACL on loans, end of the period | $ | 15,558 | $ | 13,703 | ||||
| ACL on unfunded commitments, beginning of period | $ | 1,183 | $ | 183 | ||||
| Impact of CECL adoption | — | — | ||||||
| Provision for credit losses | (10 | ) | 4 | |||||
| ACL on unfunded commitments, end of period | $ | 1,173 | $ | 187 | ||||
| Components of ACL: | ||||||||
| ACL on loans | $ | 15,558 | $ | 13,703 | ||||
| ACL on unfunded commitments | 1,173 | 187 | ||||||
| ACL, end of period | $ | 16,731 | $ | 13,890 | ||||
| Net charge-offs to average loans | ||||||||
| Provision for credit losses on loans to average loans | n/a | 0.03 | % | |||||
| ACL on loans to total loans | 1.24 | % | 1.19 | % | ||||
As a result of these factors, reserve coverage, as measured by the ratio of the allowance for credit losses to gross loans, excluding PPP loans, was 1.24% for the second quarter 2023, versus 1.28% for the first quarter 2023 and 1.20% for the second quarter 2022. Similarly, reserve coverage, as measured by the ratio of the allowance for credit losses to non-performing loans was 1,178% for first quarter of 2023, versus 714% for first quarter of 2022 and 324% for second quarter of 2022.
| 31 |
The following table details the principal categories of credit quality ratios:
| Three months ended June 30, | 2023 | 2022 | ||||||
| Net charge-offs (recoveries) to average loans receivable, gross | 0.00 | % | 0.03 | % | ||||
| Non-performing loans to loans receivable, gross | 0.11 | 0.37 | ||||||
| Accruing loans past due 30-89 days to loans receivable, gross | 0.11 | 0.09 | ||||||
| Allowance for credit losses to loans receivable, gross | 1.24 | 1.19 | ||||||
| Allowance for credit losses to non-performing loans | 1,177.77 | 324.03 | ||||||
| Non-performing assets to total assets | 0.08 | 0.28 |
Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $1.3 million, or 0.11% of gross loans receivable at June 30, 2023 as compared to $2.7 million, or 0.22% at December 31, 2022 and $4.2 million, or 0.37%, at June 30, 2022. Accruing loans past due 30-89 days were $0.7 million, or 0.06% of gross loans receivable at June 30, 2023 compared with $1.3 million, or 0.11% of gross loans receivable at December 31, 2022 and $1.0 million, or 0.09% of gross loans receivable, at June 30, 2022. See “Financial Condition – Asset Quality” above for further discussion and analysis.
Salisbury adopted CECL on January 1, 2023. Under CECL, the Bank’s lifetime credit loss models are based on historical data and incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Non-economic qualitative factors are also evaluated for each loan segment. A four-quarter reasonable and supportable forecast period is currently used for all loan portfolios. When the risk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, non-accrual loans and collateral dependent loans are individually assessed.
Salisbury segregates its loan portfolio into discrete loan pools for purposes of evaluating credit risk. Each loan pool possesses unique risk characteristics that are considered when determining the appropriate level of allowance. See Note 4 for a description of these discrete loan pools.
At June 30, 2023, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) Commercial & Industrial – National Gross Domestic Product (“GDP”) and National Unemployment; (ii) Commercial Real Estate - National GDP and National Unemployment; (iii) Residential Real Estate – National Housing Price Index and National Unemployment; (iv) Consumer - National Unemployment. National GDP and National Unemployment are sourced from the Federal Reserve Open Market Committee’s published forecast whereas the National Housing Price Index is sourced from the Federal National Mortgage Association’s published forecast. The Company's qualitative factors at June 30, 2023, included consideration of the level of uncertainty surrounding the impact of macro-economic factors such as interest rates, inflation, supply chain disruption, geo-political events as well as other factors. At June 30, 2023, the ACL estimate for loans used a reversion period of two years for each loan segment.
The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually assessed and the expected credit loss is based on the fair value of the collateral. The fair value is reduced for estimated costs to sell if the value of the collateral is expected to be realized through sale.
Also included within scope of CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process” reflect loans not in Salisbury’s gross loans receivable balance as of the balance sheet date but rather negotiated loan/line of credit terms and rates that the Bank has offered to customers and is committed to honoring. In reference to “in-process” credits, the Bank defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable. The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that obligation in unconditionally cancellable by the Bank. The allowance for credit losses on losses on off-balance sheet exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.
Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2023.
Non-Interest Income
The following table details the principal categories of non-interest income.
| Three months ended June 30, (dollars in thousands) | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||
| Trust and wealth advisory | $ | 1,330 | $ | 1,293 | $ | 37 | 2.9 | % | ||||||||
| Service charges and fees | 1,251 | 1,723 | (472 | ) | (27.4 | ) | ||||||||||
| Mortgage banking activities, net | (151 | ) | 77 | (228 | ) | n/a | ||||||||||
| (Losses) gains on mutual fund | (14 | ) | (30 | ) | 16 | (53.3 | ) | |||||||||
| (Losses) gains on securities, net | (15 | ) | (45 | ) | 30 | (66.7 | ) | |||||||||
| Bank-owned life insurance (“BOLI”) income | 196 | 163 | 33 | 20.2 | ||||||||||||
| Gain on bank-owned life insurance | 311 | 89 | 222 | 249.4 | ||||||||||||
| Other | 26 | 27 | (1 | ) | (3.7 | ) | ||||||||||
| Total non-interest income | $ | 2,934 | $ | 3,297 | $ | (363 | ) | 11.0 | % | |||||||
Non-interest income decreased $363 thousand, or 11.0% in the second quarter 2023 versus second quarter 2022. Trust and wealth advisory revenues increased $37 thousand versus second quarter 2022 primarily due to higher asset management fees. Assets under administration were $1.4 billion at June 30, 2023 compared with $1.3 billion at March 31, 2023 and $1.3 billion at June 30, 2022. Discretionary assets under administration of $638.1 million at June 30, 2023 increased from $588.4 million at March 31, 2023 and $546.5 million at June 30, 2022. Non-discretionary assets under administration of $711.7 million decreased from $712.7 million at first quarter 2023 and $714.7 million in second quarter 2022. The variance from the comparative periods primarily reflected changes in the valuation of certain partnership assets for an existing client relationship. The wealth advisory business records only a nominal annual fee on this relationship.
| 32 |
Service charges and fees decreased $472 thousand
versus second quarter 2022 primarily due to non-recurring loan prepayment fees of $425 thousand during
second quarter 2022 as well as lower lending fees, partially offset by higher deposit and other fees. Second quarter 2023 income from
mortgage sales and servicing decreased $19 thousand due to lower sales volume. Salisbury did not sell any residential loans to FHLBB during
second quarter 2023 compared with sales of $2.0 million for second quarter 2022. Mortgage banking activities, net for second quarter
2023 also included a pre-tax loss of $209 thousand on the sale of $8.2 million of shared national credit commercial loans. BOLI
income for second quarter 2023 included a non-taxable gain of $311 thousand related to proceeds receivable due to the death of
a former covered employee.
Non-Interest Expense
The following table details the principal categories of non-interest expense.
| Three months ended June 30, (dollars in thousands) | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||
| Salaries | 3,625 | $ | 3,657 | $ | (32 | ) | (0.9 | %) | ||||||||
| Employee benefits | 1,232 | 1,288 | (56 | ) | (4.3 | ) | ||||||||||
| Premises and equipment | 1,078 | 973 | 105 | 10.8 | ||||||||||||
| Information processing and services | 949 | 702 | 247 | 35.2 | ||||||||||||
| Professional fees | 850 | 821 | 29 | 3.5 | ||||||||||||
| Collections, OREO, and loan related | 29 | 116 | (87 | ) | (75.0 | ) | ||||||||||
| FDIC insurance | 248 | 122 | 126 | 103.3 | ||||||||||||
| Marketing and community support | 187 | 262 | (75 | ) | (28.6 | ) | ||||||||||
| Amortization of intangibles | 34 | 50 | (16 | ) | (32.0 | ) | ||||||||||
| Other | 544 | 541 | 3 | 0.6 | ||||||||||||
| Total non-interest expense | 8,776 | $ | 8,532 | $ | 244 | 2.9 | % | |||||||||
Non-interest expense for second quarter 2023 increased $244 thousand versus second quarter 2022. Total compensation expense decreased $88 thousand versus the second quarter 2022. The decrease from the comparative quarter primarily reflected lower production and incentive accruals as well as lower benefits expense, partially offset by higher deferred compensation costs. Premises and equipment expense increased $105 thousand versus second quarter 2022 primarily due to higher building and software maintenance expense. Information processing and services expense increased $247 thousand versus second quarter 2022 primarily due to higher ATM network processing fees, core data processing and merger-related expenses. Professional fees increased $29 thousand versus second quarter 2022 primarily due to higher legal expenses, external audit and investment management fees, partially offset by lower consulting and internal audit fees. Collections, OREO and loan related expense decreased $87 thousand primarily on lower appraisal expense. Marketing and community support expense decreased $75 thousand versus second quarter 2022 due to the timing of events.
Non-interest expense for second quarter 2023 included costs of $393 thousand associated with the pending NBT merger compared with $385 thousand in first quarter 2023.
Income Taxes
The effective income tax rates for second quarter 2023 and second quarter 2022 were 12.7% and 15.3%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax-exempt income. The tax provision for second quarter 2023 included a non-recurring credit of $163 thousand to adjust the Bank’s tax liability at quarter-end. The lower tax rate in second quarter 2023 also reflected the non-taxable BOLI proceeds receivable noted above.
Salisbury did not incur Connecticut income tax in 2023 (to date) or 2022, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.
For the six-month periods ended June 30, 2023 and 2022
Overview
Net income allocated to common shareholders was $6.3 million, or $1.11 basic earnings per common share, for the six-month period ended June 30, 2023 (six-month period 2023), compared with $7.3 million, or $1.29 basic earnings per common share, for the six-month period ended June 30, 2022 (six month period 2022). The reduction in net income allocated to common shareholders for the six-month period in 2023 primarily reflected a decline in net interest and dividend income and non-interest income, which were partly offset by a lower provision for credit losses and higher non-interest expense. The six-month period ended June 30, 2023 included costs of approximately $778 thousand associated with the pending merger with NBT Bancorp and a non-taxable gain of $311 thousand related to proceeds receivable from a bank-owned life insurance policy (“BOLI”) due to the death of a former covered employee.
Net Interest Income
Tax equivalent net interest income for the six-month period 2023 of $20.8 million decreased $0.7 million, or 3.33%, versus the six-month period 2022. Average earning assets of $1.5 billion at June 30, 2023 increased $94.7 million, or 6.8%, versus the six-month period 2022. Average total interest bearing deposits of $1.0 million increased $91.0 million, or 9.6%, versus the six-month period 2022. The net interest margin of 2.75% decreased 30 basis points compared with the six-month period 2022.
| 33 |
The following table sets forth the components of Salisbury's fully tax-equivalent (“FTE”) net interest and dividend income and yields on average interest-earning assets and interest-bearing liabilities.
| Six months ended June 30, | Average Balance | Income / Expense | Average Yield / Rate | |||||||||||||||||||||
| (dollars in thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||
| Loans (a)(d) | $ | 1,239,309 | $ | 1,095,955 | $ | 27,075 | $ | 20,971 | 4.34 | % | 3.80 | % | ||||||||||||
| Securities (c)(d) | 211,048 | 216,847 | 2,632 | 2,079 | 2.49 | 1.92 | ||||||||||||||||||
| FHLBB stock | 3,101 | 1,327 | 83 | 17 | 5.40 | 2.58 | ||||||||||||||||||
| Short term funds (b) | 44,231 | 88,813 | 872 | 146 | 3.97 | 0.33 | ||||||||||||||||||
| Total earning assets | 1,497,689 | 1,402,942 | 30,662 | 23,213 | 4.07 | 3.29 | ||||||||||||||||||
| Other assets | 54,386 | 68,256 | ||||||||||||||||||||||
| Total assets | $ | 1,552,075 | $ | 1,471,198 | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 219,722 | $ | 231,037 | 277 | 207 | 0.25 | 0.18 | ||||||||||||||||
| Money market accounts | 331,348 | 310,475 | 4,056 | 283 | 2.47 | 0.18 | ||||||||||||||||||
| Savings and other | 230,085 | 234,920 | 1,129 | 160 | 0.99 | 0.14 | ||||||||||||||||||
| Certificates of deposit | 178,954 | 134,063 | 2,652 | 405 | 2.99 | 0.61 | ||||||||||||||||||
| Total interest-bearing deposits | 960,109 | 910,495 | 8,114 | 1,055 | 1.70 | 0.23 | ||||||||||||||||||
| Repurchase agreements | 4,533 | 8,689 | 41 | 6 | 1.84 | 0.15 | ||||||||||||||||||
| Finance lease | 5,376 | 5,190 | 79 | 82 | 2.96 | 3.16 | ||||||||||||||||||
| Note payable | 115 | 158 | 4 | 5 | 6.19 | 6.13 | ||||||||||||||||||
| Subordinated Debt (net of issuance costs) | 24,545 | 24,488 | 466 | 466 | 3.80 | 3.81 | ||||||||||||||||||
| FHLBB advances | 46,851 | 1,479 | 1,131 | 55 | 4.80 | 7.46 | ||||||||||||||||||
| Total interest-bearing liabilities | 1,041,529 | 950,499 | 9,835 | 1,669 | 1.90 | 0.35 | ||||||||||||||||||
| Demand deposits | 370,057 | 381,731 | ||||||||||||||||||||||
| Other liabilities | 8,366 | 6,675 | ||||||||||||||||||||||
| Shareholders’ equity | 132,123 | 132,293 | ||||||||||||||||||||||
| Total liabilities & shareholders’ equity | $ | 1,552,075 | $ | 1,471,198 | ||||||||||||||||||||
| Net interest income (d) | $ | 20,827 | $ | 21,544 | ||||||||||||||||||||
| Spread on interest-bearing funds | 2.20 | 2.94 | ||||||||||||||||||||||
| Net interest margin (e) | 2.75 | 3.05 | ||||||||||||||||||||||
| (a) | Includes non-accrual loans. |
| (b) | Includes interest-bearing deposits in other banks and federal funds sold. |
| (c) | Average balances of securities are based on cost. |
| (d) | Includes tax exempt income benefit of $357,000 and $364,000, respectively for 2023 and 2022 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2023 and 2022. |
| (e) | Net interest income divided by average interest-earning assets. |
The following table sets forth the changes in FTE interest due to volume and rate.
| Six months ended June 30, (in thousands) | 2023 versus 2022 | |||||||||||
| Change in interest due to | Volume | Rate | Net | |||||||||
| Loans | $ | (201 | ) | $ | 6,305 | $ | 6,104 | |||||
| Securities | (667 | ) | 1,220 | 553 | ||||||||
| FHLBB stock | 4 | 62 | 66 | |||||||||
| Short term funds | (1,695 | ) | 2,421 | 726 | ||||||||
| Interest-earning assets | (2,559 | ) | 10,008 | 7,449 | ||||||||
| Deposits | (6,690 | ) | 13,749 | 7,059 | ||||||||
| Repurchase agreements | (77 | ) | 112 | 35 | ||||||||
| Finance lease | 8 | (11 | ) | (3 | ) | |||||||
| Note payable | (1 | ) | — | (1 | ) | |||||||
| Subordinated Debt | 2 | (2 | ) | — | ||||||||
| FHLBB advances | 1,719 | (643 | ) | 1,076 | ||||||||
| Interest-bearing liabilities | (5,039 | ) | 13,205 | 8,166 | ||||||||
| Net change in net interest income | $ | 2,480 | $ | (3,197 | ) | $ | (717 | ) | ||||
Interest Income
Tax equivalent interest income of $30.7 million for the six-month period ended June 30, 2023 increased $7.4 million, or 32.1%, from $23.2 million for the six-month period ended June 30, 2022. Loan income, as compared to the six months of 2022, increased $6.1 million, or 29.1%, primarily due to a $143.3 million, or 13.1%, increase in average loan balances and a 54 basis point increase in the average yield. Tax equivalent securities income increased $553 thousand, or 26.6%, for the six-month period 2023 as compared with the six-month period 2022, primarily due to a 57 basis point increase in average yield, which was partly offset by a $5.8 million, or 2.6%, decrease in average balances. Income on short-term funds as compared to six-month period 2023 increased $726 thousand, or 497.3%, primarily due to a 364 basis point increase in the average short-term funds yields, partly offset by a $44.6 million, or 50.2%, decrease in average balances.
Interest Expense
Interest expense increased $8.2 million, or 489.3%, to $9.8 million for the six-month period 2023 compared with $1.7 million for the six-month period 2022. Interest on deposit accounts increased $7.1 million, or 669.1%, as a result of an increase in the average total deposit balance of $49.6 million, or 5.4%, and a 147 basis point increase in the average deposit rate compared with the six-month period 2022. Interest expense on FHLBB advances for the six-month period 2023 increased $1.0 million, or 1,956.4% as compared with the six-month period 2022 due to an increase in the average balance of $45.4 million, or 3,067.7%, partly offset by a 266 basis point decline in the average borrowing rate.
| 34 |
Provision and Allowance for Credit Losses
A provision of $0.5 million was recorded for the six-month period ended June 30, 2023 compared to a provision of $1.5 million for the six-month period ended June 30, 2022. Net loan charge-offs were $80 thousand and $722 thousand for the respective periods. The provision expense for six-month period of 2023 reflected the Bank’s adoption of CECL in January 2023 as well as loan growth during the period, partially offset by the release of reserves associated with the sale of $8.2 million of shared national credit loans in second quarter 2023 and adjustments to the forecast of certain macroeconomic factors, which underpin the Bank’s CECL model.
| (in thousands) | June 30, 2023 | June 30, 2022 | ||||||
| At or For the Six Months Ended | (CECL) | (Incurred Loss) | ||||||
| ACL on loans, beginning of period | $ | 14,846 | $ | 12,962 | ||||
| Impact of CECL adoption | 271 | — | ||||||
| Provision for credit losses | 521 | 1,463 | ||||||
| Charge-offs: | ||||||||
| Commercial & industrial | — | (46 | ) | |||||
| Commercial real estate | — | (373 | ) | |||||
| Residential real estate | — | (259 | ) | |||||
| Consumer | (85 | ) | (56 | ) | ||||
| Total loan charge-offs | (85 | ) | (734 | ) | ||||
| Recoveries: | ||||||||
| Commercial & industrial | — | 1 | ||||||
| Commercial real estate | — | 1 | ||||||
| Residential real estate | 1 | — | ||||||
| Consumer | 4 | 10 | ||||||
| Total loan recoveries | 5 | 12 | ||||||
| Net charge-offs | $ | (80 | ) | $ | (722 | ) | ||
| ACL on loans, end of the period | $ | 15,558 | $ | 13,703 | ||||
| ACL on unfunded commitments, beginning of period | $ | 178 | $ | 146 | ||||
| Impact of CECL adoption | 913 | — | ||||||
| Provision for credit losses | 82 | 41 | ||||||
| ACL on unfunded commitments, end of period | $ | 1,173 | $ | 187 | ||||
| Components of ACL: | ||||||||
| ACL on loans | $ | 15,558 | $ | 13,703 | ||||
| ACL on unfunded commitments | 1,173 | 187 | ||||||
| ACL, end of period | $ | 16,731 | $ | 13,890 | ||||
| Net charge-offs to average loans | ||||||||
| Provision for credit losses on loans to average loans | 0.04 | % | 0.03 | % | ||||
| ACL on loans to total loans | 1.24 | % | 1.19 | % | ||||
Non-interest income
The following table details the principal categories of non-interest income.
| Six months ended June 30, (dollars in thousands) | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||
| Trust and wealth advisory | $ | 2,483 | $ | 2,533 | $ | (50 | ) | (2.0 | %) | |||||||
| Service charges and fees | 2,485 | 2,861 | (376 | ) | (13.1 | ) | ||||||||||
| Mortgage banking activities, net | (92 | ) | 432 | (524 | ) | (121.3 | ) | |||||||||
| Gains (losses) on mutual fund | 5 | (72 | ) | 77 | (106.9 | ) | ||||||||||
| (Losses) gains on securities, net | (15 | ) | 165 | (180 | ) | (109.1 | ) | |||||||||
| Bank-owned life insurance (“BOLI”) income | 388 | 325 | 63 | 19.4 | ||||||||||||
| Gain on bank-owned life insurance | 311 | 89 | 222 | 249.4 | ||||||||||||
| Other | 60 | 57 | 3 | 5.3 | ||||||||||||
| Total non-interest income | $ | 5,625 | $ | 6,390 | $ | (765 | ) | (0.12 | %) | |||||||
Non-interest income for the six-month period ended June 30, 2023 decreased $765 thousand versus the same period in 2022. Trust and wealth advisory revenues decreased $50 thousand mainly due to lower asset management fees, partially offset by higher estate planning fees. Service charges and fees decreased $376 thousand during the six-month period ended June 30, 2023. The decrease primarily reflected loan prepayment fees recorded in second quarter 2022, which were partially offset by higher deposit fees in the six month period ended June 30, 2023. Mortgage banking activities, net decreased $524 thousand versus the same period in 2022. Income from sales of mortgage loans decreased $76 thousand due to a lower volume of sales of fixed rate residential mortgage loans to FHLB Boston. Salisbury did not sell any residential loans to FHLBB during 2023 compared with sales of $7.5 million for the six-month period ended June 30, 2022. Mortgage banking activities, net for the six-month period ended June 30, 2023 also included a pre-tax loss of $209 thousand on the sale of $8.2 million of shared national credit commercial loans compared with a gain on the sale of loans of $239 thousand in the six month period ended June 30, 2022. The six-month periods ended June 30, 2023 and 2022 also included mortgage servicing amortization of $50 thousand and $78 thousand, respectively. BOLI income for the six-month periods ended June 30, 2023 and June 30, 2022 included a non-taxable gains of $311 thousand and $89 thousand, respectively, related to proceeds receivable due to the death of former covered employees.
| 35 |
Non-interest expense
The following table details the principal categories of non-interest expense.
| Six months ended June 30, (dollars in thousands) | 2023 | 2022 | 2023 vs. 2022 | |||||||||||||
| Salaries | $ | 7,346 | $ | 7,135 | $ | 211 | 3.0 | % | ||||||||
| Employee benefits | 2,700 | 2,565 | 135 | 5.3 | ||||||||||||
| Premises and equipment | 2,183 | 2,086 | 97 | 4.7 | ||||||||||||
| Loss on write-down and sale of assets | 158 | — | 158 | n/a | ||||||||||||
| Information processing and services | 1,781 | 1,387 | 394 | 28.4 | ||||||||||||
| Professional fees | 1,795 | 1,609 | 186 | 11.6 | ||||||||||||
| Collections, OREO, and loan related | 100 | 232 | (132 | ) | (56.9 | ) | ||||||||||
| FDIC insurance | 346 | 293 | 53 | 18.1 | ||||||||||||
| Marketing and community support | 314 | 447 | (133 | ) | (29.8 | ) | ||||||||||
| Amortization of intangibles | 73 | 104 | (31 | ) | (29.8 | ) | ||||||||||
| Other | 1,106 | 1,328 | (222 | ) | (16.7 | ) | ||||||||||
| Non-interest expense | $ | 17,902 | $ | 17,186 | $ | 716 | 4.2 | % | ||||||||
Non-interest expense for the six-month period ended June 30, 2023 increased $716 thousand versus the same period in 2022. Salaries increased $211 thousand due to higher base salary expense and higher incentive accruals as well as lower deferred compensation expense. Benefits increased $135 thousand primarily due to higher medical insurance costs, ESOP and 401k expense. Premises and equipment increased $97 thousand primarily due to higher building maintenance, lease expense, taxes and software maintenance. Non-interest expense also included a non-recurring charge of $158 thousand to write off fixed assets in the Red Oaks Mill, New York branch, which Salisbury closed on April 30, 2023. Information processing and services increased $394 thousand mainly due to higher core data processing costs, website and ATM and debit card network fees. Professional fees increased $186 thousand versus the six-month period 2022 primarily due to higher audit and legal fees. Collections, OREO and loan related expense decreased $132 thousand primarily on lower appraisal, litigation costs and mortgage taxes. Marketing and community support decreased $133 thousand versus second quarter 2022. Other expenses decreased $222 thousand primarily due to two isolated instances of debit card or check cashing net fraud-related losses aggregating $200 thousand incurred in 2022.
Non-interest expense for the six month period ended June 30, 2023 included costs of $778 thousand associated with the pending NBT merger.
Income taxes
The effective income tax rates for the six-month periods ended June 30, 2023 and June 30, 2022 were 16.3% and 16.9%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax-exempt income. The tax provision for the six-month period of 2023 included a non-recurring credit of $163 thousand to adjust the Bank’s tax liability at quarter-end. The lower tax rate in 2023 also reflected the BOLI proceeds receivable noted above.
Salisbury did not incur Connecticut income tax in 2023 (to date) or 2022, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.
CAPITAL RESOURCES
Shareholders’ Equity
Shareholders’ equity increased $0.7 million in second quarter to $133.1 million at June 30, 2023 as net income of $3.4 million and other activity of $0.2 million, were partially offset by unrealized losses, net of taxes, in the available-for-sale securities (“AFS”) portfolio of $2.0 million and common stock dividends paid of $0.9 million. The unrealized losses, net of taxes, in the AFS portfolio were $20.0 million at June 30, 2023. Book value per common share of $22.91 at June 30, 2023 increased $0.12 from first quarter 2023 and increased $0.90 from second quarter 2022. Tangible book value per common share of $20.51 at June 30, 2023 increased $0.13 from first quarter 2023 and increased $0.94 from second quarter 2022. At June 30, 2023 and December 31, 2022, the ratio of Salisbury’s tangible common shareholders’ equity, which included the after-tax unrealized losses on available-for-sale securities, to tangible total assets were as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Common shareholders’ equity | $ | 133,065 | $ | 128,355 | ||||
| Less: Goodwill | (13,815 | ) | (13,815 | ) | ||||
| Less: Intangible assets | (154 | ) | (227 | ) | ||||
| Tangible common shareholders’ equity | $ | 119,096 | $ | 114,313 | ||||
| Total assets | $ | 1,558,336 | $ | 1,541,582 | ||||
| Less: Goodwill | (13,815 | ) | (13,815 | ) | ||||
| Less: Intangible assets | (154 | ) | (227 | ) | ||||
| Tangible total assets | $ | 1,544,367 | $ | 1,527,540 | ||||
| Tangible common shareholders’ equity to tangible total assets | 7.71 | % | 7.48 | % | ||||
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Capital Requirements
Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well-capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Total Capital (to risk-weighted assets) | 13.66 | % | 13.43 | % | ||||
| Tier 1 Capital (to risk-weighted assets) | 12.41 | 12.24 | ||||||
| Common Equity Tier 1 Capital (to risk-weighted assets) | 12.41 | 12.24 | ||||||
| Tier 1 Capital (to average assets) | 10.15 | 9.99 | ||||||
A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action regulations issued by the FDIC and the FRB, is one which maintains a Total Risk-Based ratio of 10% or above, a Tier 1 Risk-Based ratio of 8% or above, a Common Equity Tier 1 ratio of 6.5% or above, and a Leverage ratio of 5% or above, and is not subject to any written order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level. Maintaining strong capital is essential to Salisbury and the Bank’s safety and soundness. However, the effective management of capital resources requires generating attractive returns on equity to build value for shareholders while maintaining appropriate levels of capital to fund growth, meet regulatory requirements and be consistent with prudent industry practices.
The FRB’s final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until it reached its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.
As of June 30, 2023, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.
On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a “Community Bank Leverage Ratio” (“CBLR”) that simplifies capital requirements for certain community banking organizations with less than $10 billion in total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) (“qualifying community banking organizations”) may elect to report the components of its Tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that “elects to use the CBLR framework” will not be subject to other risk-based and leverage capital requirements and will be considered to have met the “well-capitalized” ratio requirements for purposes of the agencies’ Prompt Corrective Action (“PCA”) framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria but continues to report a leverage ratio of greater than 8 %, the bank may continue to use the framework and will be deemed “well capitalized” for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period (including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be well capitalized if it elected to utilize such methodology. The Bank continues to evaluate the benefits of transitioning to this simplified methodology for assessing capital adequacy.
Subordinated Debt
On March 31, 2021 Salisbury completed a private placement of $25.0 million in aggregate principal amount of Fixed to Floating Rate Subordinated Notes due 2031 (the “Notes”) to various accredited investors. The Notes have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50% per annum, from and including the closing date to, but excluding March 31, 2026 or the earlier redemption date, payable quarterly in arrears. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the rate will be a floating per annum rate expected to be equal to the then current three-month SOFR plus 280 basis points, provided, however, that in the event three-month SOFR is less than zero, three-month term SOFR shall be deemed to be zero, payable quarterly in arrears.
Dividends
Salisbury paid $1.9 million in common stock dividends during the six-month period ended June 30, 2023. Due to the pending merger with NBT, Salisbury will not pay a cash dividend to shareholders in August 2023. However, it is anticipated that Salisbury shareholders will receive a quarterly cash dividend, which will be paid by NBT on September 15, 2023 to shareholders of record as of September 1, 2023.
Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.
Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.
FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 31, 2015, states that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.
| 37 |
Salisbury believes that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisbury or the Bank. The continued payment of common stock cash dividends by Salisbury will be dependent on Salisbury's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury.
IMPACT OF INFLATION AND CHANGING PRICES
Salisbury’s consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. Additionally, the effects of inflation on commercial and consumer customers can have implications with respect to their borrowing needs and saving and deposit practices. Potentially, if sustained, inflation could precipitate recessionary trends that could affect commercial development and residential construction. Inflation could also increase the cost of labor and products and services used by the Bank and thereby hinder efficiencies in the Bank’s ability to deliver products and services. There is no precise method, however, to measure the effects of inflation on Salisbury’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and future filings made by Salisbury with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by Salisbury and the Bank, and oral statements made by executive officers of Salisbury and the Bank, may include forward-looking statements relating to such matters as:
| (a) | assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and |
| (b) | expectations for revenues and earnings for Salisbury and the Bank. |
Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of Salisbury’s and the Bank’s business include the following:
| (a) | the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates; |
| (b) | changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses; |
| (c) | increased competition from other financial and non-financial institutions; |
| (d) | the impact of technological advances and cybersecurity matters; |
| (e) | interest rate fluctuations; |
| (f) | the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the State of Connecticut and the United States, related to the economy and overall financial stability; |
| (g) | the risk of adverse changes in business conditions due to geo-political tensions; |
| (h) | the risk that the pending merger with NBT will not be completed; |
| (i) | changes in Salisbury’s liquidity risk profile due to uncertain economic conditions and competition for deposits; and |
| (j) | other risks identified from time to time in Salisbury’s filings with the Securities and Exchange Commission. |
Such developments
could have an adverse impact on Salisbury’s and the Bank’s financial position and results of operations.
| 38 |
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Salisbury manages its exposure to interest rate risk through its Asset/Liability Management Committee (“ALCO”) using risk limits and policy guidelines to manage assets and funding liabilities to produce financial results that are consistent with Salisbury’s liquidity, capital adequacy, growth, risk and profitability targets. Interest rate risk is the risk of a negative impact to future earnings due to changes in interest rates.
The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management’s June 30, 2023 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.
The ALCO reviews the simulation results to determine whether Salisbury’s exposure to change in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure. Salisbury’s tolerance levels for changes in net interest income in its income simulations varies depending on the magnitude of interest rate changes and level of risk-based capital. All changes are measured in comparison to the projected net interest income that would result from an “unchanged” rate scenario where interest rates remain stable over the forecast horizon. The ALCO also evaluates the directional trends of net interest income, net interest margin and other financial measures over the forecast horizon for consistency with its liquidity, capital adequacy, growth, risk and profitability targets.
ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At June 30, 2023, 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 400 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 400 basis points across the yield curve; and (4) gradual and non-parallel changes in interest rates – the yield curve is assumed to remain stable through the second half of 2023 before declining in mid-to-late 2024. The Federal Funds rates increases to 5.75% by September 2023 and remains flat until a projected 0.25% rate cut in June 2024 and several additional rate cuts throughout the year before hitting 3.25% in December 2024. Through the remaining six months of 2023, the two year and five year treasury increase by 0.10% and 0.05%, respectively. The 10 year treasury declines by 0.02% during the same period. In 2024, the two year, five year, and 10 year treasury decline by 1.69%, 0.95%, and 0.47%, respectively. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.
As of June 30, 2023, net interest income simulations indicated that Salisbury’s exposure to changing interest rates over the simulation horizons remained within its tolerance levels.
The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury’s financial instruments as of June 30, 2023.
| As of June 30, 2023 | Months 1-12 | Months 13-24 | ||||||
| Immediately rising interest rates + 200bp (static growth assumptions) | (6.00 | %) | (1.80 | %) | ||||
| Immediately rising interest rates + 100bp (static growth assumptions) | (2.90 | ) | (0.80 | ) | ||||
| Immediately falling interest rates - 100bp (static growth assumptions) | (1.00 | ) | (4.00 | ) | ||||
| Immediately falling interest rates - 200bp (static growth assumptions) | (3.30 | ) | (10.40 | ) | ||||
The negative exposure of net interest income to immediately and gradually rising rates as compared to the unchanged rate scenario results from a faster projected rise in the cost of funds versus income from earning assets, as relatively rate-sensitive money market and time deposits re-price faster than longer duration earning assets. The negative exposure of net interest income to immediately falling rates as compared to an unchanged rate scenario results from a greater decline in earning asset yields compared to rates paid on funding liabilities, as a result of faster prepayments on existing assets and lower reinvestment rates on future loans originated and securities purchased.
While the ALCO reviews simulation assumptions and back-tests simulation results to ensure that they are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the re-pricing, maturity and prepayment characteristics of financial instruments and the composition of Salisbury’s balance sheet may change to a different degree than estimated. Simulation modeling assumes Salisbury’s expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from the ALCO’s estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income.
Salisbury also monitors the potential change in market value of its available-for-sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to Salisbury’s capital and liquidity position. Results are calculated using industry-standard analytical techniques and securities data. Equity securities are excluded from this analysis because the market value of such securities cannot be directly correlated with changes in interest rates.
| 39 |
The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:
| As of June 30, 2023 (in thousands) | Rates up 100bp | Rates up 200bp | ||||||
| U.S. Treasury | $ | (610 | ) | $ | (1,189 | ) | ||
| U.S. Government agency notes | (878 | ) | (1,583 | ) | ||||
| Municipal bonds | (3,059 | ) | (5,899 | ) | ||||
| Mortgage backed securities | ||||||||
| U.S. Government agencies and U.S. Government- sponsored enterprises | (2,749 | ) | (5,337 | ) | ||||
| Collateralized mortgage obligations | ||||||||
| U.S. Government agencies | (1,348 | ) | (2,655 | ) | ||||
| Corporate bonds | (351 | ) | (689 | ) | ||||
| Total available-for-sale debt securities | $ | (8,995 | ) | $ | (17,352 | ) |
| Item 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Salisbury’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury’s disclosure controls and procedures as of June 30, 2023. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 2023.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by Salisbury in its reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls
In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury’s internal control over financial reporting occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, Salisbury’s internal control over financial reporting.
PART II. OTHER INFORMATION
| Item 1. | LEGAL PROCEEDINGS |
The Bank is involved in various claims and legal proceedings arising in the ordinary course of business, which management currently believes are not material, individually or in the aggregate, to the business, financial condition or operating results of Salisbury or any of its subsidiaries. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the registrant’s business, to which Salisbury is a party or of which any of its property is subject.
| Item 1A. | RISK FACTORS |
Please refer to the note on forward-looking statements in this Quarterly Report on Form 10-Q. In addition, please consider the risk factors discussed in Salisbury’s Annual Report on Form 10-K for the year ended December 31, 2022. There were no material changes to the risk factors previously disclosed in such Annual Report.
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None
| Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None
| Item 4. | MINE SAFETY DISCLOSURES |
Not Applicable
| Item 5. | OTHER INFORMATION |
None
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| Item 6. | EXHIBITS |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SALISBURY BANCORP, INC. | |||
| August 9, 2023 | By: | /s/ Richard J. Cantele, Jr. | |
| Richard J. Cantele, Jr., | |||
| President and Chief Executive Officer | |||
| August 9, 2023 | By: | /s/ Peter Albero | |
| Peter Albero, | |||
| Executive Vice President and Chief Financial Officer | |||
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