SALISBURY BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations ofSalisbury Bancorp, Inc. ("Salisbury" or the "Company") and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Readers should also review other disclosures Salisbury files from time to time with theSecurities and Exchange Commission (the "SEC"). 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 (the "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 ten ATMs located in:
Critical Accounting Policies and Estimates
Salisbury's consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Salisbury's significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements, which, along with this Management's Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury's reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the "Provision and Allowance for Loan Losses" section of Management's Discussion and Analysis.
FINANCIAL CONDITION
Securities and Short Term Funds
The fair market value of Salisbury's investment portfolio decreased$12.2 million from year end 2021 to$192.5 million atSeptember 30, 2022 . The fair market value included net unrealized pre-tax losses of$28.3 million atSeptember 30, 2022 compared with net unrealized pre-tax gains of$1.1 million atDecember 31, 2021 . The net unrealized losses reflected the sharp increase in market interest rates that has occurred in the last nine months. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) decreased$119.0 million , or 67.9%, to$56.3 million atSeptember 30, 2022 . This decrease was driven by strong loan growth and normal customer activity during the nine-month period endedSeptember 30, 2022 . 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 its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI atSeptember 30, 2022 .
Loans
Net loans receivable increased$109.7 million , or 10.3%, to$1.18 billion atSeptember 30, 2022 , compared with$1.07 billion atDecember 31, 2021 . PPP loan balances declined from$25.6 million atDecember 31, 2021 to$0.4 million atSeptember 30, 2022 due to the forgiveness of such loans by the SBA. Excluding PPP loans, net loans receivable increased by$136.2 million , or 12.9%, compared withDecember 31, 2021 . The increase in net loans receivable was broad-based and reflected growth in residential, consumer, commercial and commercial & industrial loans. The allowance for loan losses increased by$1.4 million fromDecember 2021 primarily due to significant loan growth, management's current assessment of certain qualitative and environmental factors and charge-off activity during the nine-month period endingSeptember 30, 2022 . 29 Asset Quality During the first nine months of 2022, overall asset quality continued to improve. Non-performing assets of$1.9 million , or 0.16% of gross loans receivable declined$2.3 million or 55.7% from year end 2021. In addition, total impaired and potential problem loans declined$21.6 million , or 65.8%, from$32.8 million , or 3.04% of gross loans receivable to$11.2 million , or 0.9% of gross loans receivable atSeptember 30, 2022 . The decrease in the balance from year end 2021 primarily reflected management's upgrade of the internal risk rating on loans to businesses in the hospitality and entertainment and recreation industries, which were previously downgraded due to concerns over COVID-19. Such businesses have demonstrated a return to pre-pandemic levels of activity and liquidity. As ofSeptember 30, 2022 , Salisbury did not have any outstanding loan payment deferrals and the Bank had approximately$0.4 million of PPP loans on its balance sheet compared with approximately$26 million atDecember 31, 2021 . Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.
Past Due Loans
Loans past due 30 days or more decreased$2.1 million for the nine months endedSeptember 30, 2022 to$0.5 million , or 0.04% of gross loans receivable 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 non-performing loans during the nine-month period endingSeptember 30, 2022 .
The components of loans past due 30 days or greater are as follows:
(in thousands) September 30, 2022 December 31, 2021 Past due 30-59 days $ 276 $ 751 Past due 60-89 days 114 590 Past due 90-179 days 100 1 Past due 180 days and over - 10 Accruing loans 490 1,352 Past due 30-59 days - 14 Past due 60-89 days - - Past due 90-179 days - 63 Past due 180 days and over 15 1,213 Non-accrual loans 15 1,290
Total loans past due 30 days or greater $ 505 $
2,642
Credit Risk Ratings
Salisbury assigns credit risk ratings to loans receivable in order to manage
credit risk and to determine the allowance for loan losses. Credit risk ratings
categorize loans by common financial and structural characteristics that measure
the credit strength of a borrower. Salisbury's rating model has eight risk
rating grades, with each grade corresponding to a progressively greater risk of
default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings
(special mention, substandard, doubtful, and loss) defined by the bank's
regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to
differentiate risk within the portfolio and are reviewed on an ongoing basis and
revised, if needed, to reflect changes in the borrowers' current financial
position and outlook, risk profiles and the related collateral and structural
positions.
· Loans risk rated as "special mention" (5) possess credit deficiencies or
potential weaknesses deserving management's close attention that if left
uncorrected may result in deterioration of the repayment prospects for the
loans at some future date.
· Loans risk rated as "substandard" (6) are loans where the Bank's position is
clearly not protected adequately by borrower current net worth or payment
capacity. These loans have well defined weaknesses based on objective evidence
and include loans where future losses to the Bank may result if deficiencies
are not corrected, and loans where the primary source of repayment such as
income is diminished and the Bank must rely on sale of collateral or other
secondary sources of collection.
· Loans risk rated as "doubtful" (7) have the same weaknesses as substandard
loans with the added characteristic that the weakness makes collection or
liquidation in full, given current facts, conditions, and values, to be highly
improbable. The possibility of loss is high, but due to certain important and
reasonably specific pending factors, which may work to strengthen the loan, its
reclassification as an estimated loss is deferred until its exact status can be
determined.
· Loans risk rated as "loss" (8) are considered uncollectible and of such little
value that continuance as Bank assets is unwarranted. This classification does
not mean that the loan has absolutely no recovery or salvage value, but rather,
it is not practical or desirable to defer writing off this loan even though
partial recovery may be made in the future.
Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio and risk ratings are examined annually on a rotating basis by its two primary regulatory agencies, theFDIC and CTDOB. 30 Credit Quality Segments
Salisbury categorizes loans receivable into the following credit quality segments:
· Impaired loans consist of all non-accrual loans and troubled debt restructured
loans and represent loans for which it is probable that Salisbury will not be
able to collect all principal and interest amounts due according to the
contractual terms of the loan agreements.
· Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual
of interest has been discontinued because, in the opinion of management, full
collection of principal or interest is unlikely.
· Non-performing loans consist of non-accrual loans and accruing loans past due
90 days and over that are well collateralized, in the process of collection and
where full collection of principal and interest is reasonably assured.
Non-performing assets consist of non-performing loans plus real estate acquired
in settlement of loans.
· Troubled debt restructured loans are loans for which concessions such as
reduction of interest rates, other than normal market rate adjustments, or
deferral of principal or interest payments, extension of maturity dates, or
reduction of principal balance or accrued interest, have been granted due to a
borrower's financial condition. Loan restructuring is employed when management
believes the granting of a concession will increase the probability of the full
or partial collection of principal and interest.
· Potential problem loans consist of performing loans that have been assigned a
substandard credit risk rating and are not classified as impaired.
Impaired Loans
Impaired loans include all modified loans classified as troubled debt restructurings (TDRs) and loans on non-accrual status. The components of impaired loans are as follows:
(in thousands) September 30, 2022 December 31, 2021 Non-accrual loans, excluding troubled debt restructured loans $ 1,692 $ 2,838 Non-accrual troubled debt restructured loans 68 1,350 Accruing troubled debt restructured loans 2,772
3,609
Total impaired loans $ 4,532 $ 7,797
Non-Performing Assets
Non-performing assets decreased $2.3 million to $1.9 million , or 0.12% of assets
for the nine months ended September 30, 2022 , from $4.2 million , or 0.27% of
assets at December 31, 2021 . The 55.7% decrease in non-performing assets in the
first nine months 2022 resulted primarily from the sale and charge-off of
certain non-performing loans during the period.
The components of non-performing assets are as follows:
(in thousands) September 30, 2022 December 31, 2021 Residential 1-4 family $ 137 $ 750 Residential 5+ multifamily - 861 Home equity lines of credit - 21 Commercial 1,199 1,924 Farm land 397 432 Vacant land - - Real estate secured 1,733 3,988 Commercial and industrial 27 200 Consumer - - Non-accrual loans 1,760 4,188
Accruing loans past due 90 days and over 100
11
Non-performing loans 1,860 4,199
Foreclosed assets - -
Non-performing assets $ 1,860 $ 4,199
The past due status of non-performing loans is as follows:
(in thousands) September 30, 2022 December 31, 2021 Current $ 1,745 $ 2,898 Past due 30-59 days - 14 Past due 60-89 days - - Past due 90-179 days 100 64 Past due 180 days and over 15 1,223 Total non-performing loans $ 1,860 $ 4,199
At
31
Total Outstanding Troubled Debt Restructured Loans
Total outstanding troubled debt restructured loans decreased$2.1 million , or 42.7%, during the first nine months of 2022 to$2.8 million , or 0.24% of gross loans receivable atSeptember 30, 2022 , compared to$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 loans during the nine month period endedSeptember 30, 2022 .
The components of troubled debt restructured loans are as follows:
(in thousands) September 30, 2022 December 31, 2021 Residential 1-4 family $ 1,364 $ 1,824 Residential 5+ multifamily 79 87 Commercial 1,329 1,622 Real estate secured 2,772 3,533 Commercial and industrial - 76
Accruing troubled debt restructured loans 2,772
3,609
Residential 1-4 family 68 256
Residential 5+ multifamily - 861
Commercial - 233
Real estate secured $ 68 $ 1,350Non-accrual troubled debt restructured loans 68 1,350 Troubled debt restructured loans $ 2,840 $ 4,959
The past due status of troubled debt restructured loans is as follows:
(in thousands) September 30, 2022 December 31, 2021 Current $ 2,772 $ 3,540 Past due 30-59 days - 37 Past due 60-89 days - 32
Accruing troubled debt restructured loans 2,772
3,609
Current 68 414
Past due 180 days and over - 936Non-accrual troubled debt restructured loans 68 1,350 Total troubled debt restructured loans $ 2,840 $ 4,959
At
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$18.3 million during the first nine months of 2022 to$6.7 million , or 0.56% of gross loans receivable atSeptember 30, 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 components of potential problem loans are as follows:
(in thousands) September 30, 2022 December 31, 2021 Residential 1-4 family $ 858 $ 999 Residential 5+ multifamily - 709 Residential real estate 858 1,708 Commercial 4,156 20,998 Construction of commercial - - Commercial real estate 4,156 20,998 Farm land - - Real estate secured 5,014 22,706 Commercial and industrial 1,690 2,310 Consumer - - Total potential problem loans $ 6,704 $ 25,016
The past due status of potential problem loans is as follows:
(in thousands) September 30, 2022 December 31, 2021 Current $ 6,672 $ 24,977 Past due 30-59 days 20 23 Past due 60-89 days 12 16 Total potential problem loans $ 6,704 $
25,016
At
32 Deposits and Borrowings Deposits decreased$11.0 million , or 0.1%, to$1.325 billion atSeptember 30, 2022 compared with$1.336 billion atDecember 31, 2021 . The decrease reflected normal customer activity as deposit levels returned to pre-pandemic levels. Retail repurchase agreements decreased$4.3 million during 2022 to$7.1 million atSeptember 30, 2022 , from$11.4 million atDecember 31, 2021 .
The distribution of average total deposits by account type is as follows:
September 30, 2022 December 31, 2021
Weighted Weighted
Average Interest Average Interest
(in thousands) Average Balance Percent Rate Average Balance Percent Rate
Demand deposits $ 391,492 29.58 %
0.00 %
233,547 17.64 0.18 224,763 17.93 0.19
Regular savings accounts 246,101 18.59 0.29 315,469 25.17 0.17
Money market savings 320,552 24.22 0.44 215,300 17.18 0.11Certificates of deposit (CD's)1 131,918 9.97
0.73 130,879 10.44 0.72
Total deposits $ 1,323,610 100.00 % 0.26 % $ 1,253,364 100.00 % 0.17 %
1 CD's also include brokered certificates and there were none at
The classification of certificates of deposit by interest rates is as follows:
Interest rates (in thousands) September 30, 2022 December 31, 2021
Less than 1.00% $ 79,245 $ 97,099
1.00% to 1.99% 14,589 14,919
2.00% to 2.99% 15,787 6,493
3.00% to 3.99% 238 498
Total $ 109,859 $ 119,009
The distribution of certificates of deposit by interest rate and maturity is as
follows:
At September 30, 2022
Less Than or
Equal to One More Than One to More Than Two More Than Percent of
Interest rates (in thousands) Year Two Years to Three Years Three Years Total Total
Less than 1.00% $ 58,315 $ 11,841 $ 3,764 $ 5,325 $ 79,245 72.13 %
1.00% to 1.99% 8,530 3,814 2,245 - 14,589 13.28
2.00% to 2.99% 8,274 5,016 2,497 - 15,787 14.37
3.00% to 3.99% 238 - - - 238 0.22
Total $ 75,357 $ 20,671 $ 8,506 $ 5,325 $ 109,859 100.00 %
Scheduled maturities of time certificates of deposit in denominations of
September 30, 2022 (in Within Over thousands) 3 months 3-6 months 6-12 months 1 year Total Certificates of deposit$100,000 and over$ 23,015 $ 6,479 $ 18,252 $ 19,351 $ 67,097
Salisbury had$20.0 million of outstanding FHLBB advances atSeptember 30, 2022 compared with an outstanding balance of$7.7 million atDecember 31, 2021 . Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. AtSeptember 30, 2022 ,$20.0 million of letters of credit were outstanding.
Liquidity
Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. AtSeptember 30, 2022 , Salisbury's excess borrowing capacity at FHLBB was approximately$233.0 million . Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If a deterioration in economic conditions or other factors cause depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding. Operating activities for the nine-month period endedSeptember 30, 2022 provided net cash of$22.3 million . Investing activities utilized net cash of$135.2 million principally from$115.1 million of net loan originations and principal collections,$52.2 million of purchases of securities available-for-sale,$2.5 million in purchase of Bank Owned Life Insurance (BOLI) and$0.8 million of capital expenditures, partly offset by proceeds of$13.1 million from calls, maturities and principle payments on securities available-for-sale, and$22.0 million from the sale of available-for-sale-securities. Financing activities utilized net cash of$6.1million principally due to a decrease in deposit transaction accounts of$1.8 million , a decrease of$9.2 million in time deposits, a decrease of$4.3 million for securities sold under repurchase agreements, payments of$6.0 million for long-term FHLB borrowings, payments of$1.7 million on amortizing FHLBB advances, and the payment of common stock dividends of$2.8 million , partially offset by$20.0 million in FHLB short term advances. AtSeptember 30, 2022 , Salisbury had outstanding commitments to fund new loan originations of$57.6 million and unused lines of credit of$250.2 million . Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals. 33 RESULTS OF OPERATIONS
For the three-month periods ended
OVERVIEW
Net income allocated to common stock was$4.3 million , or$0.75 per basic common share, for the third quarter endedSeptember 30, 2022 (third quarter 2022), compared with$3.4 million , or$0.60 per basic common share, for the third quarter endedSeptember 30, 2021 (third quarter 2021), and$3.8 million , or$0.67 per basic common share, for the second quarter endedJune 30, 2022 (second quarter 2022). Net Interest Income Tax equivalent net interest income of$12.1 million for the third quarter 2022 increased$1.7 million , or 16.5%, versus third quarter 2021. Average total earning assets increased$53.8 million , or 3.8%, versus third quarter 2021. Average total interest bearing deposits increased$33.6 million , or 3.7%, versus third quarter 2021. The tax equivalent net interest margin for the third quarter 2022 was 3.27% compared with 2.92% for the third quarter 2021. Excluding PPP loan, the tax equivalent net interest margin for the third quarter 2022 was 3.25% compared with 2.78% for the third quarter 2021. The increase in net interest margin from third quarter 2021 primarily reflected a$111.7 million , or 10.6%, increase in average loans and an increase of 5 basis points in average loan yields as well as a$70.7 million , or 46.9% increase in average securities balances and an increase of 24 basis points in average yields.
The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE") net interest income and yields on average interest-earning assets and interest-bearing liabilities.
Three months ended September 30, Average Balance Income / Expense Average Yield / Rate (dollars in thousands) 2022 2021 2022 2021 2022 2021 Loans (a)(d)$ 1,168,037 $ 1,056,266 $ 11,675 $ 10,382 3.95 % 3.90 % Securities (c)(d) 221,620 150,841 1,192 720 2.15 1.91 FHLBB stock 1,191 1,743 8 6 2.92 1.38 Short term funds (b) 68,818 196,997 344 73 1.98 0.15 Total earning assets 1,459,666 1,405,847 13,219 11,181 3.58 3.15 Other assets 60,283 72,547 Total assets$ 1,519,949 $ 1,478,394
Interest-bearing demand deposits$ 233,547 $ 227,291 106
111 0.18 0.19
Money market accounts 320,552 327,861 356 140 0.44 0.17
Savings and other 246,101 217,541 179 58 0.29 0.11
Certificates of deposit 131,918 125,768 242 223 0.73 0.70Total interest-bearing deposits 932,118 898,461 883
532 0.38 0.23
Repurchase agreements 9,684 14,296 4 5 0.18 0.15
Finance lease 5,318 2,685 41 33 3.05 4.98
Note payable 142 183 2 3 6.15 6.11
Subordinated debt (net of
issuance costs) 24,508 24,452 233 233 3.80 3.82
FHLBB advances 217 9,329 2 30 3.15 1.28
Total interest-bearing
liabilities 971,987 949,406 1,165 836 0.48 0.35
Demand deposits 410,861 388,557
Other liabilities 7,065 6,965
Shareholders' equity 130,036 133,466
Total liabilities &
shareholders' equity $ 1,519,949 $ 1,478,394
Net interest income $ 12,054 $ 10,345 Spread on interest-bearing funds
3.11 2.80
Net interest margin (e) 3.27 2.92
(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 historical cost.
(d) Includes tax exempt income benefit of
for 2022 and 2021 on tax-exempt securities and loans whose income and yields
are calculated on a tax-equivalent basis. The income benefit reflected the
(e) Net interest income divided by average interest-earning assets.
34
The following table sets forth the changes in FTE interest due to volume and rate.
Three months ended September 30, (in thousands) 2022 versus 2021 Change in interest due to Volume Rate Net Loans$ 1,159 $ 134 $ 1,293 Securities 360 112 472 FHLBB stock (4 ) 6 2 Short term funds (337 ) 608 271 Interest-earning assets 1,178 860 2,038 Deposits 10 341 351 Repurchase agreements (2 ) 1 (1 ) Finance lease 27 (19 ) 8 Note Payable (1 ) - (1 ) Subordinated Debt 1 (1 ) - FHLBB advances (50 ) 22 (28 ) Interest-bearing liabilities (15 ) 344 329
Net change in net interest income$ 1,193 $ 516 $
1,709 Interest Income Tax equivalent interest income of$13.2 million for third quarter 2022 increased$2.0 million , or 18.2% from third quarter 2021. Loan income increased$1.3 million , or 12.5%, compared to third quarter 2021 due to a increase in yield of 5bps, and a$111.7 million , or 10.6%, increase in average loan balances. Tax equivalent securities income increased$472 thousand , or 65.6%, compared to third quarter 2021 due to a$70.7 million , or 46.9%, increase in average balances and a 24 basis point increase in average yield. Income on short-term funds increased$271 thousand , or 371.2%, compared with third quarter 2021 primarily due to a 183 basis point increase in the average yield, partially offset by a decrease of$128.1 million , or 65.0%, in average short-term funds due to the funding of loans and normal customer activity.
Interest Expense
Interest expense of$1.2 million for third quarter 2022 increased$329 thousand , or 39.4%, compared with third quarter 2021. Interest on deposit accounts increased$351 thousand , or 66.0%, from third quarter 2021 as a result of a 15 basis points increase in average deposit rates and a$33.7 million , or 3.7%, increase in average balances. Interest expense on FHLBB borrowings decreased$28 thousand , or 93.3%, from third quarter 2021 primarily as a result of a decrease in the average balance of$9.1 million , or 97.6%, partly offset by an increase in the average borrowing rate of 187 basis points. Interest expense on subordinated debt remained unchanged at$233 thousand , for third quarter 2022 and third quarter 2021.
Provision and Allowance for Loan Losses
A provision expense of$0.7 million was recorded for third quarter 2022, compared with$0.4 million for third quarter 2021. The provision expense for third quarter 2022 primarily reflected loan growth during the quarter as well as adjustments to certain qualitative factors due to rising interest rates, persistent inflation and the increased risk of an economic recession. Net loan charge-offs (recoveries) were$64 thousand for third quarter 2022 compared with($60) thousand for third quarter 2021. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A deterioration in economic conditions may result in an increase in delinquencies, which may subsequently necessitate an increase in loan loss reserves. The reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans excluding PPP loans, was 1.20% for third quarter 2022, versus 1.20% for second quarter 2022 and 1.28% for third quarter 2021. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 770% for third quarter of 2022, versus 324% for second quarter of 2022 and 263% for third quarter of 2021.
The following table details the principal categories of credit quality ratios:
Three months endedSeptember 30, 2022
2021
Net charge-offs (recoveries) to average loans receivable, gross 0.07 % (0.01 %) Non-performing loans to loans receivable, gross 0.16
0.47
Accruing loans past due 30-89 days to loans receivable, gross 0.03
0.08
Allowance for loan losses to loans receivable, gross 1.20
1.23
Allowance for loan losses to non-performing loans 770.49
263.30
Non-performing assets to total assets 0.12
0.34
Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were$1.9 million or 0.16% of gross loans receivable atSeptember 30, 2022 compared with$5.0 million , or 0.47%, atSeptember 30, 2021 . Accruing loans past due 30-89 days decreased$0.5 million to$0.4 million , or 0.03% of gross loans receivable, from$0.9 million , or 0.08% of gross loans receivable, atSeptember 30, 2021 . See "Financial Condition - Loan Credit Quality" above for further discussion and analysis. The allowance for loan losses represents management's estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan, or portion of a loan, to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors. Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower's aggregate loan exposure, using either the fair value of the collateral, less estimated costs to sell if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate. A specific allowance is generally established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan. 35 The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage. The unallocated component of the allowance is maintained to cover uncertainties that could affect management's estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Additionally, reserves are established for off balance sheet exposures. Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans atSeptember 30, 2021 . 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, theFDIC and CTDOB. As an integral part of their examination process, theFDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.
Non-Interest Income
The following table details the principal categories of non-interest income.
Three months endedSeptember 30 , (dollars in thousands) 2022 2021 2022 vs. 2021 Trust and wealth advisory$ 1,228 $ 1,286 ($ 58 ) (4.5 %) Service charges and fees 1,219 1,211 8 0.7
Mortgage banking activities, net 64 108
(44 ) (40.7 ) Losses on mutual fund (47 ) (4 ) (43 ) 1,075.0 Gains on securities, net - 7 (7 ) (100.0 )
Bank-owned life insurance ("BOLI") income 201 135
66 48.9
Gain on sale of assets - 73 (73 ) (100.0 )
Other 28 24 4 16.7
Total non-interest income $ 2,693 $ 2,840 ($ 147 ) (5.2 %)
Non-interest income for third quarter 2022 decreased $147 thousand versus third
quarter 2021. Trust and Wealth Advisory income decreased $58 thousand versus
third quarter 2021 primarily due to lower asset management fees. Assets under
administration were $1.2 billion as of September 30, 2022 compared with $973.2
million as of September 30, 2021 . Discretionary assets under administration of
$522.1 million at September 30, 2022 decreased from $608.2 million at September
30, 2021 primarily due to lower equity valuations. Non-discretionary assets
under administration of $710.2 million for third quarter 2022 increased from
$365.0 million at third quarter 2021 due to a higher valuation of certain
partnership assets for an existing client relationship. The trust and wealth
business records only a nominal annual fee on this relationship.
Service charges and fees of $1.2 million for third quarter 2022 were essentially
unchanged from third quarter 2021. Net fees from mortgage banking activities
were slightly below third quarter 2021 due to lower sales volume. Salisbury did
not sell any residential loans to FHLBB during third quarter 2022 compared with
sales of $1.7 million in third quarter 2021.
Non-Interest Expense
The following table details the principal categories of non-interest expense.
Three months endedSeptember 30 , (dollars in thousands) 2022 2021 2022 vs. 2021 Salaries$ 3,802 $ 3,361 $ 441 13.1 % Employee benefits 1,224 1,322 (98 ) (7.4 ) Premises and equipment 1,117 1,060 57 5.4 Write-down of assets - 144 (144 ) (100.0 )
Information processing and services 711 632 79 12.5 Professional fees 689 735 (46 ) (6.3 ) Collections, OREO, and loan related 67 120 (53 ) (44.2 ) FDIC insurance 98 146 (48 ) (32.9 ) Marketing and community support 214 256
(42 ) (16.4 ) Amortization of intangibles 46 61 (15 ) (24.6 ) Other 544 447 97 21.7 Total non-interest expense$ 8,512 $ 8,284 $ 228 2.8 %
Non-interest expense for third quarter 2021 increased$228 thousand versus third quarter 2021. Salaries increased$441 thousand versus third quarter 2021 primarily reflecting higher base salary expense as well as higher production and incentive accruals. Employee benefits expense decreased$98 thousand from third quarter 2021 primarily due to a reduction of deferred compensation expense, partially offset by higher 401k and ESOP accruals. Premises and equipment expense increased$57 thousand versus third quarter 2021 due to increased finance lease and software costs. Third quarter 2021 also included a pre-tax loss of$144 thousand on the pending sale of the building housing the Bank's branch inPoughkeepsie, New York . Data processing expense increased$79 thousand versus third quarter 2021 mainly due to higher data processing, ATM and debit card processing fees and increased website expense. Professional fees decreased$46 thousand versus third quarter 2021 as higher legal, audit & exam fees and internal audit fees offset by lower consulting and investment management fees. Collections, OREO and loan related expenses decreased$53 thousand versus third quarter 2021 primarily due to lower litigation and appraisal costs.FDIC insurance decreased$48 thousand versus third quarter 2021 on lower deposit balances. Marketing and community support costs decreased$42 thousand compared to the prior year third quarter primarily due to timing of current marketing campaigns and contributions as well as branding related costs incurred in the prior year. 36 Other Matters InJuly 2022 , Salisbury management discovered that the Bank's trust department terminated a trust account inMay 2020 and distributed approximately$1.0 million that should have been retained in continuance of the trust account. Salisbury has engaged legal counsel and is currently evaluating the Company's potential financial exposure. At this time, management believes that Salisbury's exposure is not yet known or knowable and could potentially range from zero to approximately$1.0 million depending upon the facts and circumstances and the scope of Salisbury's insurance coverage.
Income Taxes
The effective income tax rates for third quarter 2022 and third quarter 2021 were 18.65% and 20.09%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income.Salisbury did not incurConnecticut income tax in 2022 (to date) or 2021, 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. In 2004,Salisbury availed itself of this benefit by forming a PIC,SBT Mortgage Service Corporation .Salisbury's income tax provision reflects the full impact of theConnecticut legislation.Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change inConnecticut tax law.
For the nine month periods ended
Overview
Net income allocated to common shareholders was$11.5 million , or$2.04 per basic common share, for the nine month period endedSeptember 30, 2022 (nine month period 2022), compared with$12.1 million , or$2.16 per basic common share, for the nine month period endedSeptember 30, 2021 (nine month period 2021). Net Interest Income Tax equivalent net interest income of$33.6 million for the nine month period 2022 increased$3.0 million , or 9.8%, versus the nine month period 2021. Average total earning assets increased$75.8 million , or 5.6%, versus the nine month period 2021. Average total interest bearing deposits increased$39.0 million , or 4.4%, versus the nine month period 2021. The net interest margin of 3.12% increased 11 basis points from 3.01% for the nine month period 2021. Excluding PPP loans, the net interest margin for the nine month period endedSeptember 30, 2022 was approximately 3.06% compared with 2.90% for the same period in 2021. The increase in net interest margin for the nine month period endedSeptember 30, 2022 compared to the prior year period primarily reflected a$66.8 million , or 6.3%, increase in average loan balances, partially offset by a 5 basis point decline in average yield. This increase in interest income was partially offset by a$0.3 million increase in deposit costs due to a$39.1 million increase in average interest-bearing balances and a 3 basis point increase in average deposit costs.
The following table sets forth the components of
Nine months ended September 30, Average Balance Income / Expense Average Yield / Rate (dollars in thousands) 2022 2021 2022 2021 2022 2021 Loans (a)(d)$ 1,120,246 $ 1,053,451 $ 32,646 $ 30,989 3.85 % 3.90 % Securities (c)(d) 218,455 130,864 3,270 2,080 2.00 2.12 FHLBB stock 1.281 1.840 26 26 2.69 1.89 Short term funds (b) 82,075 160,055 491 148 0.80 0.12 Total earning assets 1,422,057 1,346,210 36,433 33,243 3.39 3.27 Other assets 65,570 71,421 Total assets$ 1,487,627 $ 1,417,631
Interest-bearing demand deposits$ 231,883 $ 224,479 313
332 0.18 0.20
Money market accounts 313,871 310,908 639 408 0.27 0.18
Savings and other 238,688 209,180 339 173 0.19 0.11
Certificates of deposit 133,339 134,143 647 739 0.65 0.74Total interest-bearing deposits 917,781 878,710 1,938
1,652 0.28 0.25
Repurchase agreements 9,024 11,608 11 13 0.16 0.15
Finance lease 5,233 2,753 122 102 3.12 4.95
Note payable 153 192 7 9 6.14 6.13
Subordinated debt (net of
issuance costs) 24,495 21,851 699 767 3.80 4.68
FHLBB advances 1,054 10,567 57 96 7.16 1.20
Total interest-bearing
liabilities 957,740 925,681 2,834 2,639 0.40 0.38
Demand deposits 391,537 355,352
Other liabilities 6,818 6,897
Shareholders' equity 131,532 129,701
Total liabilities &
shareholders' equity $ 1,487,627 $ 1,417,631
Net interest income $ 33,599 $ 30,604 Spread on interest-bearing funds
3.00 2.89
Net interest margin (e) 3.12 3.01
(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 historical cost.
(d) Includes tax exempt income benefit of
2022 and 2021 on tax-exempt securities and loans whose income and yields are
calculated on a tax-equivalent basis. The income benefit reflected the
federal statutory tax rate of 21.0% for 2022 and 2021.
(e) Net interest income divided by average interest-earning assets.
37
The following table sets forth the changes in FTE interest due to volume and rate.
Nine months ended September 30, (in thousands) 2022 versus 2021 Change in interest due to Volume Rate Net Loans$ 2,200 $ (543 ) $ 1,657 Securities 1,400 (210 ) 1,190 FHLBB stock (12 ) 12 - Short term funds (480 ) 823 343 Interest-earning assets 3,108 82 3,190 Deposits 17 269 286 Repurchase agreements (3 ) 1 (2 ) Finance lease 93 (73 ) 20 Note payable (2 ) - (2 ) Subordinated Debt 136 (204 ) (68 ) FHLBB advances (385 ) 346 (39 ) Interest-bearing liabilities (144 ) 339 195 Net change in net interest income$ 3,252 $ (257 ) $ 2,995 Interest Income Tax equivalent interest income of$36.4 million for the nine month period 2022 increased$3.2 million or 9.6%, compared with the nine month period 2021. Loan income increased$1.7 million , or 5.3%, compared with the nine months of 2021 primarily due to a$66.7 million , or 6.3%, increase in average loan balances, partially offset by a 5 basis point decrease in the average yield. Tax equivalent securities income for the nine month period 2022 increased$1.2 million , or 57.2%, compared with the nine month period 2021, primarily due to a$87.6 million , or 66.9%, increase in average balances, partially offset by an 12 basis point decrease in average yield. Income on short-term funds for the nine month period 2022 increased$343 thousand , or 231.8%, compared with the nine months of 2021 primarily due to a 68 basis point increase in the average short-term funds yields, partially offset by a$78.0 million , or 48.7%, decrease in average short-term funds, due to due to the funding of loans, the investment of cash into securities and normal customer activity.
Interest Expense
Interest expense of$2.8 million for the nine month period 2022 increased$195 thousand , or 7.4%, compared with the nine month period 2021. Interest on deposit accounts increased$286 thousand , or 17.3%, as a result of a$39.0 million , or 4.4%, increase in the average balances and a 3 basis point increase in average deposit rates. Interest expense on FHLBB borrowings decreased$39 thousand , or 40.6%, due to a$9.5 million , or 90.0%, decrease in average balances, partially offset by a 596 basis point increase in the average borrowing rate. Interest expense on subordinated debt for the nine month period 2022 decreased$68 thousand , or 8.9%, due to a 88 basis point decrease in average yield, partially offset by a$2.6 million , or 12.1% increase in the average balance.
Provision and Allowance for Loan Losses
A provision of$2.2 million was recorded for the nine-month period endedSeptember 30, 2022 compared to a net credit reserve release of$0.5 million for the nine-month period endedSeptember 30, 2021 . Net loan charge-offs were$786 thousand and$69 thousand for the respective periods. The provision expense for nine-month period of 2022 reflected significant loan growth and adjustments to qualitative factors due to the uncertain macro-economic environment. The provision expense also reflected a release of credit reserves of$0.6 million due to management's upgrade of the internal risk rating on certain loans related to the hospitality and entertainment and recreation industries. In 2021 management reduced credit reserves as a result of an improvement in the business environment inSalisbury's market areas due to the rollout out of vaccinations and the lifting of COVID-19 restrictions. Charge-off's for the nine-month period in 2022 included a write-down of$374 thousand in first quarter 2022 to reduce the carrying value on$3.8 million of non-performing and under-performing residential and commercial loans, whichSalisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately$239 thousand due to higher final bids. This increase was recorded as a pre-tax gain on sale inSalisbury's consolidated statement of income in first quarter 2022. In second quarter 2022,Salisbury charged off$312 thousand , which primarily related to a discrete commercial loan. Net charge-offs were$64 thousand for third quarter 2022. Reserve coverage atSeptember 30, 2022 , as measured by the ratio of allowance for loan losses to gross loans, at 1.20%, compares with 1.23% a year ago atSeptember 30, 2021 . Excluding PPP loans, the reserve coverage ratio was 1.20% forSeptember 30, 2022 compared with 1.28% forSeptember 30, 2021 . Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic or a deterioration in economic conditions due to high inflation and rising interest rates, which results in loan payment delinquencies, may subsequently necessitate an increase in loan loss reserves.
Non-interest income
The following table details the principal categories of non-interest income.
Nine months endedSeptember 30 , (dollars in thousands) 2022 2021 2022 vs. 2021 Trust and wealth advisory$ 3,762 $ 3,685 $ 77 2.1 % Service charges and fees 4,080 3,536 544 15.4
Mortgage banking activities, net 497 912 (415 ) (45.5 )
Losses on mutual fund (119 ) (18 ) (101 ) 561.1
Gains (losses) gains on securities, net 165 (2 ) 167 (8350.0 )
Bank-owned life insurance ("BOLI") income 615 386 229 59.3 Gain on sale of assets - 73 (73 ) (100.0 ) Other 84 81 3 3.7 Total non-interest income$ 9,084 $ 8,653 $ 431 5.0 % 38 Non-interest income for the nine month period endedSeptember 30, 2022 increased$431 thousand versus the same period in 2021. Trust and wealth advisory revenues increased$77 thousand mainly on higher estate planning fees. Service charges and fees increased$544 thousand primarily due to non-recurring loan prepayment fees. Net fees from mortgage banking activities decreased$415 thousand due to lower volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled$7.5 million for the nine month period endedSeptember 30, 2022 compared with$29.7 million for the nine month period endedSeptember 30, 2021 . The nine month periods endedSeptember 30, 2022 and 2021 included mortgage servicing amortization of$117 thousand and$167 thousand , respectively. BOLI income and gains increased$229 thousand versus the same period in 2021. The increase included a non-recurring non-taxable gain of$89 thousand related to proceeds receivable from a bank-owned life insurance policy ("BOLI") due to the death of a former covered employee. Non-interest income for the nine month period endedSeptember 30, 2021 also included a one-time pre-tax gain of$73 thousand primarily from the sale ofSalisbury's operations center inCanaan, Connecticut . Other income primarily includes rental property income.
Non-interest expense
The following table details the principal categories of non-interest expense.
Nine months endedSeptember 30 , (dollars in thousands) 2022 2021 2022 vs. 2021 Salaries$ 10,938 $ 9,664 $ 1,274 13.2 % Employee benefits 3,789 3,990 (201 ) (5.0 ) Premises and equipment 3,200 3,034 166 5.5 Write-down of assets 3 144 (141 ) (97.9 )
Information processing and services 2,098 1,824 274 15.0 Professional fees 2,297 2,090 207 9.9 Collections, OREO, and loan related 300 317 (17 ) (5.4 ) FDIC insurance 391 370 21 5.7 Marketing and community support 661 552
109 19.7 Amortization of intangibles 150 198 (48 ) (24.2 ) Other 1,872 1,448 424 29.3 Total non-interest expense$ 25,699 $ 23,631 $ 2,068 8.8 % Non-interest expense for the nine month period endedSeptember 30, 2022 increased$2.1 million versus the same period in 2021. Salaries increased$1.3 million primarily due to higher base salaries and incentives. Benefits decreased$201 thousand primarily due lower medical insurance costs, 401K employer match and deferred compensation related expenses. Premises and equipment increased$166 thousand mainly due to higher building depreciation and facilities related expenses. The nine month period endedSeptember 30, 2021 also included a pre-tax loss of$144 thousand on the sale of the building housing the Bank's branch inPoughkeepsie, New York . Data processing increased$274 thousand mainly due to ATM fees, data processing costs and website costs. The increase in professional fees of$207 thousand versus the nine month period 2021 primarily reflected higher legal, consulting and investment management expenses. Collections, OREO and loan related expense decreased$17 thousand primarily due to lower mortgage recording costs.FDIC related expense increased$21 thousand compared to the same period in 2021 reflecting higher deposit balances. Marketing and community support costs increased$109 thousand compared to the same period in 2021 primarily due to Salisbury's ongoing branding initiatives and marketing campaigns. Amortization of intangible assets decreased$48 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased$424 thousand primarily due fraud charges incurred in 2022 as well as higher Director fees and training costs.
Income taxes
The effective income tax rates for the nine month periods endedSeptember 30, 2022 andSeptember 30, 2021 were 17.55% and 21.05%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income.Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets.Salisbury did not incurConnecticut income tax in 2022 (to date) or 2021, 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. In 2004,Salisbury availed itself of this benefit by forming a PIC,SBT Mortgage Service Corporation .Salisbury's income tax provision reflects the full impact of 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.
CAPITAL RESOURCES
Shareholders' Equity
Shareholders' equity decreased$13.4 million in nine months to$123.2 million atSeptember 30, 2022 as unrealized after-tax losses in the available-for-sale securities ("AFS") portfolio of$23.2 million and common stock dividends paid of$2.8 million were partially offset by net income of$11.8 million and issued stock and stock-based compensation totaling of$0.6 million . The unrealized losses in the AFS portfolio, which reflected the sharp increase in market interest rates during first nine months of 2022, reduced both book value and tangible book value atSeptember 30, 2022 . Book value per common share of$21.29 atSeptember 30, 2022 decreased$0.72 from second quarter 2022 and decreased$2.04 from third quarter 2021. Tangible book value per common share of$18.86 atSeptember 30, 2022 decreased$0.71 from second quarter 2022 and decreased$1.97 from third quarter 2021. Capital Requirements
Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject, and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not "well-capitalized." Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:
September 30, 2022 December 31, 2021
Total Capital (to risk-weighted assets) 13.24 % 14.08 %
Tier 1 Capital (to risk-weighted assets) 12.07 12.87
Common Equity Tier 1 Capital (to risk-weighted assets) 12.07
12.87
Tier 1 Capital (to average assets) 9.83
9.42
39
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. While Salisbury believes that the subsidiary
Bank has sufficient capital to withstand an economic shutdown as a result of the
virus, the Bank's regulatory capital ratios could be adversely impacted by
further credit losses.
The FRB's final rules implementing the Basel Committee on Banking Supervision's
capital guidelines for bank holding companies and their bank subsidiaries
include a common equity Tier 1 capital to risk-weighted assets minimum ratio of
4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require
a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a
minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised
of common equity Tier 1 capital, was also established above the regulatory
minimum capital requirements. This capital conservation buffer was fully phased
in on January 1, 2019 . Strict eligibility criteria for regulatory capital
instruments were also implemented under the final rules. As of September 30,
2022 , the Company and the Bank met each of their capital requirements and the
most recent notification from the FDIC categorized the Bank as
"well-capitalized." There are no conditions or events since that notification
that management believes have changed the Bank's category.
On September 17, 2019 , the Office of the Comptroller of the Currency , the FRB
and the FDIC published its final rule establishing a "Community Bank
LeverageRatio" ("CBLR") that simplifies capital requirements for certain
community banking organizations with less than $10 billion in total consolidated
assets (such as the Bank). Under the final rule, depository institutions and
their holding companies that meet certain criteria (generally, those with
limited amounts of off-balance sheet exposures, trading assets and liabilities,
mortgage servicing assets, and temporary difference deferred tax assets)
("qualifying community banking organizations") may elect to report the
components of its Tier 1 leverage ratio as a measure of capital adequacy. A
qualifying community banking organization with a CBLR of greater than 9% that
"elects to use the CBLR framework" will not be subject to other risk-based and
leverage capital requirements and will be considered to have met the
well-capitalized ratio requirements for purposes of the agencies' Prompt
Corrective Action ("PCA") framework. Under the final rule, if a bank that has
opted to use the CBLR framework subsequently fails to satisfy one or more of the
qualifying criteria but continues to report a leverage ratio of greater than 8
%, the bank may continue to use the framework and will be deemed "well
capitalized" for a grace period of up to two quarters. A qualifying community
banking organization will be required to comply with the generally applicable
capital rule and file the relevant regulatory reports if the banking
organization: (1) is unable to restore compliance with all qualifying criteria
during the two-quarter grace period (including achieving compliance with the
greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8%
or less; or (3) ceases to satisfy the qualifying criteria due to consummation of
a merger transaction. The final rule became effective on January 1, 2020 . The
Bank would qualify for the CBLR methodology and would also be considered to be
well capitalized if it elected to utilize such methodology. The Bank continues
to evaluate the benefits of transitioning to this simplified methodology for
assessing capital adequacy.
Stock Repurchase Plan
On March 23, 2022 Salisbury announced that its Board of Directors has renewed
its share repurchase program that was established in March 2021 . The share
repurchase program provides for the potential repurchase of Salisbury's common
stock in amounts up to an aggregate of five percent (5%) of the outstanding
shares of Salisbury's common stock from time to time over a period of the next
twelve (12) months through privately negotiated transactions and/or market
purchases at appropriate prices, subject to price and market conditions on terms
determined to be in the best interests of Salisbury . However, there is no
assurance that Salisbury will complete repurchases of 5% of its outstanding
shares over the next twelve (12) months. Salisbury did not repurchase any shares
during the nine-month period ended September 30, 2022 .
Subordinated Debt
OnMarch 31, 2021 Salisbury completed a private placement of$25.0 million in aggregate principal amount of Fixed to Floating Rate Subordinated Notes due 2031 (the "Notes") to various accredited investors. The Notes have a maturity date ofMarch 31, 2031 and bear interest at an annual rate of 3.50% per annum, from and including the closing date to, but excludingMarch 31, 2026 or the earlier redemption date, payable quarterly in arrears. From and includingMarch 31, 2026 to, but excluding the maturity date or earlier redemption date, the rate will be a floating per annum rate expected to be equal to the then current three-month SOFR plus 280 basis points, provided, however, that in the event three-month SOFR is less than zero, three-month term SOFR shall be deemed to be zero, payable quarterly in arrears. OnMay 28, 2021 ,Salisbury redeemed in full the$10.0 million of subordinated debt issued in 2015.
Dividends
Salisbury paid$2.8 million in common stock dividends during the nine month period endedSeptember 30, 2022 . OnOctober 19, 2022 , the Board of Directors ofSalisbury declared a common stock dividend of$0.16 per common share payable onNovember 25, 2022 to shareholders of record onNovember 11, 2022 . Common stock dividends, when declared, are generally paid the last Friday 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. FRB Supervisory Letter SR 09-4,February 24, 2009 , revisedDecember 31, 2015 , 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 . 40
IMPACT OF INFLATION AND CHANGING PRICES
Salisbury's consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature 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 onSalisbury's consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and future filings made by
(a) assumptions concerning future economic and business conditions and their
effect on the economy in general and on the markets in which
the Bank do business; and
(b) expectations for revenues and earnings for
Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements,Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results ofSalisbury's and the Bank's business include the following:
(a) the risk of adverse changes in business conditions in the banking industry
generally and in the specific markets in which the Bank operates;
(b) changes in the legislative and regulatory environment that negatively impacts
(c) increased competition from other financial and non-financial institutions;
(d) the impact of technological advances and cybersecurity matters;
(e) interest rate fluctuations;
(f) the effect of the COVID-19 pandemic on
the Bank, the
economy and overall financial stability;
(g) the risk of adverse changes in business conditions due to geo-political
tensions;
(h) government and regulatory responses to the COVID-19 pandemic; and
(i) other risks identified from time to time in
Such developments could have an adverse impact on
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