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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2022

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

Commission file number 0-14854

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

 

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

 

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an “emerging growth company” in Rule 12b-2 of the Exchange Act. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ Yes ☑ No

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). ☐ Yes ☑ No

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2022 was $126.1 million based on the closing sales price of $23.61 of such stock. The number of shares of the registrant’s Common Stock outstanding as of March 1, 2023, was 5,798,816.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 
 

FORM 10-K

SALISBURY BANCORP, INC.

For the Year Ended December 31, 2022

TABLE OF CONTENTS

 

  Description Page
PART I    
Item 1. BUSINESS 3
Item 1A. RISK FACTORS 13
Item 1B. UNRESOLVED STAFF COMMENTS 16
Item 2. PROPERTIES 17
Item 3. LEGAL PROCEEDINGS 17
Item 4. MINE SAFETY DISCLOSURES 17
     
PART II    
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER  PURCHASES OF EQUITY SECURITIES 18
Item 6. [RESERVED] 19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 36
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 38
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 77
Item 9A. CONTROLS AND PROCEDURES 77
Item 9B. OTHER INFORMATION 77
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS  77
     
PART III    
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 78
Item 11. EXECUTIVE COMPENSATION 84
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS 95
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 95
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES  95
     
PART IV    
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 96
Item 16. Form 10-K Summary 97

 

 2 

 

PART I

Forward-Looking Statements

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

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

Item 1.BUSINESS

Development of 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 thirteen ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).

Abbreviations Used Herein

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

Dodd-

Frank Act

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

 

Description of Business

Lending Activities

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

The majority of the Bank’s loans as of December 31, 2022, including some loans classified as commercial loans, were secured by real estate. Interest rates charged on loans are affected principally by the Bank’s current asset/liability strategy, the demand for such loans, the cost and supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general economic and credit conditions, monetary policies of the federal government, including the FRB, federal and state tax policies and budgetary matters.

Residential Real Estate Loans

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

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

 3 

 

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

Commercial Real Estate Loans

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

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

Construction Loans

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

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

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

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

Commercial Loans

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

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

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

Consumer Loans

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

Municipal Loans

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

Credit Risk Management and Asset Quality

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

 4 

 

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

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

Trust and Wealth Advisory Services

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

Securities

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

Sources of Funds

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

Deposits

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

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

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

Borrowings

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

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

Subsidiaries

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

Human Capital Resources

Diversity, Equity and Inclusion (“DEI”)

Salisbury understands that our human capital is the most valuable asset we have and we are committed to fostering, cultivating and preserving a culture of diversity, equity and inclusion. The Bank has a DEI Plan and Policy aimed to cultivate and implement strategies to nurture a culture where talented and committed individuals can thrive. We established a DEI Council comprised of a cross section of employees and senior level management whose responsibilities include, but are not limited to, creating opportunities for employees to meaningfully engage with leadership; providing feedback and insight to executive management in support of current and future workforce needs; review of policies, procedures and processes that may impact DEI efforts; engagement with the communities we serve to promote a greater understanding and respect for diversity; and maintaining a work environment which embraces a variety of employee characteristics. All employees and directors are required to complete annual diversity awareness training. The Board of Directors is committed to diversity at the Board level and currently meets the diversity standards of NASDAQ.

Talent

Salisbury has been successful in attracting, developing and retaining qualified and competent staff. There are many factors that contribute to this success, including internships, tuition reimbursement, career pathing and customized development plans, a variety of training and professional development opportunities, internal job postings, transfer and promotion opportunities, and a comprehensive Leadership Development Program instituted in 2019. Our workforce turnover rates have historically been lower than our compensation peer group average.

 

 5 

 

Employee Compensation and Benefits

The Bank maintains a comprehensive employee benefit program providing, among other benefits, group medical, dental, and vision insurance, life insurance, disability insurance, a 401k plan, an employee stock ownership plan (“ESOP”), short and long-term incentive programs, paid time off including vacation days, personal days, and paid holidays, and employee recognition programs. The Compensation Committee reviews employee compensation and benefits against our compensation peer group annually.

 

Workplace Health and Safety

The COVID-19 pandemic has presented ongoing challenges since 2021. The safety of our employees, customers and communities continues to be our top priority. Utilizing our Pandemic Planning Policy and Program, we have implemented proper protocols for safety and business continuity. We have successfully maintained safe operations and approximately 50% of our staff are able to work remotely without disruption to our business. We continued to serve customers through our branch lobbies, drive-ups, ATMs, bank-by-appointment, and through the use of our mobile app and online banking services. Since the start of the pandemic, no employees have been furloughed or laid off, and no employee compensation was reduced. We have a Safety Committee comprised of employee representatives and senior managers who conduct routine safety inspections, provide safety training, and promote safe operations. We are proud of our historically low incident rate.

 

Culture Initiatives and Community Involvement

Our culture is extremely important to us and we seek to attract qualified individuals whose core values are aligned with that of the organization. We conducted an employee engagement survey in the fall of 2021 with an astounding 93% participation rate and an overall engagement index of 80%. Our staff value the people they work with, the flexible work arrangements, advancement opportunities and benefits. It also identified an opportunity to strengthen multi-directional communication and continue to demonstrate value, recognition and accountability. Salisbury has a longstanding commitment to supporting the communities we serve, and our staff remains actively engaged in volunteer activities through bank-sponsored events as well as a variety of community non-profits focused on education, economic development, the arts, and health and human services. They volunteered more than 7,100 hours at close to 200 local organizations. Additionally, the Bank provided monetary support to nearly 200 non-profits during 2022 and collected nearly 3,500 non-perishable food and household items that were donated directly to local community food pantries. The Bank assisted hundreds of small businesses and their employees through the Paycheck Protection Program (“PPP”) with total PPP loan volume of nearly $150 million.

 

Succession Planning

The Bank has a robust succession planning process which includes detailed CEO, Board Chair, and Key Employee succession plans. The plans are updated regularly and are reviewed by senior management and the Board of Directors annually.

 

Pay Equity

Fair and equitable salary administration is predicated on having accurate salary ranges that reflect the relevant labor market. A comprehensive market analysis is conducted and reviewed annually to ensure that our pay is in line with that of our compensation peer group. In an effort to be transparent and educate our employees, they each receive a detailed report of their compensation and benefits annually which outlines their total compensation. The bank complies with Connecticut’s requirements for employers to disclose the wage range for vacant positions to both job applicants and existing employees.

Market Area

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

Competition

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

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

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

Regulation and Supervision

General

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

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

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

Bank Holding Company Regulation

SEC and NASDAQ

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

Federal Reserve Board Regulation

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

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

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

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

Connecticut Bank Holding Company Regulation

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

Dividends

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

Financial Modernization

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

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

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State Banking Laws and Supervision

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

Lending Activities

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

Dividends

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

Powers

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

Assessments

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

Enforcement Authority

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

New York and Massachusetts Banking Laws and Supervision

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

Federal Regulations

Capital Requirements

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

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

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.

In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary. As a bank holding company, the Company is also subject to regulatory capital requirements, as described in a subsequent section. As of December 31, 2022, the Bank met its capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

Prompt Corrective Regulatory Action

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

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

 

Transactions with Affiliates

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

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

Enforcement

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

Standards for Safety and Soundness

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

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Insurance of Deposit Accounts

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

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

FDIC insured institutions are required to pay assessments to the FDIC to fund the DIF. The Bank’s current annual assessment rate is approximately 3.61 basis points of average total assets less average tangible equity. The assessment rate is adjusted quarterly to reflect changes in the assessment bases of the DIF based on quarterly Call Report submissions. From time to time, the FDIC may impose a supplemental special assessment in addition to other special assessments and regular premium rates to replenish the DIF during periods of economic difficulty. The amount of an emergency special assessment imposed on a bank will be determined by the FDIC if such amount is necessary to provide sufficient assessment income to repay amounts borrowed from the Treasury; to provide sufficient assessment income to repay obligations issued to and other amounts borrowed from insured depository institutions; or for any other purpose the FDIC may deem necessary.

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

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

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

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

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

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

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

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

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was enacted in May 2018, repealed or modified several provisions of the Dodd-Frank Act.  Certain key provisions of the Economic Growth Act and its implementing regulations include:

 

·Eliminating supervisory stress testing and company run stress testing for bank holding companies with less than $250 billion in assets;
·Prohibiting federal banking regulators from imposing higher capital standards on High Volatility Commercial Real Estate exposures unless they are for acquisition, development, or construction;
·Exempting from appraisal requirements certain transactions involving real property in rural areas and valued at less than $400,000; and
·Requiring the CFPB to provide guidance on how the Truth in Lending Act-Real Estate Settlement Procedures Act Integrated Disclosure applies to mortgage assumption transactions and construction-to-permanent home loans, as well as the extent to which lenders can rely on model disclosures that do not reflect recent regulatory changes.


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Consumer Financial Protection Bureau

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

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

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

The CARES Act and Initiatives Related to COVID-19  

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020 to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over Salisbury. It is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act.

Paycheck Protection Program. Section 1102 of the CARES Act created the Program Protection Program (PPP), a program administered by the SBA to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. The Bank participated in the PPP as a lender and has approximately $0.3 million of such loans on its consolidated balance sheet as of December 31, 2022.

Federal Reserve System

Historically, all depository institutions must hold a percentage of certain types of deposits as reserves. Reserve requirements generally are assessed on the depository institution's net transaction accounts (mostly checking accounts). Depository institutions must also regularly submit deposit reports of their deposits and other reservable liabilities. Effective March 26, 2020, the FRB reduced reserve requirement ratios to 0%, thus eliminating reserve requirements for all depository institutions at least temporarily.

Federal Home Loan Bank System

The Bank is a member of the Boston region of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The FHLBB provides a central credit facility primarily for member institutions. Member institutions are required to acquire and hold shares of capital stock in the FHLBB calculated periodically based primarily on its level of borrowings from the FHLBB. The Bank was in compliance with this requirement. At December 31, 2022, the Bank had FHLBB stock of $1.3 million, outstanding FHLBB advances and letters of credit of $10.0 million and $20.0 million, respectively.

No market exists for shares of the FHLBB and, therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB.

Other Regulations

Sarbanes-Oxley Act of 2002

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

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

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

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On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain auditor attestation of its internal control over financial reporting. Salisbury meets the new definition of a “non-accelerated filer” and as such, as of December 31, 2020, the Bank was no longer subject to section 404(b) of SOX, which requires public companies' annual reports to include the company's own assessment of internal control over financial reporting, and an auditor's attestation.

USA PATRIOT Act

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

Community Reinvestment Act and Fair Lending Laws

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

The Electronic Funds Transfer Act, Regulation E and Related Laws

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

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

Future Legislative Initiatives

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

Impact of Inflation and Changing Prices

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

Availability of Securities and Exchange Commission Filings

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

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Guide 3 Statistical Disclosure by Bank Holding Companies

The following information required by Subpart 229.1400 of Regulation S-K is located on the pages noted below.

    Page
I. Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential 21-22, 26-35
II. Investment in Debt Securities 26, 52-54
III. Loan Portfolio 26-31, 55-60
IV. Allowance for Credit Losses 23, 55-60
V. Deposits 31-32, 62-63
Item 1A.RISK FACTORS

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

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

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

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

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

Financial stress on borrowers could reduce Salisbury’s net income and profitability.

Financial stress on borrowers as a result of job losses, or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods beyond that which is provided for in Salisbury’s allowance for loan losses, which would adversely affect Salisbury’s financial condition or results of operations.

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

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

Credit market conditions may impact Salisbury’s investments.

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

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

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

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

Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2022, Salisbury had $13.8 million of goodwill on its balance sheet. Salisbury must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on Salisbury’s financial condition and results of operations.

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

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

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

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

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

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

Salisbury’s stock price may be volatile.

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

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

 

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations could also cause Salisbury’s stock price to decrease regardless of Salisbury’s operating results. As a result, such change could adversely affect the liquidity of the market for Salisbury’s shares and reduce trading.

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

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

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Salisbury continually encounters technological change.

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

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

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

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

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

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

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

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

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

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

In addition, changes in tax law may adversely affect Salisbury’s lending business and performance, especially those provisions regarding the deductibility of residential mortgage interest and state property taxes.

Salisbury may be adversely impacted by the discontinuance of LIBOR as a short-term interest rate utilized for certain financing agreements.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. The uncertainty as to the nature of alternative reference rates and the replacement of LIBOR may adversely affect the value of certain loans and investment securities.

The economic impact of the COVID-19 pandemic may continue to have an adverse impact on our business and results of operations.

The COVID-19 pandemic (hereafter referred to as “COVID-19”, “pandemic” or “virus”) has had a substantial adverse impact in the United States, including threats to public health, increased volatility in markets, and significant effects on national and local economies. The ultimate effect of the virus on Salisbury’s and the Bank’s business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with certainty.  Salisbury’s business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. COVID-19, or another highly contagious or infectious disease, could negatively impact the ability of our employees and customers to conduct such transactions and disrupt the business activities and operations of the Bank’s customers in the communities in which the Bank operates. Any sustained disruption to the Bank’s operations is likely to negatively impact Salisbury’s financial condition and results of operations. Notwithstanding Salisbury’s contingency plans and other safeguards against pandemics or other contagious diseases, the spread of COVID-19 could also negatively impact the availability of the Bank’s personnel who are necessary to conduct business operations, as well as potentially impact the business and operations of Salisbury’s third-party service providers who perform critical services for Salisbury. If the response to contain COVID-19, or another highly infectious or contagious disease, is unsuccessful, Salisbury could experience a material adverse effect on its business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Salisbury’s intangible assets, investments, loans, loan servicing rights, or deferred tax assets.

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In addition, Salisbury may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms. These and similar factors and events may have substantial negative effects on the business, financial condition, ability to pay dividends and results of operations of Salisbury, the Bank and its customers.

Salisbury may be adversely affected by new federal legislation.

Legislation enacted by the Biden administration may have an adverse impact on the conduct and profitability of businesses, including companies like Salisbury and the Bank through increased regulation and taxes.

Geopolitical events may trigger fluctuations in economic conditions which could adversely affect our financial condition and results of operations.

Salisbury’s business is subject to periodic fluctuations based on national and local economic conditions. Geopolitical events may trigger fluctuations that are not predictable, cannot be controlled and may have a material adverse impact on Salisbury’s operations and financial condition.

Merger-Related Risks

On December 5, 2022, Salisbury and NBT Bancorp Inc. (“NBT”) announced that they entered into a definitive merger agreement pursuant to which Salisbury will merge with and into NBT, and Salisbury Bank will merge with and into NBT Bank, N.A., in an all-stock transaction.

There is no assurance when or even if the merger will be completed.

Completion of the merger is subject to satisfaction or waiver of a number of conditions. There can be no assurance that the closing conditions, especially those closing conditions not within the parties’ control, will be satisfied or waived.

Failure to complete the merger with NBT could negatively affect Salisbury’s stock price and financial results.

If the pending merger with NBT is not completed for any reason, Salisbury’s ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, Salisbury would be subject to a number of risks, including the following: (a) negative reactions from the financial markets, including negative effects on Salisbury’s stock price; (b) negative reactions from our customers and vendors; (c) Salisbury will have incurred substantial expenses and will be required to pay certain costs relating to the merger, including legal, accounting, and other fees, whether or not the merger is completed; and (d) Salisbury’s management team will have devoted substantial time and resources to matters relating to the merger, and would otherwise have devoted their time and resources to other opportunities that may have been beneficial to Salisbury. See Note 2 “Acquisitions and Dispositions” in the accompanying Consolidated Financial Statements for additional information.

Salisbury may be subject to uncertainties while the merger with NBT is pending, which would adversely affect Salisbury’s business.

Uncertainty about the effect of the merger on our employees and customers may have an adverse effect Salisbury’s business. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and vendors to seek to change their existing business relationships with Salisbury. Employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the surviving corporation following the merger.

The merger agreement may be terminated and the merger with NBT may not be completed.

The merger agreement is subject to a number of customary closing conditions, including the receipt of regulatory approvals and the requisite approvals of Salisbury’s shareholders. Conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, Salisbury and/or NBT may elect to terminate the merger agreement under certain circumstances.

Shareholder litigation could prevent or delay the closing of the pending merger with NBT or otherwise negatively affect Salisbury’s business and operations.

Salisbury may incur additional costs in connection with the defense or settlement of any shareholder lawsuits filed in connection with the pending merger with NBT. Such litigation could have an adverse effect on Salisbury’s financial condition and results of operations and could prevent or delay the consummation of the merger.

Because the market price of NBT’s common stock may fluctuate, Salisbury shareholders cannot be certain of the precise value of the merger consideration they may receive in the proposed merger with NBT.

At the time the pending merger with NBT is completed, each issued and outstanding share of Salisbury common stock will be converted into the right to receive 0.745 shares of NBT’s common stock. The actual value of the shares of NBT’s common stock received by Salisbury shareholders will depend on the market value of shares of NBT’s common stock at the time the merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the merger agreement. The market value of NBT’s common stock may fluctuate between the date that the merger was announced and the closing date due to a variety of factors, including general market and economic conditions, changes in NBT’s businesses, and other factors. Many of these factors are outside of Salisbury’s and NBT’s control. Consequently, at the time that Salisbury shareholders must decide whether to approve the merger, they will not know the actual market value of the shares of NBT’s common stock they will receive when the merger is completed.
Item 1B.UNRESOLVED STAFF COMMENTS

None.

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Item 2.PROPERTIES

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

The Bank conducts its business at its main office, located at 5 Bissell Street, Lakeville, Connecticut, and through an additional thirteen full service branch offices located in Canaan, Salisbury and Sharon, Connecticut; Great Barrington, South Egremont and Sheffield, Massachusetts; and Dover Plains, Fishkill, Millerton, Newburgh, New Paltz, Poughkeepsie, and Red Oaks Mill, New York. The Bank owns its main office and seven of its branch offices and its Operations office, and currently leases six branch offices. In November of 2022, the Board of Directors authorized and directed management to proceed with the closure of the Bank’s Red Oaks Mill office in Poughkeepsie, NY. In January 2023, Salisbury notified regulators of its intent to close the Red Oaks Mill office . The Bank anticipates that this closure will be completed in second quarter 2023. For additional information, see Note 8, “Bank Premises and Equipment,” and Note 5 “Leases” to the Consolidated Financial Statements.

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

Offices Location Owned/Leased Lease expiration
Lakeville Office 5 Bissell Street, Lakeville, CT Owned -
Administrative Office 19 Bissell Street, Lakeville, CT Owned -
Operations Center 33 Bissell Street, Lakeville, CT Owned -
Salisbury Office 18 Main Street, Salisbury, CT Owned -
Sharon Office 5 Gay Street, Sharon, CT Owned -
Canaan Office 100 Main Street, Canaan, CT Owned -
South Egremont Office 51 Main Street, South Egremont, MA Leased 9/9/23
Sheffield Office 640 North Main Street, Sheffield, MA Owned -
Gt. Barrington Office 210 Main Street, Gt. Barrington, MA Leased 4/30/29
Millerton Office 87 Main Street, Millerton, NY Owned -
Poughkeepsie Office 40 Garden Street, Poughkeepsie, NY Leased 1/7/32
Fishkill Office 701 Route 9, Fishkill, NY Leased 9/29/29
Red Oaks Mill Office 2064 New Hackensack Road, Poughkeepsie, NY Leased 7/31/23
Dover Plains Office 5 Dover Village Plaza, Dover Plains, NY Leased 7/31/27
Newburgh Office 801 Auto Park Place, Newburgh, NY Leased 12/31/26
New Paltz Office 275 Main Street, New Paltz, NY Owned -

Item 3.LEGAL PROCEEDINGS

The Bank is involved in various claims and legal proceedings arising in the ordinary course of business, which management currently believes are not material, individually or in the aggregate, to the business, financial condition or operating results of Salisbury or any of its subsidiaries.

There are no material pending legal proceedings, other than ordinary routine litigation incidental to Salisbury’s business, to which Salisbury is a party or any of its subsidiaries is a party or of which any of their property is subject.
Item 4.MINE SAFETY DISCLOSURES

Not applicable.

 

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PART II

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

Market Information

Salisbury’s common stock trades on the NASDAQ Capital Market under the symbol “SAL.” All share and per share amounts have been adjusted to reflect the two-for-one forward stock split effective June 30, 2022.

Holders

There were approximately 2,421 holders of record of the common stock of Salisbury as of March 1, 2023. This number includes brokerage firms and other financial institutions that hold stock in their name, but which is actually beneficially owned by third parties.

Dividends

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

Equity Compensation Plan Information

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

Recent Sales of Unregistered Securities and Use of Proceeds

None.

Issuer Purchases of Equity Securities

None. On March 23, 2022 Salisbury announced that its Board of Directors renewed its share repurchase program that was established in March 2021. The share repurchase program provides for the potential repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over a period of the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares over the next twelve (12) months. Salisbury did not repurchase any shares during 2022.

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Item 6.[RESERVED]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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 ("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 thirteen ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).

In December 2022, Salisbury announced that it signed a definitive agreement to merge with and into NBT. The transaction is expected to close in second quarter 2023 subject to regulatory and Salisbury shareholder approval. Under the terms of the merger agreement, each outstanding share of Salisbury common stock will be converted into the right to receive 0.7450 shares of NBT common stock upon completion of the merger, which equated to a value of $35.00 per Salisbury share based on NBT’s volume-weighted average closing stock price of $46.98 for the 10-day trading period ending on November 29, 2022. The initial value reflected in the exchange ratio was approximately 187% of Salisbury’s tangible book value at September 30, 2022. The transaction is intended to qualify as a reorganization for federal income tax purposes, and as a result, the receipt of NBT common stock by shareholders of Salisbury is expected to be tax-free.

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.

Management considers the policies related to the allowance for loan losses as the most critical to the financial statement presentation because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The allowance for loan losses, which is established through a provision for loan losses charged to current earnings, is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for loan losses, the loan portfolio is segregated into pools of homogeneous loans in order to recognize differing risk characteristics among categories, and then further segregated by internal credit risk ratings. Loans that do not share similar risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events and current conditions. Adjustments to historical loss information are made to incorporate necessary qualitative adjustments to address factors that are not present in historical loss rates and are otherwise unaccounted for in the quantitative process. A reserve is recorded upon origination or purchase of a loan. The allowance represents management’s best estimate, but significant downturns in circumstances relating to loan quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in loan quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on results of operations. Note 1 describes the methodology used to determine the allowance for loan losses. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis.

Climate Change

There have been significant developments in federal and state legislation and regulation and international accords regarding climate change in recent years. Given our size and the nature of our business, the direct impact and expected future direct impact of climate-related regulation is not material to us, and is not expected to be material, to our business, financial condition, or results of operations. Salisbury has not experienced any physical effects of climate change on our operations and results. We recognize that, while not material to our operations, indirect consequences of climate-related regulation may exist as a result of the impact such legislation may have on certain types of customers who engage in activity that could be deemed potentially harmful to the environment. Salisbury notes that the climate change landscape is constantly evolving and at this time, it is not possible for us to know or predict the full universe or extent that these indirect effects will have on the Company's future operations. At this time, Salisbury does not plan to have material future capital expenditures for climate-related projects. Additionally, we have not incurred material compliance costs related to climate change.

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

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RESULTS OF OPERATIONS

Comparison of the Years Ended December 31, 2022 and 2021

Net Interest and Dividend Income

Net interest and dividend income (presented on a tax-equivalent basis) increased $4.5 million, or 10.8%, in 2022 over 2021. The net interest margin increased 15 basis point to 3.16% in 2022 from 3.01% in 2021, mostly due to a 25 basis point increase in the average yield on interest-earning assets, partly offset by a 15 basis point increase in the average cost of interest-bearing liabilities. The net interest margin was affected by changes in the mix of interest-earning assets and funding liabilities, asset and liability growth, and the effects of changes in market interest rates on the pricing and re-pricing of assets and liabilities. Excluding PPP loans, the tax-equivalent net interest margin for 2022 was 3.12% compared with 2.87% for 2021. The following table sets forth the components of Salisbury's net interest income and yields on average interest-earning assets and interest-bearing funds. Income and yields on tax-exempt securities are presented on a fully taxable equivalent basis.

Years ended December 31,  Average Balance  Income / Expense  Average Yield / Rate
(dollars in thousands)  2022  2021  2020  2022  2021  2020  2022  2021  2020
Loans (a)(d)  $1,142,663   $1,059,663   $1,019,999   $45,373   $41,549   $41,267    3.93%   3.89%   4.02%
Securities (c)(d)   218,331    144,833    89,616    4,549    2,991    2,563    2.08    2.06    2.86 
FHLBB stock   1,315    1,790    3,163    41    37    141    3.12    2.09    4.45 
Short term funds (b)   72,309    158,907    65,935    830    210    154    1.15    0.13    0.23 
Total earning assets   1,434,618    1,365,193    1,178,713    50,793    44,787    44,125    3.51    3.26    3.73 
Other assets   62,365    72,590    63,434                               
Total assets  $1,496,983   $1,437,783   $1,242,147                               
Interest-bearing demand deposits  $231,970   $224,763   $183,870    429    435    441    0.18    0.19    0.24 
Money market accounts   318,302    315,469    256,402    1,554    547    1,145    0.49    0.17    0.45 
Savings and other   240,695    215,300    175,204    630    239    464    0.26    0.11    0.26 
Certificates of deposit   132,192    130,879    144,489    1,111    939    1,840    0.84    0.72    1.27 
Total interest-bearing deposits   923,159    886,411    759,965    3,724    2,160    3,890    0.40    0.24    0.51 
Repurchase agreements   8,417    10,679    7,986    30    16    20    0.36    0.15    0.25 
Finance lease   5,294    2,739    2,965    163    136    141    3.07    4.96    4.75 
Note payable   147    187    226    9    11    14    6.14    6.13    6.08 
Subordinated debt (net of issuance costs)   24,502    22,511    9,870    932    1,000    618    3.80    4.44    6.26 
FHLBB advances   2,446    9,938    40,093    114    125    605    4.59    1.24    1.49 
Total interest-bearing liabilities   963,965    932,465    821,105    4,972    3,448    5,288    0.52    0.37    0.64 
Demand deposits   395,848    366,926    294,588                               
Other liabilities   7,183    7,285    6,956                               
Shareholders’ equity   129,987    131,107    119,498                               
Total liabilities & shareholders’ equity  $1,496,983   $1,437,783   $1,242,147                               
Net interest income (d)                 $45,821   $41,339   $38,837                
Spread on interest-bearing funds                                 3.00    2.89    3.09 
Net interest margin (e)                                 3.16    3.01    3.28 
(a)Includes non-accrual loans.
(b)Includes interest-bearing deposits in other banks and federal funds sold.
(c)Average balances of securities are based on amortized cost.
(d)Includes tax exempt income of $0.7 million, $0.7 million and $0.5 million, respectively for 2022, 2021 and 2020 on tax-exempt securities and loans for which income and yields are calculated on a tax-equivalent basis.
(e)Net interest income divided by average interest-earning assets.

 

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

Years ended December 31, (in thousands)  2022 versus 2021  2021 versus 2020
Change in interest due to  Volume  Rate  Net  Volume  Rate  Net
Loans  $3,384   $440   $3,824   $1,624   $(1,342)  $282 
Securities   1,522    36    1,558    1,371    (943)   428 
FHLBB stock   (12)   16    4    (45)   (59)   (104)
Short term funds   (559)   1,179    620    166    (110)   56 
Interest-earning assets   4,335    1,671    6,006    3,116    (2,454)   662 
Deposits   116    1,448    1,564    462    (2,192)   (1,730)
Repurchase agreements   (6)   20    14    5    (9)   (4)
Finance lease   103    (76)   27    (11)   6    (5)
Note payable   (2)    —    (2)   (3)    —    (3)
Subordinated Debt   82    (150)   (68)   676    (294)   382 
FHLBB advances   (218)   207    (11)   (417)   (63)   (480)
Interest-bearing liabilities   75    1,449    1,524    712    (2,552)   (1,840)
Net change in net interest income  $4,260   $222   $4,482   $2,404   $98   $2,502 

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

Interest and Dividend Income

Tax equivalent interest and dividend income of $50.8 million in 2022 increased $6.0 million, or 13.4% in 2022. Loan income increased $3.8 million, or 9.2%, to $45.3 million in 2022. The increase was primarily due to a $83.0 million, or 7.8%, increase in average loans and a 4 basis point increase in average yield.

Tax equivalent interest and dividend income from securities increased $1.6 million, or 52.1%, to $4.5 million in 2022, as a result of a $73.5 million, or 50.7%, increase in average security balances and a 2 basis point increase in average yield. Interest from short term funds increased $620 thousand, or 295.2%, to $830 thousand in 2022, as a result of a 102 basis point increase in average yield, partly offset by a $86.6 million, or 54.5%, decrease in average short-term balances.

Interest Expense

Interest expense increased $1.5 million, or 44.2%, to $5.0 million in 2022. Interest expense on interest bearing deposit accounts increased $1.6 million, or 72.4%, to $3.7 million in 2022, as a result of a 16 basis point increase in the average rate to 0.40% and a $36.7 million, or 4.1%, increase in average interest bearing deposit balances. Interest expense on money market accounts increased $1.0 million, or 184.1%, due to a 32 basis point increase in the average rate, and a $2.8 million, or 0.9% increase in average balances. Interest expense on savings and other accounts increased $391 thousand, or 163.6%, due to a 15 basis point increase in the average rate and a $25.4 million, or 11.8%, increase in average balances. Interest expense on certificates of deposits increased $172 thousand, or 18.3%, due to a 12 basis point increase in the average rate and a $1.3 million, or 1.0% increase in average balance.

Interest expense on FHLBB advances decreased $11 thousand, or 8.8%, to $114 thousand in 2022, due to a $7.5 million, or 75.4%, decrease in average advances, partly offset by a 335 basis point increase in the average borrowing rate to 4.59%.

Interest expense on subordinated debt decreased $68 thousand, or 6.8% to $932 thousand in 2022, due to a decrease in the average borrowing rate to 3.80%, partly offset by a $2.0 million, or 8.8%, increase in the average balance. In March 2021, Salisbury issued $25.0 million of fixed to floating rate subordinated debentures at an initial coupon rate of 3.50%. The proceeds from the issuance were used in part to fully redeem the $10 million of its outstanding subordinated debt issued in 2015 at a rate of 6.00%.

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Provision and Allowance for Loan Losses

The provision for loan losses was $2.7 million in 2022 compared with a net release of credit reserves of $0.7 million in 2021. The provision for full year 2022 was primarily driven by robust loan growth in the commercial and residential portfolios during the year. Net loan charge-offs were $0.8 million for 2022 compared with $72 thousand in 2021. The increase in charge-offs in 2022 was attributed to the sale of $3.8 million of non-performing and under performing loans in first quarter 2022 as well as the charge off of a discrete commercial loan in second quarter 2022. Net loan charge-offs for the last six months of 2022 were $78 thousand. Management will continue to monitor the impact of macro-economic factors on its borrowers and adjust the allowance as appropriate. An economic slowdown due to rising interest rates, inflation or labor shortages may result in an increase in Salisbury’s provision and allowance for loan losses.

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

Years ended December 31, (dollars in thousands)    2022      2021      2020  
Balance, beginning of period  $12,962   $13,754   $8,895 
Acquisition Discount Transfer    —     —     — 
Provision for loan losses   2,683    (720)   5,038 
Charge –offs               
Real estate mortgages   (712)   (91)   (70)
Commercial and industrial   (46)   (131)   (362)
Consumer   (88)   (59)   (70)
Charge-offs   (846)   (281)   (502)
Recoveries               
Real estate mortgages   28    160    306 
Commercial and industrial   1    53    2 
Consumer   18    (4)   15 
Recoveries   47    209    323 
Net charge-offs   (799)   (72)   (179)
Balance, end of period  $14,846   $12,962   $13,754 
                
Loans receivable, gross  $1,227,516   $1,079,427   $1,041,864 
Non-performing loans   2,662    4,199    5,648 
Accruing loans past due 30-89 days   1,310    1,341    6,838 
Ratio of allowance for loan losses:               
to loans receivable, gross   1.21%   1.20%   1.32%
to non-performing loans   557.70    308.68    243.50 
Ratio of non-performing loans               
to loans receivable, gross   0.22    0.39    0.54 
Ratio of accruing loans past due 30-89 days               
to loans receivable, gross   0.11    0.12    0.66 

 

The reserve coverage at December 31, 2022, as measured by the ratio of allowance for loan losses to gross loans, was 1.21%, as compared with 1.20% at December 31, 2021. Excluding loans advanced under the SBA’s Paycheck Protection Program, the ratio of the allowance to gross loans was 1.21% at December 31, 2022 compared with 1.23% at December 31, 2021. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.5 million to $2.7 million, or 0.22% of gross loans receivable, at December 31, 2022, down from $4.2 million or 0.39% of gross loans receivable at December 31, 2021. Accruing loans past due 30-89 days decreased slightly from $1.3 million, or 0.12%, of gross loans receivable at December 31, 2021 to $1.3 million, or 0.11%, of gross loans receivable at December 31, 2022. See “Overview – Loan Credit Quality” below for further discussion and analysis. 

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Non-Interest Income

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

Years ended December 31, (dollars in thousands)    2022      2021      2020    2022 vs. 2021  2021 vs. 2020
Trust and wealth advisory  $4,887   $4,970   $4,194   $(83)   (1.7%)  $776    18.5%
Service charges and fees   5,299    4,822    3,072    477    9.9    1,750    57.0 
Mortgage banking activities, net   556    1,000    1,621    (444)   (44.4)   (621)   (38.3)
(Losses) gains on CRA mutual fund   (120)   (26)   19    (94)   (361.5)   (45)   (236.8)
(Gains) losses on securities, net   165    (2)   196    167    n/a    (198)   (101.0)
Bank-owned life insurance (“BOLI”) income   717    556    495    161    29.0    61    12.3 
Gain on bank-owned life insurance   89     —    601    89     —    (601)   (100.0)
Gain on sale of assets    —    73     —    (73)   (100.0)   73    n/a 
Other   109    107    125    2    1.9    (18)   (14.4)
Total non-interest income  $11,702   $11,500   $10,323    $202    1.8%  $1,177    11.4%

Non-interest income increased $202 thousand, or 1.8%, in 2022 versus 2021. Trust and Wealth Advisory revenues decreased $83 thousand mainly due to lower asset-based fees. Service charges and fees increased $477 thousand from 2021 primarily due to higher deposit fees and higher loan prepayment fees. Mortgage banking activities, net decreased $444 thousand on lower sales volume. Mortgage loan sales to FHLBB totaled $7.2 million in 2022 versus $34.6 million in 2021. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $133.1 million and $140.6 million at December 31, 2022 and 2021 respectively. The twelve-month periods ended December 31, 2022 and 2021 included mortgage servicing amortization of $140 thousand and $235 thousand, respectively. Non-interest income for the twelve-month period ended December 31, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury’s operations center in Canaan, Connecticut. Other income primarily includes rental property income.

Non-Interest Expense

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

Years ended December 31, (dollars in thousands)    2022      2021      2020    2022 vs. 2021  2021 vs. 2020
Salaries  $14,932   $13,417   $11,828   $1,515    11.3%  $1,589    13.4%
Employee benefits   5,125    5,023    4,533    102    2.0    490    10.8 
Premises and equipment   4,281    4,114    4,019    167    4.1    95    2.4 
Write-down of assets   3    144     —    (141)   (97.9)   144    n/a 
Data processing   2,795    2,441    2,211    354    14.5    230    10.4 
Professional fees   3,218    2,779    2,741    439    15.8    38    1.4 
Collections, OREO, and loan related   376    455    323    (79)   (17.4)   132    40.9 
FDIC insurance   526    541    466    (15)   (2.8)   75    16.1 
Marketing and community support   822    881    573    (59)   (6.7)   308    53.8 
Amortization of intangibles   191    256    321    (65)   (25.4)   (66)   (20.6)
Other   2,376    2,053    2,023    323    15.7    31    1.5 
Non-interest expense  $34,645   $32,104   $29,038   $2,541    7.9%  $3,066    10.6%

Non-interest expenses increased $2.5 million, or 7.9%, in 2022 versus 2021. Salaries increased $1.5 million primarily reflecting annual merit increases and incentive accruals. Benefits increased $102 thousand compared to the same period in 2021 primarily due to higher 401K accruals, deferred compensation and payroll taxes. Premises and equipment increased $167 thousand mainly due to higher lease depreciation, facilities related expenses and utilities. The twelve-month period ended December 31, 2021 also included a pre-tax loss of $144 thousand on the sale of the building housing the Bank’s branch in Poughkeepsie, New York, which closed during the first quarter 2022. Data processing increased $354 thousand mainly due to higher ATM fees, core system costs, website expense, and Trust and Wealth data related expenses. The increase in professional fees of $439 thousand versus the twelve-month period 2021 primarily reflected legal and consulting expenses related to the pending merger with NBT, partially offset by lower audit and exam and investment management expenses. Collections, OREO and loan related expense decreased $79 thousand primarily due to lower appraisal, litigation related expenses and mortgage recording costs. FDIC related expense decreased $15 thousand compared to the same period in 2021. Marketing and community support costs decreased $59 thousand compared to the same period in 2021 primarily due to the cost of web site redesign and branding initiatives in 2021. Amortization of intangible assets decreased $65 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $323 thousand primarily due to higher charge-offs for fraud losses as well as higher director fees.

Income Taxes

The effective income tax rates for 2022 and 2021 were 18.2% and 20.6%, respectively. Salisbury’s effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2022, 2021 or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.

Comparison of the Years Ended December 31, 2021 and 2020

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

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Interest and Dividend Income

Tax equivalent interest and dividend income of $44.8 million in 2021 increased $0.7 million, or 1.5% in 2021. Loan income increased $282 thousand, or 0.7%, to $41.5 million in 2021. The increase was primarily due to a $39.7 million, or 3.9%, increase in average loans, which was partly offset by a 13 basis point decrease in average yield.

Tax equivalent interest and dividend income from securities increased $428 thousand, or 16.7%, to $3.0 million in 2021, as a result of a $55.2 million, or 61.9%, increase in average security balances, partly offset by an 80 basis point decrease in average yield. Interest from short term funds increased $56 thousand, or 36.4%, to $210 thousand in 2021, as a result of a $93.0 million, or 141.0%, increase in average short-term balances, partly offset by a 10 basis point decrease in average yield.

Interest Expense

Interest expense decreased $1.8 million, or 34.8%, to $3.4 million in 2021. Interest expense on interest bearing deposit accounts decreased $1.7 million, or 44.4%, to $2.2 million in 2021, as a result of a 27 basis point decrease in the average rate to 0.24%, partly offset by a $126.4 million, or 16.6%, increase in average interest bearing deposit balances. Interest expense on money market accounts decreased $598 thousand, or 52.2%, due to a 28 basis point decline in the average rate, partly offset by a $59.1 million, or 23.0% increase in average balances. Interest expense on savings and other accounts decreased $225 thousand, or 48.5%, due to a 15 basis point decline in the average rate, partially offset by a $40.1 million, or 22.9%, increase in average balances. Interest expense on certificates of deposits decreased $901 thousand, or 49.0%, due to 55 basis point decline in the average rate and a $13.6 million, or 9.4% decrease in average balance.

Interest expense on FHLBB advances decreased $480 thousand, or 79.3%, to $125 thousand in 2021, due to a $30.2 million, or 75.2%, decrease in average advances and a 25 basis point decrease in the average borrowing rate to 1.24%.

Interest expense on subordinated debt increased $382 thousand, or 61.8% to $1.0 million in 2021, due to a $12.6 million, or 128.1% increase in average balances, partly offset by a decrease in the average borrowing rate to 4.44%. In March 2021, Salisbury issued $25.0 million of fixed to floating rate subordinated debentures at an initial coupon rate of 3.50%. The proceeds from the issuance were used in part to fully redeem the $10 million of its outstanding subordinated debt issued in 2015 at a rate of 6.00%.

Provision and Allowance for Loan Losses

Net credit reserves of $0.7 million were released in 2021 compared with a provision for loan losses of $5.0 million for 2020. Net loan charge-offs were $72 thousand and $179 thousand, for the respective years. The net release of credit reserves in 2021 primarily reflected the transfer of loans in the discrete COVID-19 pool, which carries a higher level of reserves, back to their pre-pandemic loan pool because the borrowers were paying as agreed and the underlying businesses were substantially operating at pre-pandemic levels. The pay-off of certain commercial loans and internal risk rating changes also contributed to the release of credit reserves, which was substantially offset by loan growth and changes to qualitative factors due to continued uncertainty over the economic impact of COVID-19 and other macro-economic factors. Management will continue to monitor the impact of the virus and other macro-economic factors on its borrowers and adjust the allowance as appropriate. A resurgence of the virus that results in another economic lockdown or an economic slowdown due to rising interest rates, inflation or labor shortages may result in an increase in Salisbury’s provision and allowance for loan losses.

The reserve coverage at December 31, 2021, as measured by the ratio of allowance for loan losses to gross loans, was 1.20%, as compared with 1.32% at December 31, 2020. Excluding loans advanced under the SBA’s Paycheck Protection Program, the ratio of the allowance to gross loans was 1.23% at December 31, 2021 compared with 1.44% at December 31, 2020. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $1.4 million to $4.2 million, or 0.39% of gross loans receivable, at December 31, 2021, down from $5.6 million or 0.54% of gross loans receivable at December 31, 2020. Accruing loans past due 30-89 days decreased from $6.8 million, or 0.66%, of gross loans receivable at December 31, 2020 to $1.3 million, or 0.12%, of gross loans receivable at December 31, 2021. See “Overview – Loan Credit Quality” below for further discussion and analysis.

Non-Interest Income

Non-interest income increased $1.2 million, or 11.4%, in 2021 versus 2020. Trust and Wealth Advisory revenues increased $776 thousand mainly due to growth in asset-based fees. Service charges and fees increased $1.8 million from 2020. The increase primarily reflected higher deposit, interchange and loan prepayment fees. In addition, during the twelve-month period ended December 31, 2020, Salisbury waived approximately $754 thousand in various deposit fees, including overdraft and ATM fees, to support customers affected by COVID-19. Mortgage banking activities, net decreased $621 thousand on lower sales volume. Mortgage loan sales to FHLBB totaled $34.6 million in 2021 versus $59.8 million in 2020. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $140.7 million and $134.4 million at December 31, 2021 and 2020 respectively. The twelve-month periods ended December 31, 2021 and 2020 included mortgage servicing amortization of $235 thousand and $151 thousand, respectively. In 2020, the Bank recorded a non-taxable gain of $601 thousand related to proceeds received from a BOLI policy due to the death of a covered former employee. Non-interest income for the twelve-month period ended December 31, 2021 also included a pre-tax gain of $73 thousand primarily from the sale of Salisbury’s operations center in Canaan, Connecticut. Other income primarily includes rental property income.

Non-Interest Expense

Non-interest expenses increased $3.1 million, or 10.6%, in 2021 versus 2020. Salaries increased $1.6 million primarily reflecting annual merit increases and higher production and incentive accruals. Benefits increased $490 thousand compared to the same period in 2020 primarily due higher medical insurance costs, 401K accruals and payroll taxes. Premises and equipment increased $95 thousand mainly due to higher building depreciation and facilities related expenses. The twelve-month period ended December 31, 2021 also included a pre-tax loss of $144 thousand on the sale of the building housing the Bank’s branch in Poughkeepsie, New York, which closed during the first quarter 2022. Data processing increased $230 thousand mainly due to higher ATM fees, core system costs and Trust and Wealth data related expenses. The increase in professional fees of $38 thousand versus the twelve-month period 2020 primarily reflected higher legal, audit and exam and investment management expenses partially offset by lower consulting expense. Collections, OREO and loan related expense increased $132 thousand primarily due to higher appraisal and mortgage recording costs. FDIC related expense increased $75 thousand compared to the same period in 2020 reflecting higher deposit balances. Marketing and community support costs increased $308 thousand compared to the same period in 2020 primarily due to Salisbury’s website redesign and branding initiatives as well as costs associated with various marketing events. Amortization of intangible assets decreased $65 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $30 thousand and primarily reflected higher employee related expenses, postage and telephone expense.

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Income Taxes

The effective income tax rates for 2021 and 2020 were 20.6% and 17.0%, respectively. Salisbury’s effective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements.

Salisbury did not incur Connecticut income tax in 2021, 2020 or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. Salisbury avails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.

Overview

Assets

During 2022, Salisbury’s assets increased by $12.4 million, or 0.8%, to $1.54 billion at December 31, 2022. This increase was driven by robust net loan growth of $146.9 million, or 13.8%, which was mostly offset by a decline in cash and cash equivalent balances of $124.8 million, or 71.1%, as Salisbury deployed excess liquidity into loans. In addition, the balance of Salisbury’s available-for-sale (“AFS”) investment portfolio decreased $15.0 million, or 7.4%, during 2022. At December 31, 2022, Salisbury’s tangible book value and book value per common share were $19.71 and $22.13, respectively. At December 31, 2022, the Bank’s Tier 1 leverage and total risk-based capital ratios were 9.99% and 13.43%, respectively, and the Bank was categorized as "well capitalized" according to regulatory guidelines.

Securities and Short-Term Funds

During 2022, securities decreased $14.1 million, or 6.8%, to $190.6 million primarily due to unrealized losses of $27.3 million, which reflected the significant increases in market interest rates during 2022. Short-term funds (cash and due from banks and interest-bearing deposits with other banks) decreased $124.8, or 71.2%, million to $50.5 million in 2022 reflecting the funding of loans as well as a normalization of deposit balances back to pre-pandemic levels. The carrying values of securities are as follows:

December 31, (dollars in thousands)    2022      2021  
Available-for-Sale          
U.S. Treasury  $17,133   $15,131 
U.S. Government agency notes   27,154    31,604 
Municipal bonds   46,538    47,822 
Mortgage-backed securities:          
U.S. Government agencies and U.S. Government- sponsored enterprises   61,875    74,541 
Collateralized mortgage obligations:          
U.S. Government agencies   21,936    20,898 
Corporate bonds   12,774    12,400 
Mutual fund   1,933    901 
Non-Marketable          
FHLBB stock   1,285    1,397 
Total Securities  $190,628   $204,694 

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

Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management does not consider any of its securities to be OTTI at December 31, 2022. It is possible that future loss assumptions could change, necessitating Salisbury to recognize future OTTI.

Accumulated other comprehensive income at December 31, 2022 reflected net unrealized losses, net of tax, of $20.7 million in Salisbury’s AFS securities portfolio compared to an unrealized gain of $0.9 million at year end 2021. The unrealized losses, which reflected the significant increase in market interest rates experienced in 2022, do not affect Salisbury’s regulatory capital ratios.

Loans

During 2022, net loans receivable increased $146.9 million, or 13.8%, to $1.214 billion at December 31, 2022. Excluding PPP loans, net loans increased by $172.2 million, or 16.5%, in 2022. Salisbury’s retail lending department originates residential mortgage, home equity loans and lines of credit, and consumer loans for the portfolio. During 2022, Salisbury originated $118.1 million of residential mortgage loans and $15.9 million of home equity loans for the portfolio, compared with $165.9 million and $11.8 million, respectively, in 2021. During 2022, total residential mortgage and home equity loans receivable increased $88.7 million, or 18.9%, to $557.1 million at December 31, 2022, and represented 45.4% of gross loans receivable. During 2022, Salisbury’s residential mortgage lending department also originated and sold $7.2 million of residential mortgage loans, compared with $34.6 million during 2021. All such sold loans were sold through the FHLBB Mortgage Partnership Finance Program with servicing retained by Salisbury. Consumer loans, amounted to $20.5 million at December 31, 2022, representing 1.7% of gross loans receivable.

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Salisbury’s commercial lending department specializes in lending to small and mid-size companies, businesses and municipalities. More specifically, we meet our clients’ credit needs by providing short-term and long-term financing, construction loans, commercial mortgages, equipment, working capital, property improvement loans and municipal financing. The department also works with both the Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) Government Guaranteed Lending Programs; however, such loans represent a very small percent of the commercial loan portfolio. Excluding PPP loans, total commercial loans, which include commercial real estate, commercial and industrial and municipal loans, increased $75.2 million, or 13.5%, to $631.0 million at December 31, 2022, and represent 51.4% of gross loans receivable. At December 31, 2022 approximately $0.3 million of PPP loans remained on Salisbury’s balance sheet. These loans are reported as a separate component of “commercial and industrial” loans in the table below.

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

December 31, (in thousands)    2022      2021  
Residential 1-4 family  $428,486   $373,131 
Residential 5+ multifamily   80,400    52,325 
Construction of residential 1-4 family   22,534    19,738 
Home equity lines of credit   25,699    23,270 
Residential real estate   557,119    468,464 
Commercial   374,281    310,923 
Construction of commercial   46,866    58,838 
Commercial real estate   421,147    369,761 
Farm land   4,081    2,807 
Vacant land   14,440    14,182 
Real estate secured   996,787    855,214 
Commercial and industrial ex PPP loans   190,191    169,543 
PPP loans   299    25,589 
Commercial & industrial – Total   190,490    195,132 
Municipal   19,693    16,534 
Consumer   20,546    12,547 
Loans receivable, gross   1,227,516    1,079,427 
Deferred loan origination fees and costs, net   1,001    285 
Allowance for loan losses   (14,846)   (12,962)
Loans receivable, net  $1,213,671   $1,066,750 
Loans receivable, net ex PPP loans  $1,213,372   $1,041,161 
Loans Held-for-sale          
Residential 1-4 family  $ —   $2,684 

 

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

December 31, 2022 (in thousands)  Within 1 year  Within 2-5 years  After 5 years  Total
Residential  $604   $10,702   $520,114   $531,420 
Home equity lines of credit   4    168    25,527    25,699 
Commercial   2,421    49,746    322,114    374,281 
Construction of commercial   17,088    15,278    14,500    46,866 
Land   8,349    1,659    8,513    18,521 
Real estate secured   28,466    77,553    890,768    996,787 
Commercial and industrial   15,348    28,864    146,278    190,490 
Municipal   11,136    1,476    7,081    19,693 
Consumer   173    1,491    18,882    20,546 
Loans receivable, gross  $55,123   $109,384   $1,063,009   $1,227,516 

 

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

December 31, 2022 (in thousands)  Fixed interest rates  Variable or adjustable interest rates  Total Loans
Residential  $288,595   $242,825   $531,420 
Home equity lines of credit    —    25,699    25,699 
Commercial   87,280    287,001    374,281 
Construction of commercial   15,310    31,556    46,866 
Land   9,132    9,389    18,521 
Real estate secured   400,317    596,470    996,787 
Commercial and industrial   104,504    85,986    190,490 
Municipal   18,327    1,366    19,693 
Consumer   2,697    17,849    20,546 
Loans receivable, gross  $525,845   $701,671   $1,227,516 
Percentage of Total   42.8%   57.2%   100.0%

Loan Credit Quality

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

Past Due Loans

Loans past due 30 days or more decreased $1.2 million during 2022 to $1.5 million, or 0.12% of gross loans receivable at December 31, 2022, compared with $2.6 million, or 0.24% of gross loans receivable at December 31, 2021. The decline in past due loans from year end 2021 primarily reflected the sale and charge-off of certain loans during the twelve-month period ending December 31, 2022.

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

(in thousands)    2022      2021  
Past due 30-59 days  $1,195   $751 
Past due 60-89 days   115    590 
Past due 90-179 days    —    1 
Past due 180 days and over    —    10 
Accruing loans   1,310    1,352 
Past due 30-59 days   68    14 
Past due 60-89 days    —     — 
Past due 90-179 days   90    63 
Past due 180 days and over   15    1,213 
Non-accrual loans   173    1,290 
Total loans past due 30 days and over  $1,483   $2,642 

Credit Quality Segments

Salisbury categorizes loans receivable into the following credit quality segments.

·Impaired loans consist of all non-accrual loans and troubled debt restructured loans, and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.
·Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.
·Non-performing loans consist of non-accrual loans, and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.
·Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.
·Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

Non-Performing Assets

Non-performing assets decreased $1.5 million to $2.7 million at December 31, 2022, or 0.17% of assets, from $4.2 million or 0.27% of assets at December 31, 2021. The decrease in non-performing assets resulted primarily from the sale and charge-off of $2.0 million of non-performing loans and $0.4 million of loan payments, which were partially offset by the downgrade of $0.9 million of loans during 2022.

The components of non-performing assets are as follows:

December 31, (in thousands)    2022      2021  
Residential 1-4 family  $820   $750 
Residential 5+ multifamily    —    861 
Home equity lines of credit    —    21 
Commercial   1,255    1,924 
Farm land   393    432 
Vacant land    —     — 
Real estate secured   2,468    3,988 
Commercial and industrial   189    200 
Consumer   5     — 
Non-accrual loans   2,662    4,188 
Accruing loans past due 90 days and over    —    11 
Non-performing loans   2,662    4,199 
Foreclosed assets    —     — 
Non-performing assets  $2,662   $4,199 

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

Years ended December 31, (in thousands)    2022      2021  
Income in accordance with original terms  $151   $418 
Income recognized   25    7 
Reduction in interest income  $126   $411 

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

December 31, (in thousands)    2022      2021  
Current  $2,490   $2,898 
Past due 30-59 days   67    14 
Past due 60-89 days    —     — 
Past due 90-179 days   90    64 
Past due 180 days and over   15    1,223 
Total non-performing loans  $2,662   $4,199 

At December 31, 2022, 93.50% of non-performing loans were current with respect to loan payments, compared with 69.02% at December 31, 2021. Loans past due 180 days and over are substantially all mortgage loans in the process of foreclosure or litigation.

Salisbury endeavors to work constructively to resolve its non-performing loan issues with customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral.

Troubled Debt Restructured Loans

Troubled debt restructured loans decreased $2.2 million in 2022 to $2.7 million, or 0.22% of gross loans receivable, from $5.0 million, or 0.46% of gross loans receivable at December 31, 2021. The reduction in loan balance from year end 2021 primarily reflected the sale and charge-off of certain loans and loan payments during the twelve month period ended December 31, 2022. The components of troubled debt restructured loans are as follows:

December 31, (in thousands)    2022      2021  
Residential 1-4 family  $1,289   $1,824 
Residential 5+ multifamily   78    87 
Commercial   1,303    1,622 
Real estate secured   2,670    3,533 
Commercial and industrial    —    76 
Accruing troubled debt restructured loans   2,670    3,609 
Residential 1-4 family   67    256 
Residential 5+ multifamily    —    861 
Vacant land    —     — 
Commercial    —    233 
Real estate secured   67    1,350 
Commercial and Industrial    —     — 
Non-accrual troubled debt restructured loans   67    1,350 
Troubled debt restructured loans  $2,737   $4,959 

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

December 31, (in thousands)    2022      2021  
Current  $2,670   $3,540 
Past due 30-59 days    —    37 
Past due 60-89 days    —    32 
Accruing troubled debt restructured loans   2,670    3,609 
Current    —    414 
Past due 30-59 days   67     — 
Past due 180 days and over    —    936 
Non-accrual troubled debt restructured loans   67    1,350 
Total troubled debt restructured loans  $2,737   $4,959 

At December 31, 2022, 97.55% of troubled debt restructured loans were current with respect to loan payments, as compared with 79.73% at December 31, 2021. As of December 31, 2022 and 2021, there were specific reserves on troubled debt restructured loans amounting to $22 thousand and $31 thousand, respectively. 

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Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans decreased $18.9 million during 2022 to $6.1 million, or 0.49% of gross loans receivable at December 31, 2022, compared with $25.0 million, or 2.32% of gross loans receivable at December 31, 2021. The decrease primarily reflected internal credit risk rating upgrades on loans to businesses primarily in the hospitality, health care and entertainment and recreation industries which were previously downgraded due to concerns over the impact of COVID-19. These businesses have demonstrated a return to pre-pandemic levels of activity and liquidity, warranting the improvement in risk rating. The decrease in potential problem loans also reflected the sale of certain loans during 2022. The components of potential problem loans were as follows:

December 31, (in thousands)    2022      2021  
Residential 1-4 family  $589   $999 
Residential 5+ multifamily    —    709 
Home equity lines of credit    —     — 
Residential real estate   589    1,708 
Commercial   4,129    20,998 
Construction of commercial    —     — 
Commercial real estate   4,129    20,998 
Farm land    —     — 
Real estate secured   4,718    22,706 
Commercial and industrial   1,353    2,310 
Consumer   5     — 
Total potential problem loans  $6,076   $25,016 

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

December 31, (in thousands)    2022      2021  
Current  $6,056   $24,977 
Past due 30-59 days    —    23 
Past due 60-89 days    20    16 
Past due 90-179 days    —     — 
Total potential problem loans  $6,076   $25,016 

At December 31, 2022, 99.67% of potential problem loans were current with respect to loan payments, as compared with 99.84% at December 31, 2021. Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

Deposits increased $22.2 million, or 1.7%, during 2022, to $1.36 billion at December 31, 2022, compared with $1.34 billion at December 31, 2021. Deposit balances at year end 2022 included $40.0 million from an independent third party and are held in a business money market account. These funds, similar to other deposits, were utilized by Salisbury to fund loan growth. Retail repurchase agreements decreased $4.2 million, or 36.8%, to $7.2 million at December 31, 2022, compared with $11.4 million at December 31, 2021.

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

   December 31, 2022  December 31, 2021
(in thousands)  Average Balance  Percent  Weighted Average  Average Balance  Percent  Weighted Average
Demand deposits  $395,848    30.01%   0.00%  $366,926    29.28%   0.00%
Interest-bearing checking accounts   231,970    17.59    0.18    224,763    17.93    0.19 
Regular savings accounts   240,695    18.25    0.26    215,300    17.18    0.11 
Money market savings   318,302    24.13    0.49    315,469    25.17    0.17 
Certificates of deposit   132,192    10.02    0.84    130,879    10.44    0.72 
Total deposits  $1,319,007    100.00%   0.28%  $1,253,337    100.00%   0.17%

 

The total deposit accounts greater than the federally insured limit of $250,000 amounted to $567million and $531 million as of December 31, 2022 and 2021, respectively.

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

   At December 31,
Interest rates  2022  2021
Less than 1.00%  $104,261   $97,099 
1.00% to 1.99%   11,739    14,919 
2.00% to 2.99%   19,907    6,493 
3.00% to 3.99%   17,463    498 
Total  $153,370   $119,009 

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

   At December 31, 2022
Interest rates  Less Than or Equal to One Year  More Than One to Two Years  More Than Two to Three Years 

More Than Three Years

  Total  Percent of Total
Less than 1.00%  $87,011   $8,462   $4,356   $4,432   $104,261    67.98%
1.00% to 1.99%   7,059    3,759    921     —    11,739    7.65 
2.00% to 2.99%   8,138    9,272    2,497     —    19,907    12.98 
3.00% to 3.99%   8,671    8,792     —     —    17,463    11.39 
Total  $110,879   $30,285   $7,774   $4,432   $153,370    100.00%

 

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

December 31, 2022 (in thousands) 

Within

3 months

 

Within

3-6 months

 

Within

6-12 months

 

Over

1 year

  Total
Certificates of deposit $100,000 and over  $54,231   $8,502   $22,334   $25,672   $110,739 

FHLBB advances increased $2.3 million during 2022 to $10.0 million at December 31, 2022, compared with $7.7 million at December 31, 2021. The increase primarily reflected a purchase of an advance offset by the maturities and principal payments on amortizing advances. Salisbury also has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank’s request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At year end 2022 and 2021, Salisbury had $20.0 million of outstanding letters of credit with FHLBB. At December 31, 2022, Salisbury’s excess borrowing capacity at the FHLBB was $241.3 million compared with $250.9 million at December 31, 2021.

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

December 31, (dollars in thousands)    2022    2021  
Highest month-end balance during period  $10,000   $ — 
Ending balance   10,000     — 
Average balance during period   1,041     — 

Subordinated Debentures

Subordinated debentures totaled $24.5 million at December 31, 2022, which includes $469 thousand of remaining unamortized debt issuance costs. The debt issuance costs are being amortized to maturity. The effective interest rate of the subordinated debentures is 3.80%.

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MATERIAL CASH REQUIREMENTS FROM CONTRACTUAL CASH OBLIGATIONS

In the normal course of business, Salisbury enters into various contractual obligations that may require future cash payments. Contractual obligations at December 31, 2022 include operating leases, capital leases, contractual purchases and certain other benefit plans. For further discussion regarding leases see Note 5 to the Consolidated Financial Statements.

The accompanying table summarizes Salisbury’s off-balance sheet lending-related financial instruments and significant cash obligations, by remaining maturity, at December 31, 2022. Salisbury’s lending-related financial instruments include commitments that have maturities over one year. Contractual purchases include commitments for future cash expenditures, primarily for services and contracts that reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both fixed and determinable. Excluded from the following table are a number of obligations to be settled in cash, primarily in under one year. These obligations are reflected in Salisbury’s Consolidated Balance Sheets and include deposits, FHLBB advances and repurchase agreements that settle within standard market timeframes.

December 31, 2022 (in thousands)  Within  Within  Within  After   
By Remaining Maturity  1 year  1-3 years  4-5 years  5 years  Total
Residential  $789   $ —   $335   $38,611   $39,735 
Home equity lines of credit   500    250     —    34,207    34,957 
Commercial   4,446    22,925    3,734    13,251    44,356 
Land   551     —     —    196    747 
Real estate secured   6,286    23,175    4,069    86,265    119,795 
Commercial and industrial   31,489    2,015    11,473    84,785    129,762 
Municipal   2,288     —     —    250    2,538 
Consumer   253     —     —    4,979    5,232 
Unadvanced portions of loans   40,316    25,190    15,542    176,279    257,327 
Commitments to originate loans   48,711     —     —     —    48,711 
Standby letters of credit   776     —     —    1    777 
Total  $89,803   $25,190   $15,542   $176,280   $306,815 

 

LIQUIDITY

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

Operating activities for 2022 provided net cash of $27.4 million. Investing activities utilized net cash of $168.7 million, principally from purchases of securities of $54.2 million, net loan originations and principal collections of $152.2 million, an investment of $2.5 million in BOLI, capital expenditures of $0.8 million and the investment and reinvestment in mutual funds of $1.2 million, offset by sales, calls, and maturities of securities of $41.3 million, proceeds from the redemption of FHLBB stock of $0.1 million, and proceeds from insurance policies of $0.7 million. Financing activities provided net cash of $16.5 million, principally from a net increase in deposits of $22.2 million, short term FHLB advances of $10.0 million and proceeds from the exercising of stock options of $0.2 million, partly off-set by a decrease of $4.2 million in securities sold under agreements to repurchase, payments of $1.7 million on FHLBB amortizing long-term advances, repayment of long-term FHLBB advances of $6.0 million, common stock dividends of $3.7 million and other activity of $0.2 million.

Operating activities for 2021 provided net cash of $18.1 million. Investing activities utilized net cash of $153.2 million, principally from purchases of securities of $145.3 million, net loan originations and principal collections of $37.8 million, an investment of $6.0 million in BOLI and capital expenditures of $2.3 million, offset by sales, calls, and maturities of securities of $37.5 million, proceeds from sale of assets of $0.2, proceeds from the redemption of FHLBB stock of $0.3 million and other activity of $0.2 million. Financing activities provided net cash of $217.3 million, principally from a net increase in deposits of $207.1 million, net proceeds of $24.4 million from the issuance of subordinated debt, an increase of $4.3 million in securities sold under agreements to repurchase, partly offset by the redemption of $10.0 million of subordinated debt issued by Salisbury in 2015, payments of $5.0 million on FHLBB advances, common stock dividends of $3.5 million and other activity of $0.1 million.

Operating activities for 2020 provided net cash of $13.8 million. Investing activities utilized net cash of $114.0 million, principally from purchases of securities of $37.4 million, net loan originations and principal collections of $107.4 million, a $3.5 million investment in BOLI and capital expenditures of $4.4 million, offset by sales, calls, and maturities of securities of $32.5 million, BOLI proceeds of $4.0 million and proceeds from the redemption of FHLBB stock of $1.5 million. Financing activities provided net cash of $166.5 million, principally from a net deposit increase of $209.5 million and advances from FHLBB for $16.0 million, partly offset by FHLBB advances payments of $54.3 million, and common stock dividends of $3.3 million, and a decrease of $1.4 million in securities sold under agreements to repurchase.

CAPITAL RESOURCES

Shareholders’ Equity

Shareholders’ equity decreased $8.2 million, or 6.0%, in 2022 to $128.4 million at December 31, 2022. The decline was driven by unrealized losses in Salisbury’s AFS portfolio of $21.6 million, due to the significant increase in market interest rates during 2022, and common stock dividends declared of $3.7 million, partially offset by net income of $15.9 million and other activity of $1.2 million. The unrealized losses in the AFS portfolio do not affect the Bank’s regulatory capital ratios. 

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Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows at December 31, 2022 and 2021 under the regulatory capital rules then in effect:

   Minimum Capital Adequacy Requirement 

Minimum Ratios to be

Well Capitalized

  Actual Bank Ratios
    2022    2021    2022    2021    2022    2021 
Total Capital (to risk-weighted assets)   8.00%   8.00%   10.00%   10.00%   13.43%   14.08%
Common Equity Tier 1 Capital   4.50    4.50    6.50    6.50    12.24    12.87 
Tier 1 Capital (to risk-weighted assets)   6.00    6.00    8.00    8.00    12.24    12.87 
Tier 1 Capital (to average assets)   4.00    4.00    5.00    5.00    9.99    9.42 

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

The FRB’s final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of December 31, 2022, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

Stock Repurchase Plan

On March 23, 2022 Salisbury announced that its Board of Directors renewed its share repurchase program that was established in March 2021. The share repurchase program provides for the potential repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over a period of the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares over the next twelve (12) months. Salisbury did not repurchase any shares during the twelve-month period ended December 31, 2022.

Stock Split

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

Dividends

During 2022 Salisbury declared and paid four quarterly common stock dividends of $0.16 per common share each quarter totaling $3.7 million. In 2021, Salisbury declared and paid quarterly common stock dividends of $0.14 in first quarter, $0.15 in second quarter, and $0.16 in third and fourth quarter, respectively, totaling $3.5 million. On January 25, 2023, the Board of Directors of Salisbury declared a common stock dividend of $0.16 per common share payable on February 24, 2023 to shareholders of record on February 10, 2023. Common stock dividends, when declared, will generally be paid the last business day of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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.

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FRB Supervisory Letter SR 09-4, February 24, 2009, revised March 30, 2009, states that, as a general matter, the Board of Directors of a Bank Holding Company (“BHC”) should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

IMPACT OF INFLATION AND CHANGING PRICES

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

 35 

 

Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management’s December 31, 2022 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into consideration the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At December 31, 2022, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of 400 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 300 basis points across the yield curve; and (4) gradual and non-parallel changes in interest rates – the yield curve is assumed to rise in the early part of 2023 before flattening out declining toward the latter part of 2023 and into 2024. The Federal Funds rate increases to 5.50% by March 2023 and remains flat until a projected 0.25% rate cut in December 2023 and another 0.75% in rate cuts throughout 2024. In the first quarter of 2023, the two year, five year, and 10 year treasury are projected to increase by 0.80%, 0.70%, and 0.70%, respectively. In the final nine months of 2023, the two year, five year, and 10 year treasury increase by 0.20%, 0.80%, and 0.80%, respectively. In 2024, the two year, five year, and 10 year treasury decline by 0.65%, 0.45%, and 0.25%, respectively. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of December 31, 2022, net interest income simulations indicated that Salisbury’s exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury’s financial instruments as of December 31, 2022.

  December 31, 2022    Months 1-12      Months 13-24  
Immediately rising interest rates + 200bp (static growth assumptions)   (3.0%)   1.3%
Immediately rising interest rates + 100bp (static growth assumptions)   (1.3)   0.9 
Immediately falling interest rates - 100bp (static growth assumptions)   (1.5)   (3.9)
Immediately falling interest rates - 200bp (static growth assumptions)   (4.8)   (10.1)

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

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

 36 

 

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

  As of December 31, 2022 (in thousands)Rates up 100bp  Rates up 200bp  
U.S. Treasury  $(682)  $(1,330)
U.S. Government agency notes   (874)   (1,640)
Municipal bonds   (3,345)   (6,457)
Mortgage backed securities          
U.S. Government agencies and U.S. Government- sponsored enterprises   (2,882)   (5,632)
Collateralized mortgage obligations          
U.S. Government agencies   (1,396)   (2,800)
Corporate bonds   (457)   (863)
Total available-for-sale debt securities  $(9,636)  $(18,722)

 

 

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

  Page
Reports of Independent Registered Public Accounting Firms (PCAOB ID 231) 39
Consolidated Balance Sheets 41
Consolidated Statements of Income 42
Consolidated Statements of Comprehensive Income 43
Consolidated Statements of Changes in Shareholders' Equity 43
Consolidated Statements of Cash Flows 44-45
Notes to Consolidated Financial Statements 46-80

 

 38 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and the Board of Directors

of Salisbury Bancorp, Inc.

 

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Salisbury Bancorp, Inc. and Subsidiary (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

 

Allowance for Loan Losses – General Reserve Qualitative Adjustments

 

As described in Notes 1 and 4 to the financial statements, the Company has recorded an allowance for loan losses (ALL) in the amount of $14.8 million as of December 31, 2022, representing management’s estimate of the probable losses inherent in the loan portfolio as of that date. The ALL at December 31, 2022, consists of two components: the ALL individually evaluated for impairment (specific reserves), representing $22 thousand, and the ALL collectively evaluated for impairment (general reserves), representing $14.8 million. The ALL is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. The general reserve component is based on a quantitative and qualitative analysis, whereby qualitative adjustments are applied to historical loss rates by loan segment. The development of the qualitative adjustments involves significant and subjective assumptions which require a high degree of judgment relating to general economic conditions and other qualitative risk factors – both internal and external to the Company.

 

General reserve factors are based on specific quantitative and qualitative criteria representing key sources of risk within the loan portfolio. Such sources of risk include those relating to: changes in lending policies and procedures; changes in national and local economic and business conditions and developments; changes in the nature and volume of the loan portfolio; changes in lending management and staff; trends in past due, classified, nonaccrual, and other loan categories; changes in the Company’s loan review system and oversight; changes in collateral values; credit concentration risk; and the competitive environment.

 

The qualitative adjustments contribute significantly to the general reserve component of the ALL and the ALL as a whole. Management’s identification and analysis of these considerations and related adjustments requires significant judgment. We identified the estimate of the qualitative adjustments in developing the general reserve component of the ALL as a critical audit matter as it required especially subjective auditor judgment.

 

 39 

 

How the Critical Audit Matter was addressed in the Audit

 

The primary procedures we performed to address this critical audit matter included:

 

·Testing the design and operating effectiveness of controls over the evaluation of the general reserve qualitative adjustments, including controls addressing:
oManagement’s review of the accuracy of data inputs used in the determination of and as the basis for the qualitative adjustments; and
oManagement’s review of the reasonableness of the judgments and assumptions used to develop the qualitative adjustments for the general reserve.
·Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the general reserve qualitative adjustments, which included:
oEvaluation of the completeness and accuracy of data inputs used as a basis for the adjustments relating to qualitative general reserve factors; and
oEvaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of the general reserve qualitative adjustments and the resulting allocation to the ALL. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently period to period.

 

 

 

 

/s/ Baker Newman & Noyes LLC

Portsmouth, New Hampshire

March 10, 2023

 

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

 

 

 40 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

 

December 31, (dollars in thousands, except share and per share amounts)    2022      2021  
ASSETS          
Cash and due from banks  $5,864   $6,404 
Interest bearing demand deposits with other banks   44,675    168,931 
Total cash and cash equivalents   50,539    175,335 
Interest bearing Time Deposits with Financial Institutions    —    750 
Securities          
Available-for-sale at fair value   187,410    202,396 
Mutual funds at fair value   1,933    901 
Federal Home Loan Bank of Boston stock at cost   1,285    1,397 
Loans held-for-sale    —    2,684 
Loans receivable, net (allowance for loan losses: $14,846 and $12,962)   1,213,671    1,066,750 
Bank premises and equipment, net   22,148    22,625 
Goodwill   13,815    13,815 
Intangible assets (net of accumulated amortization: $5,654 and $5,463)   227    418 
Accrued interest receivable   6,797    6,260 
Cash surrender value of life insurance policies   30,379    27,738 
Deferred taxes   8,492    2,588 
Other assets   4,886    5,527 
Total Assets  $1,541,582   $1,529,184 
LIABILITIES and SHAREHOLDERS' EQUITY          
Deposits          
Demand (non-interest bearing)  $395,994   $416,073 
Demand (interest bearing)   231,486    233,600 
Money market   343,965    330,436 
Savings and other   233,578    237,075 
Certificates of deposit   153,370    119,009 
Total deposits   1,358,393    1,336,193 
Repurchase agreements   7,228    11,430 
Federal Home Loan Bank of Boston advances   10,000    7,656 
Subordinated debt   24,531    24,474 
Note payable   128    170 
Finance lease obligations   4,262    4,107 
Accrued interest and other liabilities   8,685    8,554 
Total Liabilities   1,413,227    1,392,584 
Shareholders' Equity 1          
Common stock - $0.10 per share par value          
Authorized: 10,000,000;          
Issued: 5,798,816 and 5,723,394          
Outstanding: 5,798,816 and 5,723,394   580    286 
Unearned compensation – restricted stock awards   (1,144)   (925)
Paid-in capital   47,466    46,374 
Retained earnings   102,178    89,995 
Accumulated other comprehensive (loss) income, net   (20,725)   870 
Total Shareholders' Equity   128,355    136,600 
Total Liabilities and Shareholders' Equity  $1,541,582   $1,529,184 

 

 

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

 

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

 41 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

 

Years ended December 31, (in thousands except per share amounts)   2022      2021      2020  
Interest and dividend income               
Interest and fees on loans  $44,874   $41,080   $40,796 
Interest on debt securities               
Taxable   3,479    2,048    1,671 
Tax exempt   787    697    672 
Other interest and dividends   871    247    295 
Total interest and dividend income   50,011    44,072    43,434 
Interest expense               
Deposits   3,724    2,160    3,890 
Repurchase agreements   30    16    20 
Finance lease   163    136    141 
Note payable   9    11    14 
Subordinated debt   932    1,000    618 
Federal Home Loan Bank of Boston advances   114    125    605 
Total interest expense   4,972    3,448    5,288 
Net interest and dividend income   45,039    40,624    38,146 
Provision (release) for loan losses   2,683    (720)   5,038 
Net interest and dividend income after provision (release) for loan losses   42,356    41,344    33,108 
Non-interest income               
Trust and wealth advisory   4,887    4,970    4,194 
Service charges and fees   5,299    4,822    3,072 
Mortgage banking activities, net   556    1,000    1,621 
(Losses) gains on mutual funds   (120)   (26)   19 
Gains on securities, net   165    (2)   196 
Bank-owned life insurance (“BOLI”) income   717    556    495 
Gain on bank-owned life insurance   89     —    601 
Gain on sale of assets    —    73     — 
Other   109    107    125 
Total non-interest income   11,702    11,500    10,323 
Non-interest expense               
Salaries   14,932    13,417    11,828 
Employee benefits   5,125    5,023    4,533 
Premises and equipment   4,281    4,114    4,019 
Write-down of assets   3    144     — 
Information processing and services   2,795    2,441    2,211 
Professional fees   3,218    2,779    2,741 
Collections, OREO, and loan related   376    455    323 
FDIC insurance   526    541    466 
Marketing and community support   822    881    573 
Amortization of intangibles   191    256    321 
Other   2,376    2,053    2,023 
Total non-interest expense   34,645    32,104    29,038 
Income before income taxes   19,413    20,740    14,393 
Income tax provision   3,539    4,267    2,453 
Net income  $15,874   $16,473   $11,940 
Net income available to common shareholders  $15,598   $16,225   $11,775 
Basic earnings per common share1  $2.75   $2.88   $2.11 
Diluted earnings per common share1  $2.74   $2.86   $2.10 
Common dividends per share1  $0.64   $0.61   $0.58 

 

 

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

 

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

 42 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

Years ended December 31, (in thousands)   2022      2021      2020  
Net income  $15,874   $16,473   $11,940 
Other comprehensive (loss) income               
Net unrealized (losses) gains on securities available-for-sale   (27,171)   (2,701)   2,280 
Reclassification of net realized (gains) losses  in net income   (165)   2    (196)
Unrealized (losses) gains on securities available-for-sale   (27,336)   (2,699)   2,084 
Income tax benefit (expense)   5,741    565    (437)
Unrealized (losses) gains on securities available-for-sale, net of tax   (21,595)   (2,134)   1,647 
Other comprehensive (loss) income, net of tax   (21,595)   (2,134)   1,647 
Comprehensive (loss) income  $(5,721)  $14,339   $13,587 

 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                                    
(in thousands,  Common Stock  Paid-in  Retained  Unearned compensation- restricted stock  Accumulated
other comp-
rehensive (loss)		  Total
share-holders'
except share amounts)   Shares1    Amount    capital    earnings    awards    income    equity 
Balances at December 31, 2019   5,651,824   $283   $44,490   $68,320   $(795)  $1,357   $113,655 
Net income for year    —     —     —    11,940     —     —    11,940 
Other comprehensive income, net of tax    —     —     —     —     —    1,647    1,647 
Common stock dividends declared ($0.58 per share)    —     —     —    (3,286)    —     —    (3,286)
Stock options exercised   6,210     —    53     —     —     —    53 
Issuance of restricted common stock   24,550    1    439     —    (440)    —     — 
Forfeiture of restricted common stock   (2,400)    —    (50)    —    50     —     — 
Issuance of directors restricted stock awards   6,400     —    114     —    (114)    —     — 
Stock based compensation-restricted stock awards    —     —    218     —    525     —    743 
Balances at December 31, 2020   5,686,584   $284   $45,264   $76,974   $(774)  $3,004   $124,752 
Net income for year    —     —     —    16,473     —     —    16,473 
Other comprehensive loss, net of tax    —     —     —     —     —    (2,134)   (2,134)
Common stock dividends declared ($0.61 per share)    —     —     —    (3,452)    —     —    (3,452)
Stock options exercised   3,510    1    30     —     —     —    31 
Issuance of restricted common stock   27,700    1    623     —    (624)    —     — 
Issuance of directors restricted stock awards   5,600     —    126     —    (126)    —     — 
Stock based compensation-restricted stock awards    —     —    331     —    599     —    930 
Balances at December 31, 2021   5,723,394   $286   $46,374   $89,995   $(925)  $870   $136,600 
Net income for year    —     —     —    15,874     —     —    15,874 
Other comprehensive loss, net of tax    —     —     —     —     —    (21,595)   (21,595)
Common stock dividends declared ($0.64 per share)    —     —     —    (3,691)    —     —    (3,691)
Stock options exercised   25,920    3    219     —     —     —    222 
Issuance of restricted common stock   28,700    2    811     —    (813)    —     — 
Issuance of directors restricted stock awards   7,980     —    205     —    (205)    —     — 
Vesting of performance restricted stock units   12,900     —     —     —     —     —     — 
Net settlement impact for vesting of performance restricted stock units   (78)    —    (183)    —     —     —    (183)
Transfer due to 2-for-1 forward stock split    —    289    (289)    —     —     —     — 
Stock based compensation-restricted stock awards    —     —    329     —    799     —    1,128 
Balances at December 31, 2022   5,798,816   $580   $47,466   $102,178   $(1,144)  $(20,725)  $128,355 

 

 

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

 

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

 

 43 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Years ended December 31, (in thousands)   2022      2021      2020  
Operating Activities               
Net income  $15,874   $16,473   $11,940 
Adjustments to reconcile net income to net cash provided by operating activities               
(Accretion), amortization and depreciation               
Securities   1,429    1,125    548 
Bank premises and equipment   1,612    1,515    1,426 
Core deposit intangible   191    256    321 
Amortization of modification fees on Federal Home Loan Bank of Boston advances   21    22    70 
Subordinated debt issuance costs   57    173    24 
Mortgage servicing rights   140    235    151 
Fair value adjustment on deposits    —     —    (4)
(Gains) and losses, including write-downs               
Sales and calls of securities available-for-sale, net   (165)   2    (196)
Sales of loans, excluding capitalized servicing rights   (304)   (697)   (1,204)
Mutual Funds   120    26    (19)
Other real estate owned    —     —     — 
Disposals of premises and equipment   3    71     — 
Gain on redemption of bank owned life insurance   (89)    —    (601)
Provision (release) for loan losses   2,683    (720)   5,038 
Proceeds from loans sold   11,382    34,561    59,786 
Loans originated for sale   (5,135)   (33,813)   (60,985)
(Increase) decrease in deferred loan origination fees and costs, net   (716)   (657)   1,734 
Mortgage servicing rights originated   (70)   (314)   (534)
(Decrease) increase in mortgage servicing rights impairment reserve    —    (9)   9 
(Increase) decrease in interest receivable   (537)   113    (2,958)
Deferred tax (benefit) expense   (163)   389    (1,600)
Decrease (increase) in prepaid expenses   254    (337)   393 
Increase in cash surrender value of life insurance policies   (717)   (556)   (495)
Decrease (increase) in income tax receivable   452    (450)    — 
Increase (decrease) in income tax payable   37    (320)   83 
Increase in other assets   (135)   (529)   (52)
Increase in accrued expenses   99    409    327 
Increase (decrease) in interest payable   161    6    (35)
(Decrease) increase in other liabilities   (166)   144    (107)
Stock based compensation-restricted stock awards   1,128    930    743 
Net cash provided by operating activities   27,446    18,048    13,803 
Investing Activities               
Redemptions of Federal Home Loan Bank of Boston stock, net   112    316    1,529 
Purchases of securities available-for-sale   (54,176)   (145,297)   (37,392)
Maturity of interest-bearing time deposits with financial institutions   750     —     — 
Proceeds from sales of securities available-for-sale   21,716    3,311    15,589 
Proceeds from calls of securities available-for-sale   1,500    9,500    655 
Proceeds from maturities of securities available-for-sale   17,346    24,675    16,270 
Investment and reinvestment - Mutual Funds   (1,152)   (10)   (16)
Loan originations and principal collections, net   (152,194)   (37,844)   (107,420)
Recoveries of loans previously charged off   47    209    323 
Proceeds from sale/ disposal of premises and equipment    —    248     — 
Proceeds from sales of other real estate owned    —     —    314 
Capital expenditures   (849)   (2,314)   (4,367)
Purchase of bank owned life insurance   (2,507)   (6,000)   (3,500)
Death benefit proceeds received   672     —    3,994 
Net cash utilized by investing activities  $(168,735)  $(153,206)  $(114,021)

 

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

 

 44 

 

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

 

Years ended December 31, (in thousands)   2022      2021      2020  
Financing Activities               
(Decrease) increase in deposit transaction accounts, net  $(12,161)  $219,624   $205,778 
Increase (decrease) in time deposits, net   34,361    (12,505)   3,794 
(Decrease) increase in securities sold under agreements to repurchase, net   (4,202)   4,314    (1,414)
Short-term Federal Home Loan Bank of Boston advances, net   10,000     —    (21,000)
Long-term Federal Home Loan Bank of Boston advances    —     —    6,000 
Long-term Federal Home Loan Bank of Boston repayments   (6,000)    —    (30,000)
Amortizing Federal Home Loan Bank of Boston advances    —     —    10,000 
Amortizing Federal Home Loan Bank of Boston repayments   (1,677)   (5,005)   (3,318)
Issuance of Sub Debt, net of issuance costs    —    24,418     — 
Repayment of Sub Debt    —    (10,000)    — 
Principal payments on note payable   (42)   (38)   (38)
Decrease in finance lease obligation   (134)   (56)   (74)
Stock options exercised   222    31    53 
Net settlement of restricted stock units   (183)    —     — 
Common stock dividends paid   (3,691)   (3,452)   (3,286)
Net cash provided by financing activities   16,493    217,331    166,495 
Net (decrease) increase in cash and cash equivalents   (124,796)   82,173    66,277 
Cash and cash equivalents, beginning of year   175,335    93,162    26,885 
Cash and cash equivalents, end of year  $50,539   $175,335   $93,162 
Cash paid during year               
Interest  $4,733   $3,247   $5,233 
Income taxes   3,213    4,648    3,970 
Non-cash investing and financing activities:               
New Finance Lease or amendments to Finance Lease               
Fixed Asset   289    2,490     — 
Lease liability   (289)   (2,490)    — 
Transfers from Fixed Assets to Other Assets    —    700     — 
Loan transfers to Held for Sale   3,909     —     — 
Loans transferred from Held for Sale to loans Held for Investment   (650)    —     — 
Extension of operating lease-other assets    —     —    29 
Extension of operating lease-other liabilities    —     —    (29)

 

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

 

 

 

 45 

 

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Principles of Consolidation

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

 

Basis of Financial Statement Presentation

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

Certain reclassifications have been made to the 2021 and 2020 consolidated financial statements to make them consistent with the 2022 presentation.

 

Cash and Cash Equivalents

Cash and cash equivalents include cash and balances due from banks and interest-bearing demand deposits in other banks. For purposes of reporting the consolidated statements of cash flows, the Company considers all cash and due from bank accounts, which are not subject to withdrawal restrictions or penalties, and all highly liquid investments purchased with a maturity of three months or less, to be cash equivalents. Due to the nature of cash and cash equivalents, Salisbury estimated that the carrying amount of such instruments approximated fair value. The nature of the Bank’s business requires that it maintain amounts due from banks which, at times, may exceed federally insured limits. At December 31, 2022, the balance of those funds exceeding federally insured limits was $1.9 million. The Bank has not experienced any losses on such amounts and all amounts are maintained with well-capitalized institutions.

 

Interest Bearing Time Deposits with Financial Institutions

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

 

Securities

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

 

Mutual Funds

The Company holds mutual fund investments which are reported as an equity investment with a readily determined fair value. Changes in the fair value of the mutual funds holding are reported in income as gains (losses) on mutual funds with a corresponding increase or decrease in its carrying value on the consolidated balance sheet.

 

Federal Home Loan Bank of Boston Stock

The Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). The FHLBB is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of December 31, 2022. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

 

 46 

 

Loans

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

Loans receivable includes loans processed under the SBA’s PPP program. The PPP loans are reported at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs are amortized as an adjustment to yield over the lives of the related loans.

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

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

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

Troubled debt restructured loans include those for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit Salisbury by increasing the ultimate probability of collection.

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

 

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan or portion of a loan to be uncollectible.

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

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 the pandemic, 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. Changes in the estimate are recorded in the results of operations in the period in which they become known, along with provisions for estimated losses incurred during that period. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at December 31, 2022.

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

The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans based on loan product, collateral type and abundance, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows, Fair Martlet Value approach or collateral value, and (3) an unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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Loans collectively evaluated for impairment

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management’s general loss allocation factors. Salisbury stratified its loans into the following loan segments: residential real estate secured (residential 1-4 family and 5+ multifamily, construction of residential 1-4 family, and home equity lines of credit), commercial real estate secured (commercial and construction of commercial), secured by land (farm and vacant land), commercial and industrial, municipal and consumer. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage. 

Risk characteristics relevant to each portfolio segment are as follows:

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

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

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

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

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

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

Municipal loans – Loans in this segment are extensions of credit to municipal and other governmental entities throughout Salisbury’s market area. The bank-qualified, tax-exempt loans are backed by the full faith and credit of the borrowing entity with taxing or appropriating authority, as appropriate. Maturities range from one year for bond anticipation notes to twenty years for long-term project finance. The ability of the borrower to pay may be affected by an economic downturn resulting in a severe reduction in tax or other revenues coupled with the depletion of an entity’s reserve liquidity.

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

Loans individually evaluated for impairment

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

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

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

 

Transfers of Financial Assets

Transfers of an entire financial asset, a group of entire financial assets, or participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not retain control over the assets. During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

 

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Mortgage Servicing Rights

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

 

Other Real Estate Owned (“OREO”)

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

As of December 31, 2022, and 2021, there were no residential mortgage loans collateralized by residential real estate that were in the process of foreclosure.

 

Income Taxes

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

 

Bank Premises and Equipment

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

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

Intangible Assets

Intangible assets consist of core deposit intangibles and goodwill. Intangible assets equal the excess of the purchase price over the fair value of the tangible net assets acquired in business combinations accounted for using the acquisition method of accounting. Salisbury’s intangible assets at December 31, 2022, and 2021, include goodwill of $2.4 million arising from the purchase of a branch office in 2001, $7.2 million arising from the 2004 acquisition of Canaan National Bancorp, Inc., $319 thousand arising from the 2007 purchase of a branch office in New York State, $2.7 million arising from the acquisition of Riverside Bank in December 2014 and $1.3 million from the purchase of an additional branch office in New York in 2017. See Note 9.

On an annual basis, management assesses intangible assets for impairment. For fiscal years 2022 and 2021 management performed the assessment as of November 30th to ensure that there was adequate time to review the results and record an impairment charge, if necessary, prior to finalizing the annual financial statements. There were no material changes in the Bank’s operating environment or financial results during the month of December 2022 that would have affected the outcome of the assessment. Based on the assessment, intangible assets were not impaired as of November 30, 2022. If a permanent loss in value was indicated, an impairment charge to income would have been recognized.

 

Derivative Instruments and Hedging Activities

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance in Topic 825, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. The company’s derivative contract matured in September of 2022 and no new contracts have been entered.

 

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Bank-Owned Life Insurance

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

 

Stock Based Compensation

Stock based compensation expense is recognized, based on the fair value at the date of grant on a straight-line basis over the period of time between the grant date and vesting date. The expense for performance based restricted stock awards is accrued over a three-year performance period based on the probability of achieving pre-determined thresholds or metrics.

 

Advertising Expense

Advertising costs of $640 thousand and $704 thousand in 2022 and 2021, respectively, are expensed as incurred and not capitalized.

 

Statements of Cash Flows

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

 

Computation of Earnings per Share

The Company defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (“EPS”) using the two-class method. Unvested performance based restricted stock units issued by the Company do not contain non-forfeitable rights to dividends and are not deemed to be participating securities.

The two-class method is an earnings allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Basic EPS excludes dilution and is computed by dividing income allocated to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

 

Revenue Recognition

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

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

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

Trust and Wealth Advisory

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

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Service Charges and Fees

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

Interchange Fees

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

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance removes all recognition thresholds and requires companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarifies the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarifies that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarifies or addresses specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarify the following: (1) The allowance for credit losses (ACL) for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. In March 2022, the FASB issued ASU 2022-02, which clarifies the treatment of accrued interest when measuring credit losses. The amendments in this Update eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.

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

To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, Salisbury will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a two-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses. Salisbury estimates that under the CECL framework, the ACL would be $15.0 million compared with the allowance for loan losses of $14.8 million reported on the consolidated balance sheet at December 31, 2022. In addition, Salisbury estimates that the ACL for unfunded commitments would be approximately $1.1 million compared with the allowance of $0.2 million recorded on its consolidated balance sheet as of December 31, 2022.

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

In 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. Salisbury does not expect the implementation of ASU 2022-01 to have a material impact on its consolidated financial statements.

 

 

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. The merger is expected to be consummated in second quarter 2023 following the approval of regulators and Salisbury shareholders. Merger-related expenses totaling $0.5 million related to this transaction were recorded in the year ended December 31, 2022.

 

 

NOTE 3 - SECURITIES

The composition of securities is as follows:

(in thousands)   Amortized cost basis    Gross un-realized gains    Gross un-realized losses    Fair value 
December 31, 2022                    
Available-for-sale                    
U.S. Treasury  $19,283   $ —   $2,150   $17,133 
U.S. Government Agency notes   29,696    94    2,636    27,154 
Municipal bonds   55,179     —    8,641    46,538 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government- sponsored enterprises   69,866    20    8,011    61,875 
Collateralized mortgage obligations:                    
U.S. Government agencies   25,370     —    3,434    21,936 
Corporate bonds   14,250     —    1,476    12,774 
Total securities available-for-sale  $213,644   $114   $26,348   $187,410 
Mutual funds                                $1,933 
Non-marketable securities                    
Federal Home Loan Bank of Boston stock  $1,285   $ —   $ —   $1,285 

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

 

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The total (losses) gains on mutual funds for the years ended December 31, 2022, 2021 and 2020 were ($120) thousand, ($26) thousand and $19 thousand, respectively, and equal the (losses) gains on mutual funds held as of the end of year since no sales occurred during those years.

Sales of securities available-for-sale and gross gains and gross losses realized are as follows:

  Years ended December 31, (in thousands)    2022      2021      2020  
Proceeds  $21,716   $3,311   $15,589 
Gains realized   451    56    293 
Losses realized   (286)   (65)   (97)
Net  gains (losses) realized   165    (9)   196 
Income tax provision (benefit)   35    (2)   41 


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

                   
   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  $6,435   $484   $10,698   $1,666   $17,133   $2,150 
U.S. Government Agency notes   3,106    158    17,467    2,478    20,573    2,636 
Municipal bonds   37,277    5,950    9,261    2,691    46,538    8,641 
Mortgage- backed securities:                              
U.S. Government agencies and U.S. Government - sponsored enterprises   18,861    1,559    39,909    6,452    58,770    8,011 
Collateralized mortgage obligations   14,333    1,782    7,603    1,652    21,936    3,434 
Corporate bonds   11,251    1,249    1,523    227    12,774    1,476 
Total temporarily impaired securities  $91,263   $11,182   $86,461   $15,166   $177,724   $26,348 

                   
   Less than 12 Months  12 Months or Longer  Total
  December 31, 2021 (in thousands)  Fair
value		 

Unrealized

losses

  Fair
value		 

Unrealized

losses

  Fair
Value		 

Unrealized

losses

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

 

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

December 31, 2022 (in thousands)  Maturity  Amortized cost    Fair value     Yield(1)  
U.S. Treasury  After 1 year but within 5 years  $10,799   $9,838    1.29%
   After 5 year but within 10 years   8,484    7,295    1.17 
   Total   19,283    17,133    1.24 
U.S. Government Agency notes  After 1 year but within 5 years   6,962    6,070    1.00 
   After 5 year but within 10 years   8,958    7,552    1.42 
   Total   15,920    13,622    1.23 
Municipal bonds  After 1 year but within 5 years   510    455    1.74 
   After 5 year but within 10 years   15,283    12,407    2.31 
   After 10 years but within 15 years   12,823    10,933    2.53 
   After 15 years   26,563    22,743    2.84 
   Total   55,179    46,538    2.61 
Mortgage-backed securities, U.S. Government Agency and Collateralized mortgage obligations   Securities not due at a single maturity date   109,012    97,343    2.64 
   Total   109,012    97,343    2.64 
Corporate bonds  After 5 years but within 10 years   14,250    12,774    4.46 
   Total   14,250    12,774    4.46 
Securities available-for-sale     $213,644   $187,410    2.65%

(1)       Yield is based on amortized cost.

 

 53 

 

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

The following summarizes, by security type, the basis for evaluating if the applicable debt securities were OTTI at December 31, 2022.

U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Ten securities had unrealized losses at December 31, 2022, which approximated 11.15% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at December 31, 2022.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Twenty-two securities had unrealized losses at December 31, 2022, which approximated 11.36% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at December 31, 2022.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixty-six securities were in an unrealized loss position at December 31, 2022, which approximated 15.66% of its amortized cost. Management believes the unrealized loss positions are attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at December 31, 2022.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Ninety-three securities had unrealized losses at December 31, 2022, which approximated 12.42% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at December 31, 2022.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Eighteen securities had unrealized losses at December 31, 2022, which approximated 10.36% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at December 31, 2022.

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank’s FHLBB stock as of December 31, 2022. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

  

 54 

 

NOTE 4 - LOANS

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

December 31,    2022      2021  
(in thousands)    Total Loans      Total Loans  
Residential 1-4 family  $428,486   $373,131 
Residential 5+ multifamily   80,400    52,325 
Construction of residential 1-4 family   22,534    19,738 
Home equity lines of credit   25,699    23,270 
Residential real estate   557,119    468,464 
Commercial   374,281    310,923 
Construction of commercial   46,866    58,838 
Commercial real estate   421,147    369,761 
Farm land   4,081    2,807 
Vacant land   14,440    14,182 
Real estate secured   996,787    855,214 
Commercial and industrial ex PPP Loans   190,191    169,543 
PPP Loans   299    25,589 
Total Commercial and industrial   190,490    195,132 
Municipal   19,693    16,534 
Consumer   20,546    12,547 
Loans receivable, gross   1,227,516    1,079,427 
Deferred loan origination costs (fees), net   1,001    285 
Allowance for loan losses   (14,846)   (12,962)
Loans receivable, net  $1,213,671   $1,066,750 
Loans held-for-sale          
Residential 1-4 family  $ —   $2,684 


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

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

At December 31, 2022 and 2021, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $64.1 million and $77.5 million, respectively.

Concentrations of Credit Risk

Salisbury's loans consist primarily of residential and commercial real estate loans located principally in Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts, which constitute Salisbury's service area. Salisbury offers a broad range of loan and credit facilities to borrowers in its service area, including residential mortgage loans, commercial real estate loans, construction loans, working capital loans, equipment loans, and a variety of consumer loans, including home equity lines of credit, installment loans and collateral loans. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The ability of single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the market area and real estate values. The ability of commercial borrowers to honor their repayment commitments is dependent on the general economy as well as the health of the real estate economic sector in Salisbury’s market area.

Salisbury’s commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 31% 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 a ski resort, bowling alleys 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 198% as of December 31, 2022 and 179% at December 31, 2021 compared to the regulatory monitoring guideline of 300%. Salisbury’s commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors.

 55 

 

Credit Quality

Salisbury uses credit risk ratings as part of its determination of the allowance for loan losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

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

Loans rated as "substandard" (6) are loans where the Bank’s position is clearly not protected adequately by the borrower’s 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 the sale of collateral or other secondary sources of collection.

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

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

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

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

(in thousands)  Pass  Special mention  Substandard  Doubtful  Loss  Total
December 31, 2022                              
Residential 1-4 family  $423,612   $2,995   $1,879   $ —   $ —   $428,486 
Residential 5+ multifamily   80,254    68    78     —     —    80,400 
Construction of residential 1-4 family   22,534     —     —     —     —    22,534 
Home equity lines of credit   25,536    163     —     —     —    25,699 
Residential real estate   551,936    3,226    1,957     —     —    557,119 
Commercial   355,963    12,934    5,384     —     —    374,281 
Construction of commercial   46,866     —     —     —     —    46,866 
Commercial real estate   402,829    12,934    5,384     —     —    421,147 
Farm land   2,408    1,280    393     —     —    4,081 
Vacant land   14,410    30     —     —     —    14,440 
Real estate secured   971,583    17,470    7,734     —     —    996,787 
Commercial and industrial   188,267    680    1,543     —     —    190,490 
Municipal   19,693     —     —     —     —    19,693 
Consumer   20,541     —    5     —     —    20,546 
Loans receivable, gross  $1,200,084   $18,150   $9,282   $ —   $ —   $1,227,516 

 

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

 

 56 

 

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

         Past due
(In thousands)   Current     30-59 days    60-89 days    90-179 days    180 days and over    30 days and over    Accruing 90 days and over    Non- accrual 
December 31, 2022                        
Residential 1-4 family  $427,769   $672   $30   $ —   $15   $717   $ —   $820 
Residential 5+ multifamily   80,400     —     —     —     —     —     —     — 
Construction of residential 1-4 family   22,534     —     —     —     —     —     —     — 
Home equity lines of credit   25,411    288     —     —     —    288     —     — 
Residential real estate   556,114    960    30     —    15    1,005     —    820 
Commercial   374,196     —     —    85     —    85     —    1,255 
Construction of commercial   46,866     —     —     —     —     —     —     — 
Commercial real estate   421,062     —     —    85     —    85     —    1,255 
Farm land   4,081     —     —     —     —     —     —    393 
Vacant land   14,440     —     —     —     —     —     —     — 
Real estate secured   995,697    960    30    85    15    1,090     —    2,468 
Commercial and industrial   190,340    149    1     —     —    150     —    189 
Municipal   19,693     —     —     —     —     —     —     — 
Consumer   20,303    154    84    5     —    243     —    5 
Loans receivable, gross  $1,226,033   $1,263   $115   $90   $15   $1,483   $ —   $2,662 

 

 

         Past due
(In thousands)   Current     30-59 days    60-89 days    90-179 days    180 days and over    30 days and over    Accruing 90 days and over    Non- accrual 
December 31, 201                        
Residential 1-4 family  $372,620   $223   $135   $63   $90   $511   $ —   $750 
Residential 5+ multifamily   51,464     —     —     —    861    861     —    861 
Construction of residential 1-4 family   19,668     —    70     —     —    70     —     — 
Home equity lines of credit   23,000    165    98     —    7    270     —    21 
Residential real estate   466,752    388    303    63    958    1,712     —    1,632 
Commercial   310,331    87    251     —    254    592     —    1,924 
Construction of commercial   58,838     —     —     —     —     —     —     — 
Commercial real estate   369,169    87    251     —    254    592     —    1,924 
Farm land   2,807     —     —     —     —     —     —    432 
Vacant land   14,182     —     —     —     —     —     —     — 
Real estate secured   852,910    475    554    63    1,212    2,304     —    3,988 
Commercial and industrial   194,838    250    32    1    11    294    11    200 
Municipal   16,534     —     —     —     —     —     —     — 
Consumer   12,503    40    4     —     —    44     —     — 
Loans receivable, gross  $1,076,785   $765   $590   $64   $1,223   $2,642   $11   $4,188 

 

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings occurring during the years ended December 31, 2022 and 2021:

For the twelve months ended December 2022, there were no troubled debt restructurings, for the twelve months ended December 2021, there was one residential real estate loan with a modification and term extension that was a troubled debt restructuring. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

The following table discloses the recorded investment and number of modifications for TDRs within the last year where a concession has been made, that then defaulted in the current reporting period. All TDR loans are included in the Impaired Loan schedule and are individually evaluated.

 

Modifications that Subsequently Defaulted

For the twelve months ending

December 31, 2022

For the twelve months ending

December 31, 2021

Quantity Balance Quantity Balance
Troubled Debt Restructurings
Residential 1-4 family — — 1 74
Total — — 1 74

 57 

 

Impaired loans

Loans individually evaluated for impairment (impaired loans) are loans for which Salisbury does not expect to collect all principal and interest in accordance with the contractual terms of the loan. Impaired loans include all modified loans classified as TDRs and loans on non-accrual status. The components of impaired loans are as follows:

December 31, (in thousands)    2022      2021  
Non-accrual loans, excluding troubled debt restructured loans  $2,595   $2,838 
Non-accrual troubled debt restructured loans   67    1,350 
Accruing troubled debt restructured loans   2,670    3,609 
Total impaired loans  $5,332   $7,797 
Commitments to lend additional amounts to impaired borrowers  $ —   $ — 


Allowance for Loan Losses

                   
    Year Ended December 31, 2022   Year Ended December 31, 2021
(in thousands)   Beginning balance  

Prov-

ision (release)

   Charge- offs   Reco- veries   Ending balance   Beginning balance  

Prov-

ision (release)

   Charge- offs   Reco- veries   Ending balance
Residential 1-4 family   $ 2,846     $ 822     $ (73 )   $ 27     $ 3,622     $ 2,646     $ 225     $ (44 )   $ 19     $ 2,846  
Residential 5+ multifamily     817       779       (231 )     —       1,365       686       131       —       —       817  
Construction of residential 1-4 family     186       42       (25 )      —       203       65       121       —       —       186  
Home equity lines of credit     198       53       (11 )      —       240       252       (34 )     (21 )      1       198  
Residential real estate     4,047       1,696       (340 )     27     5,430       3,649       443       (65 )     20     4,047  
Commercial     5,416       907       (372 )     1       5,952       6,546       (1,260 )      (6 )     136       5,416  
Construction of commercial     1,025       (309 )      —       —       716       596       447       (18 )      —       1,025  
Commercial real estate     6,441       598       (372 )     1       6,668       7,142       (813 )      (24 )     136       6,441  
Farm land     21       9       —       —       30       59       (39 )      (2 )      3       21  
Vacant land     95       (4 )      —       —       91       180       (86 )     —       1       95  
Real estate secured     10,604       2,299       (712 )     28       12,219       11,030       (495 )      (91 )     160       10,604  
Commercial and industrial     1,364       31       (46 )      1       1,350       1,397       45     (131 )     53       1,364  
Municipal     31       28     —       —       59       43       (12 )      —       —       31  
Consumer     82       111       (88 )     18       123       77       68       (59 )     (4 )      82  
Unallocated     881       214       —       —       1,095       1,207       (326 )      —       —       881  
Totals   $ 12,962     $ 2,683     $ (846 )   $ 47     $ 14,846     $ 13,754     $ (720 )    $ (281 )   $ 209     $ 12,962  
         
    December 31, 2020
(in thousands)   Beginning balance   Provision (release)   Charge-offs   Recoveries   Ending balance
Residential 1-4 family   $ 2,393     $ 255     $ (11 )   $ 9     $ 2,646  
Residential 5+ multifamily     446       282       (42 )      —       686  
Construction of residential 1-4 family     75       (10 )      —       —       65  
Home equity lines of credit     197       (197 )     —       252       252  
Residential real estate     3,111       330       (53 )     261     3,649  
Commercial     3,742       2,776       (17 )     45       6,546  
Construction of commercial     104       492     —       —       596  
Commercial real estate     3,846       3,268       (17 )     45       7,142  
Farm land     47       12       —       —       59  
Vacant land     71       109     —       —       180  
Real estate secured     7,075       3,719       (70 )     306       11,030  
Commercial and industrial     1,145       612     (362 )     2       1,397  
Municipal     46       (3 )     —       —       43  
Consumer     60       72       (70 )     15       77  
Unallocated     569       638       —       —       1,207  
Totals   $ 8,895     $ 5,038     $ (502 )   $ 323     $ 13,754  

 

 58 

 

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

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2022                              
Residential 1-4 family  $426,377   $3,622   $2,109   $ —   $428,486   $3,622 
Residential 5+ multifamily   80,322    1,365    78     —    80,400    1,365 
Construction of residential 1-4 family   22,534    203     —     —    22,534    203 
Home equity lines of credit   25,699    240     —     —    25,699    240 
Residential real estate   554,932    5,430    2,187     —    557,119    5,430 
Commercial   371,723    5,930    2,558    22    374,281    5,952 
Construction of commercial   46,866    716     —     —    46,866    716 
Commercial real estate   418,589    6,646    2,558    22    421,147    6,668 
Farm land   3,688    30    393     —    4,081    30 
Vacant land   14,440    91     —     —    14,440    91 
Real estate secured   991,649    12,197    5,138    22    996,787    12,219 
Commercial and industrial   190,301    1,350    189     —    190,490    1,350 
Municipal   19,693    59     —     —    19,693    59 
Consumer   20,541    123    5     —    20,546    123 
Unallocated allowance    —    1,095     —     —     —    1,095 
Totals  $1,222,184   $14,824   $5,332   $22   $1,227,516   $14,846 

 

  (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
December 31, 2021                              
Residential 1-4 family  $370,558   $2,845   $2,573   $1   $373,131   $2,846 
Residential 5+ multifamily   51,376    817    949     —    52,325    817 
Construction of residential 1-4 family   19,738    186     —     —    19,738    186 
Home equity lines of credit   23,249    198    21     —    23,270    198 
Residential real estate   464,921    4,046    3,543    1    468,464    4,047 
Commercial   307,377    5,388    3,546    28    310,923    5,416 
Construction of commercial   58,838    1,025     —     —    58,838    1,025 
Commercial real estate   366,215    6,413    3,546    28    369,761    6,441 
Farm land   2,375    21    432     —    2,807    21 
Vacant land   14,182    95     —     —    14,182    95 
Real estate secured   847,693    10,575    7,521    29    855,214    10,604 
Commercial and industrial   194,856    1,297    276    67    195,132    1,364 
Municipal   16,534    31     —     —    16,534    31 
Consumer   12,547    82     —     —    12,547    82 
Unallocated allowance    —    881     —     —     —    881 
Totals  $1,071,630   $12,866   $7,797   $96   $1,079,427   $12,962 


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

  December 31, 2022 (in thousands)  Collectively evaluated  Individually evaluated  Total portfolio
    Loans    Allowance    Loans    Allowance    Loans    Allowance 
Performing loans  $1,216,108   $13,351   $ —   $ —   $1,216,108   $13,351 
Potential problem loans 1   6,076    378     —     —    6,076    378 
Impaired loans    —     —    5,332    22    5,332    22 
Unallocated allowance    —    1,095     —     —     —    1,095 
Totals  $1,222,184   $14,824   $5,332   $22   $1,227,516   $14,846 

 

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

1 Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired, included in this total are purchased loans net of any purchase marks remaining on the loan.

 

 59 

 

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

   Impaired loans with specific allowance   Impaired loans with no specific allowance 
(In thousands)  Loan balance           Loan balance     
    Recorded Investment    Note    Average    Specific allowance    Income recognized    Recorded Investment    Note    Average    Income recognized 
December 31, 2022                           
Residential  $ —   $ —   $306   $ —   $ —   $2,187   $2,283   $2,192   $61 
Home equity lines of credit    —     —     —     —     —     —     —    8     — 
Residential real estate    —     —    306     —     —    2,187    2,283    2,200    61 
Commercial   559    559    604    22    30    1,999    2,148    2,308    45 
Construction of commercial    —     —     —     —     —     —     —     —     — 
Farm land    —     —     —     —     —    393    443    410     — 
Vacant land    —     —     —     —     —     —     —     —     — 
Real estate secured   559    559    910    22    30    4,579    4,874    4,918    106 
Commercial and industrial    —     —    64     —     —    189    195    88    13 
Consumer    —     —     —     —     —    5    5     —     — 
Totals  $559   $559   $974   $22   $30   $4,773   $5,074   $5,006   $119 

 

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

 

 

NOTE 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 are to be paid by Salisbury. The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank’s consolidated financial statements for the years ended December 31, 2022 and 2021.

($ in thousands)   Classification    December 31, 2022      December 31, 2021  
Assets             
Operating  Other assets  $1,175   $1,021 
Finance  Bank premises and equipment 1   3,856    3,791 
Total Leased Assets     $5,031   $4,812 
Liabilities             
Operating  Accrued interest and other liabilities  $1,175   $1,021 
Finance  Finance lease obligations   4,262    4,107 
Total lease liabilities     $5,437   $5,128 

1 Net of accumulated depreciation of $720 thousand and $496 thousand, respectively.

 

Lease cost ($ in thousands)  Classification    Twelve months ended
December 31, 2022		      Twelve months ended
December 31, 2021		  
Operating leases  Premises and equipment  $293   $295 
Finance leases:             
Amortization of leased assets  Premises and equipment   223    101 
Interest on finance leases  Interest expense   163    136 
Total lease cost     $679   $532 

 

Weighted Average Remaining Lease Term    December 31, 2022      December 31, 2021  
Operating leases   5.9 years    6.9 years 
Financing leases   21.5 years    23.5 years 
Weighted Average Discount Rate 1          
Operating leases   3.63%   3.61%
Financing leases   3.74%   4.97%

 

1    Salisbury uses the most appropriate FHLBB Advance rates as the discount rate, as its leases do not provide an implicit rate.

                 

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The following is a schedule by years of the present value of the net minimum lease payments as of December 31, 2022.

 

  Future minimum lease payments (in thousands)    Finance Leases      Operating Leases  
 2023   $304   $241 
 2024    314    204 
 2025    323    213 
 2026    334    214 
 2027    344    188 
 Thereafter    4,624    242 
 Total future minimum lease payments    6,243    1,302 
 Less amount representing interest    (1,981)   (127)
 Total present value of net future minimum lease payments   $4,262   $1,175 

 

In December 2022, the Board of Directors voted not to extend the lease for the Company's Red Oaks Mill office in Poughkeepsie, NY. In January 2023, the Company notified regulators of its intent to close this office. The lease expires July 31, 2023.

NOTE 6 - MORTGAGE SERVICING RIGHTS

Mortgage servicing rights are accounted for using the amortization method under which the servicing rights are accounted for at the lower of amortized cost or fair value. The risks inherent in mortgage servicing rights, included in other assets, relate primarily to changes in prepayments that result form shifts in mortgage interest rates. The following summarizes the activity pertaining to capitalized mortgage servicing rights and the related valuation allowance:

December 31, (in thousands)    2022      2021  
Residential mortgage loans serviced for others  $133,100   $140,623 
Fair value of mortgage servicing rights   1,376    1,043 

 

Changes in mortgage servicing rights are as follows:

Years ended December 31, (in thousands)    2022      2021      2020  
Mortgage Servicing Rights               
Balance, beginning of period  $700   $621   $238 
Originated   70    314    534 
Amortization (1)   (140)   (235)   (151)
Balance, end of period   630    700    621 
Valuation Allowance               
Balance, beginning of period    —    (9)    — 
Decrease (increase) in impairment reserve (1)    —    9    (9)
Balance, end of period    —     —    (9)
Mortgage servicing rights, net  $630   $700   $612 
(1)Amortization expense and changes in the impairment reserve are recorded in mortgage banking activities, net.

 

For the years ended December 31, 2022, 2021 and 2020, contractually specified mortgage servicing fee income amounted to $348 thousand, $354 thousand and $287 thousand, respectively and is classified within the mortgage banking activities, net in the accompanying consolidated statements of income.

 

 

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.

December 31, (in thousands)    2022      2021  
Securities available-for-sale (at fair value)  $74,303   $75,737 
Loans receivable (at book value)   380,787    378,845 
Total pledged assets  $455,090   $454,582 

 

At December 31, 2022, securities were pledged as follows: $66.7 million to secure public deposits, $7.6 million to secure repurchase agreements and $0.02 million to secure FHLBB advances.

 

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NOTE 8 - BANK PREMISES AND EQUIPMENT

The components of premises and equipment are as follows:

December 31, (in thousands)    2022      2021  
Land  $3,277   $3,277 
Buildings and improvements   18,412    18,246 
Leasehold improvements   1,553    1,553 
Finance leases   4,577    4,288 
Furniture, fixtures, equipment and software   11,650    10,623 
Fixed assets in process    —    347 
Total cost   39,469    38,334 
Accumulated depreciation and amortization   (17,321)   (15,709)
Bank premises and equipment, net  $22,148   $22,625 

 

 

NOTE 9 - GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying values of goodwill and intangible assets were as follows:

Years ended December 31, (in thousands)    2022      2021      2020  
Goodwill (1)               
Balance, beginning of period  $13,815   $13,815   $13,815 
Additions    —     —     — 
Impairment    —     —     — 
Balance, end of period  $13,815   $13,815   $13,815 
Core deposit intangibles               
Cost, beginning of period  $5,881   $5,881   $5,881 
Additions    —     —     — 
Cost, end of period   5,881    5,881    5,881 
Amortization, beginning of period   (5,463)   (5,207)   (4,886)
Amortization   (191)   (256)   (321)
Amortization, end of period   (5,654)   (5,463)   (5,207)
Core deposit intangibles, net  $227   $418   $674 
(1)Not subject to amortization.

 

The Company preforms its goodwill impairment evaluation as of November 30 each year unless a triggering event occurs that would require an interim impairment evaluation. The Company generally utilizes a qualitative approach during this annual assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine it is more likely that not that goodwill is impaired, then a quantitative assessment is performed to determine fair value of a reporting unit. If the carrying value of the reporting unit with goodwill exceeds its fair value, goodwill is considered impaired and is written down by the excess carrying value of the reporting unit. No goodwill impairment was recognized during the years ended December 31, 2022, 2021 and 2020.

The core deposit intangibles were recorded as identifiable intangible assets and are being amortized over ten years using the sum-of-the-years’ digits method. Estimated annual amortization expense of core deposit intangibles is as follows as of December 31, 2022:

December 31, 

CDI amortization

(in thousands)

 2023    128   
 2024    61   
 2025    25   
 2026    12   
 2027    1   
 Total    $227   

 

NOTE 10 - DEPOSITS

Scheduled maturities of time certificates of deposit are as follows as of December 31, 2022:

December 31, (in thousands)  CD maturities
 2023   $110,879   
 2024    30,285   
 2025    7,774   
 2026    2,427   
 2027    2,005   
 Total   $153,370   

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The total amount and scheduled maturities of time certificates of deposit in denominations of $250 thousand or more are as follows:

December 31, (in thousands)    2022      2021  
Within three months  $46,526   $8,642 
After three through six months   1,270    1,010 
After six through twelve months   10,670    4,938 
Over one year   8,193    3,286 
Total  $66,659   $17,876 


Included in certificates of deposit at December 31, 2022 and 2021 are brokered and reciprocal deposits of approximately $51.2 million and $34.7 million, respectively. Included in money market funds at December 31, 2022 and 2021 are approximately $46.6 million and $73.3 million, respectively of brokered money market accounts.

 

 

NOTE 11 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Salisbury enters into overnight and short-term repurchase agreements with its customers. Securities sold under repurchase agreements are as follows:

December 31, (dollars in thousands)    2022      2021  
Repurchase agreements, ending balance  $7,228   $11,430 
Repurchase agreements, average balance during period   8,417    10,679 
Book value of collateral   21,444    17,084 
Market value of collateral   18,842    17,469 
Weighted average rate during period   0.36%   0.15%
Weighted average maturity                  1 day                   1 day 

 

 

NOTE 12 – FEDERAL HOME LOAN BANK OF BOSTON ADVANCES AND OTHER BORROWED FUNDS

Federal Home Loan Bank of Boston (“FHLBB”) advances are as follows:

December 31, 2022 December 31, 2021
Years ended December 31, (dollars in thousands) Total (1) Rate (2) Total (1) Rate (2)
2022 — — 7,656 1.39
2023 10,000 4.43 — —
Total $10,000 4.43% $7,656 1.39%
(1)Net of modification costs.
(2)Weighted average rate based on scheduled maturity dates.


In addition to outstanding FHLBB advances, Salisbury has additional available borrowing capacity, based on current capital stock levels, of $241.2 million including access to an unused FHLBB line of credit of $3.5 million at December 31, 2022. Advances from the FHLBB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one-to-four family properties, certain unencumbered investment securities and other qualified assets. At December 31, 2022 and December 31, 2021, the available borrowing capacity was reduced by $20.0 million of letters of credit provided to the Company by the FHLBB.

Subordinated Debentures:

In March 2021, Salisbury completed the issuance of $25.0 million in aggregate principal amount of 3.25% Fixed to Floating Rate Subordinated Notes Due 2031 (the “Notes”) in a private placement transaction 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, 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. The notes are redeemable, without penalty, on or after March 31, 2026 and, in certain limited circumstances, prior to that date. The Notes have been structured to qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations. Subordinated debentures totaled $24.5 million at December 31, 2022 and 2021, which included $469 thousand and $526 thousand, respectively, of remaining unamortized debt issuance costs. The debt issuance costs are being amortized to maturity. The effective interest rate of the subordinated debentures is 3.80%.

Notes Payable:

In October 2015, Salisbury entered into a private mortgage for $380 thousand to purchase the Sharon, Connecticut branch property. The mortgage, which has an interest rate of 6%, will mature in September 2030. The outstanding mortgage balance at December 31, 2022 and December 31, 2021 was $128 thousand and $170 thousand, respectively.

 

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NOTE 13 – NET DEFERRED TAX ASSET AND INCOME TAXES

Salisbury provides deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not. The components of the income tax provision were as follows:

Years ended December 31, (in thousands)    2022      2021      2020  
Federal  $3,364   $3,340   $3,487 
State   338    538    566 
Current provision   3,702    3,878    4,053 
Federal   (140)   327    (1,335)
State   (23)   62    (265)
Deferred (benefit) expense   (163)   389    (1,600)
Income tax provision  $3,539   $4,267   $2,453 


The following is a reconciliation of the expected federal statutory tax to the income tax provision:

Years ended December 31, (in thousands)    2022      2021      2020  
Income tax at statutory federal tax rate   21.00%   21.00%   21.00%
State tax, net of federal tax benefit   1.28    2.30    1.97 
Tax exempt income and dividends received deduction   (3.01)   (2.52)   (3.69)
BOLI interest and gain   (0.87)   (0.56)   (1.60)
Other   (0.17)   0.35    (0.64)
Effective income tax rates   18.23%   20.57%   17.04%


The components of Salisbury's net deferred tax assets are as follows:

December 31, (in thousands)    2022      2021  
Allowance for loan losses  $3,633   $3,170 
Interest on non-performing loans   99    157 
Accrued deferred compensation   472    488 
Post-retirement benefits   8    11 
Deferred loan costs, net    —    17 
Other real estate owned write-downs    —    4 
Restricted stock awards   390    361 
Net unrealized holding losses on available-for-sale securities   5,509     — 
Write-down of securities   33     — 
Mark-to-market adjustments of securities   31     — 
Other   118    183 
Gross deferred tax assets   10,293    4,391 
Deferred loan fees, net   (242)   (69)
Goodwill and core deposit intangible asset   (644)   (615)
Accelerated depreciation   (763)   (681)
Prepaid expenses    —    (32)
Gain on disposal    —    (5)
Mortgage servicing rights   (152)   (169)
Net unrealized holding gains on available-for-sale securities    —    (232)
Gross deferred tax liabilities   (1,801)   (1,803)
Net deferred tax asset  $8,492   $2,588 

 

Salisbury will only recognize a deferred tax asset when, based upon available evidence, realization is more likely than not. In accordance with Connecticut legislation, in 2004, Salisbury formed a PIC, SBT Mortgage Service Corporation. Salisbury does not expect to pay Connecticut state income tax in the foreseeable future unless there is a change in Connecticut law.

Salisbury’s policy is to provide for uncertain tax positions and the related interest and penalties (recorded as a component of income tax expense, if any) based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. As of December 31, 2022, and 2021, there were no material uncertain tax positions related to federal and state tax matters. Salisbury is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2019 through December 31, 2022.

 

 

NOTE 14 – SHAREHOLDERS’ EQUITY

Capital Requirements

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

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The Company and the Bank became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as “well capitalized” under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At December 31, 2022, the Bank exceeded the minimum requirement for the capital conservation buffer. As of December 31, 2022, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

The Bank’s risk-weighted assets at December 31, 2022 and December 31, 2021 were $1,256.6 million and $1,085.4 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

   Actual  Minimum Capital Required For Capital Adequacy  Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer  Minimum To Be Well Capitalized Under
Prompt Corrective
Action Provisions
(dollars in thousands)  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio
December 30, 2022                        
Total Capital (to risk-weighted assets)  $168,786    13.43%  $100,525    8.0%  $131,939    10.5%  $125,656    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   153,762    12.24    75,394    6.0    106,808    8.5    100,525    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   153,762    12.24    56,545    4.5    87,959    7.0    81,677    6.5 
                                         
Tier 1 Capital (to average assets)   153,762    9.99    61,540    4.0    61,540    4.0    76,925    5.0 
December 31, 2021                                        
Total Capital (to risk-weighted assets)  $152,789    14.08%  $86,832    8.0%  $113,968    10.5%  $108,541    10.0%
                                         
Tier 1 Capital (to risk-weighted assets)   139,681    12.87    65,124    6.0    92,259    8.5    86,832    8.0 
                                         
Common Equity Tier 1 Capital (to risk-weighted assets)   139,681    12.87    48,843    4.5    75,978    7.0    70,551    6.5 
                                         
Tier 1 Capital (to average assets)   139,681    9.42    59,285    4.0    59,285    4.0    74,106    5.0 

Legal Limitations 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 legal limits on the payment of cash dividends and other payments by banks to their holding companies. Under Connecticut law, a 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 a 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.

Share Repurchase Program

On March 23, 2022 Salisbury announced that its Board of Directors has renewed its share repurchase program that was established in March 2021. The share repurchase program provides for the potential repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over a period of the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares over the next twelve (12) months. Salisbury did not repurchase any shares during 2022.

Stock Spilt

On May 18, 2022, shareholders approved a recommendation by Salisbury’s Board of Directors to amend Salisbury’s Certificate of Incorporation to increase Salisbury’s authorized shares of Common Stock from 5,000,000 to 10,000,000 shares. On June 30, 2022, Salisbury’s Board implemented a two for one forward split of the shares of the Company’s Common Stock as a means of enhancing the liquidity and marketability of the Company’s securities in the best interests of shareholders. The par value of the Company’s stock was not affected by the split and remained at $0.10 per share. All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two-for-one stock spilt effective June 30, 2022.

 

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NOTE 15 – OTHER BENEFITS

401(k) Plan

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 contribution expense for 2022, 2021 and 2020 was $1.2 million, $1.1 million, and $0.9 million, respectively.

Employee Stock Ownership Plan (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. Benefit expenses totaled $279 thousand, $265 thousand, and $263 thousand, in 2022, 2021, and 2020, respectively. On December 21, 2022, the Board of Directors of the Company adopted resolutions to terminate the Plan effective on the date immediately preceding the closing date of the pending merger with NBT (see Note 2).  Upon termination, the employees participating in the Plan will become fully vested in the Company’s contributions to the Plan. 

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 $702 thousand and $779 thousand at December 31, 2022, and 2021, respectively. A credit was posted to the expense in 2022 in the amount of $77 thousand reflecting changes in discount rate and liability needed at December 31, 2022. Expense under this arrangement was $8 thousand and $7 thousand in 2021 and 2020 respectively.

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 $212 thousand and $263 thousand at December 31, 2022 and December 31, 2021, respectively. The related expenses were immaterial for all periods presented.

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. In 2022 and 2021, the Bank awarded seven (7) Executives with discretionary contributions to the plan.

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

The amended and restated Plan allows participant deferrals and provides greater flexibility in participant elections and investment options. The amended and restated Plan also provides additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified date before separation from service, and allows a participant to elect for each year’s contributions the manner in which such distributions will be paid. Installment distributions can be made in monthly, quarterly or annual installments. Payment of benefits under the Plan, other than benefits payable as a result of base salary deferrals, are conditioned on the participant’s covenant to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one year following the participant’s separation from service. The Bank has established a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally owned by the participants. In second quarter 2022, Salisbury contributed $100 thousand to the amended and restated Plan for Mr. Cantele, President and Chief Executive Officer. Salisbury’s expense for this plan was $152 thousand, $114 thousand and $135 thousand for 2022, 2021 and 2020, respectively.

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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 16 - LONG TERM INCENTIVE PLANS

The Board of Directors adopted the 2011 Long Term Incentive Plan (the “Plan”) on March 25, 2011, and the shareholders approved the Plan at the 2011 Annual Meeting. The Plan was amended on January 18, 2013, January 29, 2016 and again on April 28, 2017. The purpose of the Plan is to assist Salisbury and the Bank in attracting, motivating, retaining and rewarding employees, officers and directors by enabling such persons to acquire or increase a proprietary interest in Salisbury in order to strengthen the mutuality of interests between such persons and our shareholders, and providing such persons with stock-based long-term performance incentives to expend their maximum efforts in the creation of shareholder value.

The terms of the Plan provide for grants of Directors Stock Retainer Awards, Stock Options, Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock Units, Performance Awards, Deferred Stock, Dividend Equivalents, and Stock or Other Stock-Based Awards that may be settled in shares of common stock, cash, or other property (collectively, “Awards”). Under the Plan, the total number of shares of Common Stock reserved and available for issuance in the ten years following adoption of the Plan in connection with Awards under the Plan is 168,000 shares of Common Stock, which represented less than 5% of Salisbury’s outstanding shares of Common Stock at the time the Plan was adopted. Shares of Common Stock with respect to Awards previously granted under the Plan that are cancelled, terminate without being exercised, expire, are forfeited or lapse will again be available for issuance as Awards. Also, shares of Common Stock subject to Awards settled in cash and shares of Common Stock that are surrendered in payment of any Award or any tax withholding requirements will again be available for issuance as Awards. No more than 60,000 shares of Common Stock may be issued pursuant to Awards in any one calendar year. In addition, the Plan limits the total number of shares of Common Stock that may be awarded as Incentive Stock Options (“ISOs”) to 84,000 and the total number of shares of Common Stock that may be issued as Directors Stock Retainer Awards to 30,000. The Directors stock retainer awards were increased from 240 shares per year to 480 shares per year effective January 25, 2013. Effective January 29, 2016, the Directors stock retainer award was increased from 480 shares to 680 shares annually.

The Board of Directors adopted the 2017 Long Term Incentive Plan (the “2017 LTIP”) on February 24, 2017, which was approved by shareholders at the 2017 Annual Meeting on May 17, 2017. Pursuant to the 2017 LTIP, as of May 2017, following shareholder approval of the 2017 LTIP, no further awards will be made under the 2011 LTIP, which shall remain in existence solely for purposes of administering outstanding grants. Under the 2017 LTIP, the total number of shares of Common Stock reserved and available for issuance in the next ten years in connection with awards under the 2017 LTIP is 400,000 shares of Common Stock, which represents approximately 7% of Salisbury’s 5,540,072 outstanding shares of Common Stock as of March 20, 2017. Of the maximum shares available under the 2017 LTIP, 400,000 shares may be issued upon the exercise of stock options (all of which may be granted as incentive stock options) and 300,000 shares may be issued as restricted stock or restricted stock units (including deferred stock units), provided that, to the extent that a share is issued as a restricted stock award or a restricted stock unit, the share would no longer be available for award as a stock option, unless the restricted stock award or restricted unit is forfeited or otherwise returned to the 2017 LTIP. On March 9, 2020 the Board of Directors approved an amendment to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan (the “Plan”) which allows the Committee, in its sole discretion, to accelerate vesting of all or a portion of an award upon the termination of service of a participant or the occurrence of a change in control. On June 19, 2022 the Board of Directors approved an amendment to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan (the “Plan”) to reflect the two-for-one stock split effective on June 1, 2022.

Restricted stock

In 2022, 2021 and 2020 Salisbury granted a total of 36,680, 33,300, and 30,950 shares of restricted stock pursuant to its 2017 LTIP to certain employees and Directors. The fair value of the stock at grant date was determined to be $1.0 million, $750 thousand, and $554 thousand, respectively. The stock will be vested three years from the grant date.

The following table presents the amount of cumulatively granted restricted stock awards under the 2011 and 2017 Long-Term Incentive Plans:

      Weighted Average     Weighted Average     Weighted Average
  Year Ended December 31,  2022  Grant Price  2021  Grant Price  2020  Grant Price
 Beginning of Year    88,810   $20.22    80,250   $19.72    79,252   $20.52 
 Granted    36,680    27.77    33,300    22.53    30,950    17.92 
 Vested    (30,560)   19.93    (24,740)   21.73    (27,552)   19.86 
 Forfeited    0    0.00    0    0.00    (2,400)   20.63 
 End of Year    94,930   $23.22    88,810   $20.22    80,250   $19.72 

 

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The fair value of the restricted shares that vested during 2022 and 2021 were $816 thousand and $538 thousand, respectively. Compensation expense for restricted stock awards in 2022, 2021 and 2020 was $799 thousand, $599 thousand and $525, respectively. Unrecognized compensation cost relating to the restricted stock awards was $1,144 thousand and $925 thousand, as of December 31, 2022, and 2021, respectively. The remaining weighted average vesting period on restricted shares as of December 31, 2022, over which unrecognized compensation cost is expected to be recognized, is 1.2 years. The tax benefit associated with restricted stock awards, which was recognized in earnings for 2022, 2021 and 2020, was approximately $144 thousand, $108 thousand and $95 thousand, respectively.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted 6,800 performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank’s performance. This RSU plan replaced the Bank’s Phantom Stock Appreciation Units plan (Phantom). The final tranche of awards under the Phantom plan was paid out in January 2021.

The performance goal for awards granted under the RSU plan in 2019 is based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance. This tranche of awards vested in 2022 at 150% because the growth in Salisbury’s tangible book value over the performance period exceeded target performance.

On July 29, 2020, the Compensation Committee granted an additional 14,500 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank’s tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is achieved, vesting will occur no later than July 29, 2023.

On June 23, 2021, the Compensation Committee granted an additional 14,800 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($4.50 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than June 23, 2024.

On February 28, 2022, the Compensation Committee granted an additional 13,900 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($4.50 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 15, 2025.

The fair value of the awards granted under the RSU plan at the grant date was $394 thousand $354 thousand and $264 thousand, respectively, for those grants awarded in 2022, 2021, and 2020. In 2020, 350 RSUs were forfeited. Compensation expense of $329 thousand, $331 thousand and $221 was recorded with respect to these RSUs in 2022, 2021 and 2020, respectively. No performance-based restricted stock units were awarded prior to 2018. The shares noted above are contingently issuable only upon attainment of the minimum performance goal.

The following table presents the amount of cumulatively granted performance based restricted stock units awarded under the 2017 Long-Term Incentive Plan:

             
Weighted Average Weighted Average
Year Ended December 31, 2022 Grant Price 2021 Grant Price
Beginning of Year 42,200 $20.92 27,400 $19.32
Granted 13,900 28.33 14,800 23.90
Vested (12,900) 20.60 — —
End of Year 43,200 $23.41 42,200 $20.92

 

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 $1,297 thousand, $1,166 thousand, and $941 thousand, in 2022, 2021, and 2020, respectively.

 

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NOTE 17 – STOCK OPTIONS

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. The table below reflects the remaining outstanding options related to this transaction and presents a summary of the status of Salisbury's outstanding stock options:

  Year ended December 31, 2022  Number of options  Weighted average exercise price  Weighted average remaining contractual term (in years)  Aggregate intrinsic value
 Beginning of period    25,920   $8.52           
 Exercised    (25,920)   8.52           
 End of period     —   $ —    0.00   $0 

 

  Year ended December 31, 2021  Number of options  Weighted average exercise price  Weighted average remaining contractual term (in years)  Aggregate intrinsic value
 Beginning of period    29,430   $8.52           
 Exercised    (3,510)   8.52           
 End of period    25,920   $8.52    2.00   $491,443 

 

The total intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of stock options exercised during the years ended December 31, 2022, 2021 and 2020 was $531 thousand, $37 thousand, and $78 thousand, respectively.

 

 

NOTE 18 - RELATED PARTY TRANSACTIONS

In the normal course of business, the Bank has granted loans to executive officers, directors, principal shareholders and associates of the foregoing persons considered to be related parties. Changes in loans to executive officers, directors and their related associates are as follows (there are no loans to principal shareholders):

  Years ended December 31, (in thousands)    2022      2021  
 Balance, beginning of period   $9,046   $9,417 
 Advances    3,734    2,067 
 Repayments    (3,934)   (2,438)
 Balance, end of period   $8,846   $9,046 

 

 

NOTE 19 – OTHER COMPREHENSIVE (LOSS) INCOME

The following table presents a reconciliation of the changes in the components of other comprehensive (loss) income for the dates indicated, including the amount of income tax benefit (expense) allocated to each component of other comprehensive (loss) income:

Years ended December 31, (in thousands)    2022      2021      2020  
Other comprehensive (loss) income                
Net unrealized (losses) gains on securities available-for-sale  $(27,171)  $(2,701)  $2,280 
Reclassification of net realized (gains) losses in net income (1)   (165)   2    (196)
Unrealized (losses) gains on securities available-for-sale   (27,336)   (2,699)   2,084 
Income tax benefit (expense)   5,741    565    (437)
Unrealized (losses) gains on securities available-for-sale, net of tax   (21,595)   (2,134)   1,647 
Other comprehensive (loss) income  $(21,595)  $(2,134)  $1,647 
                

(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 pretax amount is reflected as gains (losses) on securities, net; the tax effect is included in the income tax provision; and the after-tax amount is included in net income. The income tax benefit related to reclassification of net realized (losses) gains was approximately $35 thousand, $0 thousand, and $41 thousand in 2022, 2021 and 2020, respectively.

 

The components of accumulated other comprehensive (loss) income are as follows:

December 31, (dollars in thousands)    2022      2021  
Unrealized (losses) gains on securities available-for-sale, net of tax  $(20,725)  $870 
Accumulated other comprehensive (loss) income  $(20,725)  $870 

 

 

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NOTE 20 – DERIVATIVES AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives

 

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

 

Fair Value Hedges of Interest Rate Risk

 

The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

 

Salisbury’s fair value hedge matured in third quarter 2022. As of December 31, 2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

 

Line Item in the Statement of Financial Position in Which the Hedged Item is Included  Carrying Amount of the
Hedged Assets		  Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets
(in thousands)  December 31, 2021  December 31, 2021
Loans receivable(1)  $9,982   $(18)
Total  $9,982   $(18)

 

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

 

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

              
   As of December 31, 2021
(in thousands)  Notional Amount 

Balance Sheet

Location

Derivatives designated as hedge instruments         
Interest Rate Products  $10,000   Other assets $18 
Total Derivatives designated as hedge instruments       $18 
              

The tables below present the effect of the Company’s derivative financial instruments on the Income Statement as of December 31, 2022 and 2021.

     
 
    Twelve months ended December 31, 2022    Twelve months ended December 31, 2021 
(in thousands)   Interest
Income		    Interest
Expense		    Interest
Income		    Interest
Expense		 
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded  $64   $—   $3   $— 
Gain or (loss) on fair value hedging relationships in Subtopic 815-20                    
Interest contracts                    
Hedged items   18    —    (14)    — 
Derivatives designated as hedging instruments  $46   $—   $17   $— 

 

 

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NOTE 21 - COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Bank’s agreement with the core accounting processing service provider will continue until the eighth anniversary of the commencement date, which was November 10, 2016. If the Bank cancels the agreement prior to the end of the contract term, a lump sum termination fee will have to be paid. The fee shall consist of the total amount that would have been paid or reimbursed to the service provider during the remainder of the term of the agreement.

Contingent Liabilities

The Bank is involved in various claims and legal proceedings, which are not material, arising in the ordinary course of business. 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 to which any of its property is subject. 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 December 2022, Salisbury filed a complaint against the beneficiaries to recover the distributed proceeds and to reinstate the trust account. At this time, management believes that Salisbury’s exposure is not yet known or knowable and could potentially range from zero to approximately $0.8 million depending upon the facts and circumstances.

 

NOTE 22 - FINANCIAL INSTRUMENTS

The Bank, in the normal course of business and to meet the financing needs of its customers, is a party to financial instruments with off-balance sheet risk.    These financial instruments include commitments to originate loans, letters of credit, and unadvanced funds on loans.  The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets.  The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to originate loans are agreements to lend to a customer provided there are no violations of any conditions established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer's creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower.  Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income producing properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  As of December 31, 2022 and 2021, the maximum potential amount of the Bank’s obligation was $0.8 million and $2.8 million, respectively, for financial, commercial and standby letters of credit.  If a letter of credit is drawn upon, the Bank may seek recourse through the customer’s underlying line of credit.  If the customer’s line of credit is also in default, the Bank may take possession of the collateral, if any, securing the line of credit.

Financial instruments with off-balance sheet credit risk are as follows:

December 31, (in thousands)    2022      2021  
Residential  $39,735   $16,288 
Home equity lines of credit   34,957    31,490 
Commercial   44,356    41,544 
Land   747    839 
Real estate secured   119,795    90,161 
Commercial and industrial   129,762    112,262 
Municipal   2,538    541 
Consumer   5,232    4,349 
Unadvanced portions of loans   257,327    207,313 
Commitments to originate loans   48,711    43,689 
Letters of credit   777    2,835 
Total  $306,815   $253,837 


The allowance for off balance sheet commitments is calculated by applying a reserve percentage discounted by a utilization factor to the sum of unguaranteed unused lines of credit and loan contracts that the Bank has committed to but not funded as of year-end. The allowance for off-balance sheet commitments was $178 thousand and $146 thousand as of December 31, 2022 and December 31, 2021, respectively.

 

 

NOTE 23 - FAIR VALUE MEASUREMENTS

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 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.

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Salisbury adopted ASC 820-10, “Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. 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. Salisbury uses interest rate swaps to manage its interest rate risk. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Salisbury incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

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.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the twelve-month period ended December 31, 2022 and 2021.

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

•Securities available-for-sale and the mutual funds. Securities available-for-sale and the 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. For certain corporate bonds, management uses a discounted cash flow model to estimate fair value.
•Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
•Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.
•Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.
•Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.

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Assets measured at fair value are as follows:

  Fair Value Measurements Using  Assets at
(in thousands)   Level 1    Level 2    Level 3    fair value 
December 31, 2022                    
Assets at fair value on a recurring basis                    
U.S. Treasury  $ —   $17,133   $ —   $17,133 
U.S. Government Agency notes    —    27,154     —    27,154 
Municipal bonds    —    46,538     —    46,538 
Mortgage-backed securities:                    
U.S. Government agencies and U.S. Government-sponsored enterprises    —    61,875     —    61,875 
Collateralized mortgage obligations:                    
U.S. Government agencies    —    21,936     —    21,936 
Corporate bonds   833    11,941     —    12,744 
Securities available-for-sale  $833   $186,577   $ —   $187,410 
Mutual funds   1,933     —     —    1,933 

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

 

1 At December 30, 2022, Salisbury did not have any assets measured at fair value on a non-recurring basis. Prior to December 31, 2021, the Bank entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch and relocate the branch to leased space nearby. This sale was completed in January 2022.

 

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

    Carrying    Estimated   Fair value measurements using 
(In thousands)   value    fair value    Level 1    Level 2    Level 3 
December 31, 2022                         
Financial Assets                         
Cash and cash equivalents  $50,539   $50,539   $50,539   $ —   $ — 
Securities available-for-sale   187,410    187,410    833    186,577     — 
Mutual fund   1,933    1,933    1,933     —     — 
Federal Home Loan Bank of Boston stock   1,285    1,285     —    1,285     — 
Loans held-for-sale    —     —     —     —     — 
Loans receivable, net   1,213,671    1,172,416     —     —    1,172,416 
Accrued interest receivable   6,797    6,797     —    6,797     — 
Cash surrender value of life insurance policies   30,379    30,379     —    30,379     — 
Financial Liabilities                         
Demand (non-interest-bearing)  $395,994   $395,994   $ —   $395,994   $ — 
Demand (interest-bearing)   231,486    231,486     —    231,486     — 
Money market   343,965    343,965     —    343,965     — 
Savings and other   233,578    233,578     —    233,578     — 
Certificates of deposit   153,370    153,411     —    153,411     — 
Deposits   1,358,393    1,358,434     —    1,358,434     — 
Repurchase agreements   7,228    7,228     —    7,228     — 
FHLBB advances   10,000    10,000     —    10,000     — 
Subordinated debt   24,531    21,670     —    21,670     — 
Note payable   128    125     —    125     — 
Finance lease liability   4,262    3,546     —     —    3,546 
Accrued interest payable   210    210     —    210     — 

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


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

 

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NOTE 24 – SALISBURY BANCORP, INC. (PARENT ONLY) CONDENSED FINANCIAL INFORMATION

The unconsolidated balance sheets and statements of income and cash flows of Salisbury Bancorp, Inc. are presented as follows:

  Balance Sheets
  December 31, (in thousands)		    2022      2021  
Assets          
Cash and due from banks  $5,443   $6,412 
Investment in bank subsidiary   146,772    154,292 
Other assets   796    386 
Total Assets  $153,011   $161,090 
Liabilities and Shareholders' Equity          
Subordinated debt  $24,531   $24,474 
Other liabilities   125    16 
Shareholders' equity   128,355    136,600 
Total Liabilities and Shareholders' Equity  $153,011   $161,090 

 

  Statements of Income
  Years ended December 31, (in thousands)		    2022      2021      2020  
Dividends from subsidiary  $4,321   $3,994   $3,787 
Interest income   10    11    6 
Interest expense   932    1,000    618 
Non-interest expenses   1,063    574    495 
Income before taxes and equity in undistributed net income of subsidiary   2,336    2,431    2,680 
Income tax benefit   409    386    273 
Income before equity in undistributed net income of subsidiary   2,745    2,817    2,953 
Equity in undistributed net income of subsidiary   13,129    13,656    8,987 
Net income  $15,874   $16,473   $11,940 

 

  Statements of Cash Flows
  Years ended December 31, (in thousands)		    2022      2021      2020  
Net income  $15,874   $16,473   $11,940 
Adjustments to reconcile net income to net cash provided by operating activities:               
Equity in undistributed net income of subsidiary   (13,129)   (13,656)   (8,987)
Other   (245)   63    (25)
Net cash provided by operating activities   2,500    2,880    2,928 
Investing Activities               
Investment in bank    —    (9,433)    — 
Net cash utilized by investing activities    —    (9,433)    — 
Financing activities               
Issuance of subordinated debt, net of issuance cost    —    24,418     — 
Payoff of subordinated debt    —    (10,000)    — 
Common stock dividends paid   (3,691)   (3,452)   (3,286)
Proceeds from issuance of common stock   222    31    53 
Net cash (utilized) provided by financing activities   (3,469)   10,997    (3,233)
Net (decrease) increase in cash and cash equivalents   (969)   4,444    (305)
Cash and cash equivalents, beginning of period   6,412    1,968    2,273 
Cash and cash equivalents, end of period  $5,443   $6,412   $1,968 

 

 

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NOTE 25 – EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, restricted stock and stock units, and other potentially dilutive securities outstanding. Earnings per share are restated for stock splits and dividends through the date of issuance of the financial statements.

The calculation of earnings per share is as follows:

  Years ended December 31, (in thousands, except per share amounts)    2022      2021      2020  
Net income  $15,874   $16,473   $11,940 
Less: Undistributed earnings allocated to participating securities   (276)   (248)   (165)
Net income allocated to common shareholders  $15,598   $16,225   $11,775 
Weighted average common shares issued   5,770    5,710    5,674 
Less: Unvested restricted stock awards   (100)   (86)   (78)
Weighted average common shares outstanding used to calculate basic earnings per common share   5,670    5,624    5,596 
Add: Dilutive effect of performance based restricted stock awards and stock options   26    48    16 
Weighted average common shares outstanding used to calculate diluted earnings per common share   5,696    5,672    5,612 
Earnings per common share (basic)  $2.75   $2.88   $2.11 
Earnings per common share (diluted)  $2.74   $2.86   $2.10 

 

 

NOTE 26 – SUBSEQUENT EVENTS

On January 25, 2023 the Board of Directors declared a dividend of $0.16 per common share payable on February 24, 2023 to shareholders of record as of February 10, 2023.

 

On March 1, 2023, Salisbury executed a one-year lease for a building in Millerton, New York. The lease carries an option for a one year renewal.

 

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Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.
Item 9A.CONTROLS AND PROCEDURES

Controls and Procedures

Salisbury carried out an evaluation under the supervision and with the participation of Salisbury’s management, including Salisbury’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Salisbury’s disclosure controls and procedures at and for the year ended December 31, 2022. Based upon that evaluation, management, including the principal executive officer and principal financial officer, concluded that Salisbury’s disclosure controls and procedures were effective as of the end of the period covered by this report and (i) designed to ensure that information required to be disclosed by Salisbury in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (ii) accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Management of Salisbury and its subsidiary is responsible for establishing and maintaining effective internal control over financial reporting. Pursuant to the rules and regulations of the SEC, internal control over financial reporting is a process designed by, or under the supervision of, Salisbury’s principal executive and principal financial officers, or persons performing similar functions, and effected by Salisbury’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles, and includes those policies and procedures that:

i.Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of Salisbury;
ii.Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of Salisbury are being made only in accordance with authorizations of management and directors of Salisbury; and
iii.Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Salisbury’s assets that could have a material effect on the financial statements.

As of December 31, 2022, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control —Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2022 was effective.

Changes in internal control over financial reporting 

There were no significant changes in internal control over financial reporting during the fourth quarter of 2022 that materially affected or are reasonably likely to materially affect Salisbury’s internal control over financial reporting.
Item 9B.OTHER INFORMATION

None

Item 9C.DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not Applicable.

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PART III

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers

The following table sets forth information regarding the executive officers of Salisbury, and the executive officers of the Bank who are deemed executive officers of Salisbury pursuant to Rule 3b-7 of the Exchange Act, followed by certain biographical information as of December 31, 2022. Executive Officers are generally appointed by the Board each year following the Annual Meeting.

Name

Position

Age

Years of Service

Peter Albero(1) Executive Vice President and Chief Financial Officer of Salisbury and the Bank 58 5
Carla L. Balesano(2) Executive Vice President and Chief Credit Officer of the Bank 68 2
Richard J. Cantele, Jr.(3) President and Chief Executive Officer of Salisbury and the Bank 63 41
Todd M. Clinton(4) Executive Vice President and Chief Risk Officer of the Bank 61 36
John M. Davies(5) President of NY Region and Chief Lending Officer of the Bank 60 8
Steven M. Essex(6) Executive Vice President and Head of Salisbury Bank Wealth Advisory 53 13
Amy D. Raymond(7) Executive Vice President and Chief Retail Lending Officer of the Bank 51 21
Todd J. Rubino(8) Executive Vice President and Chief Commercial Lending Officer of the Bank 54 8
Stephen M. Scott(9) Executive Vice President and Chief Operating Officer of the Bank 39 <1
       
             
(1)Mr. Albero was appointed Executive Vice President and Chief Financial Officer of Salisbury and the Bank on October 20, 2017. Mr. Albero holds a BS in Accounting and Finance from Manhattan College (magna cum laude) and an MBA from New York University. He is a Certified Public Accountant with more than 20 years of accounting management. He previously served as Director, Financial Services Advisory Practice at PricewaterhouseCoopers LLP, New York, NY since September 2015. Prior to that, Mr. Albero spent 27 years at Morgan Stanley, New York, NY most recently serving as Managing Director, Head of SEC Reporting and Disclosure from June 2014 to July 2015. He served as Managing Director, Head of Regulatory Reporting from September 2012 to May 2014 and prior to that, as Managing Director, Head of Corporate Reporting and Analysis from December 2007 to August 2012.

(2)Ms. Balesano was appointed Executive Vice President and Chief Credit Officer of the Bank on July 27, 2020. She previously served as SVP, Syndicated Lending at Liberty Bank. Prior to that, she was an Executive Credit Officer and Head of Corporate Loan Strategies at Peoples United Bank, and Managing Senior Credit Officer at TD Bank, where she was responsible for the leadership and management of a team of credit officers overseeing and managing commercial and corporate banking credit activities. She has also held senior credit positions at Webster Bank and Bank of America. Ms. Balesano received her AD from Manchester Community College, has completed numerous professional development courses with RMA, and has continued her education at the University of Connecticut.
(3)Mr. Cantele has been a director of Salisbury and the Bank since 2005. Mr. Cantele graduated from Fairfield University in 1981 with a Bachelor of Science degree in Finance; and graduated from the Stonier Graduate School of Banking in 1997. Mr. Cantele became President and Chief Executive Officer of Salisbury and the Bank in 2009, prior to which he served as President and Chief Operating Officer of Salisbury and the Bank since 2005. Mr. Cantele has been an executive officer of Salisbury since 2001 and of the Bank since 1989, serving as Executive Vice President, Treasurer and Chief Operating Officer of the Bank and Salisbury and Secretary of Salisbury.

(4)Mr. Clinton joined the Bank in 1987. He was named Executive Vice President and Chief Risk Officer in May of 2014. Prior to that, he served as Senior Vice President, Chief Technology and Compliance Officer of the Bank since June of 2002. Mr. Clinton served as Operations Officer of the Bank from September of 1997 to June of 2002. He is a graduate of the Connecticut School of Finance and Management and the ABA Compliance Management School and has more than 40 years of experience in community banking.
(5)Mr. Davies joined the Bank as President of the New York Region in December of 2014 and subsequently assumed the additional responsibility of Chief Lending Officer. Prior to that, Mr. Davies served as President and Chief Executive Officer of Riverside Bank for three years and served as Executive Vice President of Riverside Bank prior to that. He is a graduate of Pace University with an MBA in Business Administration and has more than 25 years of commercial lending experience.
(6)Mr. Essex joined the Bank in 2009 as Vice President, Trust Officer. In January of 2014 he assumed responsibility as Interim Head of the Trust Wealth Advisory Department. In June of 2014, he was promoted to Senior Vice President, Head of Trust Wealth Advisory Services, and in May 2016 he was promoted to Executive Vice President, Head of Trust Wealth Advisory Services. Mr. Essex is a graduate of the University of Connecticut with a Bachelor’s degree in Economics. He has more than 25 years of experience in high net worth relationship management, business development, and financial and estate planning.

(7)Mrs. Raymond joined the Bank in June of 2001 as Special Projects Coordinator. She has held a number of different positions within the Bank since that time, including Branch Manager, Mortgage Processor, and Sales Manager for Mortgage Originations. In May of 2006 she was promoted to Assistant Vice President, Mortgage Origination. In May of 2007 she was promoted to Vice President, Mortgage Origination. In May of 2014 she was promoted to Senior Vice President, Retail Lending and CRA Officer. In April of 2015 she was named Senior Vice President, Retail and Commercial Operations Manager, CRA Officer. Mrs. Raymond was named Executive Vice President and Chief Retail Banking Officer in February of 2019. She holds a BS in Business Management from the University of New Haven. She has more than 20 years of experience in community banking. In September of 2022, she was named Executive Vice President, Chief Retail and Consumer Lending Officer, CRA Officer, and Fair Lending Officer.
(8)Mr. Rubino joined the Bank in December of 2014 as Senior Vice President, Senior Commercial Lending Officer. He was appointed Executive Vice President, Chief Commercial Lending Officer in December of 2021. Prior to this, he served as Executive Vice President and Senior Lending Officer at Riverside Bank. Mr. Rubino holds a B.A. in Economics from the State University of New York at Binghamton. He has over 30 years of community banking experience.
(9)Mr. Scott joined the Bank in May of 2022 as Executive Vice President and Chief Operating Officer. Prior to this, he served as Chief Operating Officer at Fieldpoint Private for 7 years. Mr. Scott holds a BBA in Business Management from Western Connecticut State University, Ancell School and is a graduate of the ABA Graduate School of Banking Leadership Program at University of Pennsylvania, Wharton School.
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Information about Salisbury’s Directors

The Board of Directors is composed of a diverse group of persons with a variety of experience, qualifications, attributes and skills that enable the Board of Directors to meet the needs of Salisbury’s governance principles and make a positive impact on the Bank’s business and the communities served by the Bank. In particular, the Board of Directors consists of a group of individuals who collectively bring a mix of skills and knowledge in the areas of banking, finance, accounting and business. All members of the Board of Directors have an understanding of finance and accounting, and are able to read and understand fundamental financial statements and generally accepted accounting principles and their application to the accounting of Salisbury. Each of the director’s previous experience, analytical aptitude and leadership provide Salisbury with a wealth of knowledge from which it may draw. In addition, members of the Board of Directors are active in, and knowledgeable about, the credit and banking needs of its customers and the local communities in which Salisbury and the Bank operate. Salisbury believes these individuals possess valuable skills and attributes for service as a director of Salisbury and the Bank and that their local knowledge and experience assists Salisbury in serving its customers, the community, and shareholders.

One of Salisbury’s directors serves on the boards of directors of other public companies. Ms. Schalkwyk is a Director of Exchange Income Corporation, which is headquartered in Winnipeg, Canada and is a diversified acquisition-oriented corporation focused on opportunities in aerospace and aviation services and equipment, and manufacturing. The biographies of each of the nominees and continuing board members below contain information regarding the person’s business experience and the experiences, qualifications, attributes or skills that caused the Nominating and Governance Committee and the Board of Directors to determine that the person should serve as a director. Each existing director is also a director of the Bank.

George E. Banta (87) has been a director of the Bank and Salisbury since 2014. Mr. Banta is a graduate of Cornell University, School of Hotel Administration and has over 50 years of experience in the restaurant, hotel, and real estate businesses. Mr. Banta owns the Beekman Arms Inn in Rhinebeck, New York, and serves as President of Banta Properties, Inc., which owns and operates 5 restaurants. Mr. Banta is also President of Banta Motel Co. Inc., which owns and operates 20 franchise hotels in New York, Connecticut, Pennsylvania, and New Jersey. He is also a partner in several real estate holdings. Mr. Banta’s expansive knowledge of real estate and related business experience are valuable to the Board’s overall capabilities.

Arthur J. Bassin (78) has been a director of the Bank and Salisbury since June, 2010. Mr. Bassin served as an Artillery Officer in the U.S. Army from 1965 to 1967. He spent 25 years in consumer, commercial and mortgage banking at Citibank (1969-1983) and Dime Savings Bank of New York (1983-1992), followed by 10 years in private equity, most recently as President and Chief Executive Officer of TVData Technologies (1994-2001). Mr. Bassin earned his MBA from Harvard Business School in 1969 and his AB from Harvard College in 1965. He took office as Ancram Town Supervisor in January 2010. Mr. Bassin has served as a director on several boards and currently serves on the Boards of Cricket Hill Farm, Inc. and Cricket Hill Academy, Inc. He previously served on the Board of Amputee Coalition of America. Mr. Bassin also serves on the Ancram Town Board and the Columbia County Board of Supervisors. Mr. Bassin’s experience in board and community service, consumer, commercial and mortgage banking as well as in private equity, in addition to his demonstrated leadership skills, provides valuable insight and skills to Salisbury and the Bank.

Richard J. Cantele, Jr., (63) the President and Chief Executive Officer of Salisbury and the Bank, has been a director of Salisbury and the Bank since 2005. Mr. Cantele graduated from Fairfield University in 1981 with a Bachelor of Science degree in Finance, and graduated from the Stonier Graduate School of Banking in 1997. Mr. Cantele became President and Chief Executive Officer of Salisbury and the Bank in 2009, prior to which he served as President and Chief Operating Officer of Salisbury and the Bank since 2005. Mr. Cantele has been an executive officer of Salisbury since 2001 and the Bank since 1989, serving as Executive Vice President, Treasurer and Chief Operating Officer of the Bank and Salisbury and Secretary of Salisbury. He became a director of Sharon Hospital in 2017 and President of the Sharon Hospital Board in January of 2020. He also serves as a member of the Town of Salisbury’s Board of Finance and the Board of Wyantenuck Country Club. Mr. Cantele’s positions as President and Chief Executive Officer along with his extensive years of service to Salisbury and the Bank provide him with thorough knowledge of the Bank and the markets which it serves.

David B. Farrell (67) has been a director of the Bank and Salisbury since June, 2012. Mr. Farrell was elected Chairman of the Board in May of 2019. Mr. Farrell graduated from St. Bonaventure University, cum laude, in 1977 with a B.S. degree in Business and Accounting. He was formerly employed by Coopers and Lybrand and was a Certified Public Accountant in New York State. Mr. Farrell is the Chief Executive Officer of Welle Training, Inc., an organization providing behavioral safety management to the healthcare industry. Mr. Farrell is also Chief Executive Officer and Founder of Farrell & Company, LLC, a management consulting firm. Mr. Farrell previously served as President and Chief Executive Officer and member of the board of directors of Bob’s Stores (1999-2008), a Division of The TJX Companies, Inc. He previously served as an officer and director of Berkshire Hills Bancorp (2005-2009). Mr. Farrell’s education and experience in the retail and financial services industries as well as his prior experience as a director of another financial institution provides valuable knowledge and insight to Salisbury and the Bank. In particular, his extensive background in accounting and financial oversight provides a unique set of skills to the Board. Mr. Farrell qualifies as a “financial expert” as defined by federal securities laws.

Paul S. Hoffner (58) has been a director of the Bank and Salisbury since May, 2021. Prior to that, he served as a member of the Riverside Division Advisory Board from 2015 to 2020 and Director of Riverside Bank from 2012 to 2014. Mr. Hoffner graduated from Tufts University with a Bachelor of Science in 1986 and earned his MBA from NYU’s Stern School of Business in 1988. He is President of John Herbert Company, a second-generation floor covering contractor based in Newburgh, NY. Mr. Hoffner joined such company in 1988, and 8 years later, he purchased it and began heading its business development effort, a role he is still in today. Mr. Hoffner serves on several philanthropic boards, and his primary interests are providing scholarships for local, less advantaged youth, tackling housing insecurity, poverty alleviation, and financial literacy. Mr. Hoffner has developed an extensive network of relationships in various communities that Salisbury serves which, combined with his education, leadership, and extensive business experience will serve to strengthen our Boards.

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Holly J. Nelson (69) has been a director of the Bank since 1995 and of Salisbury since 1998. Ms. Nelson graduated from Cornell University with a B.A. in 1979. She is Development and Events Coordinator for the Hotchkiss Library of Sharon and is a member of Iceland Adventure, LLC, a tour operator. Ms. Nelson has served in a board and leadership capacity for many organizations, including board member of the Berkshire Taconic Community Foundation and board member of the HousingUs affordable housing initiative. She has been involved in a variety of non-profit organizations in NY, CT, and MA, as well as public government positions in the Town of North East, New York. Ms. Nelson’s education, knowledge of marketing and non-profit organizations, and experience in successfully operating small businesses in the New York market area served by the Bank provides valuable perspective and leadership skills to the Board.

Neila B. Radin (69) has been a director of the Bank and Salisbury since November 22, 2019. Ms. Radin is a graduate of New York University, B.A. (magna cum laude) and the Harvard Law School, J.D. Ms. Radin retired as a Managing Director and Associate General Counsel of JPMorgan Chase & Co. (JPMC), where she served as special advisor to the general counsel of JPMC on complex projects, and was, for more than twenty years, JPMC’s General Counsel of Corporate Law with legal responsibility for corporate law, corporate finance, mergers and acquisitions, private equity, strategic investments, corporate securities issuances and funding, investor relations, and disclosure issues affecting such company. Ms. Radin has served as Chair of the Securities Law Committee and President of the New York Chapter of the Society of Corporate Secretaries & Governance Professionals, and served on various Bar committees and panels. She is currently on the Board of Directors of Workforce Professionals Training Institute, the leading provider of training, consulting and systems building to New York City's workforce development organizations, where she serves as Chair of its Nominating and Governance Committee and is a member of the Board's Executive, Risk and Program Committees. Ms. Radin is also the Vice-Chair of the Vassar College Life-Long Learning Institute, a volunteer member organization that offers non-credit educational courses to its members, 55 and older. Ms. Radin’s education, experience, and legal background provides valuable insight into financial services and corporate governance matters.

Grace E. Schalkwyk (67) has been a director of the Bank and Salisbury since November 22, 2019. Ms. Schalkwyk holds a Bachelor of Commerce (Finance) from University of British Columbia, with executive education from Columbia Business School and INSEAD. She holds the Board Leadership Fellow designation from the National Association of Corporate Directors (NACD). Ms. Schalkwyk is an advisor to fintech and other technology companies. Her prior experience includes positions with Standard & Poor’s (now S&P Global) leading a global information business; Artnet AG as Chief Financial Officer; Reuters (now Refinitiv) in corporate development; and Credit Suisse in investment banking, advising clients on financings, strategic transactions, enhancing valuation, and investor engagement. Ms. Schalkwyk is active with NACD, Women Corporate Directors, cybersecurity events and fintech forums. She serves on the boards of Winnipeg, MB based Exchange Income Corp., and Lakeville, CT based Crescendo, Inc. She qualifies as a “financial expert” as defined by federal securities laws. Ms. Schalkwyk’s extensive experience and skillset provides valuable insight in today’s complex and fast paced banking environment.

CORPORATE GOVERNANCE

 

Salisbury’s Board of Directors is committed to strong corporate governance practices to maximize Shareholder value while complying with legal requirements and safe and sound banking principles. Accordingly, the Board has adopted corporate governance practices, which, along with the rules and listing standards of the NASDAQ Equities Market (“NASDAQ”) and the regulations of the SEC, are periodically reviewed by Management and the Board.

 

Meetings and Committees of the Board of Directors

The Board of Directors met seventeen (17) times during 2022. The Board’s committees include the Executive Committee, the Human Resource and Compensation Committee, the Nominating and Governance Committee, and the Audit Committee. The members of the committees are appointed by the Board of Directors at least annually. In addition to these committees, the Bank and Salisbury also maintain committees to oversee other areas of Salisbury’s operations.

During 2022, no director attended fewer than 75% of the aggregate of (1) the total number of meetings held by Salisbury’s Board of Directors during the period that the individual served; and (2) the total number of meetings held by all committees of Salisbury’s Board of Directors on which they served. Salisbury does not maintain a policy for directors’ attendance at Salisbury’s Annual Meetings of Shareholders, but encourages all directors to attend. All of the directors of Salisbury attended Salisbury’s Annual Meeting of Shareholders on May 18, 2022 with the exception of Mr. Cantele.

Director Independence

The Board has determined that all directors are considered “independent” within the meaning of the independence standards of NASDAQ with the exception of Richard J. Cantele, Jr., who is an executive officer of Salisbury and the Bank. Mr. Cantele does not serve on any of Salisbury’s committees other than the Executive Committee. All members of the Nominating and Governance Committee, Human Resource and Compensation Committee and Audit Committee are “independent”. The Board based these determinations of independence primarily on a review of responses to Director Questionnaires regarding current and previous employment relationships as well as material transactions and relationships between Salisbury and Salisbury’s or the Bank’s directors, members of their immediate families, and entities in which directors have a significant interest.

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Board Diversity

As a Smaller Reporting Company, Salisbury meets the diversity objectives of NASDAQ by including at least two female directors.

 

Board Diversity Matrix (as of December 31, 2022)
Total Number of Directors 8
  Female Male Non-Binary Did Not Disclose Gender
Gender Identity
Directors 3 5 0 0
Demographic Background
African American or Black 0 0 0 0
Alaskan Native or Native American 0 0 0 0
Asian 0 0 0 0
Hispanic or Latinx 0 0 0 0
Native Hawaiian or Pacific Islander 0 0 0 0
White 3 5 0 0
Two or More Races or Ethnicities 0 0 0 0
LGBTQ+ 0
Did Not Disclose Demographic Background 0

Executive Committee

The Executive Committee has general supervision over the affairs of Salisbury between meetings of the Board of Directors. The current members of the Executive Committee are Richard J. Cantele, Jr., David B. Farrell (Chair), Neila B. Radin, and Grace E. Schalkwyk. The Executive Committee did not meet during 2022.

Nominating and Governance Committee

The Nominating and Governance Committee is responsible for assisting the Board of Directors in identifying and evaluating potential nominees for director and recommending qualified nominees to the Board for consideration; oversight of the annual evaluation process for the Board of Directors; and selecting director nominees to stand for election at Salisbury’s annual meetings of Shareholders. The Nominating and Governance Committee is also responsible for making recommendations to the Board of Directors relating to appropriate corporate governance matters, developments and practices. The Nominating and Governance Committee considers various factors and qualifications, in accordance with its Charter, Salisbury’s Bylaws and Certificate of Incorporation and applicable law. Its process for identifying and evaluating nominees for director has historically operated informally and without any differences in the manner in which it evaluates nominees recommended by Shareholders. The Nominating and Governance Committee is responsible for reviewing Shareholder nominations submitted to Salisbury. The Nominating and Governance Committee determines whether such nomination was submitted timely and whether it satisfies all applicable eligibility requirements before recommending appropriate action to the Board of Directors.

The Nominating and Governance Committee and the Board of Directors consider factors such as established age and tenure guidelines as well as those summarized below in evaluating director candidates, including any nominee submitted by Shareholders, and trust that Salisbury’s Bylaws, Nominating and Governance Committee Charter and the qualifications and considerations such as those enumerated below provide adequate guidance and flexibility in evaluating candidates. The Board of Directors has adopted a policy with regard to the consideration of diversity in identifying director nominees, and remains committed to diversity at the Board level as well as with regard to employees. An audit or monitoring of such policy is performed periodically to examine and evaluate the effectiveness of the policy, as well as compliance with relevant laws, regulations and/or best practices. Audits of the policy are performed by either internal audit or Salisbury’s Risk Management Department and are submitted to the Audit Committee for review. Salisbury’s Nominating and Governance Committee works to ensure that the Board is composed of individuals with expertise in fields relevant to Salisbury’s business, experience from different professions and industries, a diversity of age, ethnicity and gender and a range of tenures. This approach has proven beneficial given the complex and dynamic nature of the banking industry. The Nominating and Governance Committee considers a number of qualifications when identifying and recommending a director nominee, including whether the nominee would assist in achieving a mix of board members that represents a variety of background, experience and diversity. Salisbury has been a leader in Board diversity, particularly with respect to gender diversity, with three women serving on the Board, and diversity of professional experience.

Qualifications for director candidates include:

·Sound business judgment and financial sophistication in order to understand Salisbury’s financial and operating performance and to provide strategic guidance to management.
·Business management experience.
·Integrity, commitment, honesty and objectivity.
·A general familiarity with (i) prudent banking principles; (ii) bank operations/technology; (iii) pertinent laws, policies and regulations; (iv) markets and trends affecting the financial services industry; and (v) local economic and business opportunities.
·Strong communication skills in order to function effectively with Salisbury’s constituencies.
·A financial interest in Salisbury as a Shareholder. Generally, candidates should not have relationships with Salisbury or the Bank that would disqualify the candidate from being considered independent.
·Generally, candidates should be involved in philanthropic, education, business or civic leadership positions.
·Generally, candidates should assist in achieving a mix of board members that represents a variety of background, experience and diversity.
·Generally, candidates should be familiar with the geographic areas served by Salisbury.
·Candidates should evidence a willingness and commitment to devote sufficient time and energy to prepare for and attend Board of Director and committee meetings and to diligently perform the duties and responsibilities of service as a director.
·Candidates should not have interests that conflict with those of Salisbury or the Bank.
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Salisbury has not paid a fee to any third-party or parties to identify or assist in identifying or evaluating potential nominees. The Board of Directors and Nominating and Governance Committee do not discriminate on the basis of sex, race, color, gender, national origin, religion or disability in the evaluation of candidates. The Nominating and Governance Committee also recommends to the Board of Directors for its approval that directors serve as members of each committee, recommends corporate governance principles applicable to Salisbury, and oversees the annual evaluation process for the Board.

A copy of Salisbury’s Nominating and Governance Committee Charter is available on Salisbury’s website at salisburybank.com under “Shareholder Relations”, “Governance Documents”.

Any Shareholder who wishes to recommend a nominee for director should send the required information, as set forth below and in Salisbury’s Bylaws, to the attention of the Secretary at Salisbury Bancorp, Inc., 5 Bissell Street, P.O. Box 1868, Lakeville, Connecticut 06039-1868. Such nominations by a Shareholder shall be made only if such written notice of such Shareholder’s intent to make such nomination has been given to the Secretary not less than twenty (20) days and not more than sixty (60) days prior to the anniversary of the date on which Salisbury first mailed its proxy statement related to the annual meeting in the prior year.

Such Shareholder’s notice shall set forth (1) as to each person whom the Shareholder proposes to nominate for election as a Director, (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of Salisbury that are beneficially owned by such person, and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to applicable law and regulations (including without limitation such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (2) as to the Shareholder giving the notice, (a) the name and address, as they appear on Salisbury’s books, of such Shareholder, (b) the class and number of shares of Salisbury that are beneficially owned by such Shareholder, (c) representation that the Shareholder is a holder of record of Common Stock of Salisbury entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, and (d) a description of all arrangements or understandings between the Shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Shareholder.

The current members of the Nominating and Governance Committee are George E. Banta, Arthur J. Bassin, David B. Farrell, Holly J. Nelson, and Neila B. Radin (Chair). All such members are “independent” in accordance with the independence standards of NASDAQ. The Nominating and Governance Committee met two (2) times during 2022.

Audit Committee

Salisbury’s Audit Committee has been established in accordance with Section 3(a)(58)(A) of the Exchange Act for the purpose of overseeing the accounting and financial reporting process of Salisbury and audits of the financial statements of Salisbury. Subject to the Audit Committee Charter, the Audit Committee assists the Board of Directors in fulfilling its responsibility to the Shareholders, potential Shareholders and investment community relating to corporate accounting, reporting practices of Salisbury, and the quality and integrity of the financial reports of Salisbury. In so doing, it is the responsibility of the Audit Committee to appoint and oversee the independent auditors for Salisbury and to maintain free and open means of communication between the directors, the independent auditors, the internal auditors and the financial management of Salisbury.

The responsibilities of the Audit Committee are governed by Salisbury’s Audit Committee Charter, which was adopted by Salisbury’s Board of Directors. Its current members are David B. Farrell, Paul S. Hoffner, Neila B. Radin, and Grace E. Schalkwyk (Chair). The Audit Committee formally met nine (9) times during 2022. Each of the members of the Audit Committee is an “independent director” in accordance with the independence standards of NASDAQ. The Board of Directors has determined that David B. Farrell and Grace E. Schalkwyk each qualify as an “audit committee financial expert” as such term is defined by federal securities laws and regulations. Additionally, the Board of Directors are of the opinion that the members of the Audit Committee bring diverse educational, business and professional experience that is beneficial to the Audit Committee function of Salisbury and the Bank and enables the Audit Committee to fulfill its responsibility.

A copy of Salisbury’s Audit Committee Charter is available on Salisbury’s website at salisburybank.com under “Shareholder Relations”, “Governance Documents”.

Compensation Committee

The Human Resource and Compensation Committee (the “Compensation Committee”) is currently comprised of the following members of the Board of Directors, all of whom are considered “independent” pursuant to the independence standards of NASDAQ: George E. Banta, Arthur J. Bassin (Chair), David B. Farrell, Paul S. Hoffner, and Neila B. Radin. The Compensation Committee met eight (8) times during 2022.

A copy of Salisbury’s Human Resource and Compensation Committee Charter, which the Compensation Committee and the Board of Directors review and assess at least annually, is available on Salisbury’s website at salisburybank.com under “Shareholder Relations”, “Governance Documents”.

The role and responsibilities of the Compensation Committee as well as discussion of the Compensation Committee processes and procedures, including its use of independent compensation consultants and the role of executive officers in determining or recommending the amount or form of executive and director compensation, are further described below under “Compensation Discussion and Analysis.”

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Compensation Committee Report

The Compensation Committee performs various functions related to compensation, which is described more fully below. The Compensation Committee has reviewed and discussed with management the section below entitled “Compensation Discussion and Analysis.” Based on this discussion, the Compensation Committee recommended that the Board of Directors include the Compensation Discussion and Analysis in Salisbury’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Submitted by: George E. Banta, Arthur J. Bassin (Chair), David B. Farrell, Paul S. Hoffner, and Neila B. Radin.

Compensation Committee Interlocks and Insider Participation

No current or former executive officer or other employee of Salisbury or the Bank served on the Compensation Committee in 2022. No executive officer of Salisbury served on the Compensation Committee or the board of directors of any other entity during 2022 that had one of its executive officers serving on the Compensation Committee or the Board of Salisbury or the Bank. No member of the Compensation Committee of Salisbury had any relationship with Salisbury or the Bank since January 1, 2022 requiring disclosure under Item 404 of Regulation S-K under the Exchange Act.

Board Leadership Structure

The Board of Directors regularly reviews and assesses the effectiveness of its leadership structure and will implement any changes as it deems appropriate.

The leadership structure is comprised of a staggered board of directors, which includes the two separate individuals who serve as the Chairman, who is independent under the independence standards of NASDAQ, and the Chief Executive Officer, who also serves as President (and is, therefore, not considered independent as he is an officer of Salisbury). All other directors are independent under the independence standards of NASDAQ. David B. Farrell was elected Chairman of the Board of Salisbury and the Bank May 15, 2019.

Salisbury’s Bylaws provide that the Board shall elect from among its members a Chair of the Board, who shall preside at all Board meetings. If the Chair is an officer of Salisbury or the Bank, the Board shall elect an independent Presiding Director and shall by resolution set forth the duties and responsibilities of the Presiding Director. The Board will elect a Chair, and, if warranted, a Presiding Director, at Salisbury’s Organizational Meeting following the Annual Meeting of Shareholders.

The Board has set the number of directors at eight (8). Salisbury has established responsibilities for the Chair and, if warranted, a Presiding Director, to ensure that the Board of Directors is adequately informed about the affairs of Salisbury and the Bank. Salisbury deems that this leadership structure ensures appropriate and effective governance of Salisbury and the Bank.

Consistent with applicable corporate governance guidelines and Salisbury’s Bylaws, the primary responsibilities of the Chair are to be responsible for the leadership of the board meetings, prepare the agenda and preside over meetings.

To assess effective independent oversight, the Board of Directors has adopted several governance practices, including regular executive sessions of independent directors and annual performance evaluations of the directors and the Chief Executive Officer by the independent directors. The Board of Directors maintains a Board Chair Succession Plan which provides an appropriate framework to ensure that Salisbury is able to meet the changing needs of the organization; to think about recruitment and assessment of board members before they are needed; and to maintain/improve competencies of board members.

Salisbury recognizes that no single leadership model is appropriate for all companies at all times. The Board of Directors recognizes that, depending upon the circumstances, other leadership models might be appropriate at some point, and the Board of Directors periodically reviews its leadership structure in this regard.

Board Role in Risk Oversight

The Board oversees risks inherent to the business of banking by delegating oversight to certain Board committees, management committees and the Chief Executive Officer. Additionally, the Audit Committee monitors: (1) the effectiveness of Salisbury’s internal controls; (2) the integrity of its Consolidated Financial Statements; and (3) compliance with legal and regulatory requirements. In addition, the Audit Committee coordinates with the internal audit function and the independent registered public accountant.

At the monthly Board meetings, the Board receives the minutes from each Committee meeting and the Chair of each Committee reports on Committee actions. The Board also receives various reports from key members of senior management and regularly reviews and discusses these reports with senior managers. The Board reviews the policies and practices of Salisbury and the Bank on a regular basis. In addition, the Board reviews corporate strategies and objectives and evaluates business performance.

During times when there may be elevated levels of risk, such as those presented by the COVID-19 pandemic, the Board monitors the impact on the risk profile by regularly reviewing and monitoring management’s response and actions taken to mitigate risks, including financial and non-financial risks, business continuity, and human capital risks.

Code of Ethics

Salisbury has adopted a Code of Ethics and Conflicts of Interest Policy that applies to Salisbury’s directors, officers and employees, including Salisbury’s Principal Executive Officer and Principal Financial Officer. A copy of such Code of Ethics is available upon request, without charge, by writing to Shelly L. Humeston, Secretary, Salisbury Bancorp, Inc., 5 Bissell Street, P. O. Box 1868, Lakeville, Connecticut 06039-1868.

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Derivative Trading and Hedging

Salisbury has a policy that all of its directors, officers and other employees who possess material nonpublic information regarding Salisbury refrain from making any purchases, sales or recommendations relating to Salisbury. In addition, it is Salisbury’s policy that all directors, officers and employees shall not engage in any of the following activities with respect to Salisbury’s securities: (1) trade in Salisbury’s securities on a short-term basis; any security of Salisbury purchased by a director, officer or employee of Salisbury is to be held for investment rather than trading purposes (which generally means for a minimum of nine (9) months before sale, unless the security is subject to a forced sale which has been approved based upon a significant and unexpected change in the financial circumstances of the purchaser, such as the death or serious illness of a family member, or other substantial justification; (2) purchase Salisbury’s securities on margin; or (3) make any “short-sales” of Salisbury’s securities.

Board of Directors’ Communications with Shareholders

Salisbury’s Board of Directors does not have a formal process for Shareholders to send communications to the Board of Directors, however, the volume of such communications has historically been de minimus. Accordingly, the Board of Directors considers Salisbury’s informal process to be adequate to address the needs of Salisbury and its shareholders in this regard. Historically, such informal process has functioned as follows: any Shareholder communication is forwarded to the President and Chief Executive Officer for appropriate discussion by the Board of Directors and the formulation of an appropriate response. Shareholders may forward written communications to the Board of Directors by addressing such comments to the Board of Directors of Salisbury Bancorp, Inc., 5 Bissell Street, P. O. Box 1868, Lakeville, Connecticut 06039-1868.

Audit Committee Report

The following is the report of the Audit Committee with respect to the audited financial statements for the fiscal year 2022. The Audit Committee has reviewed and discussed Salisbury’s audited financial statements for the fiscal year ended December 31, 2022 with management and has discussed the matters that are required to be discussed by the applicable requirements of the Public Company Accounting Oversight Board, with Baker Newman & Noyes, P.A., LLC (“BNN”), Salisbury’s independent registered accounting firm.

The Audit Committee has received the written disclosures and the letter from BNN required by the Public Company Accounting Oversight Board for independent auditor communications with Audit Committees concerning independence, and has discussed BNN’s independence with respect to Salisbury with BNN.

Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Salisbury’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 for filing with the SEC.

The foregoing Report of Salisbury’s Audit Committee is provided in accordance with the rules and regulations of the SEC. Pursuant to such rules and regulations, this Report shall not be deemed “soliciting material,” filed with the SEC, subject to Regulation 14A and 14C of the SEC or subject to the liabilities of Section 18 of the Exchange Act.

Submitted by: David B. Farrell, Paul S. Hoffner, Neila B. Radin, and Grace E. Schalkwyk (Chair).

 

Item 11.EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

 

As a “Smaller Reporting Company”, we are not required to include a Compensation Discussion and Analysis (“CD&A”) under Item 402(b) of Regulation S-K. Nevertheless, we want our shareholders to fully understand our compensation policies and procedures so we have incorporated many, but not all, of the required disclosures of a full CD&A.

 

This section discusses Salisbury’s overall executive compensation philosophy, guidelines and programs for the fiscal year ended December 31, 2022. Salisbury’s executive compensation program and policies are designed to reward Salisbury’s executives based upon achievement of long and short-term goals while effectively managing risk. The following discussion explains the process, objectives and measurements used by the Compensation Committee in setting the compensation of Salisbury’s Named Executive Officers (also referred to herein as “NEOs”). For a full understanding of the information presented, please consider the following discussion together with the tables and its related narrative and footnotes below.

 

The following table lists Salisbury’s NEOs during the fiscal year ended December 31, 2022:

 

Name   Position with Salisbury During the Fiscal Year Ended December 31, 2022

Richard J. Cantele, Jr.

  

President and Chief Executive Officer of Salisbury and the Bank

John M. Davies   President of NY Region and Chief Lending Officer of the Bank
Peter Albero   Executive Vice President and Chief Financial Officer of Salisbury and the Bank

 

Executive Summary

The Board of Directors of Salisbury and the Compensation Committee are committed to a pay-for-performance philosophy. The executive team continues to take actions to improve profitability and ensure that Salisbury acts in a manner that preserves and enhances Shareholder value.

 

The Compensation Committee remains focused on maintaining pay/performance alignment and maintaining proportionality relative to our stakeholders. Using approved performance metrics and vehicles available through our 2017 Long Term Incentive Plan, the Compensation Committee is able to appropriately compensate executives and staff.

 

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During 2022, the Compensation Committee evaluated incentive awards based on Salisbury’s performance against financial goals, performance relative to peers, and progress toward the achievement of other strategic and operational priorities. Salisbury’s performance remained strong throughout 2022 and even exceeded expectations. The 2022 awards were consistent with the Compensation Committee’s intent to reward and retain key employees for ensuring that, despite the uncertainties, Salisbury remains focused on strategies and goals that will enhance long-term value for all stakeholders.

 

The COVID-19 pandemic continues to evolve, and its effects remain uncertain. The Compensation Committee and the Board will continue to evaluate our compensation programs to ensure that they continue to serve the best interests of our company and our Shareholders.

 

2022 Executive Compensation Decisions

The Compensation Committee, working with an independent compensation consultant, establishes base salary and the target Short Term Incentive Plan (“STIP”) bonus opportunity levels for each NEO based on a review of Bank performance overall and on each NEO’s performance for the previous year against specific financial targets and individual qualitative goals. Base salary levels have been targeted at or near the average base salary compensation level of the peer group. If necessary and appropriate, market adjustments or equity awards are used to bring the NEOs up to peer group averages.  The Compensation Committee endeavors to maintain a balance between cash compensation and equity-based compensation and to balance short term incentives with longer term incentives.  In 2022, the Compensation Committee recommended, and the Board approved, an award to NEOs of 11,500 shares of restricted stock and 7,000 performance based restricted stock units in the aggregate.

 

Compensation Governance Practices

Salisbury has in place the following executive compensation best practices and policies, which promote sound compensation governance and are in the best interests of our Shareholders:

 

What We Do What We Don’t Do
☑  Performance-based variable compensation through formal incentive programs ☒  No severance benefits exceeding 3x base salary and annual cash bonus
☑  Annual incentive plan risk assessments ☒  No guaranteed incentive payments
☑  Benchmarking against a relevant peer group ☒  No uncapped non-sales incentive plans
☑  Double trigger for change in control payments ☒  No significant/excessive perquisites
☑  Clawback policy ☒  No tax gross-ups
☑  Independent compensation consultant  

 

Say-on-Pay Results

Salisbury holds an annual non-binding Shareholder advisory vote with respect to “say-on-pay”. Nearly 97% of Salisbury’s voting Shareholders approved the “say-on-pay” proposal concerning the compensation of Salisbury’s NEOs described in Salisbury’s annual meeting proxy statement for the year 2022. The Compensation Committee believes that Shareholders generally support Salisbury’s approach to executive compensation and will continue to consider the say-on-pay Shareholder voting results when making compensation decisions for NEOs.

 

Compensation Philosophy and Objectives

The compensation objectives of the Board of Directors and Compensation Committee begin with the premise that Salisbury’s success depends, in large part, on the dedication and commitment of the people Salisbury places in key management positions and on the incentives provided to such persons to successfully implement Salisbury’s business strategy and other corporate objectives. The overall objective of Salisbury’s compensation program is to maximize Shareholder value through the recruitment, retention and motivation of talented employees and officers (including NEOs as identified in the section titled “Executive Compensation” and the Summary Compensation Table below) of Salisbury. We recognize that the Bank operates in a competitive environment for talent. Therefore, Salisbury’s approach considers a full range of compensation elements that enable us to compare favorably with Salisbury’s peers as we seek to attract and retain key personnel.

 

The Compensation Committee pays particular attention to designing compensation plans that do not encourage Salisbury’s NEOs and other executive officers to take inappropriate or excessive risks. As such, Salisbury assesses its program annually from a risk perspective and seeks to implement the best practices in the industry.

 

The compensation program closely aligns total compensation with achievement of strategic and financial goals. It is Salisbury’s intention that a meaningful portion of total compensation should be tied to Shareholder return, thereby encouraging and rewarding NEOs and other executives for pursuing strategies that increase tangible book value and earnings per share over time. Accordingly, the 2017 Long Term Incentive Plan was approved by Shareholders at the Annual Meeting on May 17, 2017 in order to award restricted stock, stock options and other equity related awards to Salisbury’s officers, employees and directors to further align their interests with those of Salisbury’s Shareholders.

 

The Compensation Committee engaged Pearl Meyer & Partners, LLC (“Pearl Meyer”) in 2021 to conduct a comprehensive review of all elements of compensation for NEOs to ensure that the current compensation structure is consistent with the objectives outlined above. The Compensation Committee intends for total compensation to be commensurate with that of like institutions with similar performance.

 

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As a result of this comprehensive review, during 2021 the Compensation Committee recommended, and the Board of Directors approved, compensation changes for NEOs to ensure that total compensation is aligned with the market median. The Compensation Committee and the Board of Directors annually review the CEOs participation in a non-qualified deferred compensation plan, which allows for annual discretionary employer contributions based on a qualitative assessment of the CEOs performance and the financial performance of the Bank to provide more flexibility in the contribution, vesting, investment vehicles and distribution of payments. Stock ownership guidelines for the CEO are a minimum of three (3) times his base salary in Salisbury common stock.

 

Role of the Compensation Committee

The Compensation Committee is currently comprised of five (5) members of the Board, each of whom is independent in accordance with the independence standards of NASDAQ. The Compensation Committee operates under a written charter that establishes its responsibilities. A copy of the Compensation Committee Charter can be found on Salisbury’s website at salisburybank.com under “Shareholder Relations”, “Governance Documents”. The Compensation Committee reviews the charter annually to ensure that the scope of the charter is consistent with the Compensation Committee’s expected role. Under the charter, the Compensation Committee is responsible for reviewing Salisbury’s general compensation strategy, establishing salaries and reviewing benefit programs, including pensions and incentive compensation plans; and advising the Board of Directors and making recommendations with respect to such plans. In particular, the Compensation Committee reviews and approves Salisbury’s compensation strategies and objectives, reviews and approves executive officers’ compensation, administers incentive plans and reviews and makes recommendations to the Board regarding general employee pension benefit plans and other benefit plans on an as needed basis. The charter provides that compensation and benefit matters related to the Chief Executive Officer must also be approved by all outside (non-employee) members of Salisbury’s Board based on the evaluation of the CEO’s performance. Consistent with applicable law, the charter also authorizes the Compensation Committee to engage consultants and other professionals without management approval to the extent deemed necessary to discharge its responsibilities.

 

Salisbury strives for pay packages that are fair and equitable. In determining whether compensation of executive officers is fair, the Compensation Committee considers each component of compensation including salary and bonus, stock compensation, amounts to be received from any deferred compensation, severance, perquisites and benefits. In establishing levels of compensation, the Compensation Committee endeavors to take into consideration an individual’s performance, level of expertise, responsibilities, length of service, comparable levels of compensation paid to executives of other companies of comparable size and development within the industry, as well as the financial condition and performance of the Bank.

 

Role of Management

Certain members of the Bank’s executive team provide input to the Compensation Committee regarding compensation matters. In particular, officers who serve as a resource to the Compensation Committee include the President and Chief Executive Officer, the Chief Financial Officer, the Director of Human Resources, and the Corporate Secretary. As requested by the Compensation Committee from time to time, these officers provide input regarding employee compensation programs for employees other than themselves, present data and analysis to formulate recommendations regarding employee compensation, benefit plans, related insurance matters, and promotions. The Director of Human Resources provides the Compensation Committee with data for its consideration in setting the base salary for the NEOs. The Compensation Committee considers this input from management critical to ensuring that the Compensation Committee and its advisers have the data needed to make informed decisions with respect to Salisbury’s compensation programs and each NEO’s individual compensation.

 

No individual executive officer may participate in the review, discussion or decision of the Compensation Committee regarding their own compensation. Executive officers may participate in the review, discussion or decision of the Compensation Committee regarding other employee compensation, director compensation, benefit plans and promotions.

 

Interaction with the Compensation Consultant

As discussed above, in carrying out its duties, the Compensation Committee has the sole authority to retain, at Salisbury’s expense, and to terminate a compensation consultant and to approve the consultant’s fees and all other terms of the engagement. The Compensation Committee also has the authority to retain independent counsel and other advisors at Salisbury’s expense as needed. The consultants provide expertise and information about competitive trends in the industry. The consultants also provide survey data and assist in assembling relevant comparison groups for various purposes and establishing benchmarks for base salary and cash incentives based on a number of factors.

 

During 2022, the Compensation Committee engaged the services of Pearl Meyer as an objective third-party consultant to conduct services including review of the proposed compensation peer group for 2022 pay decisions, NEO compensation, Board compensation, and guidance with 2022 incentive plan payouts.

 

In conducting its review, the Compensation Committee also relied on other survey sources, including Pearl Meyer & Partners Northeast Bankers Salary Survey 2022 and S&P Global for proxy compensation data for NEOs for the approved compensation peer group.

 

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Benchmarking of Compensation; Peer Group

The Compensation Committee periodically benchmarks compensation of executive officers and directors utilizing published industry surveys and publicly disclosed information from a peer group of publicly traded financial institutions. The last comprehensive competitive market assessment by Pearl Meyer was conducted in 2020. On December 15, 2021, the Compensation Committee reviewed and approved a peer group of banks with publicly traded holding companies to assist the Compensation Committee in helping to assess competitive compensation as well as relative performance comparisons for short and long-term incentive opportunities for 2022. The peer group includes the following:

 

Holding Company Name Bank Name
1st Constitution Bancorp 1st Constitution Bank
Bank of Princeton The Bank of Princeton
Bankwell Financial Group, Inc. Bankwell Bank
Chemung Financial Corp. Chemung Canal Trust Company
Embassy Bancorp, Inc. Embassy Bank (for the Lehigh Valley)
Emclaire Financial Corp. Farmers National Bank of Emlenton
Evans Bancorp, Inc. Evans Bank, N.A.
FNCB Bancorp, Inc. FNCB Bank
Greene County Bancorp, Inc. (MHC) The Bank of Greene County (MHC)
Norwood Financial Corp. Wayne Bank
Parke Bancorp, Inc. Parke Bank
Pathfinder Bancorp, Inc. Pathfinder Bank
PCSB Financial Corp. PCSB Bank
Provident Bancorp, Inc. Provident Bank (MHC)
Prudential Bancorp, Inc. Prudential Savings Bank
Rhinebeck Bancorp, Inc. (MHC) Rhinebeck Bank
Union Bankshares, Inc. Union Bank
Unity Bancorp, Inc. Unity Bank
Western New England Bancorp, Inc. Westfield Bank

 

Elements of Compensation

Salisbury’s compensation program with respect to its NEOs primarily consists of the following:

 

·Base salary, which is designed to provide a reasonable level of predictable income commensurate with the market standards for each executive position and to attract and retain executives with a proven track record of performance;
·Annual incentive compensation, which is based both on specified goals and benchmarks for individuals and the institution as a whole, as recommended by senior management and approved by the Compensation Committee;
·Long-term equity compensation, which aligns the interests of key employees with those of the Shareholders through the grant of restricted shares and stock options. A portion of our equity awards are performance-based and are intended to link financial outcome for key employees to performance that maximizes long-term Shareholder returns;
·Severance benefits payable pursuant to agreements between certain executive officers and Salisbury;
·Retirement benefits payable pursuant to Salisbury’s tax-qualified and non-qualified plans; and
·Other broad-based benefits consistent with industry practice, which are competitive in the market.

The following sections summarize the role of each component, how decisions are made and resulting decisions for the fiscal year ended December 31, 2022 as they relate to the NEOs.

 

Base Salaries. Base salary is designed to provide a reasonable level of predictable income commensurate with market standards for the position held, adjusted for specific responsibilities, individual experience and demonstrated performance. Base salaries are reviewed annually and adjusted from time to time to realign base salaries with market levels after considering various factors including:

 

·Market data for peer institutions and direct competitors located in the Northeast region;
·Internal review of the NEOs’ compensation, both individually and relative to other officers of Salisbury;
·Qualification and experience of the executive;
·Achievement of company-wide objectives; and
·Financial condition and results of operations, including tax and accounting impact on Salisbury of the base salaries.

 

Details regarding base salary are included in the section below entitled “Executive Compensation” and the Summary Compensation Table in that section.

 

Short Term Incentive Plan (“STIP”). Salisbury maintains a STIP intended to motivate employees to attain desired objectives and to encourage teamwork and collaboration while aligning compensation with overall Bank performance. This STIP is a key element of the total compensation benefits provided to Salisbury’s NEOs and enables Salisbury to remain competitive with the market by providing the opportunity to receive meaningful cash incentives. The design of the STIP is intended to ensure that no benefits are paid to executives and other employees unless Bank performance goals are attained. If Salisbury’s performance goals are attained, the Compensation Committee then considers, with management’s input, whether to make awards under the STIP. The Compensation Committee reviews specific performance measures to determine participants’ payout amounts based upon recommendations made by management. The Compensation Committee believes that establishing specific performance measures for participants will enhance the ability of the STIP to encourage performance in those targeted areas. The Compensation Committee reviews the STIP each year and, if necessary, adjusts the specific performance metrics, goals and compensation opportunities based on business objectives.

 

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For the fiscal year ended December 31, 2022, the Compensation Committee approved the following performance metrics for NEOs:

 

Performance Metric Weighting
Earnings Per Share (“EPS”) 40%
Efficiency Ratio 20%
Return on Average Assets (“ROAA”) 40%

 

 

For fiscal year 2022, Salisbury’s annual target incentive ratios as a percentage of base salary and in dollars, as well as the actual incentive ratios as a percentage of base salary and in dollars for the NEOs, were as follows:

 

Executive 

Target STOP

(as a % of salary)

 

Target STIP

(in $)

 

Actual STIP

(as a % of salary)

 

Actual STIP

(in $)

Richard J. Cantele, Jr., President and Chief Executive Officer   35%  $182,000    50.96%  $265,720 
John M. Davies, President of NY Region and Chief Lending Officer   30%  $80,647    43.68%  $117,744 
Peter Albero, Executive Vice President and Chief Financial Officer   30%  $81,416    43.68%  $118,867 

 

After reviewing 2022 financial performance, the Compensation Committee approved 2022 STIP awards as noted above. Salisbury’s earnings per share, efficiency ratio and return on average assets for fiscal year 2022 exceeded the performance targets. Each of these financial targets was weighted as noted above when determining the actual STIP payout. Salisbury’s outperformance on all three financial metrics resulted in an actual STIP payout that exceeded the target payout.

 

Long Term Incentive Plan (“LTIP”). The goal of the Salisbury 2017 Long Term Incentive Plan (“2017 LTIP”) is to promote Salisbury’s growth and profitability, to provide certain employees, officers and directors with an incentive to achieve corporate objectives, to motivate, attract and retain individuals of outstanding competence, and to strengthen the mutuality of interests between such persons and Salisbury’s Shareholders.

 

On February 28, 2022, the Compensation Committee granted a total of 13,900 Performance Based Restricted Stock Units pursuant to the 2017 LTIP, including 7,000 units in the aggregate to NEOs. Mr. Cantele received 3,000 units, Mr. Davies received 2,000 units, and Mr. Albero received 2,000 units. The aggregate fair value of the units as of the grant date was determined to be $393,752 and the units vest three years from the grant date. Vesting of the Performance Based Restricted Stock Units are contingent upon achieving tangible book value (“TBV”) growth over the three-year measurement period. The threshold increase in TBV in order to receive an award is $3.50. No portion of the award will be earned if the increase in TBV at the end of the measurement period is less than $3.50. One hundred percent (100%) of the award (the “target payout”) will be earned if the increase in TBV for the measurement period is $4.50, and an award will be earned in excess of the target payout if growth in TBV exceeds $4.50. The actual number of restricted stock units earned will be scaled, based on actual performance over the measurement period versus the stated goals. Performance Based Restricted Stock Units are reported in the year granted and reflect the maximum possible valuation

 

Executive 

Threshold

($3.50 or 75%)

 

Target

($4.50 or 100%)

 

Maximum

($6.50 or 150%)

Richard J. Cantele, Jr., President and Chief Executive Officer   2,250    3,000    4,500 
John M. Davies, President of NY Region and Chief Lending Officer   1,500    2,000    3,000 
Peter Albero, Executive Vice President and Chief Financial Officer   1,500    2,000    3,000 

 

On February 28, 2022, the Compensation Committee granted 28,700 shares of restricted stock, including 11,500 shares in the aggregate to NEOs. Mr. Cantele received 5,600 shares, Mr. Davies received 2,400 shares, and Mr. Albero received 3,500 shares. On May 18, 2022, 7,980 shares of restricted stock were granted to non-employee directors. The aggregate fair value of the stock as of the grant date was determined to be $813,000 and $205,000, respectively and the stock vests three years from the grant date.

 

Phantom Stock Appreciation Unit and Long Term Incentive Plan. Effective January 1, 2015, the Board of Directors adopted the 2015 Phantom Stock Appreciation Unit and Long Term Incentive Plan (the “Plan”) to promote the long-term financial success of Salisbury and the Bank, by providing a means to attract, retain and reward individuals who can and do contribute to such success and further align their interests with those of Salisbury’s Shareholders. A “Phantom Stock Appreciation Unit” represents the right to receive a cash payment on the determination date (i.e., the vesting date) equal to the positive difference between the strike price (which shall not be less than the tangible book value) on the grant date and the tangible book value of a share of Salisbury’s Common Stock on the determination date. There have been no Phantom Stock Appreciation Units granted since 2018, which awards vested in 2021, on the third anniversary of the grant date.

 

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Management Agreements. Salisbury or the Bank has entered into various management agreements with its NEOs, including a severance agreement with Mr. Cantele, Salisbury’s President and Chief Executive Officer, a change in control agreement with Mr. Albero, Salisbury’s Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, Salisbury’s President of the New York Region and Chief Lending Officer. Such agreements 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. In addition, it is the intent of the Compensation Committee to better align the interests of the executive with those of Salisbury’s Shareholders, and the Compensation Committee believes that these agreements allow executives to more objectively evaluate opportunities for Shareholders without causing undue personal financial conflicts. For a more detailed description of these agreements, please see the discussion following the Summary Compensation Table, below.

 

Broad-based Benefits. Salisbury or the Bank also provides Salisbury’s NEOs certain broad-based benefits available to all qualifying employees, including:

 

·a defined contribution 401(k) retirement plan and discretionary profit-sharing plan;
·an employee stock ownership plan;
·medical coverage (all employees share in a percentage of the cost, depending on their elections); and
·group life insurance coverage (death benefit capped at $350,000, with the value of the death benefit over $50,000 being reported as taxable income to all employees).

 

Executive Benefits and Perquisites. In addition to the broad-based benefits described above, the NEOs received the following fringe benefits and perquisites in 2022:

 

·the NEOs and other senior officers may participate in a non-qualified deferred compensation plan into which the Board can make a discretionary contribution each year; and
·the NEOs and other senior officers are parties to split dollar life insurance agreements with the Bank.

 

Risk Management

The Compensation Committee regularly reviews all incentive-based plans to ensure that controls are in place so that Salisbury’s employees are not presented with opportunities to take unnecessary and excessive risks that could threaten the value of Salisbury and the Bank. With respect to the STIP and LTIP, the Compensation Committee reviews and approves the Bank-wide performance objectives that determine bonus payments to be made thereunder. The performance objectives selected are prevalent measures used by comparable financial institutions and Salisbury’s peer group.

 

Compensation Clawback Policy

Salisbury maintains a Compensation Clawback Policy, which applies to Salisbury’s STIP, LTIP and employer discretionary contributions to the NQDC Plan and which allows Salisbury to recover any bonus payment made to any Covered Officer, as defined below, that was based on materially inaccurate financial statements or other materially inaccurate reporting or fraud. The Clawback Policy applies to Salisbury’s NEOs and other Executive Officers (each a “Covered Officer”). In the event the Compensation Committee determines that fraud, material error, gross negligence or intentional illegal conduct or misconduct (each, a “Covered Misconduct” as defined in the Clawback Policy) has contributed to Salisbury’s restatement of its financial statements, the Compensation Committee, in its discretion, will, refer the matter and its recommendation as to an appropriate remedy to the Board of Directors for consideration.

 

Impact of Accounting and Tax on the Form of Compensation

The Compensation Committee and Salisbury’s Board of Directors and management consider the accounting and tax (individual and corporate) consequences of the compensation plans prior to making changes to the plans. The Compensation Committee has considered the impact of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (ASC) Topic 718 (formerly SFAS No. 123(R)), on Salisbury’s use of equity incentives as a key retention tool.

 

As part of its role, the Compensation Committee also reviews and considers sections of the Internal Revenue Code (“IRC”), including but not limited to, potential parachute payments that could result in excise taxes under IRC Section 280G and the deductibility of executive compensation under Section 162(m), which limits deduction of compensation paid to NEOs to $1,000,000. This applies to base salary, all cash incentive plans and equity grants other than stock options. During fiscal 2022, one employee received taxable compensation in excess of $1,000,000 and therefore, deductibility of compensation was limited by these sections of the IRC.

 

Ownership Guidelines

Salisbury maintains minimum stock ownership guidelines for the CEO of three (3) times base salary. Salisbury regularly reviews the stock ownership levels of directors and other NEOs. As of December 31, 2022, Salisbury’s executive officers and directors own approximately 8% of Salisbury’s outstanding shares. Such amounts include a total of 64,580 restricted shares awarded to officers and directors.

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EXECUTIVE COMPENSATION

Named Executive Officers of Salisbury

The following table shows the compensation of Salisbury’s Named Executive Officers, which include those individuals who served as President and Chief Executive Officer, Chief Lending Officer, and Chief Financial Officer as of December 31, 2022 and 2021. Pursuant to federal securities laws and regulations, these persons are referred to as Salisbury’s “Named Executive Officers” or “NEOs.”

 

Summary Compensation Table

 
Name and Principal Position   Year    

Salary
($)

    

Bonus(1)
($)

 

Stock Awards(2)(3)
($)

    

Option Awards
($)

    

All Other Compensation(4)
($)

    

Total
($)

 
Richard J. Cantele, Jr., President and Chief   2022    520,000    265,720    286,133    0    146,433    1,218,286 
Executive Officer   2021    435,308    223,860    233,808    0    152,427    1,045,403 
John M. Davies,  President of NY Region and Chief   2022    268,822    117,744    154,982    0    35,488    577,036 
Lending Officer   2021    262,266    96,776    125,805    0    82,212    567,059 
Peter Albero, Executive Vice President and Chief   2022    265,385    118,867    184,145    0    47,052    615,449 
Financial Officer   2021    258,912    95,538    143,845    0    98,301    596,596 

 

(1) Bonuses are accrued in the year indicated and are generally paid in the succeeding fiscal year. A portion of the bonus Mr. Cantele and Mr. Albero earned in 2022 was paid in 2022. The remainder was paid in 2023. The bonus earned in 2021 was paid in 2022.
(2) Reflects the aggregate fair value of restricted stock awards on date of grant. The value is the amount recognized for financial statement purposes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718.
(3) The 2022 awards to NEOs Cantele, Davies, and Albero represent 5,600, 2,400, and 3,500 shares of restricted stock, respectively, granted on 2/28/22 pursuant to Salisbury’s LTIP, which shares vest on the third anniversary of the grant date. The 2022 awards also include units of performance based restricted stock, of which 3,000 units were granted to Mr. Cantele and 2,000 units were granted to each of Mr. Davies and Mr. Albero, on 2/28/22. The maximum payout for such performance based restricted stock units (assumes a share price of $30.00) is $135,000 for Mr. Cantele; $90,000 for Mr. Davies; and $90,000 for Mr. Albero.
(4) All other compensation was comprised of the following elements for the year ended December 31, 2022:

 

    Cantele ($)    Davis ($)    Albero ($) 
Group Term Life Insurance   1,224    856    464 
Non-qualified Deferred Comp.   101,781    0    10,244 
401(k) Employer Contribution   26,985    24,493    24,493 
Dividends paid on restricted stock   11,072    4,768    6,480 
Employee Stock Ownership Plan   5,371    5,371    5,371 
TOTAL  $146,433   $35,488   $47,052 

 

CEO Pay Ratio – 23:1

The SEC requires disclosure of the median annual total compensation of all employees (excluding the chief executive officer), the annual total compensation of the chief executive officer, and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. The disclosure is required in any annual report, proxy or information statement, or registration statement that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K.

 

The Compensation Committee strives to maintain an executive compensation program that is consistent and internally equitable to motivate Salisbury’s employees to perform in ways that enhance Shareholder value. Salisbury is committed to internal pay equity, and the Compensation Committee monitors the relationship between the pay of executive officers and the pay of non-executive employees. The Compensation Committee reviewed a comparison of the CEO’s annual total compensation in fiscal year 2022 to that of all other employees for the same period.

 

The calculation of annual total compensation for the CEO for fiscal year 2022 as is reported in the Summary Compensation Table was $1,218,286. The calculation of annual total compensation of all other employees was determined by “Total W-2 Earnings” in the fiscal year reported (2022) and includes all employees as of December 31, 2022. Once the median employee was identified, the Summary Compensation Table methodology was used to calculate annual total compensation.

 

Salisbury’s median employee is identified by: (i) calculating the annual total compensation described above for each of Salisbury’s employees, and (ii) ranking the annual total compensation of all employees except for the CEO from lowest to highest (a list of 193 employees).

 

The annual total compensation for fiscal year 2022 for Salisbury’s median employee was $53,200. The resulting ratio, which represents a reasonable estimate calculated in a manner consistent with SEC rules and guidance, of Salisbury’s CEO’s pay to the pay of Salisbury’s median employee for fiscal year 2022 is 23 to 1.

 

The SEC’s rules provide flexibility in determining the pay ratio and a degree of imprecision that may result from the use of estimates, assumptions, adjustments, and statistical sampling that may be used to identify the “median employee” thus, this information should not be relied upon for comparing Salisbury to its peers.

 

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Severance Agreement for Richard J. Cantele, Jr. On January 24, 2020, the Bank and Richard J. Cantele, Jr., President and Chief Executive Officer of the Bank, entered into an updated severance agreement, which became effective as of January 1, 2020 and superseded and replaced a prior severance agreement, to provide benefits to Mr. Cantele in the event of his termination of employment for the reasons set forth in the agreement. The term of the severance agreement is for two years, and automatically renews annually; provided, however, in the case of a change in control (as defined in the severance agreement), the severance agreement will automatically be extended for two years. In the event of Mr. Cantele’s (i) involuntary termination of employment by the Bank for reasons other than “cause” (as defined in the severance agreement) or due to his death or disability, or (ii) his voluntary termination of employment for “good reason” (also, as defined in the agreement) in either case, other than on or after a change in control, he will be entitled to a severance benefit equal to two (2) times the greater of (i) his annual base salary rate in effect on the date of termination or his average annual base salary rate for the twelve-month period ending on the last day of the calendar month immediately before the date of termination and (ii) his average annual cash bonus paid during or attributable to the two-year period immediately preceding the date of termination. Such benefit will be paid in a lump sum within 60 days following Mr. Cantele’s separation from service. In addition, Mr. Cantele generally will be entitled to continued participation in the Bank’s group health plan for two years following separation from service, subject to his payment of a portion of the premium substantially equal to the portion paid by executive employees of the Bank for comparable coverage. Payment of the severance benefits will be conditioned upon the execution by Mr. Cantele of a general release within 60 days of the date of his termination of employment, unless such payment is otherwise required to be deferred under IRC Section 409A. The severance agreement also requires Mr. Cantele to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one (1) year following his separation from service. The non-compete restriction shall not apply if the executive’s employment is terminated following a change in control.

 

In the event of a change in control followed by Mr. Cantele’s involuntary termination of employment for reasons other than cause or voluntary termination of employment for good reason, he will be entitled to a lump sum cash payment equal to three (3) times the greater of (i) his highest annual base salary rate in effect on the date of termination or his highest annual base salary rate for the twenty-four month period ending on the last day of the month preceding the date of termination, and (ii) his highest annual cash bonus paid or attributable to any year in the three-year period immediately preceding the date of the Change in Control, payable within 60 days following termination. The Bank will also provide him with life insurance coverage and non-taxable medical and dental coverage, at no cost to him, substantially comparable to the coverage maintained by the Bank for him prior to his date of termination, for a period of three years. In addition, Mr. Cantele will be entitled to the payment of unpaid compensation and benefits and unused vacation accrued through the date of his termination of employment. He will also receive reimbursement for expenses incurred on behalf of the Bank prior to his termination of employment within 60 days following his date of termination, unless such payment is otherwise required to be deferred under IRC Section 409A. In all other respects, the updated agreement is substantially the same as the original prior agreement.

 

Severance Agreement for John M. Davies. On January 24, 2020, the Bank and Mr. Davies, President of the New York Region and Chief Lending Officer of the Bank, entered into a severance agreement, which became effective as of January 1, 2020 and superseded and replaced a prior employment agreement, to provide benefits to Mr. Davies in the event of his termination of employment for the reasons set forth in the severance agreement. The term of the severance agreement is two years and automatically renews annually; provided, however, in the case of a change in control (as defined in the severance agreement), the severance agreement will automatically be extended for two years. In the event of Mr. Davies’ involuntary termination of employment by the Bank for reasons other than “cause” (as defined in the severance agreement) or his death or disability, or a voluntary termination of employment for “good reason” (as defined in the severance agreement), in either case, other than on or after a change in control, Mr. Davies will be entitled to a severance benefit equal to the greater of (i) his annual base salary rate in effect on the date of termination or his average annual base salary rate for the twelve-month period ending on the last day of the calendar month immediately before the date of termination and (ii) his average annual cash bonus paid during or attributable to the two-year period immediately preceding the date of termination. Such benefit will be paid in a lump sum within 60 days following his separation from service unless such payment is otherwise required to be deferred under IRC Section 409A. In addition, Mr. Davies generally will be entitled to continued participation in the Bank’s group health plan for two years following separation from service, subject to his payment of a premium portion substantially equal to the premium portion paid by executive employees of the Bank for comparable coverage. Payment of the severance benefits will be conditioned upon Mr. Davies executing a general release within 60 days following the date of his termination of employment. Further, the severance agreement requires Mr. Davies to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one (1) year following his separation from service. The non-compete restriction shall not apply if the executive’s employment is terminated following a change in control.

 

In the event of involuntary termination of employment for reasons other than cause or a voluntary termination of employment for good reason occurring on or after a change in control, Mr. Davies will be entitled to a lump sum cash payment equal to two (2) times the greater of (i) his highest annual base salary rate in effect on the date of termination or his average annual base salary rate for the twenty-four month period ending on the last day of the month preceding the date of termination, and (ii) his highest annual cash bonus paid or attributable to any year in the two-year period immediately preceding the date of the change in control. Such amount will be payable within sixty (60) days following termination, unless such payment is otherwise required to be deferred under IRC Section 409A. The Bank will also provide Mr. Davies with life insurance coverage and non-taxable medical and dental coverage for a period of two years, at no cost to him, substantially comparable to the coverage maintained by the Bank for him prior to his date of termination. In addition, Mr. Davies will be entitled to the payment of unpaid compensation and benefits and unused vacation accrued through the date of his termination of employment. He will also receive reimbursement for expenses incurred on behalf of the Bank prior to his termination of employment within sixty (60) days following his date of termination.

 

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Change in Control Agreement for Peter Albero. On January 24, 2020, the Bank and Mr. Albero, Executive Vice President and Chief Financial Officer, entered into an updated change in control agreement, which became effective as of January 1, 2020 and superseded and replaced a prior change in control agreement between the parties. The change in control agreement will automatically renew for additional one (1) year terms, unless either party elects not to renew the agreement by providing notice of non-renewal to the other party at least thirty (30) days prior to the renewal date. The agreement was updated to provide that in the event Salisbury or the Bank at any time during the term of the change in control agreement effects a transaction which would be a “change in control” (as defined in the agreement), then the change in control agreement shall be automatically extended for twenty-four (24) months following the date a change in control occurs.

 

The change in control agreement was also updated to provide that in the event that Mr. Albero is involuntarily terminated on or after a change in control for reasons other than “cause” (as defined in the change in control agreement) or due to his death or disability, or voluntarily terminates for “good reason” (as defined in the change in control agreement) on or after a change in control, Mr. Albero will be entitled to a lump sum cash payment equal to two (2) times the greater of (i) his annual base salary rate in effect on the date of termination, or if greater, his average annual base salary rate for the twelve (12) month period ending on the last day of the calendar month immediately before the date of termination and (ii) one (1) times his highest annual cash bonus paid during or attributable to the two-year period immediately preceding the date of termination. In addition, Mr. Albero would be entitled to the continuation of current Bank provided dental, medical and life insurance coverage and other benefits as set forth in the change in control agreement for two years. In no event may any compensation payable under the change in control agreement constitute an “excess parachute payment” under Section 280G or violate Section 409A of the Internal Revenue Code. Payment of change in control benefits under the change in control agreement are conditioned upon Mr. Albero’s covenant to comply with non-compete, non-solicitation, and non-disclosure provisions for a period of one (1) year following his termination of employment. Notwithstanding any provision in the change in control agreement, Mr. Albero will serve as an employee-at-will. In all other respects, the change in control agreement is substantially the same as the prior change in control agreement.

 

Non-qualified Deferred Compensation Plan. On January 25, 2013, the Board of Directors adopted a Non-qualified Deferred Compensation Plan (the “NQDC Plan”) effective as of January 1, 2013. The NQDC Plan permits the Board of Directors to select certain key employees of the Bank, including the NEOs, to participate in the NQDC Plan, provided that such employees also evidence their participation by execution of a participation agreement.

 

On December 27, 2021, the Board of Directors executed the Salisbury Bank and Trust Company Amended and Restated Non-Qualified Deferred Compensation Plan (the “Plan”), effective as of January 1, 2022, which supersedes the prior NQDC Plan. 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 NQDC 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.  Under the Plan, 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 also allows participant deferrals and provides greater flexibility in participant elections and investment options. In addition to employer discretionary contributions, participants will be entitled to defer up to 50% of their base salary and up to 100% of their discretionary bonuses and cash incentive compensation, however, such base salary deferrals and bonus and cash incentive deferrals will not commence prior to January 1, 2023. The Plan permits the Compensation Committee to add non-employee directors as participants. If implemented, non-employee directors will be entitled to make elective deferrals of up to 50% of their annual retainer and committee fees. This provision may not be implemented for plan year 2022.

 

For plan years commencing after December 31, 2021, a participant will be required to enter into a “Participation Agreement” on initial participation that will set forth, among other things, the vesting schedule for any discretionary contributions received and the participant’s benefit age (i.e. the eligible “retirement age”). A participant will also be required to enter into an “Annual Election Form” which will set forth (i) the participant’s distribution elections under various circumstances and (ii) commencing in 2023, the amount of a participant’s elective deferrals of base salary and/or discretionary bonus or incentive compensation.

 

Under the amended and restated Plan, each discretionary contribution would vest based on a rolling five-year vesting schedule, so that in the sixth year of participation the first year’s contribution would be 100% vested and the fifth-year contribution would be 20% vested. Vesting of discretionary contributions generally accelerates when a participant reaches benefit age, however, the Bank can delegate one or more discretionary contributions for a particular person as contributions for which vesting would not automatically accelerate.

 

The amended and restated Plan provides additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified date before separation of 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.

 

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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 will establish a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally owned by the participants.

 

Split Dollar Life Insurance Arrangements. During the 2022 calendar year, Messrs. Cantele, Albero and Davies and certain other officers were parties to split dollar life insurance agreements with the Bank, which upon the officer’s death, splits the death benefit payable under one or more insurance policies between the officer’s beneficiary and the Bank.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth the outstanding equity awards held by Salisbury’s NEOs at fiscal year ended December 31, 2022.

Outstanding Equity Awards at Fiscal Year End

 

Option Awards

Stock Awards

 

Number of securities underlying unexercised options exercisable

 

 Number of securities underlying unexercised options unexercisable Equity incentive plan awards:  number of securities underlying unexercisable unearned options Option exercise price Option expiration date Number of shares or units of stock that have not vested(1) Market value of shares or units of stock that have not vested(2)

Name

(#)

(#)

(#)

($)

(#)

($)

Richard J. Cantele, Jr.       N/A N/A 25,200 791,280
John M. Davies       N/A N/A 12,800 401,920
Peter Albero       N/A N/A 15,700 492,980

 

(1) Stock awards listed represent grants under Salisbury’s 2017 LTIP. Each of the awards vest on the third anniversary of the grant date.

(2) Reflects the value of the restricted stock awards and performance based restricted stock units as of the fiscal year ended December 31, 2022 based on the market price of $31.40 per share on that date.

 

Name Date Award Granted Type of Award Number of Shares/ Units
Cantele 5/29/20 Restricted Shares 5,000
Cantele 7/29/20 Performance-Based Restricted Stock Units 3,000
Cantele 5/19/21 Restricted Shares 5,600
Cantele 6/23/21 Performance-Based Restricted Stock Units 3,000
Cantele 2/28/22 Restricted Shares 5,600
Cantele 2/28/22 Performance-Based Restricted Stock Units 3,000
Davies 5/29/20 Restricted Shares 2,000
Davies 7/29/20 Performance-Based Restricted Stock Units 2,000
Davies 5/19/21 Restricted Shares 2,400
Davies 6/23/21 Performance-Based Restricted Stock Units 2,000
Davies 2/28/22 Restricted Shares 2,400
Davies 2/28/22 Performance-Based Restricted Stock Units 2,000
Albero 5/29/20 Restricted Shares 3,000
Albero 7/29/20 Performance-Based Restricted Stock Units 2,000
Albero 5/19/21 Restricted Shares 3,200
Albero 6/23/21 Performance-Based Restricted Stock Units 2,000
Albero 2/28/22 Restricted Shares 3,500
Albero 2/28/22 Performance-Based Restricted Stock Units 2,000

 

 

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BOARD OF DIRECTORS COMPENSATION

 

The following table summarizes the compensation paid to non-employee directors for the fiscal year ended December 31, 2022. Directors who are also employees of Salisbury or the Bank do not receive additional compensation for Board service. The compensation received by Mr. Cantele, the only director who is also an employee of Salisbury, is reflected in the Summary Compensation Table on page 90 of this document.

 

2022 Director Compensation Table

 

Name   

Fees Earned or Paid in Cash

($)

    

Stock Awards(1)

($)

    

All Other Compensation(2)

($)

    

Total

($)

 
George E. Banta   33,050    29,355    1,645    64,050 
Arthur J. Bassin   45,625(3)   29,355    1,645    76,625 
David B. Farrell   55,675(4)   29,355    1,645    86,675 
Paul S. Hoffner   36,550    29,355    365    66,270 
Nancy F. Humphreys   26,887(5)   0    70,460    97,347 
Holly J. Nelson   38,175(6)   29,355    1,645    69,175 
Neila B. Radin
   38,350(7)   29,355    1,133    68,838 
Grace E. Schalkwyk   39,625(8)   29,355    1,133    70,113 

 

(1)Each director with the exception of Humphreys received 1,140 shares of restricted stock on 5/18/22 pursuant to the 2017 LTIP. Director Humphreys retired from the Boards on 5/18/22. The fair market value at grant date is reported above. The shares will be fully vested on the third anniversary of the grant date and the fair market value at time of vesting will be included as compensation in 2025.
(2)Represents the dividends earned during 2022 on restricted shares awarded 5/31/19, 5/29/20, 5/19/21, and 2/28/22 pursuant to the 2017 LTIP which shares vest on the third anniversary of the grant date. Director Humphreys retired from the Boards on 5/18/22 at which time the vesting was accelerated on restricted shares awarded to her on 5/29/20 and 5/19/21 ($20,596 each respectively). Also includes a cash bonus of $28,500 awarded to Director Humphreys for her service during 2021-2022.
(3)Includes $5,000 paid to Mr. Bassin for his services as Chairperson of the Compensation Committee and $2,500 for his services as Chairperson of the Loan Committee.
(4)Includes $48,500 for his services as Chairman of the Board.
(5)Includes $1,875 paid to Mrs. Humphreys for her services as Chairperson of the ALCO/Investment Committee, pro-rated. Mrs. Humphreys retired from the Boards 5/18/22.

(6)Includes $2,500 paid to Ms. Nelson for her services as Chairperson of the Trust Committee.
(7)Includes $2,500 paid to Ms. Radin for her services as Chairperson of the Nominating and Governance Committee.
(8)Includes $5,000 paid to Ms. Schalkwyk for her services as Chairperson of the Audit Committee.

 

 

 

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Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Security Ownership of Certain Beneficial Owners (Principal Shareholders)

Persons and groups who beneficially own more than five percent (5%) of Salisbury’s common stock are required to file certain reports with the Securities and Exchange Commission (“SEC”). Management is not aware of any person (including any “group” as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) who beneficially owns more than 5% of Salisbury’s Common Stock (a “Principal Shareholder”) as of December 31, 2022 except as set forth in the table below:

 

Name and Address of Beneficial Owner (2) Amount and Nature of Beneficial Ownership Percentage of Common Shares Outstanding(1)

FJ Capital Management LLC

7901 Jones Branch Dr., Ste. 210

McLean, VA 22102

 384,570 6.63%

 

(1) Percentages are based upon the 5,798,816 shares of Salisbury’s Common Stock outstanding as of December 31, 2022.

(2) Based on information as of December 31, 2022, obtained from a Schedule 13G filed with the SEC on or about February 9, 2023, by FJ Capital Management LLC. FJ Capital Management LLC reported in its Schedule 13G that it has shared voting power and shared dispositive power over 182,949 shares (6.36%) which consist of 174,096 shares (6.05%) held by Financial Opportunity Fund LLC of which FJ Capital Management LLC is the managing member and has shared voting power and shared dispositive power, and 8,853 shares held by a separate managed account of which FJ Capital Management LLC is the managing member; as such, the Reporting Person may be deemed to be a beneficial owner of reported shares but as to which the Reporting Person disclaims beneficial ownership. Martin Friedman is the Managing Member of FJ Capital Management LLC; as such, Mr. Friedman may be deemed to be a beneficial owner of reported shares but as to which Mr. Friedman disclaims beneficial ownership. The foregoing information has been included solely in reliance upon, and without independent investigation of, the disclosures contained in FJ Capital Management LLC’s Schedule 13G.

 

Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Transactions with Management and Others

Salisbury and the Bank have had, and expect to have in the future, transactions in the ordinary course of business with certain directors, officers and their associates on substantially the same terms as those available for comparable transactions with others not related to Salisbury or the Bank.

 

Indebtedness of Management and Others

Some of the directors and executive officers of Salisbury and the Bank, as well as firms and companies with which they are associated, are or have been customers of the Bank and, as such, have had banking transactions with the Bank. As a matter of policy, loans to directors and executive officers were, and in the future will be, made in the ordinary course of business on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with other persons not related to Salisbury and the Bank and did not, and in the future will not, involve more than the normal risk of collectability or present other unfavorable features.

 

DELINQUENT SECTION 16(a) REPORTS

 

Section 16(a) of the Exchange Act requires Salisbury’s executive officers, directors and other persons who own more than ten percent (10%) of Salisbury’s Common Stock to file with the SEC reports of ownership and changes in ownership of Salisbury’s Common Stock and to furnish Salisbury with copies of all such reports that they file.

 

Based on a review of copies of reports filed with the SEC since January 1, 2022 and of written representations by executive officers and directors, all persons subject to the reporting requirements of Section 16(a) have filed the required reports on a timely basis to the best of management’s knowledge.

 

Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

Relationship with Independent Public Accountants

Audit Fees

The aggregate fees billed for professional services rendered for the audit of Salisbury’s annual financial statements as presented on Forms 10-K for the last two (2) fiscal years and the reviews of the financial statements included in Salisbury’s Forms 10-Q for the quarters of the fiscal years ended December 31, 2022 and December 31, 2021 were $317,300(1) and $294,900, respectively.

(1) Audit fees for 2022 are an estimate, as certain fees have not yet been billed.

Audit Related Fees

Fees billed in each of the last two (2) fiscal years for assurance and related services that are reasonably related to performance of the audit or review of Salisbury’s financial statements that are not reported under “Audit Fees” above for each of the fiscal years ended December 31, 2022 and December 31, 2021 were $24,500(1) and $23,000, respectively.

(1) Audit related fees for 2022 are an estimate, as certain fees have not yet been billed.

Tax Fees

The aggregate fees billed in each of the last two (2) fiscal years for professional services rendered for tax preparation for the fiscal years ended December 31, 2022 and December 31, 2021 were $18,150 and $19,315, respectively.

Independence

The Audit Committee of the Board of Directors of Salisbury has considered and determined that the provision of services rendered by BNN relating to matters noted above is compatible with maintaining the independence of such auditors.

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Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent auditors, other than those listed under the de minimus exception. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to a particular service or category of services, and is generally subject to a specific budget. The Audit Committee has delegated pre-approval authority to its Chairman when expeditious delivery of services is necessary. The independent auditors and management are required to report to the full Audit Committee regarding the extent of services provided by independent auditors in accordance with this pre-approval and the fees for the services performed to date. In 2022, there were no fees paid to BNN that were approved by the Audit Committee pursuant to §17 C.F.R. 210.2-01(c)(7)(i)(C) with respect to waivers of pre-approval requirements.

PART IV

Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)Financial Statements. The Consolidated Financial Statements of Registrant and its subsidiary are included within Item 8 of Part II of this report.
(a)(2)Financial Statement schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because they are either not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto included within Item 8 of this Form 10-K.
(b)Exhibits. The following exhibits are included as part of this Form 10-K.

Exhibit No.Description
2.1Agreement and Plan of Merger by and among NBT Bancorp Inc., NBT Bank, N.A., Salisbury Bancorp, Inc., and Salisbury Bank and Trust Company dated December 5, 2022 (incorporated by reference to Exhibit 2.1 of Form 8-K filed on December 5, 2022).
3.1Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant’s 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 11, 2009).
3.1.2Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed March 19, 2009).
3.1.3Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant’s Form 8-K filed on August 25, 2011).
3.1.4Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant’s Form 8-K filed October 30, 2014).
3.2Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
4.1Form of Subordinated Note, dated as of March 31, 2021, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Registrant’s Form 8-K filed March 31, 2021).
4.2Description of registrant’s securities.
10.12011 Long Term Incentive Plan adopted by the Board on March 25, 2011 and approved by the shareholders at Salisbury’s 2011 Annual Meeting of Shareholders (incorporated by reference to Exhibit 10.9 of Registrant’s Annual Report on Form 10-K filed March 19, 2012).
10.2Amendment Number One to 2011 Long Term Incentive Plan dated as of January 18, 2013 (incorporated by reference to Exhibit 10.10 of Registrant’s Annual Report on Form 10-K filed March 7, 2013).
10.3Severance Agreement between Salisbury Bank and Trust Company and Mr. Richard J. Cantele, Jr. dated January 24, 2020 (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed January 30, 2020).

10.4Non-qualified Deferred Compensation Plan effective as of January 1, 2013 (incorporated by reference to Exhibit 10.2 of Registrant’s Form 8-K filed February 15, 2013).
10.5Employee Stock Ownership Plan (incorporated by reference to Exhibit 10.14 of Form 10-K filed March 28, 2014).
10.6Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 2, 2015).
10.7Amendment Number One to Salisbury Bancorp, Inc. 2015 Phantom Stock Appreciation Unit and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 of Form 8-K filed January 30, 2015).
10.8Amendment Number Two to 2011 Long Term Incentive Plan dated as of January 29, 2016 (incorporated by reference to Exhibit 10.12 of Form 10-K filed March 30, 2016).
10.9Form of Split-dollar Life Insurance Agreements with Senior Executive Officers (incorporated by reference to Exhibit 10.13 of Form 10-K filed March 30, 2016).
10.10Severance Agreement between Salisbury Bank and Trust Company and John M. Davies dated January 24, 2020 (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 30, 2020).
10.11Form of Subordinated Note Purchase Agreement, dated as of March 31, 2021, between Salisbury Bancorp, Inc. and the Purchasers identified therein. (incorporated by reference to Exhibit 10.1 of Registrant’s Form 8-K filed March 31, 2021).
10.122017 Long Term Incentive Plan adopted by the Board on February 24, 2017 and approved by shareholders at Salisbury’s 2017 Annual Meeting of Shareholders (incorporated by reference to Appendix A of the Registrant’s proxy filed March 20, 2017).
10.13Amendment Number Three to 2011 Long Term Incentive Plan dated as of April 28, 2017 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed May 15, 2017).
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10.14Change in Control Agreement with Peter Albero dated January 24, 2020 (incorporated by reference to Exhibit 10.3 of Form 8-K filed January 30, 2020).
10.15Change in Control Agreement with Steven M. Essex dated February 22, 2019 (incorporated by reference to Exhibit 10.2 of Form 8-K filed February 25, 2019).
10.16Amendment Number One to 2017 Long Term Incentive Plan dated as of March 9, 2020 (incorporated by reference to Exhibit 10.16 of Form 10-K filed March 13, 2020)
10.17Form of Performance Award Agreement – Restricted Stock Units (incorporated by reference to Exhibit 10.1 of Form 8-K filed July 29, 2020)
10.18Split-dollar Life Insurance Agreement with Peter Albero effective September 1, 2021 (incorporated by reference to Exhibit 10.1 of Form 8-K filed September 2, 2021)
10.19Form of Split-dollar Life Insurance Agreements with Senior Executive Officers (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 29, 2020).
10.20Split-dollar Life Insurance Agreement with Richard J. Cantele, Jr. effective September 1, 2021 (incorporated by reference to Exhibit 10.3 of Form 8-K filed September 2, 2021).
10.21Split-dollar Life Insurance Agreement with John Davies effective September 1, 2021 (incorporated by reference to Exhibit 10.1 of Form 8-K filed September 2, 2021).
10.22Change in Control Agreement with Carla L. Balesano dated July 29, 2020 (incorporated by reference to Exhibit 10.2 of Form 10-Q filed November 6, 2020).
10.23Amended and Restated Non-Qualified Deferred Compensation Plan effective January 1, 2022 (incorporated by reference to Exhibit 10.1 of Form 8-K filed December 29, 2021)
21.1Subsidiaries of the Registrant.
23.1Consent of Baker Newman & Noyes, LLC.
31.1Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(c)Financial Statement Schedules
   
 No financial statement schedules aare required to be filed as Exhibits pursuant to Item 15(c).

Item 16.Form 10-K Summary

None.

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

/s/ Richard J. Cantele, Jr.

Richard J. Cantele, Jr.,

President and Chief Executive Officer

March 10, 2023

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/s/ George E. Banta /s/ Holly J. Nelson
George E. Banta Holly J. Nelson
Director Director 
March 10, 2023 March 10, 2023
   
/s/ Arthur J. Bassin /s/ Neila B. Radin
Arthur J. Bassin Neila B. Radin
Director Director
March 10, 2023 March 10, 2023
   
/s/ Richard J. Cantele, Jr. /s/ Grace E. Schalkwyk
Richard J. Cantele, Jr. Grace E. Schalkwyk
Director, President and Chief Executive Officer Director
March 10, 2023 March 10, 2023
   
/s/ David B. Farrell /s/ Peter Albero
David B. Farrell Peter Albero
Director Chief Financial Officer
March 10, 2023 and Chief Accounting Officer
  March 10, 2023
/s/ Paul S. Hoffner  
Paul S. Hoffner  
Director  
March 10, 2023  

 

 

 

 

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