SALISBURY BANCORP BUSINESS
Salisbury Bancorp, Inc. , aConnecticut corporation, formed in 1998, is the bank holding company forSalisbury Bank and Trust Company (the "Bank"), aConnecticut -chartered andFederal Deposit Insurance Corporation ("FDIC") insured commercial bank headquartered inLakeville, 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:
InDecember 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 onNovember 29, 2022 . The initial value reflected in the exchange ratio was approximately 187% of Salisbury's tangible book value atSeptember 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.
20 RESULTS OF OPERATIONS
Comparison of the Years Ended
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
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.
21
The following table sets forth the changes in net interest income (presented on a tax-equivalent basis) due to volume and rate.
Years endedDecember 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
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. InMarch 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%. 22
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 atDecember 31, 2022 , as measured by the ratio of allowance for loan losses to gross loans, was 1.21%, as compared with 1.20% atDecember 31, 2021 . Excluding loans advanced under the SBA's Paycheck Protection Program, the ratio of the allowance to gross loans was 1.21% atDecember 31, 2022 compared with 1.23% atDecember 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, atDecember 31, 2022 , down from$4.2 million or 0.39% of gross loans receivable atDecember 31, 2021 . Accruing loans past due 30-89 days decreased slightly from$1.3 million , or 0.12%, of gross loans receivable atDecember 31, 2021 to$1.3 million , or 0.11%, of gross loans receivable atDecember 31, 2022 . See "Overview - Loan Credit Quality" below for further discussion and analysis. 23 Non-Interest Income
The following table details the principal categories of non-interest income.
Years endedDecember 31 , (dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Trust and wealth advisory$ 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
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 atDecember 31, 2022 and 2021 respectively. The twelve-month periods endedDecember 31, 2022 and 2021 included mortgage servicing amortization of$140 thousand and$235 thousand , respectively. Non-interest income for the twelve-month period endedDecember 31, 2021 also included a pre-tax gain of$73 thousand primarily from the sale of Salisbury's operations center inCanaan, Connecticut . Other income primarily includes rental property income. Non-Interest Expense
The following table details the principal categories of non-interest expense.
Years endedDecember 31 , (dollars in thousands) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Salaries$ 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 endedDecember 31, 2021 also included a pre-tax loss of$144 thousand on the sale of the building housing the Bank's branch inPoughkeepsie, 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 incurConnecticut income tax in 2022, 2021 or 2019, other than minimum state income tax, as a result of aConnecticut law that permits banks to shelter certain mortgage income from theConnecticut corporation business tax through the use of a special purpose entity called aPassive 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 theConnecticut legislation.Salisbury does not expect to pay other than minimumConnecticut state income tax in the foreseeable future unless there is a change inConnecticut tax law.
Comparison of the Years Ended
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. 24 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%. InMarch 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 inSalisbury's provision and allowance for loan losses. The reserve coverage atDecember 31, 2021 , as measured by the ratio of allowance for loan losses to gross loans, was 1.20%, as compared with 1.32% atDecember 31, 2020 . Excluding loans advanced under the SBA's Paycheck Protection Program, the ratio of the allowance to gross loans was 1.23% atDecember 31, 2021 compared with 1.44% atDecember 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, atDecember 31, 2021 , down from$5.6 million or 0.54% of gross loans receivable atDecember 31, 2020 . Accruing loans past due 30-89 days decreased from$6.8 million , or 0.66%, of gross loans receivable atDecember 31, 2020 to$1.3 million , or 0.12%, of gross loans receivable atDecember 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 endedDecember 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 atDecember 31, 2021 and 2020 respectively. The twelve-month periods endedDecember 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 endedDecember 31, 2021 also included a pre-tax gain of$73 thousand primarily from the sale ofSalisbury's operations center inCanaan, 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 endedDecember 31, 2021 also included a pre-tax loss of$144 thousand on the sale of the building housing the Bank's branch inPoughkeepsie, 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. 25 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 incurConnecticut income tax in 2021, 2020 or 2019, other than minimum state income tax, as a result of aConnecticut law that permits banks to shelter certain mortgage income from theConnecticut corporation business tax through the use of a special purpose entity called aPassive 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 theConnecticut legislation.Salisbury does not expect to pay other than minimumConnecticut state income tax in the foreseeable future unless there is a change inConnecticut tax law.
Overview
Assets
During 2022,Salisbury's assets increased by$12.4 million , or 0.8%, to$1.54 billion atDecember 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%, asSalisbury deployed excess liquidity into loans. In addition, the balance ofSalisbury's available-for-sale ("AFS") investment portfolio decreased$15.0 million , or 7.4%, during 2022. AtDecember 31, 2022 ,Salisbury's tangible book value and book value per common share were$19.71 and$22.13 , respectively. AtDecember 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
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 1,397Total 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 thatSalisbury 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 atDecember 31, 2022 . It is possible that future loss assumptions could change, necessitatingSalisbury to recognize future OTTI. Accumulated other comprehensive income atDecember 31, 2022 reflected net unrealized losses, net of tax, of$20.7 million inSalisbury'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 affectSalisbury's regulatory capital ratios.
Loans
During 2022, net loans receivable increased$146.9 million , or 13.8%, to$1.214 billion atDecember 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 atDecember 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 bySalisbury . Consumer loans, amounted to$20.5 million atDecember 31, 2022 , representing 1.7% of gross loans receivable. 26Salisbury'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 theSmall Business Administration ("SBA") andUnited 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 atDecember 31, 2022 , and represent 51.4% of gross loans receivable. AtDecember 31, 2022 approximately$0.3 million of PPP loans remained onSalisbury's balance sheet. These loans are reported as a separate component of "commercial and industrial" loans in the table below. The principal categories of loans receivable and loans held-for-sale are as follows: December 31, (in thousands) 2022 2021 Residential 1-4 family$ 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 27 The composition of loans receivable with either fixed, variable or adjustable interest rates is as follows: Variable or adjustable December 31, 2022 (in thousands) Fixed interest rates 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 QualitySalisbury 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 atDecember 31, 2022 , compared with$2.6 million , or 0.24% of gross loans receivable atDecember 31, 2021 . The decline in past due loans from year end 2021 primarily reflected the sale and charge-off of certain loans during the twelve-month period ending December
31, 2022. 28
The components of loans past due 30 days or greater are as follows:
(in thousands) 2022 2021 Past due 30-59 days$ 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
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
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 atDecember 31, 2022 , or 0.17% of assets, from$4.2 million or 0.27% of assets atDecember 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
25 7
Reduction in interest income $ 126 $ 411
29
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 AtDecember 31, 2022 , 93.50% of non-performing loans were current with respect to loan payments, compared with 69.02% atDecember 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$5.0 million , or 0.46% of gross loans receivable atDecember 31, 2021 . The reduction in loan balance from year end 2021 primarily reflected the sale and charge-off of certain loans and loan payments during the twelve month period endedDecember 31, 2022 . The components of troubled debt restructured loans are as follows: December 31, (in thousands) 2022 2021 Residential 1-4 family$ 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
AtDecember 31, 2022 , 97.55% of troubled debt restructured loans were current with respect to loan payments, as compared with 79.73% atDecember 31, 2021 . As ofDecember 31, 2022 and 2021, there were specific reserves on troubled debt restructured loans amounting to$22 thousand and$31 thousand , respectively. 30 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 atDecember 31, 2022 , compared with$25.0 million , or 2.32% of gross loans receivable atDecember 31, 2021 . The decrease primarily reflected internal credit risk rating upgrades on loans to businesses primarily in the hospitality, health care and entertainment and recreation industries which were previously downgraded due to concerns over the impact of COVID-19. These businesses have demonstrated a return to pre-pandemic levels of activity and liquidity, warranting the improvement in risk rating. The decrease in potential problem loans also reflected the sale of certain loans during 2022. The components of potential problem loans were as follows: December 31, (in thousands) 2022 2021 Residential 1-4 family$ 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
Deposits and Borrowings
Deposits increased$22.2 million , or 1.7%, during 2022, to$1.36 billion atDecember 31, 2022 , compared with$1.34 billion atDecember 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 bySalisbury to fund loan growth. Retail repurchase agreements decreased$4.2 million , or 36.8%, to$7.2 million atDecember 31, 2022 , compared with$11.4 million atDecember 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
31
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
Less Than or Equal More Than One to More Than Two to More Than Three
Interest rates to One Year Two Years Three Years 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
December 31, 2022 (in Within Within Within Over thousands) 3 months 3-6 months 6-12 months 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 atDecember 31, 2022 , compared with$7.7 million atDecember 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. AtDecember 31, 2022 ,Salisbury's excess borrowing capacity at the FHLBB was$241.3 million compared with$250.9 million atDecember 31, 2021 .
The following table sets forth certain information concerning short-term FHLBB advances:
December 31, (dollars in thousands) 2022 2021 Highest month-end balance during period$ 10,000 $ - Ending balance 10,000 - Average balance during period 1,041 - Subordinated Debentures Subordinated debentures totaled$24.5 million atDecember 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%. 32
MATERIAL CASH REQUIREMENTS FROM CONTRACTUAL CASH OBLIGATIONS
In the normal course of business,
The accompanying table summarizesSalisbury's off-balance sheet lending-related financial instruments and significant cash obligations, by remaining maturity, atDecember 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 inSalisbury's Consolidated Balance Sheets and include deposits, FHLBB advances and repurchase agreements that settle within standard market timeframes.
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 15,542 176,279 257,327Commitments 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 atDecember 31, 2022 . The decline was driven by unrealized losses inSalisbury'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. 33 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 atDecember 31, 2022 and 2021 under the regulatory capital rules then in effect: Minimum Capital Adequacy Minimum Ratios to be Requirement 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 theFDIC 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 toSalisbury 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 theBasel 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 ofDecember 31, 2022 , the Company and the Bank met each of their capital requirements and the most recent notification from theFDIC categorized the Bank as "well-capitalized." There are no conditions or events since that notification that management believes have changed the Bank's category. OnSeptember 17, 2019 , theOffice of the Comptroller of the Currency , the FRB and theFDIC 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 onJanuary 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
OnMarch 23, 2022 Salisbury announced that its Board of Directors renewed its share repurchase program that was established inMarch 2021 . The share repurchase program provides for the potential repurchase ofSalisbury'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 ofSalisbury . However, there is no assurance thatSalisbury 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 endedDecember 31, 2022 .
Stock Split
AtSalisbury's annual shareholder meeting onMay 18, 2022 , shareholders approved a recommendation bySalisbury's Board of Directors to amendSalisbury's Certificate of Incorporation to increaseSalisbury's authorized shares of Common Stock from 5,000,000 to 10,000,000 shares. OnJune 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 . OnJanuary 25, 2023 , the Board of Directors ofSalisbury declared a common stock dividend of$0.16 per common share payable onFebruary 24, 2023 to shareholders of record onFebruary 10, 2023 . Common stock dividends, when declared, will generally be paid the last business day of February, May, August and November, althoughSalisbury 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 toSalisbury . There are certain restrictions on the payment of cash dividends and other payments by the Bank toSalisbury . UnderConnecticut 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. 34
FRB Supervisory Letter SR 09-4,February 24, 2009 , revisedMarch 30, 2009 , states that, as a general matter, the Board of Directors of aBank Holding Company ("BHC") should inform theFederal 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 theFederal 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 considersSalisbury's capital needs, asset quality, and overall financial condition and does not adversely affect the financial stability ofSalisbury or the Bank. The continued payment of common stock cash dividends bySalisbury will be dependent onSalisbury's future core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors ofSalisbury .
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 to the Consolidated Financial Statements for details of recently
issued accounting pronouncements and their expected impact on
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 ofSalisbury'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 affectSalisbury 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.
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