SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

 

For the quarterlyperiod ended September 30, 2020March 31, 2021

OR

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

 

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut06-1514263
(State or other jurisdiction(I.R.S. Employer
of incorporation or organization)Identification No.)
5 Bissell Street, Lakeville, CT06039
(Address of principal executive offices) (Zip code)(Zip code) 

((860)860) 435-9801

(Registrant's telephone number, including area code)

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

Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, Par Value $0.10 per shareSALNASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes☑ No ☐

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

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

Accelerated filer ☑

Non-accelerated filer ☐

Smaller reporting company ☑

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

The number of shares of Common Stock outstanding as of November 4, 2020May 5, 2021 is 2,843,2922,845,147.

TABLE OF CONTENTS

TABLE OF CONTENTS

PART 1 FINANCIAL INFORMATIONPage
Item 1.Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2020MARCH 31, 2021 (unaudited) and DECEMBER 31, 201920203
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2021 and 2020 and 2019 (unaudited)4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2021 and 2020 and 2019 (unaudited)5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2021 and 2020 and 2019 (unaudited)5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2021 and 2020 and 2019 (unaudited)76
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS98
Item 2.MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS3128
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK4941
Item 4.CONTROLS AND PROCEDURES5043
PART II. OTHER INFORMATION43
Item 1.LEGAL PROCEEDINGS5143
Item 1A.RISK FACTORS5143
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS5143
Item 3.DEFAULTS UPON SENIOR SECURITIES5143
Item 4.MINE SAFETY DISCLOSURES5143
Item 5.OTHER INFORMATION5143
Item 6.EXHIBITS5244
SIGNATURES5245

2
Table of Contents

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(dollars in thousands, except share data)  September 30, 2020   December 31, 2019 
(in thousands, except share data)March 31, 2021December 31, 2020
ASSETS  (unaudited)     
Cash and due from banks $6,828  $7,406 $8,785$10,599
Interest bearing demand deposits with other banks  88,513   19,479 150,41182,563
Total cash and cash equivalents  95,341   26,885 159,19693,162
Interest bearing Time Deposits with Financial Institutions  750   750 750750
Securities        
Available-for-sale at fair value  95,720   91,801 127,34398,411
CRA mutual fund at fair value  916   882 904917
Federal Home Loan Bank of Boston stock at cost  3,158   3,242 1,7131,713
Loans held-for-sale  2,761   332 2,3132,735
Loans receivable, net (allowance for loan losses: $13,001 and $8,895)  1,031,593   927,413 
Other real estate owned  —   314 
Loans receivable, net (allowance for loan losses: $13,886 and $13,754)1,041,1851,027,738
Bank premises and equipment, net  18,727   17,385 20,83120,355
Goodwill  13,815   13,815 13,81513,815
Intangible assets (net of accumulated amortization: $5,132 and $4,884)  748   995 
Intangible assets (net of accumulated amortization: $5,278 and $5,207)603674
Accrued interest receivable  6,055   3,415 6,2376,373
Cash surrender value of life insurance policies  17,572   20,580 21,30721,182
Deferred taxes  2,252   1,249 2,8492,412
Other assets  3,352   3,390 4,0833,423
Total Assets $1,292,760  $1,112,448 $1,403,129$1,293,660
LIABILITIES and SHAREHOLDERS' EQUITY        
Deposits        
Demand (non-interest bearing) $313,742  $237,852 $334,638$310,769
Demand (interest bearing)  201,760   153,314 229,200218,869
Money market  270,097   239,504 311,971278,146
Savings and other  181,691   161,112 207,109189,776
Certificates of deposit  127,851   127,724 128,253131,514
Total deposits  1,095,141   919,506 1,211,1711,129,074
Repurchase agreements  10,885   8,530 8,6877,116
Federal Home Loan Bank of Boston advances  43,880   50,887 11,39612,639
Subordinated debt  9,877   9,859 34,3059,883
Note payable  218   246 197208
Finance lease obligations  1,685   1,718 1,6581,673
Accrued interest and other liabilities  8,834   8,047 8,4738,315
Total Liabilities  1,170,520   998,793 1,275,8871,168,908
Shareholders' Equity        
Common stock - $0.10 per share par value        
Authorized: 5,000,000        
Issued: 2,843,292 and 2,825,912        
Outstanding: 2,843,292 and 2,825,912  284   283 
Authorized: 5,000,000;
Issued: 2,845,147 and 2,843,292
Outstanding: 2,845,147 and 2,843,292285284
Unearned compensation - restricted stock awards  (906)  (795)(646)(774)
Paid-in capital  45,171   44,490 45,36945,264
Retained earnings  74,995   68,320 80,67576,974
Accumulated other comprehensive income, net  2,696   1,357 1,5593,004
Total Shareholders' Equity  122,240   113,655 127,242124,752
Total Liabilities and Shareholders' Equity $1,292,760  $1,112,448 $1,403,129$1,293,660

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

3

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three months ended March 31, (in thousands, except per share amounts)20212020
Interest and dividend income
Interest and fees on loans$10,477$9,987
Interest on debt securities
Taxable423455
Tax exempt162185
Other interest and dividends3491
Total interest and dividend income11,09610,718
Interest expense
Deposits5551,509
Repurchase agreements37
Finance lease3236
Note payable34
Subordinated Debt119156
Federal Home Loan Bank of Boston advances34219
Total interest expense7461,931
Net interest and dividend income10,3508,787
Provision for loan losses1581,706
Net interest and dividend income after provision for loan losses10,1927,081
Non-interest income
Trust and wealth advisory1,1461,030
Service charges and fees950905
Mortgage banking activities, net608128
(Losses) gains on CRA mutual fund(16)14
Gains on sales and calls of available -for-sale- securities, net-1
BOLI income and gains125134
Other2833
Total non-interest income2,8412,245
Non-interest expense
Salaries2,9012,850
Employee benefits1,3121,146
Premises and equipment954911
Data processing565540
Professional fees711628
Collections, OREO, and loan related8425
FDIC insurance145105
Marketing and community support82125
Amortization of intangibles7187
Other434519
Total non-interest expense7,2596,936
Income before income taxes5,7742,390
Income tax provision1,248343
Net income$4,526$2,047
Net income available to common shareholders$4,462$2,013
Basic earnings per common share$1.59$0.72
Diluted earnings per common share1.590.72
Common dividends per share0.290.29

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

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

          
   Three months ended   Nine months ended 
Periods ended September 30, (in thousands, except per share amounts)2020   2019   2020   2019 
Interest and dividend income                
Interest and fees on loans $10,362  $10,045  $30,662  $29,859 
Interest on debt securities                
Taxable  396   530   1,260   1,734 
Tax exempt  157   166   513   355 
Other interest and dividends  87   282   229   761 
Total interest and dividend income  11,002   11,023   32,664   32,709 
Interest expense                
Deposits  764   1,879   3,261   5,674 
Repurchase agreements  6   9   16   16 
Finance lease  35   43   106   135 
Note payable  3   4   11   12 
Subordinated debt  156   156   468   468 
Federal Home Loan Bank of Boston advances  113   265   472   956 
Total interest expense  1,077   2,356   4,334   7,261 
Net interest and dividend income  9,925   8,667   28,330   25,448 
Provision for loan losses  686   94   4,198   539 
Net interest and dividend income after provision for loan losses  9,239   8,573   24,132   24,909 
Non-interest income                
Trust and wealth advisory  1,068   1,023   3,129   2,973 
Service charges and fees  711   1,003   2,214   2,935 
Gains on sales of mortgage loans, net  707   42   1,020   50 
Mortgage servicing, net  29   76   162   232 
Gains on CRA mutual fund  —   6   22   29 
Gains (losses) on available-for-sale securities, net  34   (9)  216   263 
BOLI income and gains  719   86   986   253 
Other  18   29   97   96 
Total non-interest income  3,286   2,256   7,846   6,831 
Non-interest expense                
Salaries  3,114   3,042   8,375   8,994 
Employee benefits  1,061   1,181   3,244   3,408 
Premises and equipment  1,005   974   2,897   2,950 
Data processing  569   534   1,666   1,620 
Professional fees  635   572   2,020   1,690 
OREO gains, losses and write-downs, net  —   84   —   406 
Collections and other real estate owned  108   119   212   328 
FDIC insurance  123   (9)  331   294 
Marketing and community support  126   141   419   448 
Amortization of intangibles  78   93   247   297 
Other  440   453   1,572   1,398 
Total non-interest expense  7,259   7,184   20,983   21,833 
Income before income taxes  5,266   3,645   10,995   9,907 
Income tax provision  910   657   1,858   1,781 
Net income $4,356  $2,988  $9,137  $8,126 
Net income available to common stock $4,288  $2,940  $9,006  $8,016 
                 
Basic earnings per common share $1.53  $1.06  $3.22  $2.88 
Diluted earnings per common share $1.53  $1.05  $3.21  $2.87 
Common dividends per share $0.29  $0.28  $0.87  $0.84 

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

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

            
   Three months ended   Nine months ended 
Periods ended September 30, (in thousands)  2020   2019   2020   2019 
Net income $4,356  $2,988  $9,137  $8,126 
Other comprehensive income (loss)                
Net unrealized gains  on securities available-for-sale  113   313   1,912   2,704 
Reclassification of net realized losses (gains) and write-downs in net income (1)  (34)  9   (216)  (263)
Unrealized gains on securities available-for-sale  79   322   1,696   2,441 
Income tax (expense)  (17)  (67)  (357)  (512)
Other comprehensive income  62   255   1,339   1,929 
Comprehensive income $4,418  $3,243  $10,477  $10,055 

Three months ended March 31, (in thousands)20212020
Net income$4,526$2,047
Other comprehensive income
Net unrealized (losses) gains on securities available-for-sale(1,828)1,330
Reclassification of net realized (income) losses in net income(1)-(1)
Unrealized (losses) gains on securities available-for-sale(1,828)1,329
Income tax benefit (expense)383(280)
Unrealized (losses) gains on securities available-for-sale, net of tax(1,445)1,049
Comprehensive income$3,081$3,096

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains (losses) on sales and calls of available-for-sale securities, net, the tax effect, which is immaterial to Salisbury's consolidated results, is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending September 30, 2020 and 2019 are $(7) thousand and $2 thousand, respectively. The net tax effect for the nine months ending September 30, 2020 and 2019 were ($45) thousand and ($55) thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

(dollars in thousands)

Common StockPaid-inRetainedUnearned compensation restricted stockAccumulated other comprehensiveTotal shareholders'
SharesAmountCapitalEarningsawardsincome (loss)equity
Balances at December 31, 20192,825,912$283$44,490$68,320$(795)$1,357$113,655
Net income---2,047--2,047
Other comprehensive income, net of tax-----1,0491,049
Common stock dividends declared ($0.29 per share)---(820)--(820)
Stock Options exercised3,105-53---53
Stock based compensation-restricted stock awards--23-136-159
Balances at March 31, 20202,829,017$283$44,566$69,547$(659)$2,406$116,143
Balances at December 31, 20202,843,292$284$45,264$76,974$(774)$3,004$124,752
Net income---4,526--4,526
Other comprehensive loss, net of tax-----(1,445)(1,445)
Common stock dividends declared ($0.29 per share)---(825)--(825)
Issuance of restricted common stock100-4-(4)--
Stock Options exercised1,755130---31
Stock based compensation-restricted stock awards--71-132-203
Balances at March 31, 20212,845,147$285$45,369$80,675$(646)$1,559$127,242

        

Three months ended September 30,
(dollars in thousands)

 Common Stock Paid-in Retained Unearned compensation restricted stock Accumulated other comprehensive Total shareholders'
  Shares Amount Capital Earnings awards (loss) income equity
Balances at June 30, 2019  2,823,476  $282  $44,382  $63,905  $(1,075) $1,454  $108,948 
Net income  —   —   —   2,988   —   —   2,988 
Other comprehensive loss, net of tax  —   —   —   —   —   255   255 
Common stock dividends declared ($0.28 per share)  —   —   —   (789)  —   —   (789)
Stock options exercised  —   —   —   —   —   —   — 
Forfeiture of stock awards  (250)  —   (10)  —   10   —   — 
Retired common stock  (14)  —   —   —   —   —   — 
Stock based compensation-restricted stock  awards  —   —   —   —   178   —   178 
Balances at September 30, 2019  2,823,212  $282  $44,372  $66,104  $(887) $1,709  $111,580 
Balances at June 30, 2020  2,843,292  $284  $45,096  $71,461  $(1,031) $2,634  $118,444 
Net income  —   —   —   4,356   —   —   4,356 
Other comprehensive loss, net of tax  —   —   —   —   —   62   62 
Common stock dividends declared ($0.29 per share)  —   —   —   (822)  —   —   (822)
Issuance of restricted common stock  500   —   18   —   (18)  —   — 
Forfeiture of stock awards
  (500)  —   (21)  —   21   —   — 
Stock based compensation-restricted stock awards  —   —   78   —   122   —   200 
Balances at September 30, 2020  2,843,292  $284  $45,171  $74,995  $(906) $2,696  $122,240 
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Nine months ended September 30,
(dollars in thousands)

 Common Stock Paid-in Retained Unearned compensation restricted stock Accumulated other comprehensive Total shareholders'
  Shares Amount Capital Earnings awards (loss) income equity
Balances at December 31, 2018  2,806,781  $281  $43,770  $60,339  $(711) $(220) $103,459 
Net income for period  —   —   —   8,126   —   —   8,126 
Other comprehensive income, net of tax  —   —   —   —   —   1,929   1,929 
Common stock dividends declared ($0.84 per share)  —   —   —   (2,361)  —   —   (2,361)
Stock options exercised  2,025   —   34   —   —   —   34 
Issuance of restricted common stock  11,530   1   457   —   (458)  —   — 
Forfeiture of stock awards  (710)  —   (31)  —   31   —   — 
Issuance of director's restricted stock awards  3,600   —   142   —   (142)  —   — 
Retired Common Stock  (14)  —   —   —   —   —   — 
Stock based compensation-restricted stock awards  —   —   —   —   393   —   393 
Balances at September 30, 2019  2,823,212  $282  $44,372  $66,104  $(887) $1,709  $111,580 
Balances at December 31, 2019  2,825,912  $283  $44,490  $68,320  $(795) $1,357  $113,655 
Net income for period  —   —   —   9,137   —   —   9,137 
Other comprehensive income, net of tax  —   —   —   —   —   1,339   1,339 
Common stock dividends declared ($0.87 per share)  —   —   —   (2,462)  —   —   (2,462)
Stock options exercised  3,105   —   53   —   —   —   53 
Issuance of restricted common stock  12,275   1   439   —   (440)  —   — 
Forfeiture of stock awards
  (1,200)  —   (50)  —   50   —   — 
Issuance of director's restricted stock awards  3,200   —   114   —   (114)  —   — 
Stock based compensation-restricted stock awards  —   —   125   —   393   —   518 
Balances at September 30, 2020  2,843,292  $284  $45,171  $74,995  $(906) $2,696  $122,240 

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

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Nine months ended September 30, (in thousands)  2020   2019 
Operating Activities        
Net income $9,137  $8,126 
Adjustments to reconcile net income to net cash provided by operating activities        
(Accretion), amortization and depreciation        
Securities  388   238 
Bank premises and equipment  1,071   1,210 
Core deposit intangible  247   297 
Modification fees on Federal Home Loan Bank of Boston advances  64   174 
Subordinated debt issuance costs  18   18 
Mortgage servicing rights  84   36 
Fair value adjustment on loans  —   (64)
Fair value adjustment on deposits  (4)  (6)
(Gains) and losses, including write-downs        
Sales and calls of securities available-for-sale, net  (216)  (263)
CRA Mutual Fund  (22)  (29)
Sales of loans, excluding capitalized servicing rights  (843)  (50)
Other real estate owned  —   406 
Provision for loan losses  4,198   539 
Proceeds from loans sold  45,246   6,107 
Loans originated for sale  (46,832)  (6,563)
Increase in deferred loan origination fees and costs, net  2,321   62 
Mortgage servicing rights originated  (413)  (25)
Increase in interest receivable  (2,640)  (277)
Deferred tax benefit  (1,359)  (176)
Decrease (increase) in prepaid expenses  295   (147)
Increase in cash surrender value of life insurance policies  (986)  (253)
Decrease in income tax receivable  —   137 
Increase in income tax payable  1,412   — 
Decrease in other assets  42   728 
Decrease in accrued expenses  (584)  (348)
Increase in interest payable  132   270 
Decrease in other liabilities  (144)  (147)
Stock based compensation-restricted stock awards  518   393 
Net cash provided by operating activities  11,130   10,393 
Investing Activities        
Redemption (purchase) of Federal Home Loan Bank of Boston stock, net of redemptions  84   1,921 
Purchases of securities available-for-sale  (27,802)  (51,931)
Purchases of interest-bearing time deposits with financial institutions  —   (786)
Proceeds from sales of securities available-for-sale  12,526   41,802 
Proceeds from calls of securities available-for-sale  655   75 
Proceeds from principal payments and maturities of securities available-for-sale  12,226   9,523 
Reinvestment of CRA Mutual Fund  (12)  (16)
Loan originations and principal collections, net  (110,743)  (6,405)
Recoveries of loans previously charged off  44   64 
Proceeds from sales of other real estate owned  314   1,086 
Capital expenditures  (2,384)  (1,760)
Purchase of life insurance policies  —   (5,750)
Proceeds from life insurance policy  3,994   — 
Net cash used by investing activities $(111,098) $(12,177)

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

Three months ended March 31, (in thousands)20212020
Operating Activities
Net income$4,526$2,047
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation:
Securities178105
Bank premises and equipment363355
Core deposit intangible7187
Modification fees on Federal Home Loan Bank of Boston advances545
Subordinated debt issuance costs46
Mortgage servicing rights7516
Fair value adjustment on deposits-(1)
(Gains) and losses, including write-downs
Loss (gain) on CRA mutual fund16(14)
Gain on securities available-for-sale, net-(1)
Gain on sales of loans, excluding capitalized servicing rights(494)(45)
Provision for loan losses1581,706
Proceeds from loans sold21,2813,157
Loans originated for sale(20,365)(3,360)
Decrease in deferred loan origination fees and costs, net99333
Mortgage servicing rights originated(193)(33)
Decrease in mortgage servicing rights impairment reserve(9)-
Decrease (increase) in interest receivable136(22)
Deferred tax benefit(54)(205)
(Increase) decrease in prepaid expenses(36)18
Increase in cash surrender value of life insurance policies(125)(134)
Increase in other assets(497)(78)
Decrease in accrued expenses(1,002)(2,969)
Increase in income tax payable1,118408
(Decrease) increase in interest payable(6)219
Increase in other liabilities48613
Stock based compensation-restricted stock awards203159
Net cash provided by operating activities6,3942,112
Investing Activities
Redemption of Federal Home Loan Bank of Boston stock-509
Purchases of securities available-for-sale(40,466)(2,729)
Reinvestment of CRA mutual fund(3)(4)
Proceeds from calls of securities available-for-sale-655
Proceeds from maturities/principal payments of securities available-for-sale9,5283,767
Loan originations and principal collections, net(14,611)(23,497)
Recoveries of loans previously charged off1329
Proceeds from sale of OREO-314
Capital expenditures(839)(505)
Net cash utilized by investing activities$(46,378)$(21,461)

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Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)

Nine months ended September 30, (in thousands)  2020   2019 
Financing Activities        
Increase in deposit transaction accounts, net $175,508  $47,642 
Increase (decrease) in time deposits, net  131   (23,193)
Increase in securities sold under agreements to repurchase, net  2,355   4,484 
Federal Home Loan Bank of Boston long term advances  46,001   — 
Federal Home Loan Bank of Boston long-term maturities/payments  (21,000)  (35,000)
Federal Home Loan Bank of Boston short-term advances, net change  (30,000)  5,500 
Principal payments on Amortizing FHLB Advance  (2,072)  — 
Principal payments on note payable  (28)  (25)
Decrease in finance lease obligation  (62)  (194)
Stock options exercised  53   34 
Common stock dividends paid  (2,462)  (2,361)
Net cash provided by (applied to) by financing activities  168,424   (3,113)
Net increase (decrease) in cash and cash equivalents  68,456   (4,897)
Cash and cash equivalents, beginning of period  26,885   58,445 
Cash and cash equivalents, end of period $95,341  $53,548 
Three months ended March 31, (in thousands)20212020
Financing Activities
Increase (decrease) in deposit transaction accounts, net$85,358$(1,068)
(Decrease) increase in time deposits, net(3,261)47,182
Increase (decrease) in securities sold under agreements to repurchase, net1,571(3,601)
Federal Home Loan Bank of Boston advances, net change in advances with maturity dates less than three months-(20,000)
Advances on Federal Home Loan Bank of Boston long term advances-10,000
Issuance of subordinated debt, net of costs24,418-
Principal payments on amortizing FHLB Advances(1,248)-
Principal payments on note payable(11)(9)
Principal payments on finance lease obligations(15)(11)
Stock options exercised3153
Common stock dividends paid(825)(820)
Net cash provided by financing activities106,01831,726
Net increase in cash and cash equivalents66,03412,377
Cash and cash equivalents, beginning of period93,16226,885
Cash and cash equivalents, end of period$159,196$39,262
Cash paid during period
Interest$743$1,662
Income taxes183140

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

7

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Supplemental Cash Flow Information:        
Cash paid for interest $4,124  $6,805 
Cash paid for income taxes  1,805   1,593 
Non-cash transfers:        
Finance Lease obligations        
Adoption of ASU 2016-02 - Other assets  —   1,552 
Adoption of ASU 2016-02 - Other liabilities  —   (1,552)

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

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Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim (unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for the interim periods presented.

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 20192020 Annual Report on Form 10-K for the year ended December 31, 2019.2020.

The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.

Risks and Uncertainties

The outbreak of the COVID-19 pandemic ("virus” or "COVID-19”) has adversely impacted a broad range of industries in which the Bank's customers operate and could impair their ability to fulfill their financial obligations to the Bank. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Bank operates. Salisbury proactively implemented many operational changes in March 2020 to protect its employees and customers, which included the closing of the lobbies of its branches to customers, implementing banking by appointment and requiring employees to work remotely or from different locations. Salisbury has experienced neither a significant interruption in service provided to its customers nor a material decline in business activity as a result of the virus. On July 8, 2020, Salisbury reopened its branches to customers.

The Coronavirus Aid, Relief and Economic Security("CARES”) Act was signed into law on March 27, 2020 as a legislative economic stimulus package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to small businesses. While the states in the Bank's market area have begun a phased reopening, economic conditions have not returned to pre-COVID-19 levels and many businesses remain closed or are operating at reduced capacity. A resurgence of the virus may cause the states in the Bank's market area to close businesses again. If this were to happen, the Bank could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact that the virus and an economic shutdown will have on Salisbury's operations, Salisbury is disclosing the material items of which it is currently aware.

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Recent Accounting Pronouncements

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

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

8

In January 2017,

The Bank is working towards the FASB issued ASU 2017-04, "Intangibles—Goodwillcompletion of its ACL methodology. To estimate the ACL for loans and Other (Topic 350): Simplifyingoff-balance sheet credit exposures, such as unfunded loan commitments, the Test for Goodwill Impairment.” This ASUCorporation will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is intendedexpected to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measuresinclude a goodwill impairment loss by comparing the implied fair value ofone-year reasonable and supportable forecast period and thereafter a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Entities should apply the guidance prospectively. On January 1, 2020, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changesone-year reversion period to the Disclosure Requirementshistorical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.

Based on the credit quality of Salisbury's existing available for Fair Value Measurement.” Thissale debt securities portfolio, which primarily consists of obligations of U.S. government agency and U.S. government-sponsored enterprise securities, including mortgage-backed securities, Salisbury does not expect the adoption of ASU eliminates, adds and modifies certain disclosure requirements2016-13, as it relates to debt securities, to be significant. For available for fair value measurements. Amongsale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2amortized cost of the fair value hierarchy, butsecurities. As a result, improvements to estimated credit losses will be requiredrecognized immediately in earnings rather than as interest income over time.

The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury expects to disclosecomplete independent model validation and to finalize its documentation of ACL processes and controls by the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.first quarter of 2023.

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In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting orfor Income Taxes.”" The amendments in this Update simplify the accounting for income taxes by removing the following exceptions:1. Exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) 2. Exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment 3. Exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary 4. Exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this Update also simplify the accounting for income taxes by doing the following: 1. Requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax. 2. Requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. 3. Specifying that an entity is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements. However, an entity may elect to do so (on an entity-by-entity basis) for a legal entity that is both not subject to tax and disregarded by the taxing authority. 4. Requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. 5. Making minor Codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years; early adoption is permitted.years. On January 1, 2021, Salisbury is currently evaluating the provisions of ASU 2019-12 to determine the potential impactadopted the new standard, willwhich did not have a material impact on Salisbury's Consolidated Financial Statements.

In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. Under current generally accepted accounting principles, entities amortize the premium on purchased callable debt securities to the earliest call date. If a callable debt security contains additional future call dates, entities should consider whether the amortized cost basis exceeded the amount repayable by the issuer at the next call date. If so, the excess or premium should be amortized to the next call date. This ASU clarifies that the next call date is the first date when a call option at a specified price becomes exercisable. Once that date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020; early adoption is2020. On January 1, 2021, Salisbury adopted the new standard, which did not permitted. ASU 2020-08 is not expected to have a material impact on Salisbury's Consolidated Financial Statements.

Other Regulatory Pronouncements

OnIn January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 the Securities and Exchange Commission finalized amendmentsor on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the definitionsdate of "accelerated” and "large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and were effective on April 27, 2020 and applyissuance of a final Update, up to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a "smaller reporting company” and an "accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changeddate that the definition of "accelerated filer” and expands the category of "non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a "smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of "accelerated” or "large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion onare available to be issued. Salisbury is currently evaluating the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rulesimpact of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time providedtransition from LIBOR to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.a new reference rate.

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NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)  Amortized cost basis   Gross un-realized gains   Gross un-realized losses   Fair value 
September 30, 2020                
Available-for-sale                
U.S. Government Agency notes $5,643  $176  $32  $5,787 
Municipal bonds  25,219   1,348   9   26,558 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government- sponsored enterprises  35,256   1,288   36   36,508 
Collateralized mortgage obligations:                
U.S. Government agencies  18,439   598   —   19,037 
Corporate bonds  7,750   101   21   7,830 
Total securities available-for-sale $92,307  $3,511  $98  $95,720 
CRA mutual fund                            $916 
Non-marketable securities                
Federal Home Loan Bank of Boston stock $3,158  $—  $—  $3,158 
(in thousands)  Amortized cost basis   Gross un-realized gains   Gross un-realized losses   Fair value 
December 31, 2019                
Available-for-sale                
U.S. Government Agency notes $4,520  $125  $1  $4,644 
Municipal bonds  26,562   704   73   27,193 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government-
sponsored enterprises		  28,961   420   24   29,357 
Collateralized mortgage obligations:                
U.S. Government agencies  25,041   468   10   25,499 
Corporate bonds  5,000   108   —   5,108 
Total securities available-for-sale $90,084  $1,825  $108  $91,801 
CRA mutual fund             $882 
Non-marketable securities                
Federal Home Loan Bank of Boston stock $3,242  $—  $—  $3,242 
(in thousands)Amortized cost basis (1)Gross un-realized gainsGross un-realized lossesFair value
March 31, 2021
Available-for-sale
U.S. Government Agency notes$19,095$133$86$19,142
Municipal bonds27,5001,2937428,719
Mortgage-backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises55,43578649955,722
Collateralized mortgage obligations:
U.S. Government agencies14,5903216214,849
Corporate bonds8,750161-8,911
Total securities available-for-sale$125,370$2,694$721$127,343
CRA mutual fund$904
Non-marketable securities
Federal Home Loan Bank of Boston stock$1,713$-$-$1,713
(in thousands)Amortized cost basis (1)Gross un-realized gainsGross un-realized lossesFair value
December 31, 2020
Available-for-sale
U.S. Government Agency notes$7,735$153$37$7,851
Municipal bonds25,8311,787127,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises35,2401,3764336,573
Collateralized mortgage obligations:
U.S. Government agencies17,054400-17,454
Corporate bonds8,750166-8,916
Total securities available-for-sale$94,610$3,882$81$98,411
CRA mutual fund$917
Non-marketable securities
Federal Home Loan Bank of Boston stock$1,713$-$-$1,713

Salisbury sold $1.9 million indid not sell any available-for-sale securities available-for-sale during the three month periodperiods ended September 30,March 31, 2021 and March 31, 2020, realizing a pre-tax gain of $34respectively. thousand and related tax expense of $7 thousand. Salisbury sold $12.5 million of available-for-sale securities during the nine month period ended September 30, 2020 realizing a pre-tax gain of $216 thousand and a related tax expense of $45 thousand. Salisbury sold $13.7 million in securities available-for-sale during the three month period ended September 30, 2019 realizing a pre-tax loss of $9 thousand and related tax benefit of $2 thousand. Salisbury sold $41.8 million of available-for-sale securities during the nine month period ended September 30, 2019 realizing a pre-tax gain of $263 thousand and a related tax expense of $55 thousand.

The amortized cost, fair value and tax equivalent yield of securities, by maturity, are as follows:

September 30, 2020 (in thousands) Maturity Amortized cost  Fair value  Yield(1) 
U.S. Government Agency notes After 1 year but within 5 years $2,496  $2,567   3.48%
               
Municipal bonds After 5 year but within 10 years  2,224   2,379   2.85 
  After 10 years  22,995   24,179   3.05 
  Total  25,219   26,558   3.03 
Mortgage-backed securities and Collateralized mortgage obligations Securities not due at a single maturity date  56,842   58,765   2.15 
Corporate bonds After 5 years but within 10 years  7,750   7,830   5.20 
Securities available-for-sale   $92,307  $95,720   2.68%

(1)Yield is based on amortized cost.

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

     
  Less than 12 Months 12 Months or Longer Total
September 30, 2020 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale            
U.S. Government Agency notes $1,561  $31  $75  $1  $1,636  $32 
Municipal bonds  2,194   9   —   —   2,194   9 
Mortgage- backed securities:                        
U.S. Government agencies and U.S. Government - sponsored enterprises  6,729   35   65   1   6,794   36 
Corporate bonds  1,479   21   —   —   1,479   21 
Total temporarily impaired securities $11,963  $96  $140  $2  $12,103  $98 
                         
      
  Less than 12 Months 12 Months or Longer Total
December 31, 2019 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale                        
U.S. Government Agency notes $—  $—  $195  $1  $195  $1 
Municipal bonds  6,273   73   —   —   6,273   73 
Mortgage- backed securities:                        
U.S. Government agencies and U.S. Government - sponsored enterprises  5,781   22   704   2   6,485   24 
Collateralized mortgage obligations:                        
U.S. Government Agencies  1,438   10   —   —   1,438   10 
Total temporarily impaired securities $13,492  $105  $899  $3  $14,391  $108 
Less than 12 Months12 Months or LongerTotal
March 31, 2021 (in thousands)Fair valueUnrealized lossesFair valueUnrealized lossesFair valueUnrealized losses
Available-for-sale
U.S. Government Agency notes$10,993$86$-$-$10,993$86
Municipal bonds4,99674--4,99674
Mortgage- backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises36,534499--36,534499
Collateralized mortgage obligations:
U.S. Government agencies4,03062--4,03062
Total temporarily impaired securities$56,553$721$-$-$56,553$721

Less than 12 Months12 Months or LongerTotal
December 31, 2020 (in thousands)Fair valueUnrealized lossesFair valueUnrealized lossesFair valueUnrealized losses
Available-for-sale
U.S. Government Agency notes$2,553$36$20$1$2,573$37
Municipal bonds5581--5581
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises3,761424513,80643
Total temporarily impaired securities$6,872$79$65$2$6,937$81

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

March 31, 2021 (in thousands)MaturityAmortized costFair valueYield(1)
U.S. Government Agency notesAfter 1 year but within 5 years$4,497$4,5122.32%
After 5 year but within 10 years2,9952,9641.35
Total7,4927,4761.93
Municipal bondsAfter 5 year but within 10 years3,0383,1882.71
After 10 years24,46225,5312.94
Total27,50028,7192.92
Mortgage-backed securities, Collateralized mortgage obligations,
U.S. Government agencies and sponsored enterprisesNot a single maturity81,62882,2371.94
Corporate bondsAfter 5 years but within 10 years8,7508,9115.22
Securities available-for-sale$125,370$127,3432.39%

(1) Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable debt securities were OTTI at September 30, 2020.March 31, 2021.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. SixTwelve securities had unrealized losses at September 30, 2020,March 31, 2021, which approximated 1.94%0.78% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020.March 31, 2021

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. ThreeEight securities had unrealized losses at September 30, 2020,March 31, 2021, which approximated 0.43%1.47% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020.March 31, 2021.

11

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. NineThirty seven securities had unrealized losses at September 30, 2020,March 31, 2021, which approximated 0.53%1.36% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2020.

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Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. Two securities had unrealized losses at September 30, 2020, which approximated 1.38% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2020March 31, 2021.

The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2020.March 31, 2021. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

NOTE 3 - LOANS

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

(In thousands)  September 30, 2020  December 31, 2019 
Residential 1-4 family $352,547  $346,299 
Residential 5+ multifamily  35,880   35,455 
Construction of residential 1-4 family  11,899   11,889 
Home equity lines of credit  28,895   33,798 
Residential real estate  429,221   427,441 
Commercial  308,725   289,795 
Construction of commercial  24,687   8,466 
Commercial real estate  333,412   298,261 
Farm land  3,295   3,641 
Vacant land  13,694   7,893 
Real estate secured  779,622   737,236 
Commercial and industrial (1)  237,448   169,411 
Municipal  20,797   21,914 
Consumer  7,686   6,385 
Loans receivable, gross  1,045,553   934,946 
Deferred loan origination (fees) and costs, net  (959)  1,362 
Loans receivable, gross $1,044,594  $936,308 
Allowance for loan losses  (13,001)  (8,895)
Loans receivable, net $1,031,593  $927,413 
Loans held-for-sale        
Residential 1-4 family $2,761  $332 
(1)Commercial and industrial balance as of September 30, 2020 includes $99.9 million of Paycheck Protection Program loans.
(In thousands)March 31, 2021December 31, 2020
Residential 1-4 family$344,527$352,001
Residential 5+ multifamily37,78937,058
Construction of residential 1-4 family10,4358,814
Home equity lines of credit26,24027,804
Residential real estate418,991425,677
Commercial306,830310,841
Construction of commercial34,31231,722
Commercial real estate341,142342,563
Farm land3,6063,198
Vacant land13,22814,079
Real estate secured776,967785,517
Commercial and industrial249,357227,148
Municipal21,49521,512
Consumer8,6177,687
Loans receivable, gross1,056,4361,041,864
Deferred loan origination (fees) and costs, net(1,365)(372)
Allowance for loan losses(13,886)(13,754)
Loans receivable, net$1,041,185$1,027,738
Loans held-for-sale
Residential 1-4 family$2,313$2,735

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

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

At September 30, 2020March 31, 2021 and December 31, 2019,2020, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $62.768.0 million and $67.065.3 million, respectively.

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Concentrations of Credit Risk

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

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Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused bydue to the COVID-19 virus pandemic ("virus”virus"). Approximately 38%40% of the Bank's commercial gross loans receivableloan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15%14% of the Bank's gross commercial loan receivables isloans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9%8% of grossthe Bank's commercial loan receivables isloans are to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables isloans are to entertainment and recreation related businesses, which include a ski resort, bowling alleyscamps and amusement parks. Salisbury's commercial real estate exposure as a percentage of the Bank's total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately 165% as of March 31, 2021 and 182% at December 31, 2020 compared to the regulatory monitoring guideline of 300%.

Salisbury's commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration ("SBA”SBA") guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. The duration ofDue to the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery,COVID-19 pandemic, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses. Management is currently unable to predict the extent to which the COVID-19 pandemic will impact these and other borrowers.

On a year-to-date basis through March 31, 2021, Salisbury processed 435 applications for loans of approximately $47 million under the SBA's PPP program. The PPP loans are reported in the Commercial and Industrial category at their outstanding principal balance, net of unamortized deferred loan origination fees and costs on originated loans. Interest income is accrued on the unpaid principal balance. Deferred loan origination fees and costs on the loans originated in 2021 are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. For the three months ended March 31, 2021, Salisbury recorded net interest income of $0.2 million and net origination fees of approximately $1.1 million on PPP loans. At March 31, 2021 Salisbury had PPP loan balances of $94 million, net of deferred fees, on its consolidated balance sheet compared with approximately $85 million at December 31, 2020.

Credit Quality

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

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

Loans rated as "substandard" (6) are loans where the Bank's position is clearly not protected adequately by borrower current net worth or payment capacity. These loans have well defined weaknesses based on objective evidence and include loans where future losses to the Bank may result if deficiencies are not corrected, and loans where the primary source of repayment such as income is diminished and the Bank must rely on sale of collateral or other secondary sources of collection.

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

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

Management actively reviews and tests its credit risk ratings against actual experience and engages an independent third-party to annually validate its assignment of credit risk ratings. In addition, the Bank's loan portfolio is examined periodically by its regulatory agencies, the Federal Deposit Insurance Corporation ("FDIC”FDIC") and the Connecticut Department of Banking ("CTDOB”CTDOB").

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The composition of loans receivable by risk rating grade ispresented below. The increase in the balance of loans classified as follows:"substandard" at March 31, 2021 primarily reflected the downgrade of loans to certain borrowers in the hospitality and entertainment industries who are receiving loan payments deferrals due to COVID-19. Such loans were classified as either "pass" or "special mention" at December 31, 2020.

(in thousands) Pass Special mention Substandard Doubtful Loss Total
September 30, 2020                        
Residential 1-4 family $342,812  $5,846  $3,889  $—  $—  $352,547 
Residential 5+ multifamily  34,082   93   1,705   —   —   35,880 
Construction of residential 1-4 family  11,899   —   —   —   —   11,899 
Home equity lines of credit  28,304   358   233   —   —   28,895 
Residential real estate  417,097   6,297   5,827   —   —   429,221 
Commercial  292,298   2,207   14,149   71   —   308,725 
Construction of commercial  24,455   —   232   —   —   24,687 
Commercial real estate  316,753   2,207   14,381   71   —   333,412 
Farm land  1,624   —   1,671   —   —   3,295 
Vacant land  13,604   52   38   —   —   13,694 
Real estate secured  749,078   8,556   21,917   71   —   779,622 
Commercial and industrial  235,135   1,259   694   360   —   237,448 
Municipal  20,797   —   —   —   —   20,797 
Consumer  7,655   1   30   —   —   7,686 
Loans receivable, gross $1,012,665  $9,816  $22,641  $431  $—  $1,045,553 
(in thousands) Pass Special mention Substandard Doubtful Loss Total
December 31 , 2019                        
Residential 1-4 family $337,302  $4,278  $4,719  $—  $—  $346,299 
Residential 5+ multifamily  33,619   99   1,737   —   —   35,455 
Construction of residential 1-4 family  11,889   —   —  —   —   11,889 
Home equity lines of credit  33,381   312   105  —   —   33,798 
Residential real estate  416,191   4,689   6,561  —   —   427,441 
Commercial  271,708   10,964   7,052  71   —   289,795 
Construction of commercial  8,225   —   241  —   —   8,466 
Commercial real estate  279,933   10,964   7,293  71   —   298,261 
Farm land  1,934   —   1,707  —   —   3,641 
Vacant land  7,834   59   —  —   —   7,893 
Real estate secured  705,892   15,712   15,561  71   —   737,236 
Commercial and industrial  167,458   443   1,510  —   —   169,411 
Municipal  21,914   —   —  —   —   21,914 
Consumer  6,344   3   38  —   —   6,385 
Loans receivable, gross $  901,608  $16,158  $17,109  $71  $—  $  934,946 
(in thousands)PassSpecial mentionSubstandardDoubtfulLossTotal
March 31, 2021
Residential 1-4 family$334,636$5,807$4,084$-$-$344,527
Residential 5+ multifamily35,9191801,690--37,789
Construction of residential 1-4 family10,435----10,435
Home equity lines of credit25,756247237--26,240
Residential real estate406,7466,2346,011--418,991
Commercial262,6557,16337,012--306,830
Construction of commercial34,086-226--34,312
Commercial real estate296,7417,16337,238--341,142
Farm land1,6361,369601--3,606
Vacant land12,34484737--13,228
Real estate secured717,46715,61343,887--776,967
Commercial and industrial246,2419201,906290-249,357
Municipal21,495----21,495
Consumer8,593-24--8,617
Loans receivable, gross$993,796$16,533$45,817$290$-$1,056,436
(in thousands)PassSpecial mentionSubstandardDoubtfulLossTotal
December 31, 2020
Residential 1-4 family$342,243$5,615$4,143$-$-$352,001
Residential 5+ multifamily35,272901,696--37,058
Construction of residential 1-4 family8,814----8,814
Home equity lines of credit27,393257154--27,804
Residential real estate413,7225,9625,993--425,677
Commercial276,86615,56518,410--310,841
Construction of commercial31,493-229--31,722
Commercial real estate308,35915,56518,639--342,563
Farm land1,612-1,586--3,198
Vacant land13,9925037--14,079
Real estate secured737,68521,57726,255--785,517
Commercial and industrial224,9061,271632339-227,148
Municipal21,512----21,512
Consumer7,660-27--7,687
Loans receivable, gross$991,763$22,848$26,914$339$-$1,041,864

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

                
   Past due  Past due
                
         180 30 Accruing  18030Accruing
(in thousands)     days days 90 days daysdays90 days
   30-59 60-89 90-179 and and and Non-30-5960-8990-179andandandNon-
  Current days days days over over over accrualCurrentdaysdaysdaysoveroveroveraccrual
September 30, 2020                
March 31, 2021
Residential 1-4 family $351,642  $122  $440  $257  $86  $905  $—  $1,353 $341,636$1,806$-$372$713$2,891$-$1,358
Residential 5+ multifamily  35,019   —   —   —   861   861   —   861 36,928---861861-861
Construction of residential 1-4 family  11,899   —   —   —   —   —   —   — 10,435-------
Home equity lines of credit  28,611   29   46   71   138   284   —   233 26,1198-9104121-237
Residential real estate  427,171   151   486   328   1,085   2,050   —   2,447 415,1181,814-3811,6783,873-2,456
Commercial  307,209   864   147   —   505   1,516   —   1,262 306,233293-20995597402,233
Construction of commercial  24,687   —   —   —   —   —   —   — 34,312-------
Commercial real estate  331,896   864   147   —   505   1,516   —   1,262 340,545293-20995597402,233
Farm land  3,134   161   —   —   —   161   —   166 3,0054147450-601450151
Vacant land  13,694   —   —   —   —   —   —   38 13,191--37-37-37
Real estate secured  775,895   1,176   633   328   1,590   3,727   —   3,913 771,8592,1111471,0771,7735,1084904,877
Commercial and industrial  236,790   250   —   300   108   658   11   757 249,042266-24731514325
Municipal  20,797   —   —   —   —   —   —   — 21,495-------
Consumer  7,637   49   —   —   —   49   —   — 8,6152---2--
Loans receivable, gross $1,041,119  $1,475  $633  $628  $1,698  $4,434  $11  $4,670 $1,051,011$2,379$147$1,079$1,820$5,425$504$5,202

                 
    Past due  
                 
          180 30 Accruing  
(in thousands)     days days 90 days 
    30-59 60-89 90-179 and and and Non-
   Current days days days over over over accrual
December 31, 2019                
Residential 1-4 family $344,085  $971  $351  $200  $692  $2,214  $—  $1,551 
Residential 5+ multifamily  34,594   —   —   —   861   861   —   861 
Construction of residential 1-4 family  11,889   —   —   —   —   —   —   — 
Home equity lines of credit  33,522   152   46   —   78   276   —   105 
Residential real estate  424,090   1,123   397   200   1,631   3,351   —   2,517 
Commercial  289,103   336   141   71   144   692   —   914 
Construction of commercial  8,466   —   —   —   —   —   —   — 
Commercial real estate  297,569   336   141   71   144   692   —   914 
Farm land  3,461   180   —   —   —   180   —   186 
Vacant land  7,852   —   41   —   —   41   —   — 
Real estate secured  732,972   1,639   579   271   1,775   4,264   —   3,617 
Commercial and industrial  169,262   2   146   1   —   149   1   — 
Municipal  21,914   —   —   —   —   —   —   — 
Consumer  6,382   —   1   2   —   3   2   — 
Loans receivable, gross $930,530  $1,641  $726  $274  $1,775  $4,416  $3  $3,617 

Past due
18030Accruing
(in thousands)daysdays90 days
30-5960-8990-179andandandNon-
Currentdaysdaysdaysoveroveroveraccrual
December 31, 2020
Residential 1-4 family$349,382$1,419$308$673$219$2,619$-$1,508
Residential 5+ multifamily36,197---861861-861
Construction of residential 1-4 family8,814-------
Home equity lines of credit27,5221579-116282-154
Residential real estate421,9151,5763176731,1963,762-2,523
Commercial307,9271,855530954342,914-2,544
Construction of commercial31,722-------
Commercial real estate339,6491,855530954342,914-2,544
Farm land2,594154450--604-158
Vacant land14,079------37
Real estate secured778,2373,5851,2977681,6307,280-5,262
Commercial and industrial224,4962,1484571462,65212374
Municipal21,512-------
Consumer7,67710---10--
Loans receivable, gross$1,031,922$5,743$1,754$769$1,676$9,942$12$5,636

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Troubled Debt Restructurings (TDRs)

There were no troubled debt restructurings in the first quarter of 2021. For the three months ended March 31, 2020, there was one commercial real estate troubled debt restructuring for $133 thousand. Salisbury currently does not have any commitments to lend additional funds to TDR loans.

Troubled debt restructurings are as follows:

  

For the three months ending September 30, 2020

 For the three months ending September 30, 2019
(in thousands) Quantity Pre-modification balance Post-modification balance Quantity Pre-modification balance Post-modification balance
Residential real estate  1  $180  $180   1  $791  $791 
Commercial real estate  —   —   —   1   274   274 
Consumer  —   —   —   —   —   — 
Troubled debt restructurings  1  $180  $180   2  $1,065  $1,065 
Interest only payments to sell property  —  $—  $—   1  $791  $791 
Rate reduction  —   —   —   —   —   — 
Modification and Rate reduction  —   —   —   —   —   — 
Workout refinance. Extension of new funds to pay outstanding taxes  —   —   —   —   —   — 
Modification and term extension  1   180   180   1   274   274 
Troubled debt restructurings  1  $180  $180   2  $1,065  $1,065 

  For the nine months ending September 30, 2020 For the nine months ending September 30, 2019
(in thousands) Quantity Pre-modification balance Post-modification balance Quantity Pre-modification balance Post-modification balance
Residential real estate  1  $180  $180   3  $1,400  $1,400 
Commercial real estate  1   133   133   1   274   274 
Consumer  —   —   —   1   42   42 
Troubled debt restructurings  2  $313  $313   5  $1,716  $1,716 
Interest only payments to sell property  —  $—  $—   1  $791  $791 
Rate reduction  —   —   —   —   —   — 
Modification and Rate reduction  —   —   —   3   651   651 
Workout refinance. Extension of new funds to pay outstanding taxes  1   133   133   —   —   — 
Modification and term extension  1   180   180   1   274   274 
Troubled debt restructurings  2  $313  $313   5  $1,716  $1,716 

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Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

                    
 Three months ended September 30, 2020 Three months ended September 30, 2019 Three months ended March 31, 2021 Three months ended March 31, 2020
(in thousands) Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance Beginning balance Provision Charge- offs Reco- veries Ending balance Beginning balance Provision Charge- offs Reco- veries Ending balance
Residential 1-4 family $3,048  $69  $(11) $1  $3,107  $2,074  $175  $(31) $1  $2,219  $2,646  $(208)  $(9) $1  $2,430  $2,393  $306  $- $7  $2,706 
Residential 5+ multifamily  589   14   —   —   603   495   (5)  —   —   490   686   (64)   -  -   622   446   62   -   -   508 
Construction of residential 1-4 family  87   10   —   —   97   79   4   —   —   83   65   12   -   -   77   75   12   -   -   87 
Home equity lines of credit  283   (8)  —   —   275   224   (11)  —   —   213   252   (57)   -   -   195   197   81  -   -   278 
Residential real estate  4,007   85   (11)  1   4,082   2,872   163   (31)  1   3,005   3,649   (317)   (9)  1  3,324   3,111   461   -  7  3,579 
Commercial  5,160   317   (14)  1   5,464   3,777   (149)  (20)  —   3,608   6,546   530   (6)  10   7,080   3,742   758   -  19   4,519 
Construction of commercial  205   195   —   —   400   127   23   —   —   150   596   (12)   -   -   584   104   22   -   -   126 
Commercial real estate  5,365   512   (14)  1   5,864   3,904   (126)  (20)  —   3,758   7,142   518   (6)  10   7,664   3,846   780   -  19   4,645 
Farm land  60   5   —   —   65   47   —   —   —   47   59   (9)   -   -   50   47   5   -   -   52 
Vacant land  182   (11)  —   —   171   89   (14)  —   —   75   180   (71)   -   -   109   71   73  -   -   144 
Real estate secured  9,614   591   (25)  2   10,182   6,912   23   (51)  1   6,885   11,030   121   (15)  11   11,147   7,075   1,319   -  26   8,420 
Commercial and industrial  1,515   (44)  —   1   1,472   1,176   74   (97)  14   1,167   1,397   (28)  -   -   1,369   1,145   (74)  -  -   1,071 
Municipal  36   5   —   —   41   30   17   —   —   47   43   -  -   -   43   46   7   -   -   53 
Consumer  74   40   (41)  7   80   81   (26)  (5)  3   53   77   (3)   (24)  2   52   60   51   (12)  3   102 
Unallocated  1,132   94   —   —   1,226   688   6   —   —   694   1,207   68   -   -   1,275   569   403   -   -   972 
Totals $12,371  $686  $(66) $10  $13,001  $8,887  $94  $(153) $18  $8,846  $13,754  $158  $(39) $13  $13,886  $8,895  $1,706  $(12) $29  $10,618 

           
  Nine months ended September 30, 2020 Nine months ended September 30, 2019
(in thousands) Beginning balance Provision Charge- offs Reco- veries Ending balance Beginning balance Acquisition Discount Transfer Provision Charge- offs Reco- veries Ending balance
Residential 1-4 family $2,393  $716  $(11) $9  $3,107  $2,149  $10  $90  $(32) $2  $2,219 
Residential 5+ multifamily  446   199   (42)  —   603   413   —   77   —   —   490 
Construction of residential 1-4 family  75   22   —   —   97   83   —   —   —   —   83 
Home equity lines of credit  197   78   —   —   275   219   1   (7)  —   —   213 
Residential real estate  3,111   1,015   (53)  9  4,082   2,864   11   160   (32)  2  3,005 
Commercial  3,742   1,719   (17)  20   5,464   3,048   488   114   (44)  2   3,608 
Construction of commercial  104   296   —   —   400   122   —   28   —   —   150 
Commercial real estate  3,846   2,015   (17)  20   5,864   3,170   488   142   (44)  2   3,758 
Farm land  47   18   —   —   65   33   —   14   —   —   47 
Vacant land  71   100   —   —   171   100   —   (25)  —   —   75 
Real estate secured  7,075   3,148   (70)  29   10,182   6,167   499   291   (76)  4   6,885 
Commercial and industrial  1,145   326   —   1   1,472   1,158   164   (54)  (146)  45   1,167 
Municipal  46   (5)  —   —   41   12   —   35   —   —   47 
Consumer  60   72   (66)  14   80   56   —   11   (29)  15   53 
Unallocated  569   657   —   —   1,226   438   —   256   —   —   694 
Totals $8,895  $4,198  $(136) $44  $13,001  $7,831  $663  $539  $(251) $64  $8,846 

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ThThee composition of loans receivable and the allowance for loan lossesis as follows:

             
(in thousands) Collectively evaluated Individually evaluated Total portfolioCollectively evaluatedIndividually evaluatedTotal portfolio
  Loans  Allowance  Loans  Allowance  Loans  Allowance LoansAllowanceLoansAllowanceLoansAllowance
September 30, 2020                        
March 31, 2021
Residential 1-4 family $347,701  $2,724  $4,846  $383  $352,547  $3,107 $340,398$2,337$4,129$93$344,527$2,430
Residential 5+ multifamily  34,913   603   967   —   35,880   603 36,826622963-37,789622
Construction of residential 1-4 family  11,899   97   —   —   11,899   97 10,43577--10,43577
Home equity lines of credit  28,662   261   233   14   28,895   275 26,003195237-26,240195
Residential real estate  423,175   3,685   6,046   397   429,221   4,082 413,6623,2315,32993418,9913,324
Commercial  304,328   5,194   4,397   270   308,725   5,464 301,5266,9465,304134306,8307,080
Construction of commercial  24,687   400   —   —   24,687   400 34,312584--34,312584
Commercial real estate  329,015   5,594   4,397   270   333,412   5,864 335,8387,5305,304134341,1427,664
Farm land  3,129   65   166   —   3,295   65 3,45550151-3,60650
Vacant land  13,524   168   170   3   13,694   171 13,064107164213,228109
Real estate secured  768,843   9,512   10,779   670   779,622   10,182 766,01910,91810,948229776,96711,147
Commercial and industrial  236,572   1,092   876   380   237,448   1,472 248,9251,247432122249,3571,369
Municipal  20,797   41   —   —   20,797   41 21,49543--21,49543
Consumer  7,656   62   30   18   7,686   80 8,5935224-8,61752
Unallocated allowance  —   1,226   —   —   —   1,226 -1,275---1,275
Totals $1,033,868  $11,933  $11,685  $1,068  $1,045,553  $13,001 $1,045,032$13,535$11,404$351$1,056,436$13,886

 

             
(in thousands) Collectively evaluated Individually evaluated Total portfolioCollectively evaluatedIndividually evaluatedTotal portfolio
  Loans   Allowance   Loans   Allowance   Loans   Allowance LoansAllowanceLoansAllowanceLoansAllowance
December 31, 2019                        
December 31, 2020
Residential 1-4 family $340,847  $2,117  $5,452  $276  $346,299  $2,393 $347,695$2,445$4,306$201$352,001$2,646
Residential 5+ multifamily  34,478   446   977   —   35,455   446 36,094686964-37,058686
Construction of residential 1-4 family  11,889   75   —   —   11,889   75 8,81465--8,81465
Home equity lines of credit  33,693   197   105   —   33,798   197 27,6502321542027,804252
Residential real estate  420,907   2,835   6,534   276   427,441   3,111 420,2533,4285,424221425,6773,649
Commercial  285,462   3,333   4,333   409   289,795   3,742 305,1936,2985,648248310,8416,546
Construction of commercial  8,466   104   —   —   8,466   104 31,722596--31,722596
Commercial real estate  293,928   3,437   4,333   409   298,261   3,846 336,9156,8945,648248342,5637,142
Farm land  3,455   47   186   —   3,641   47 3,04059158-3,19859
Vacant land  7,713   66   180   5   7,893   71 13,912178167214,079180
Real estate secured  726,003   6,385   11,233   690   737,236   7,075 774,12010,55911,397471785,51711,030
Commercial and industrial  169,285   1,143   126   2   169,411   1,145 226,6621,223486174227,1481,397
Municipal  21,914   46   —   —   21,914   46 21,51243--21,51243
Consumer  6,349   59   36   1   6,385   60 7,6615926187,68777
Unallocated allowance  —   569   —   —   —   569 -1,207---1,207
Totals $923,551  $8,202  $11,395  $693  $934,946  $8,895 $1,029,955$13,091$11,909$663$1,041,864$13,754

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

                  
September 30, 2020 (in thousands)Collectively evaluated Individually evaluated Total portfolio
   Loans   Allowance   Loans   Allowance   Loans  Allowance 
Performing loans $1,018,802  $9,702  $—  $—  $1,018,802  $9,702 
Potential problem loans 1  15,066   1,005   —   —   15,066   1,005 
Impaired loans  —   —   11,685   1,068   11,685   1,068 
Unallocated allowance  —   1,226   —   —   —   1,226 
Totals $1,033,868  $11,933  $11,685  $1,068  $1,045,553  $13,001 

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March 30, 2021 (in thousands)Collectively evaluatedIndividually evaluatedTotal portfolio
LoansAllowanceLoansAllowanceLoansAllowance
Performing loans$1,007,513$9,131$-$-$1,007,513$9,131
Potential problem loans 137,5193,129--37,5193,129
Impaired loans--11,40435111,404351
Unallocated allowance-1,275---1,275
Totals$1,045,032$13,535$11,404$351$1,056,436$13,886

            
December 31, 2019 (in thousands)Collectively evaluated Individually evaluated Total portfolio
December 31, 2020 (in thousands)December 31, 2020 (in thousands)Collectively evaluatedIndividually evaluatedTotal portfolio
  Loans  Allowance  Loans  Allowance  Loans Allowance LoansAllowanceLoansAllowanceLoansAllowance
Performing loans $913,648  $7,251  $—  $—  $913,648  $7,251 $1,011,757$10,424$-$-$1,011,757$10,424
Potential problem loans 1  9,903   382   —   —   9,903   382 18,1981,460--18,1981,460
Impaired loans  —   —   11,395   693   11,395   693 --11,90966311,909663
Unallocated allowance  —   569   —   —   —   569 -1,207---1,207
Totals $923,551  $8,202  $11,395  $693  $934,946  $8,895 $1,029,955$13,091$11,909$663$1,041,864$13,754

1 Potential problemloans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired.

17

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

                            
  Impaired loans with specific allowance  Impaired loans with no specific allowance
(in thousands) Loan balance        Loan balance    
   Book   Note   Average   Specific allowance   Income recognized   Book   Note   Average   Income recognized 
September 30, 2020                  
Residential $3,854  $3,972  $4,034  $383  $67  $1,959  $2,335  $1,912  $20 
Home equity lines of credit  75   75   77   14   —   158   507   111   1 
Residential real estate  3,929   4,047   4,111   397   67   2,117   2,842   2,023   21 
Commercial  3,099   3,148   3,401   270   104   1,298   1,940   978   31 
Construction of commercial  —   —   —   —   —   —   —   —   — 
Farm land  —   —   —   —   —   166   322   177   — 
Vacant land  38   40   40   3   —   132   148   136   7 
Real estate secured  7,066   7,235   7,552   670   171   3,713   5,252   3,314   59 
Commercial and industrial  824   827   422   380   3   52   205   59   2 
Consumer  30   30   33   18   1   —   —   —   — 
Totals $7,920  $8,092  $8,007  $1,068  $175  $3,765  $5,457  $3,373  $61 

Note: The income recognized isfollows as of and for the nine month period ended September 30, 2020.three months ended:

Impaired loans with specific allowanceImpaired loans with no specific allowance
(in thousands)Loan balanceSpecificIncomeLoan balanceIncome
BookNoteAverageallowancerecognizedBookNoteAveragerecognized
March 31, 2021
Residential$836$860$2,368$93$9$4,257$4,688$2,779$21
Home equity lines of credit--56--237277140-
Residential real estate8368602,4249394,4944,9652,91921
Commercial1,9411,9582,769134203,3634,0062,87335
Construction of commercial---------
Farm land-----151316154-
Vacant land16418210122--65-
Real estate secured2,9413,0005,294229318,0089,2876,01156
Commercial and industrial338349382122193308821
Consumer--19--24246-
Totals$3,279$3,349$5,695$351$32$8,125$9,619$6,099$57

Impaired loans with specific allowanceImpaired loans with no specific allowance
(in thousands)Loan balanceSpecificIncomeLoan balanceIncome
BookNoteAverageallowancerecognizedBookNoteAveragerecognized
March 31, 2020
Residential$4,015$4,140$4,067$306$42$1,705$2,019$2,070$6
Home equity lines of credit89892226-118464108-
Residential real estate4,1044,2294,089332421,8232,4832,1786
Commercial3,6723,7413,405533446381,25492410
Construction of commercial---------
Farm land-----181327184-
Vacant land414141811371541382
Real estate secured7,8178,0117,535873872,7794,2183,42418
Commercial and industrial1661701118153207861
Consumer34343527-----
Totals$8,017$8,215$7,681$908$88$2,832$4,425$3,510$19

Certain data with respect to loans individually evaluatedevaluated for impairment is as follows as of and for the year ended December 31, 2019:2020:

          
 Impaired loans with specific allowance Impaired loans with no specific allowanceImpaired loans with specific allowanceImpaired loans with no specific allowance
(in thousands) Loan balance   Loan balance  Loan balanceLoan balance
 Book Note Average Specific allowance Income recognized Book Note Average Income recognized Recorded InvestmentNoteAverageSpecific allowanceIncome recognizedRecorded InvestmentNoteAverageIncome recognized
December 31, 2019                  
December 31, 2020
Residential $4,111  $4,190  $3,725  $276  $162  $2,318  $3,081  $2,940  $52 $2,971$3,040$3,862$201$72$2,299$2,676$1,993$27
Home equity lines of credit  —   —   52   —   —   105   450   391   — 75757620-79117103-
Residential real estate  4,111   4,190   3,777   276   162   2,423   3,531   3,331   52 3,0463,1153,938221722,3782,7932,09627
Commercial  3,309   3,335   2,574   409   90   1,024   1,733   1,747   54 3,0583,1173,3252481322,5903,2031,13991
Construction of commercial  —   —   77   —   —   —   —   39   — ---------
Farm land  —   —   —   —   —   186   329   203   — -----158319173-
Vacant land  41   41   42   5   3   139   157   143   10 3740392-1301451349
Real estate secured  7,461   7,566   6,470   690   255   3,772   5,750   5,463   116 6,1416,2727,3024712045,2566,4603,542127
Commercial and industrial  93   97   16   2   4   33   188   265   4 416424482174470283582
Consumer  36   36   21   1   —   —   —   3   — 262631182----
Totals $7,590  $7,699  $6,507  $693  $259  $3,805  $5,938  $5,731  $120 $6,583$6,722$7,815$663$210$5,326$6,743$3,600$129

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NOTE 4 - LEASES

TheThe Bank leases facilities and equipment with various expiration dates through 2036. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance are to be paid by Salisbury. The Bank does not have any leases with related parties and equipment leases are not material to Salisbury's consolidated financial statements.

The following table provides the assets and liabilities as of March 31, 2021 and December 31, 2020, as well as the costs of operating and financefinancial leases thatwhich are included in the Bank's consolidated balance sheet as of September 30, 2020 and December 31, 2019 and consolidated income statementsstatement for the nine months and three months ended September 30, 2020March 31, 2021 and 2019.2020.

($ in thousands, except lease term and discount rate) Classification  September 30, 2020   December 31, 2019 
Assets      
Operating Other assets $1,235  $1,360 
Finance Bank premises and equipment 1 1,427   1,503 
Total Leased Assets   $2,662  $2,863 
Liabilities          
Operating Other liabilities $1,213  $1,360 
Finance Finance lease  1,685   1,718 
Total lease liabilities   $2,898  $3,078 
1 Net of accumulated depreciation of $370 thousand and $294 thousand, respectively.
           
Lease cost Classification  Nine months ended September 30, 2020   Three months ended September 30, 2020 
Operating leases Premises and equipment $188  $64 
Finance leases:          
Amortization of leased assets Premises and equipment  76   25 
Interest on finance leases Interest expense  107   36 
Total lease cost   $371  $125 
           
Lease cost Classification  Nine months ended September 30, 2019   Three months ended September 30, 2019 
Operating leases Premises and equipment $193  $70 
Finance leases:          
Amortization of leased assets Premises and equipment  174   54 
Interest on finance leases Interest expense  135   43 
Total lease cost   $502  $167 
           
Weighted Average Remaining Lease Term  September 30, 2020   December 31, 2019 
Operating leases    8.0 years   8.2 years 
Financing leases    14.7 years   15.1 years 
Weighted Average Discount Rate1         
Operating leases    3.73%  3.70%
Financing leases    8.38%  8.41%
1 Salisbury uses the FHLB five-year Advance rate as the discount rate, as our leases do not provide an implicit rate.
(in thousands, except lease term and discount rate)ClassificationMarch 31, 2021December 31, 2020
Assets
OperatingOther assets$1,128$1,182
FinanceBank premises and equipment 11,3771,402
Total Leased Assets$2,505$2,584
Liabilities
OperatingOther liabilities$1,128$1,182
FinanceFinance lease1,6581,673
Total lease liabilities$2,796$2,855
1 Net of accumulated depreciation of $319 thousand.
Lease costClassificationThree Months Ended March 31, 2021Three Months Ended March 31, 2020
Operating leasesPremises and equipment$80$62
Finance leases:
Amortization of leased assetsPremises and equipment2525
Interest on finance leasesInterest expense3236
Total lease cost$137$123
March 31, 2021December 31, 2020
Weighted Average Remaining Lease Term
Operating leases8.2 years7.6 years
Financing leases14.2 years14.2 years
Weighted Average Discount Rate 1
Operating leases3.8%3.7%
Financing leases8.3%8.4%
1 Salisbury uses the FHLB five year Advance rate as the discount rate, as our leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of September 30, 2020.March 31, 2021.

 Future minimum lease payments (in thousands)  Operating Leases   Finance Leases 
 2020  $64  $47 
 2021   250   192 
 2022   199   195 
 2023   148   197 
 2024   129   200 
 Thereafter   623   1,980 
 Total future minimum lease payments   1,413   2,811 
 Less amount representing interest   (200)  (1,126)
 Total present value of net future minimum lease payments  $1,213  $1,685 
Future minimum lease payments (in thousands)Operating LeasesFinance Leases
2021$186$144
2022199195
2023146197
2024129200
2025137203
Thereafter4621,778
Total future minimum lease payments1,2592,717
Less amount representing interest(131)(1,059)
Total present value of net future minimum lease payments$1,128$1,658

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NOTE 5 - MORTGAGE SERVICING RIGHTS

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Residential mortgage loans serviced for others $130,304  $106,255 $145,474$134,428
Fair value of mortgage servicing rights  714   813 936762

Changes in mortgage servicing rights are as follows:

            
   Three months ended   Nine months ended 
Periods ended September 30, (in thousands)  2020   2019   2020   2019 
Mortgage Servicing Rights                
Balance, beginning of period $353  $209  $238  $228 
Originated  270   21   413   25 
Amortization (1)  (56)  (13)  (84)  (36)
Balance, end of period $567  $217  $567  $217 
(1)
Three months ended March 31, (in thousands)20212020
Mortgage Servicing Rights
Balance, beginning of period$621$238
Originated19333
Amortization (1)(75)(16)
Balance, end of period$739$255
Valuation Allowance
Balance, beginning of period(9)-
Decrease in impairment reserve (1)9
Balance, end of period-
Mortgage servicing rights, net$739$255

(1)Amortization expense and changes in the impairment reserve are recorded in mortgage servicing, net.

NOTE 6 - PLEDGED ASSETS

The following securities and loans were pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available.

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Securities available-for-sale (at fair value) $61,542  $52,845 $61,683$54,581
Loans receivable (at book value)  427,828   434,329 
Loans receivable402,538420,415
Total pledged assets $489,370  $487,174 $464,221$474,996

At September 30, 2020,March 31, 2021, securities were pledged as follows: $46.8652.97 million to secure public deposits, $14.668.69 million to secure repurchase agreements and $0.02 million to secure FHLBB advances. In addition to securities,Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 7 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain pools of its pre-payable fixed-rate assets due to changes in benchmark interest rates. Salisbury uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, Federal Funds. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for Salisbury receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

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As of September 30, 2020,March 31, 2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges:

Line Item in the Statement of Financial Position in Which the Hedged Item is IncludedCarrying Amount of the
Hedged Assets/(Liabilities)		Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)March 31, 2021December 31, 2020March 31, 2021December 31, 2020
Loans receivable(1)$9,993$9,996$(7)$(4)
Total$9,993$9,996$(7)$(4)
(1)These amounts include the amortized cost basis of closed portfolios used in designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At March 31, 2021, the amortized cost basis of the closed portfolios used in these hedging relationships was $44.7 million; the cumulative basis adjustment associated with these hedging relationships was $7 thousand; and the amount of the designated hedged item was $10.0 million.

    
Line Item in the Statement of Financial Position in Which the Hedged Item is Included Carrying Amount of the
Hedged Assets/(Liabilities)		 Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
(in thousands)September 30, 2020 December 31, 2019 September 30, 2020 December 31, 2019 
Loans receivable(1) $10,003  $—  $3  $— 
Total $10,003  $—  $3  $— 

(1) These amounts include the amortized cost basis of closed portfolios used to designated hedging relationships in which the hedged item is the last layer expected to be remaining at the end of the hedging relationship. At September 30, 2020, the amortized cost basis of the closed portfolios used in these hedging relationships was $52.8 million; the cumulative basis adjustment associated with these hedging relationships was $3 thousand; and the amount of the designated hedged item was $10.0 million. Salisbury did not use derivatives as a fair value hedge prior to third quarter 2020.

The table below presents the fair value of Salisbury's derivative financial instrument and its classification on the Balance Sheet as of September 30,March 31, 2021 and December 31, 2020. Salisbury did not use derivative financial instruments prior to third quarter 2020.

As of March 31, 2021As of December 31, 2020
(in thousands)Notional AmountBalance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as hedge instruments
Interest Rate Products$10,000Other assets$7Other Assets$4
Total Derivatives designated as hedge instruments$7$4

   
  As of September 30, 2020
(in thousands) Notional Amount Balance Sheet Location Fair Value
Derivatives designated as hedge instruments      
Interest Rate Products $10,000  Other liabilities $3 
Total Derivatives designated as hedge instruments       $3 


The table below presents the effect of the Company's derivative financial instruments on the Income Statement as of September 30, 2020.for the three months ended March 31, 2021. Salisbury did not use derivative financial instrumentsderivatives prior to thirdfourth quarter 2020.

Three months ended
March 31, 2021
(in thousands)Interest
Income		Interest Expense
Total amounts of interest income and expense line items presented in the income statement in which the effects of fair value or cash flow hedges are recorded$1$-
 
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items(2)-
Derivatives designated as hedging instruments$3$-

  
  Three months ended September 30, 2020
(in thousands) Interest
Income		 Interest Expense
Total amounts of income and expense line items presented in the    
statement of financial performance in which the effects of fair value or    
cash flow hedges are recorded $—  $— 
         
Gain or (loss) on fair value hedging relationships in Subtopic 815-20        
Interest contracts        
Hedged items  3   — 
Derivatives designated as hedging instruments $(3) $— 

Credit-Risk Related ContingentContingent Features

Salisbury has an agreement with its derivative counterparty that contains a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations.

The agreement also contains a provision where if the Bank fails to maintain its status as a well / adequate capitalized institution, then Salisbury could be required to post cash or certain marketable securities issued by the U.S. Treasury or U.S. Government-sponsored enterprises as collateral. The minimum amount that Salisbury would have to post as collateral is $250$250 thousand.

As of September 30, 2020,March 31, 2021, the fair value of derivativesderivative was $7 thousand in a net liabilityasset position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3 thousand.agreements. As of September 30, 2020,March 31, 2021, Salisbury has not posted any collateral related to these agreements. If Salisbury had breached any of these provisions at September 30, 2020, the Bank could have been required to settle its obligations under the agreements at their termination value of $3 thousand.

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NOTE 8 - EARNINGS PER SHARE

Salisbury defines unvested share-based payment awards that contain non-forfeitable rights to dividends as participating securities that are included in computing earnings per share (EPS) using the two-class method.

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

The following table sets forth the computation of earnings per share (basic and diluted) for the periods indicated:

            
  Three months ended   Nine months ended 
Periods ended September 30, (in thousands, except per share data)  2020   2019   2020   2019 
Three months ended March 31, (in thousands, except per share data)20212020
Net income $4,356  $2,988  $9,137  $8,126 $4,526$2,047
Less: Undistributed earnings allocated to participating securities  (67)  (48)  (131)  (110)(64)(34)
Net income allocated to common stock $4,288  $2,940  $9,006  $8,016 $4,462$2,013
Weighted-average common shares issued  2,843   2,823   2,835   2,815 2,8452,828
Less: Unvested restricted stock awards  (44)  (40)  (41)  (34)(40)(40)
Weighted average common shares outstanding used to calculate basic earnings per common share  2,799   2,783   2,794   2,781 2,8052,788
Add: Dilutive effect of stock options  8   12   8   12 
Add: Dilutive effect of stock options and restricted stock units109
Weighted-average common shares outstanding used to calculate diluted earnings per common share  2,807   2,795   2,802   2,793 2,8152,797
Earnings per common share (basic) $1.53  $1.06  $3.22  $2.88 $1.59$0.72
Earnings per common share (diluted) $1.53  $1.05  $3.21  $2.87 $1.59$0.72

NOTE 9 - SHAREHOLDERS' EQUITY

Capital Requirements

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

The requirementsBank became subject to capital regulations adopted by the Board of the final rules approved byGovernors of the Federal Reserve Board ("FRB”)System (FRB) and the FDIC, includewhich implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as "well capitalized" under the prompt corrective action framework are noted in the table below. In addition, the regulations established a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, 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 Tier2.5% effective January 1, 2019. Failure to maintain the capital is also established aboveconservation buffer will limit the regulatory minimum capital requirements. Asability of September 30, 2020,the Company and the Bank to pay discretionary bonuses and dividends. At March 31, 2021, the Bank exceeded the regulatoryminimum requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implementedAs of December 31, 2020, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the final rules. A bank canregulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

On March 31, 2021 Salisbury issued $25 million of subordinated debt that matures in 2031. During the first five years, the debt is non-callable, and the coupon is fixed at 3.50%. After year five, the coupon will float at the then three-month Secured Overnight Financing Rate plus 280 basis points. The proceeds, net of issuance costs, will be considered "well-capitalized” even if it does not maintainused for general corporate purposes, including the capital conservation bufferredemption of $10 million in outstanding subordinated debt, which Salisbury issued over five years ago at a higher coupon rate, as longwell as it meetspotential share repurchases pursuant to the "well-capitalized” levels set forth below (and provided it is not subjectCommon Stock Repurchase Plan approved by the Board of Directors in March 2021. At March 31, 2021, $15 million of the net proceeds was retained at the holding company level and the remainder was allocated to any written order, agreement, capital directive, etc.). A bank withthe Bank.

In March 2021, Salisbury announced that its Board of Directors adopted a capital conservation buffershare repurchase program, which provides for the repurchase of at least 2.5% means that it generally will not be subjectSalisbury's common stock in amounts up to certain limitations regarding capital distributions, such as dividend payments, discretionary payments on tier 1 instruments, share buybacks, and certain discretionary bonus paymentsan aggregate of five percent (5%) of the outstanding shares of Salisbury's common stock from time to executive officers.time over the next twelve months.

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The Bank's risk-weighted assets at September 30, 2020March 31, 2021 and December 31, 20192020 were $916.3967.6 million and $891.0938.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

        
 Actual Minimum Capital Required For Capital Adequacy Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer Minimum To Be Well Capitalized Under Prompt Corrective Action ProvisionsActualMinimum Capital Required For Capital AdequacyMinimum Capital Required For Capital Adequacy Plus Required Capital Conservation BufferMinimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio Amount RatioAmountRatioAmountRatioAmountRatioAmountRatio

September 30, 2020

                                

March 31, 2021

Total Capital (to risk-weighted assets) $124,616   13.60% $73,307   8.0% $96,216   10.5% $91,634   10.0%$141,11314.58%$77,4058.0%$101,59410.5%$96,75610.0%
                                    
Tier 1 Capital (to risk-weighted assets)  113,142   12.35   54,980   6.0   77,889   8.5   73,307   8.0 128,99513.3358,0546.082,2438.577,4058.0
                                
Common Equity Tier 1 Capital (to risk-weighted assets)  113,142   12.35   41,235   4.5   64,144   7.0   59,562   6.5 128,99513.3343,5404.567,7297.062,8926.5
                                
Tier 1 Capital (to average assets) $113,142   8.93   50,704   4.0   50,704   4.0   63,380   5.0 $128,9959.83$52,4804.0$52,4804.0$65,6015.0
December 31, 2019                                
December 31, 2020
Total Capital (to risk-weighted assets) $114,421   12.84% $71,278   8.0% $93,553   10.5% $89,098   10.0%$127,25413.57%$75,0378.0%$98,48610.5%$93,79610.0%
                                
Tier 1 Capital (to risk-weighted assets)  105,430   11.83   53,459   6.0   75,733   8.5   71,278   8.0 115,50312.3156,2786.079,7278.575,0378.0
                                
Common Equity Tier 1 Capital (to risk-weighted assets)  105,430   11.83   40,094   4.5   62,368   7.0   57,914   6.5 115,50312.3142,2084.566,6577.060,9676.5
                                
Tier 1 Capital (to average assets) $105,430   9.60   43,944   4.0  $43,944   4.0  $54,930   5.0 $115,5038.90$51,9074.0$51,9074.0$64,8845.0
                                

Restrictions on Cash Dividends to Common Shareholders

Salisbury's ability to pay cash dividends is substantially dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

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

NOTE 10 - BENEFITS

Salisbury offers a 401(k) Plan to eligible employees. Under the 401(k) Plan, eligible participants may contribute a percentage of their pay subject to IRS limitations. Salisbury may make discretionary contributions to the Plan. The Plan includes a safe harbor contribution of 3% for all qualifying employees. The Bank's safe harbor contribution percentage is reviewed annually and, under provisions of the 401(k) Plan, is subject to change in the future. An additional discretionary match may also be made for all employees that meet the 401(k) Plan's qualifying requirements for such a match. This discretionary matching percentage, if any, is also subject to review under the provisions of the 401(k) Plan. Both the safe harbor and additional discretionary match, if any, vest immediately. Salisbury's 401(k) Plan expense was $229286 thousand and $231238 thousand, respectively, for the three month periods ended September 30, 2020March 31, 2021 and 2019, and $667 thousand and $662 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019. Other post-retirement benefit obligation (credit) expense for endorsement split-dollar life insurance arrangements was $(32) thousand and $21 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $7 thousand and $69 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019. A credit was recognized in third quarter 2020 to reflect the payout of insurance proceeds and the corresponding reduction in liability due to the death of a covered former employee.2020.

ESOP

Salisbury offers an ESOP to eligible employees. Under the ESOP,Plan, Salisbury may make discretionary contributions to the ESOP. Plan. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $5655 thousand and $10557 thousand, respectively, for the three month periods ended September 30, 2020March 31, 2021 and 2019, and $1702020. thousand and $207 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019.

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Other Retirement Plans

Salisbury adopted ASC 715-60, "Compensation - Retirement Benefits - Defined Benefit Plans - Other Postretirement" and recognized a liability for Salisbury's future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $858 thousand and $771 thousand at March 31, 2021, and December 31, 2020, respectively. Expenses under this arrangement for the three months ended March 31, 2021 and 2020 were $86 thousand and $23 respectively.

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense forIn 2021 and 2020, the Bank awarded seven (7) Executives with discretionary contributions to the plan. Expenses related to this plan wasfor the first three months ended March 31 amounted to $29 thousand in 2021 and $33 thousand in 2020.

Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers, including a severance agreement with Mr. Cantele, President and $29 thousand, respectively, forChief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the three month periods ended September 30, 2020New York Region and 2019,Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with eleven other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and $100 thousandother benefits. Such agreements, and $87 thousand, respectively, fortheir subsequent amendments, are designed to allow Salisbury to retain the nine month periods ended September 30, 2020 and 2019.services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury's operations

Grants of Restricted Stock and Options

NOTE 11 - LONG TERM INCENTIVE PLANS

Restricted stock

Restricted stock expense wasExpense in first quarter 2021 and 2020 related to employee and directors' stock-based compensation totaled $122132 thousand and $131136 thousand, respectively, for the three month periods ended September 30, 2020 and 2019, and $393 thousand and $348 thousand, respectively for the nine month periods ended September 30, 2020 and 2019. The tax benefit from restricted stock expense was $22 thousand and $24 thousand, respectively for the three month periods ended September 30, 2020 and 2019; and $71 thousand and $63 thousand, respectively for the nine month periods ended September 30, 2020 and 2019. In second quarter 2020, Salisbury granted a total of 14,975 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $536 thousand. In third quarter 2020, Salisbury granted 500 restricted shares with a fair value of approximately $18 thousand at grant date. The restricted stock will vest three years from the grant date.respectively. Unrecognized compensation cost relating to the awards as of September 30,March 31, 2021 and 2020 and 2019 totaled $906646 thousand and $887659 thousand, respectively. There were no forfeitures of $21 thousand or 500 shares in the thirdfirst quarter of 2020 and forfeitures of $50 thousand2021 or 1,200 shares for year to date 2020. There were forfeitures of $10 thousand or 250 shares in the third quarter of 2019 and forfeitures of $31 thousand or 710 shares for year to date 2019.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted 6,800 performance-based restricted stock units (RSU) pursuant to the 2017 Long-Term Incentive Plan to further align compensation with the Bank's performance. This RSU plan replaced the Bank's Phantom Stock Appreciation Units plan (Phantom). Salisbury will continue to record an expense for the Phantom plan untilpaid out the final tranche of these awards is paid out in January 2021. Salisbury's expense for the Phantom plan was $180 thousand and $8436 thousand, respectively, for the three month periods ended September 30, 2020March 31, 2021 and 2019, and $101 thousand and $203 thousand, respectively, for the nine month periods ended September 30, 2020 and 2019.2020.

The performance goal for the March 2019 grantawards granted under the RSU plan in 2019 is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved. Inachieved, vesting will occur no later than March 29, 2022.

On July 29, 2020, the Compensation Committee granted an additional 7,250 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank's tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is achieved.

The fair value of the awards granted under the RSU plan at the grant date was $264 thousand and $280 thousand, respectively, for those grants awarded in 2020 and 2019. Compensation expense of $8071 thousand and $23 thousand was recorded with respect to both tranches ofthese RSUs infor the three months ended September 30,March 31, 2021 and 2020, and 2019, respectively, and $127 and $46 thousand for the nine months ended September 30, 2020 and 2019.respectively. No performance-based restricted stock units were awarded prior to 2019. The shares noted above are contingently issuable only upon attainment of the minimum performance goal.

Short Term Incentive Plan (STIP)

Salisbury offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP expense, which is included in compensation expenses, totaled $238 thousand and $153 thousand for the three months ended March 29, 2019.31, 2021 and 2020, respectively.

Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In the secondfirst quarter 2021 and third quarters 2020, there were no stock options exercised and year to date 2020, 1,755 stock options were exercised at $17.04 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury.executive. Also, in the first quarter of 2020, a former Riverside employee exercised 1,350 stock options at $17.04 per share. In the first and third quarters of 2019 there were no stock options exercised. In the second quarter 2019, there were 2,025 stock options exercised at $17.04, by one employee. In the first quarter 2018, 1,350 stock options were exercised at $31.11 per share by one former Riverside Bank executive, who is currently a Named Executive Officer of Salisbury.

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NOTE 1112 - FAIR VALUE OF ASSETS AND LIABILITIES

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Salisbury adopted ASC 820-10, "Fair Value Measurement - Overall,”" which provides a framework for measuring fair value under generally accepted accounting principles. This guidance permitted Salisbury the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Salisbury did not elect fair value treatment for any financial assets or liabilities upon adoption.

In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information ("inputs”inputs") are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury's market assumptions. These two types of inputs have created the following fair value hierarchy:

•Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
•Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
•Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.


The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities. Currently, Salisbury uses an interest rate swap to manage its interest rate risk. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Salisbury incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significantpursuant to the fair value measurement. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the nine-month period ended September 30, 2020.valuation hierarchy.

•Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.
•Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
•Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.
•Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

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Assets and liabilities measured at fair value are as follows:

        
  Fair Value Measurements Using Assets and
(in thousands) Level 1 Level 2 Level 3 liabilities at
        fair value
September 30, 2020                
Assets at fair value on a recurring basis                
U.S. Government Agency notes $—  $5,787  $—  $5,787 
Municipal bonds  —   26,558   —   26,558 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government-sponsored enterprises  —   36,508   —   36,508 
Collateralized mortgage obligations:                
U.S. Government agencies  —   19,037   —   19,037 
Corporate bonds  —   7,830   —   7,830 
Securities available-for-sale $—  $95,720  $—  $95,720 
CRA mutual funds  916   —   —   916 
Assets at fair value on a non-recurring basis                
Collateral dependent impaired loans $—  $—  $2,010  $2,010 
Other real estate owned $—  $—  $—  $— 
Liabilities at fair value on a recurring basis                
Derivative financial instruments $—  $3  $—  $3 
December 31, 2019                
Assets at fair value on a recurring basis                
U.S. Government Agency notes $—  $4,644  $—  $4,644 
Municipal bonds  —   27,193   —   27,193 
Mortgage-backed securities:                
U.S. Government agencies and U.S. Government-sponsored enterprises  —   29,357   —   29,357 
Collateralized mortgage obligations:                
U.S. Government agencies  —   25,499   —   25,499 
Corporate bonds  —   5,108   —   5,108 
Securities available-for-sale $—  $91,801  $—  $91,801 
CRA mutual funds  882   —   —   882 
Assets at fair value on a non-recurring basis                
Collateral dependent impaired loans $—  $—  $1,593  $1,593 
Other real estate owned $—  $—  $314  $314 
Fair Value Measurements UsingAssets at
(in thousands)Level 1Level 2Level 3fair
value
March 31, 2021
Assets at fair value on a recurring basis
U.S. Government Agency notes$-$19,142$-$19,142
Municipal bonds-28,719-28,719
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises-55,722-55,722
Collateralized mortgage obligations:
U.S. Government agencies-14,849-14,849
Corporate bonds-8,911-8,911
Securities available-for-sale$-$127,343$-$127,343
CRA mutual funds904--904
Derivative financial instruments-7-7
December 31, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes$-$7,851$-$7,851
Municipal bonds-27,617-27,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises-36,573-36,573
Collateralized mortgage obligations:
U.S. Government agencies-17,454-17,454
Corporate bonds-8,916-8,916
Securities available-for-sale$-$98,411$-$98,411
CRA mutual funds917--917
Derivative financial instruments-4-4

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

      
(in thousands) Carrying Estimated Fair value measurements using
  value fair value Level 1 Level 2 Level 3
September 30, 2020                    
Financial Assets                    
Cash and cash equivalents $95,341  $95,341  $95,341  $—  $— 
Interest bearing time deposits with financial institutions  750   750   750   —   — 
Securities available-for-sale  95,720   95,720   —   95,720   — 
CRA mutual fund  916   916   916   —   — 
Federal Home Loan Bank of Boston stock  3,158   3,158   3,158   —   — 
Loans held-for-sale  2,761   2,802   —   —   2,802 
Loans receivable, net  1,031,593   1,058,564   —   —   1,058,564 
Accrued interest receivable  6,055   6,055   6,055   —   — 
Cash surrender value of life insurance policies  17,572   17,572   17,572   —   — 
Financial Liabilities                    
Demand (non-interest-bearing) $313,742  $313,742  $—  $313,742  $— 
Demand (interest-bearing)  201,760   201,760   —   201,760   — 
Money market  270,097   270,097   —   270,097   — 
Savings and other  181,691   181,691   —   181,691   — 
Certificates of deposit  127,851   129,311   —   129,311   — 
Deposits  1,095,141   1,096,601   —   1,096,601   — 
Repurchase agreements  10,885   10,885   —   10,885   — 
FHLBB advances  43,880   44,099   —   44,099   — 
Subordinated debt  9,877   9,965   9,965   —   — 
Note payable  218   222   —   222   — 
Finance lease liability  1,685   1,868   —   —   1,868 
Accrued interest payable  210   210   210   —   — 
Derivative financial instruments  3   3   —   3   — 
December 31, 2019                    
Financial Assets                    
Cash and cash equivalents $26,885  $26,885  $26,885  $—  $— 
Interest bearing time deposits with financial institutions  750   750   750   —   — 
Securities available-for-sale  91,801   91,801   —   91,801   — 
CRA mutual fund  882   882   882   —   — 
Federal Home Loan Bank of Boston stock  3,242   3,242   3,242   —   — 
Loans held-for-sale  332   334   —   —   334 
Loans receivable, net  927,413   933,287   —   —   933,287 
Accrued interest receivable  3,415   3,415   3,415   —   — 
Cash surrender value of life insurance policies  20,580   20,580   20,580   —   — 
Financial Liabilities                    
Demand (non-interest-bearing) $237,852  $237,852  $—  $237,852  $— 
Demand (interest-bearing)  153,314   153,314   —   153,314   — 
Money market  239,504   239,504   —   239,504   — 
Savings and other  161,112   161,112   —   161,112   — 
Certificates of deposit  127,724   128,629   —   128,629   — 
Deposits  919,506   920,411   —   920,411   — 
Repurchase agreements  8,530   8,530   —   8,530   — 
FHLBB advances  50,887   51,028   —   51,028   — 
Subordinated debt  9,859   10,113   10,113   —   — 
Note payable  246   251   —   251   — 
Finance lease liability  1,718   1,967   —   —   1,967 
Accrued interest payable  78   78   78   —   — 
(in thousands)CarryingEstimatedFair value measurements using
valuefair valueLevel 1Level 2Level 3
March 31, 2021
Financial Assets
Cash and cash equivalents$159,196$159,196$159,196$-$-
Interest bearing time deposits with financial institutions750750750
Securities available-for-sale, net127,343127,343-127,343-
CRA mutual fund904904904--
Federal Home Loan Bank of Boston stock1,7131,7131,713--
Loans held-for-sale2,3132,352--2,352
Loans receivable, net1,041,1851,043,432--1,043,432
Accrued interest receivable6,2376,2376,237--
Cash surrender value of life insurance policies21,30721,30721,307--
Derivative financial instruments77-7-
Financial Liabilities
Demand (non-interest-bearing)$334,638$334,638$-$334,638$-
Demand (interest-bearing)229,200229,200-229,200-
Money market311,971311,971-311,971-
Savings and other207,109207,109-207,109-
Certificates of deposit128,253129,440-129,440-
Deposits1,211,1711,212,358-1,212,358-
Repurchase agreements8,6878,687-8,687-
FHLBB advances11,39611,525-11,525-
Subordinated debt34,30535,04135,041--
Note payable197202-202-
Finance lease obligation1,6581,801--1,801
Accrued interest payable373737--
December 31, 2020
Financial Assets
Cash and cash equivalents$93,162$93,162$93,162$-$-
Interest bearing time deposits with financial institutions750750750--
Securities available-for-sale98,41198,411-98,411-
CRA mutual fund917917917--
Federal Home Loan Bank of Boston stock1,7131,7131,713--
Loans held-for-sale2,7352,790--2,790
Loans receivable, net1,027,7381,057,234--1,057,234
Accrued interest receivable6,3736,3736,373--
Cash surrender value of life insurance policies21,18221,18221,182--
Derivative financial instruments44-4-
Financial Liabilities
Demand (non-interest-bearing)$310,769$310,769$-$310,769$-
Demand (interest-bearing)218,869218,869-218,869-
Money market278,146278,146-278,146-
Savings and other189,776189,776-189,776-
Certificates of deposit131,514132,875-132,875-
Deposits1,129,0741,130,435-1,130,435-
Repurchase agreements7,1167,116-7,116-
FHLBB advances12,63912,786-12,786-
Subordinated debt9,88310,02710,027--
Note payable208212-212-
Finance lease liability1,6731,920--1,920
Accrued interest payable434343--

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

NOTE 1213 - SUBSEQUENT EVENTS

On October 30, 2020April 21, 2021 the Board of Directors increased and declared a quarterly dividend of $0.290.30 per common share payable on November 27, 2020May 28, 2021 to shareholders of record as of November 13, 2020.May 14, 2021. The Board of Directors also authorized the full redemption of Salisbury's $10 million outstanding subordinated debt, issued in December 2015, on May 28, 2021.

On a year-to-date basis through May 4, 2021, Salisbury processed 470 loan applications, for approximately $48 million, under the PPP program.

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Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. ("Salisbury”Salisbury" or the "Company”"Company") and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019.2020. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the "SEC”"SEC").

BUSINESS

Salisbury Bancorp, Inc., a Connecticut corporation, formed in 1998, is the bank holding company for Salisbury Bank and Trust Company (the "Bank"), a Connecticut-chartered and Federal Deposit Insurance Corporation (the "FDIC") insured commercial bank headquartered in Lakeville, Connecticut. Salisbury's common stock is traded on the NASDAQ Capital Market under the symbol "SAL.”" Salisbury's principal business consists of its operation and control of the business of the Bank.

The Bank, formed in 1848, currently provides commercial banking, consumer financing, retail banking and trust and wealth advisory services through a network of fourteen banking offices and ten ATMs located in: Litchfield County, Connecticut; Dutchess, Orange and Ulster Counties, New York; and Berkshire County, Massachusetts and through its internet website (salisburybank.com).

On June 29, 2020, Salisbury Bank was added to the Russell 3000 stock index.

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”Losses" section of Management's Discussion and Analysis.

Goodwill and Intangible Assets

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Future events or changes in the estimates, which are used to determine the carrying value of goodwill and identifiable intangible assets or which otherwise adversely affect their value or estimated lives, could have a material adverse impact on the results of operations.

Available-For-Sale Securities

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

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Derivative Instruments and Hedging Activities

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

In accordance with the FASB's fair value measurement guidance, Salisbury made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

FINANCIAL CONDITION

Impact of COVID-19 Virus

COVID-19 has placed significant health and economic pressure on the communities the Bank serves, the State of Connecticut, the United States and other countries. In response, the Bank has proactively implemented several steps such as those set forth below to support the safety and well-being of its employees and customers, which procedures continue through the date of this Report:

·The Bank is practicing social distancing following the guidelines of the Center for Disease Control and requires or encourages many of its employees to work from home or from alternate locations.
·On July 8, 2020, the lobbies to the Bank's branches reopened to customers, and banking is also available to customers by appointment.
·The Bank continues to leverage the drive-up windows in twelve of its fourteen branches as well as its electronic banking platform to continue to serve customers.

Salisbury will continue to adjust its operating model as the circumstances surrounding the pandemic continue to evolve.

Securities and Short Term Funds

During the first nine monthsquarter of 2020,2021, securities available-for-sale increased $3.9$28.9 million to $95.7$130.0 million. The net increase reflected by the purchases of $29.3 million at September 30, 2020.of Mortgage-backed securities, $5.0 million of U.S. Government Agency notes, $4.5 million of Collateralized mortgage obligations securities and $1.7 million of municipal securities which were partly offset by $9.5 million in maturities/principal payments of securities and a decrease in unrealized gains of $1.8 million. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $68.5$66.0 million to $95.3 million at September 30, 2020.$159.2 million.

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Salisbury evaluates securities for OTTI wherewhen 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 betweenbetween 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 at September 30, 2020.March 31, 2021.

Loans

Net loans receivable increased $13.4 million to $1.041 billion at March 31, 2021, compared with $1.028 billion at December 31, 2020. The increase primarily reflected net growth of $1,031.6$22.2 million at September 30, 2020, increased $104.2in commercial and industrial loans, which included loans granted under the SBA's Paycheck Protection Program ("PPP"). During first quarter 2021, Salisbury processed 435 customer applications for PPP loans of approximately $47 million, which was partially offset by the forgiveness of approximately $36 million PPP loans by the SBA. At March 31, 2021 Salisbury had PPP loans, net of deferred fees, of approximately $94 million on its balance sheet compared from $927.4with approximately $85 million at December 31, 2019. The increase primarily reflected PPP loan balances of $97.6 million, net of deferred fees as well as growth in commercial real estate loans. Salisbury’s residential loans receivable balance increased approximately $1.8 million from year end 2019. The overall increase in net loans receivable was partly offset by a $4.2 million increase in the allowance2020. Salisbury continued to experience robust demand for loan losses, which primarily reflected the uncertainty surrounding the impact of COVID-19, as well as loan growth during the period.

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Despite the minimal growth in the residential loan balance from year end 2019, Salisbury experienced significant residential mortgage activity both as purchasers relocated from the New York metropolitan area to less populated communities in response to COVID-19, and as a result of the attractive mortgage interest rate environment, which precipitated refinance activity. During the third quarter 2020, Salisbury originated $45.5 million of residential mortgage loans including refinance activity, comparedin first quarter 2021. Despite this demand, residential real estate balances declined $6.7 million during first quarter 2021 to $14.5$419.0 million at March 31, 2021. During first quarter 2021, residential mortgage loan originations of $42.8 million were more than offset by the sale of $21.3 million of loans during third quarter 2019. For the nine month period ended September 30, 2020, Salisbury originated $106.6 million of residential mortgage loans, including refinance activity, compared with $38.7 million of loans during the comparable period of 2019. Salisbury manages the Bank’s interest rate risk in part by selling fixed rate residential loans to FHLB Boston. During the third quarter 2020, Salisbury sold approximately $26.6 million of residential mortgagesuch loans to FHLB Boston, as part of the Bank's strategy to manage interest rate risk, and loan amortization and payments of approximately $28.2 million. In first quarter 2020, residential mortgage loan originations of $19.9 million were partially offset by the sale of $3.2 million of such loans to FHLB Boston and loan amortization and payments of approximately $11.9 million. The ratio of gross loans to deposits for first quarter 2021 was 87.2% compared with $5.6 million in third92.2% for fourth quarter 2019. For the nine month period ended September 30, 2020 and September 30, 2019, Salisbury sold approximately $44.4 million and $6.1 million of residential mortgage loans, respectively, to FHLB Boston.99.3% for first quarter 2020.

Asset Quality

During the first ninethree months of 2020,2021, non-performing assets increased $0.8 million to $4.7 million, or 0.36% of gross loans receivable,remained relatively unchanged at September 30, 2020 from $3.9 million, or 0.35% of gross loans receivable, at December 31, 2019.$5.7 million. During the first nine monthsquarter of 2020,2021, total impaired and potential problem loans increased by $5.5$18.8 million to $26.8$48.9 million, or 2.56%4.6% of gross loans receivable at September 30, 2020,March 31, 2021, from $21.3$30.1 million, or 2.28%2.9% of gross loans receivable at December 31, 2019.2020.The increase primarily reflected loans to certain borrowers in the hospitality and entertainment and recreation industries for which loan payments are currently deferred due to COVID-19 or which management considers to have a higher risk of default due to the pandemic. As discussed further below, management added a new discrete loan pool in second quarter 2020, which includes loans deemed to be a higher risk due to COVID-19, such as commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk due to the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, in second quarter 2020, management increased the risk weights for loans with an internal risk rating of "4" (Watch), "5" (Special Mention) and "6" (Substandard") to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. Management reduced these risk weights back to their pre-COVID-19 levels in first quarter 2021 because the pre-COVID risk weights currently reflect the inherent risk of loss within these risk ratings, and management is receiving more timely and transparent information to determine if a downgrade in a loan rating is deemed necessary as the economy transitions beyond COVID-19.

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.

On March 22, 2020, the federal banking agencies issued an "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”Coronavirus". This, this guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of the virus. The guidance goes on to explain that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of the relief program are not Troubled Debt Restructurings ("TDRs”TDRs"). Section 4013 of the CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied thisSection 4013 guidance and implemented a loan payment deferral program which allows residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. Borrowers may apply to the Bank for additional deferments, which will be evaluated on a case-by-case basis.

As of September 30, 2020, 21 residential and consumer loans ($7 million loan balances) and 37March 31, 2021, fourteen commercial loans ($5627.0 million loan balances) were granted payment deferrals. Eleven of the loans ($18.5 million loan balance) related to borrowers in the hospitality industry and three of the loans ($8.5 million loan balance) related to borrowers in the entertainment & recreation industry. The loan balance for which payments were deferred represented approximately 2.8% of Salisbury's gross loan balance at March 31, 2021, excluding loans granted under the SBA's Paycheck Protection Program. There were no outstanding deferrals related to residential and consumer loans as of March 31, 2021. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. Salisbury evaluated each borrower's request for loan payment along withdeferrals on a case-by case-basis. Salisbury also reviewed the deferred principal. credit characteristics and internal risk rating assigned to each borrower that was granted a deferral. This review considered several factors, which included an assessment of COVID-19's impact on the operations of the business, other sources of liquidity available to a borrower for loan payments, the borrower's cooperation, the value of collateral and the number of payment deferrals granted to that borrower. Salisbury also considered a borrower's ability to make partial payments, which represent a subset or combination of principal, interest and mortgage taxes. At March 31, 2021, three of the loans deferring payments were deferring principal only and eleven loans were deferring principal and interest.

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The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program ("PPP”).Program. As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. In 2020, Salisbury processed 932 PPP loans for a principal balance of approximately $100 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020, the Paycheck Protection Program Flexibility Act ("PPPFA”PPPFA") was signed into law. The PPPFA increased the covered period from eight weeks to twenty fourtwenty-four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two yeartwo-year term. Management funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank ("FHLB”FHLB") advances, and brokered deposits. Salisbury did not participate in the Federal Reserve's Paycheck Protection Program Liquidity Facility ("PPPLF”PPPLF"). As of September 30,March 31, 2021, approximately $50 million of the PPP loans originated in 2020 Salisbury submitted twentywere forgiven by the SBA.

On December 27, 2020 the Consolidated Appropriations Act, 2021 was signed into law. Certain provisions of the CARES Act were modified and extended by the Act. One of the features of the Act was the provision of $284 billion in additional funding for the PPP loan forgiveness applications (loan balanceprogram, including a Second draw Paycheck Protection Program for qualifying businesses for which there was a quarterly revenue reduction of $0.4 million)at least 25% compared to the SBA. Upon receiptsame quarter in 2019. On a year-to-date basis through March 31, 2021, Salisbury processed another 435 customer PPP applications for loans of a forgiveness application, the SBA will have ninety days to review the application. Thus, the duration of the SBA's review process will impact the amount of fee income that Salisbury will recognize in fiscal year 2020.approximately $47 million. The Bank is permitted to accelerate the recognitionfunded these loans through deposits. As of deferred fee incomeMarch 31, 2021, Salisbury had approximately $94 million of PPP loans on forgiven loans.its balance sheet compared with approximately $85 million at December 31, 2020.

Past Due Loans

Loans past due 30 days or more increased $18 thousand for the nine months ended September 30, 2020decreased $4.5 million during first quarter 2021 to $4.4$5.4 million, or 0.42%0.51% of gross loans receivable at March 31, 2021 compared with $4.4$9.9 million, or 0.47%0.95% of gross loans receivable at December 31, 2019.2020. The decrease in past due loans from fourth quarter 2020 primarily reflected loans that matured in fourth quarter 2020 that were subsequently rewritten in first quarter 2021.

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

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Past due 30-59 days $1,100  $1,351 $2,375$5,263
Past due 60-89 days  538   726 -1,575
Past due 90-179 days  —   3 4921
Past due 180 days and over  11   — 1211
Accruing loans  1,649   2,080 2,8796,850
Past due 30-59 days  375   290 4480
Past due 60-89 days  95   — 147179
Past due 90-179 days  628   271 587768
Past due 180 days and over  1,687   1,775 1,8081,665
Non-accrual loans  2,785   2,336 2,5463,092
Total loans past due 30 days or greater $4,434  $4,416 $5,425$9,942

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, the FDIC and CTDOB.

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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.
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·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

ImpairedImpaired 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)March 31, 2021December 31, 2020
Non-accrual loans, excluding troubled debt restructured loans$3,684$4,091
Non-accrual troubled debt restructured loans1,5181,546
Accruing troubled debt restructured loans6,2026,272
Total impaired loans$11,404$11,909
Commitments to lend additional amounts to impaired borrowers$-$-

(in thousands)  September 30, 2020   December 31, 2019 
Non-accrual loans, excluding troubled debt restructured loans $2,996  $2,604 
Non-accrual troubled debt restructured loans  1,674   1,013 
Accruing troubled debt restructured loans  7,015   7,778 
Total impaired loans $11,685  $11,395 

Non-Performing Assets

Non-performing assets increased $0.8 million$58 thousand to $4.7$5.7 million, or 0.36%0.41% of assets for the nine months ended September 30, 2020,at March 31, 2021, from $3.9$5.6 million, or 0.35%0.44% of assets at December 31, 20192020, and decreased $1.0increased $2.5 million from $5.7$3.2 million, or 0.50%0.28% of assets at September 30, 2019.March 31, 2020.

The 19.0% increase in non-performing assets in the first nine months 2020 resulted primarily from: $2.2 million of loans placed on non-accrual, offset by the sale of $0.8 million of loans, $0.3 million of loans returned to accrual status, $0.1 million of loan payoffs and the sale of $0.3 million of OREO.

The components of non-performing assets are as follows:

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Residential 1-4 family $1,353  $1,551 $1,358$1,508
Residential 5+ multifamily  861   861 861861
Home equity lines of credit  233   105 237154
Commercial  1,262   914 2,2332,544
Farm land  166   186 151158
Vacant land  38   — 3737
Real estate secured  3,913   3,617 4,8775,262
Commercial and industrial  757   — 325374
Non-accruing loans  4,670   3,617 
Consumer--
Non-accrual loans5,2025,636
Accruing loans past due 90 days and over  11   3 50412
Non-performing loans  4,681   3,620 5,7065,648
Other Real Estate Owned (OREO)  —   314 
Foreclosed assets--
Non-performing assets $4,681  $3,934 $5,706$5,648

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

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Current $1,885  $1,281 $2,655$2,545
Past due 30-59 days  375   290 4480
Past due 60-89 days  95   — 147179
Past due 90-179 days  628   274 1,080769
Past due 180 days and over  1,698   1,775 1,8201,675
Total non-performing loans $4,681  $3,620 $5,706$5,648

At September 30, 2020, 40.26%March 31, 2021, 46.53% of non-performing loans were current with respect to loan payments, compared with 35.39%45.06% at December 31, 2019.2020.

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Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubledTroubled debt restructured loans decreased slightly during first nine months of 2020quarter 2021 to $8.7$7.7 million, or 0.83%0.73% of gross loans receivable at September 30, 2020,March 31, 2021, compared to $8.8$7.8 million, or 0.94%0.75% of gross loans receivable at December 31, 2019.2020.

The components of troubled debt restructured loans are as follows:

(in thousands)  September 30, 2020   December 31, 2019 
Residential 1-4 family $3,494  $3,901 
Residential 5+ multifamily  105   116 
Personal  30   36 
Vacant land  132   180 
Commercial  3,135   3,419 
Real estate secured  6,896   7,652 
Commercial and industrial  119   126 
Accruing troubled debt restructured loans  7,015   7,778 
Residential 1-4 family  506   152 
Residential 5+ multifamily  861   861 
Vacant land  38   — 
Commercial  269   — 
Real estate secured  1,674   1,013 
Non-accrual troubled debt restructured loans  1,674   1,013 
Troubled debt restructured loans $8,689  $8,791 

(in thousands)March 31, 2021December 31, 2020
Residential 1-4 family$2,771$2,798
Residential 5+ multifamily102103
Personal2426
Vacant land127130
Commercial3,0713,105
Real estate secured6,0956,162
Commercial and industrial107111
Accruing troubled debt restructured loans6,2026,273
Residential 1-4 family372378
Residential 5+ multifamily861861
Vacant land3737
Commercial249269
Real estate secured1,5191,545
Commercial and Industrial(1)-
Non-accrual troubled debt restructured loans1,5181,545
Troubled debt restructured loans$7,720$7,818

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

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Current $6,728  $7,227 $6,164$5,737
Past due 30-59 days  248   470 38536
Past due 60-89 days  39   81 --
Accruing troubled debt restructured loans  7,015   7,778 6,2026,273
Current  543   19 444237
Past due 30-59 days--
Past due 60-89 days--
Past due 90-179 days  —   133 213178
Past due 180 days and over  1,131   861 8611,130
Non-accrual troubled debt restructured loans  1,674   1,013 1,5181,545
Total troubled debt restructured loans $8,689  $8,791 $7,720$7,818

At September 30, 2020, 83.68%March 31, 2021, 85.60% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.43%76.41% at December 31, 2019.2020.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $5.2$19.3 million during the first nine monthsquarter of 20202021 to $15.1$37.5 million, or 1.44%3.56% of gross loans receivable at September 30, 2020,March 31, 2021, compared with $9.9$18.2 million, or 1.06%1.75% of gross loans receivable at December 31, 2019.2020. The increase in potential problem loans from year end 2020 primarily reflected the downgrade of $6.9 millionthe internal risk rating on loans to certain borrowers in the hospitality and $0.3 million of commercialentertainment and residential 1-4 family loans, respectively, partly offset by the paydown of a commercial line of credit of $0.8 million, the payoff of $0.4 million in residential 1-4 family loans, the upgrade of $0.4 million of residential 1-4 family loans and $0.4 million of commercial and industrial loans placed on non-accrual.recreation industries who have been granted loan payment deferrals due to COVID-19.

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The components of potential problem loans are as follows:

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Residential 1-4 family $1,634  $2,109 $1,719$1,620
Residential 5+ multifamily  738   760 727732
Home equity lines of credit  —   — --
Residential real estate  2,372   2,869 2,4462,352
Commercial  10,778   3,886 32,63213,703
Construction of commercial  232   241 226229
Commercial real estate  11,010   4,127 32,85813,932
Farm land  1,505   1,521 4501,427
Real estate secured  14,887   8,517 35,75417,711
Commercial and industrial  178   1,384 1,764486
Consumer  1   2 11
Total potential problem loans $15,066  $9,903 $37,519$18,198

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

(in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Current $14,457  $9,654 $36,608$17,598
Past due 30-59 days  452   108 42140
Past due 60-89 days  157   138 -560
Past due 90-179 days  —   3 490-
Total potential problem loans $15,066  $9,903 $37,519$18,198

At September 30, 2020, 95.96%March 31, 2021, 97.57% of potential problem loans were current with respect to loan payments, as compared with 97.49%96.70% at December 31, 2019.2020. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Goodwill

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. The virus triggered significant volatility in the global financial markets. On September 30, 2020, Salisbury's closing stock price was $31.61 per share compared with its book value of $42.99 per share. Salisbury's stock price has declined approximately 31% from December 31, 2019 whereas financial stocks, as measured by the SNL US Bank $1 billion - $5 billion index, declined approximately 38% over the same period. As a result of the stock market volatility during the past twelve months, the Bank was required to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired.impaired at March 31, 2021. At March 31, 2021, Salisbury's closing stock price was $44.41 per share compared with its book value of $44.72 per share. During first quarter 2021, SAL's market price peaked at $50.88 per share on March 11, 2021. Bank stocks, as measured by the S&P US BMI Banks Index, increased 23.7% since year end 2020 whereas SAL increased 19.2% over the same period. Management performed a qualitative analysis that evaluated several qualitative factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price. Management performed a qualitative analysisconcluded that as of September 30, 2020 and concluded thatMarch 31, 2021 it was not more likely than not that goodwill was impaired. As a result, the Bank did not record an impairment charge for goodwill for thirdfirst quarter 2020.2021.

Deposits and Borrowings

Deposits increased $175.6$82.1 million during the first nine months of 2020,quarter 2021, or 19.1%7%, to $1.1$1.2 billion at September 30, 2020,March 31, 2021, compared with $919.5$1.1 million at December 31, 2019. The increase partly reflected the funding of nearly $100.0 million of PPP loans, an increase in brokered certificate of deposit balances of $18.0 million as well as an increase in retail and business customer balances due to the uncertainty surrounding COVID-19.2020. Retail repurchase agreements increased $2.4$1.6 million during 20202021 to $10.9$8.7 million at September 30, 2020,March 31, 2021, compared with $8.5$7.1 million at December 31, 2019.2020.

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

 September 30, 2020 December 31, 2019March 31, 2021December 31, 2020
(in thousands) Average Balance Percent Weighted
Interest Rate		 Average Balance Percent Weighted
Interest Rate		Average BalancePercentWeighted
Interest Rate		Average BalancePercentWeighted
Interest Rate
Demand deposits $286,496   27.23%  0.00% $231,169   24.50%  0.00%$328,37228.24%0.00%$294,60327.94%0.00%
Interest-bearing checking accounts  195,253   18.56   0.22   155,463   16.48   0.39 218,42518.790.20183,87017.440.24
Regular savings accounts  176,963   16.82   0.15   175,011   18.55   0.87 197,52616.990.11175,20416.610.26
Money market savings  258,257   24.54   0.30   222,090   23.54   1.05 288,76724.840.18256,40224.310.45
Certificates of deposit (CD's)1  135,238   12.85   1.15%  159,863   16.94   1.80 129,60311.150.83144,48813.701.27
Total deposits $1,052,207   100.00%  0.29% $943,596   100.00%  0.78%$1,162,694100.00%0.19%$1,054,567100.00%0.37%

1CD's included Certificate of Deposit Account Registry Service ("CDARS”) one-way buys of $2.9 million at December 31, 2019. The Bank did not have a CDARS one-way buy balance as of September 30, 2020. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. CD's also include brokered certificates of deposits of $18.0 million at September 30, 2020. Salisbury did not have any brokered certificates of deposit outstanding atMarch 31, 2021 and December 31, 2019.2020.

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

Interest rates (in thousands)  September 30, 2020   December 31, 2019 
Interest ratesMarch 31, 2021December 31, 2020
Less than 1.00% $58,456  $34,261 $93,439$73,538
1.00% to 1.99%  36,047   46,502 22,80225,589
2.00% to 2.99%  32,850   46,463 11,51431,889
3.00% to 3.99%  498   498 498498
Total $127,851  $127,724 $128,253$131,514

The distributiondistribution of certificates of deposit by interest rate and maturity is as follows:

 At September 30, 2020At March 31, 2021
Interest rates (in thousands) Less Than or Equal to One Year More Than One to Two Years More Than Two to Three Years More Than Three Years Total Percent of Total
Interest ratesLess Than or Equal to One YearMore Than One to Two YearsMore Than Two to Three YearsMore Than Three YearsTotalPercent of Total
Less than 1.00% $43,812  $10,790  $968  $2,886  $58,456   45.72%$76,174$11,229$1,680$4,356$93,43972.86%
1.00% to 1.99%  16,967   8,646   4,413   6,021   36,047   28.19%7,5628,2002,3184,72122,80217.78%
2.00% to 2.99%  24,217   2,902   1,011   4,720   32,850   25.69%5,0117424,4251,33611,5148.98%
3.00% to 3.99%  —   498   —   —   498   0.39%498---4980.39%
Total $84,996  $22,836  $6,392  $13,627  $127,851   100.00%$89,245$20,171$8,423$10,413$128,253100.00%

Scheduled maturities of time certificates of deposit in denominations of $100,000 or more are as follows:

September 30, 2020 (in thousands) Within
3 months		 
3-6 months		 
6-12 months		 Over
1 year		 Total
March 31, 2021 (in thousands)Within
3 months
3-6 months
6-12 months		Over
1 year		Total
Certificates of deposit $100,000 and over $15,568  $9,274  $23,829  $31,482  $80,153 $26,613$8,084$26,787$20,358$81,842

FHLBB advances decreased $7.0$1.2 million duringthe first nine monthsquarter of 20202021 to $43.9$11.4 million at September 30, 2020,March 31, 2021, compared with $50.9$12.6 million at December 31, 2019.2020. The decrease was due to the payments on an amortized advance during first quarter 2020. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank's request an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At September 30, 2020, $15March 31, 2021, $20.0 million of letters of credit were outstanding.outstanding compared with $18.0 million at December 31, 2020. Salisbury's borrowing capacity at the FHLB was $247.6 million at March 31, 2021.

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

(dollars in thousands)  September 30, 2020   December 31, 2019 March 31, 2021December 31, 2020
Highest month-end balance during period $35,000  $47,000 $-$15,000
Ending balance  —   30,000 --
Average balance during period  8,704   5,670 -5,956

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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. At September 30, 2020,March 31, 2021, Salisbury's excess borrowing capacity at FHLBB was approximately $233.9$247.6 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

Salisbury manages its liquidity in accordance with a liquidity funding policy, and also maintains a contingency funding plan that provides for the prompt and comprehensive response to unexpected demands for liquidity. Management believes Salisbury's funding sources will meet anticipated funding needs.

Operating activities for the nine-monththree-month period ended September 30, 2020March 31, 2021 provided net cash of $11.1$6.4 million. Investing activities utilized net cash of $111.1$46.4 million principally from $110.7due to the purchase of securities available-for-sale of $40.5 million, of net loan originations of $14.6 million and principal collections, $27.8$0.9 million for the purchase of purchases of securities available-for-sale and $2.4 million of capital expenditures,fixed assets, partly offset by proceeds of $12.9 million from calls and maturities of securities available-for-sale, $12.5$9.5 million from the salematurities/principal paydowns of available-for-sale-securities, $4.0 million of proceeds received on life insurance policy and $0.3 million from the sale of other real estate owned.available-for-sale (AFS) securities. Financing activities provided net cash of $168.4$106.0 million principallyprimarily due to anthe increase inof savings deposits of $175.6$85.4 million, net proceeds from the issuance of subordinated debt of $24.4 million and an increase of $46.0$1.6 million in long-term FHLBB advances, partiallysecurities sold under agreements to repurchase, partly offset by the repaymenta net decrease of FHLBB short term advances of $30.0$3.3 million FHLBB long-term advances maturities/in time deposit accounts and principal payments of $21.0$1.2 million FHLBB amortizing payment of $2.1 million and the payment of common stock dividends of $2.5 million.on FHLB advances.

At September 30, 2020,March 31, 2021, Salisbury had outstanding commitments to fund new loan originations of $30.5$30.7 million and unused lines of credit of $144.0$175.3 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.

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RESULTS OF OPERATIONS

For the three-monththree month periods ended September 30,March 31, 2021 and 2020 and 2019

OVERVIEW

Net income allocated to common stockshareholders was $4.3$4.5 million, or $1.53$1.59 basic earnings per basic common share, for the thirdfirst quarter ended September 30, 2020 (thirdMarch 31, 2021 (first quarter 2020)2021), compared with $2.9$2.8 million, or $1.06$0.99 basic earnings per basic common share, for the thirdfourth quarter ended September 30, 2019 (thirdDecember 31, 2020 (fourth quarter 2019)2020), and $2.7$2.0 million, or $0.96$0.72 basic earnings per basic common share, for the secondfirst quarter ended June 30,March 31, 2020 (second(first quarter 2020). Excluding the impact of PPP loans, the tax equivalent net interest income for first quarter 2021 was 3.16% compared with 3.13% for fourth quarter 2020. There were no PPP loans recorded on Salisbury's consolidated balance sheet in first quarter 2020.

Net Interest Income

Tax equivalent net interest income for the thirdfirst quarter 20202021 increased $1.3$1.6 million, or 14.4%17.48%, versus thirdfirst quarter 2019.2020. Loan interest income for the first quarter 2021 included PPP interest and fees of approximately $232 thousand and $1.1 million, respectively. Average earning assets increased $151.0$194.1 million versus thirdfirst quarter 2019.2020. Average total interest bearing deposits increased $48.8$120.0 million or 6.8%, versus thirdfirst quarter 2019.2020. Average loan balances for the first quarter 2021 included an average PPP loan balance of $92.8 million. The tax equivalent net interest margin 3.29%of 3.34% decreased 1 basis points versus 3.35% for both thirdthe first quarter 2020 and third2020. Excluding PPP loans, the net interest margin for first quarter 2019.2021 was approximately 3.16%.

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The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE”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
Three months ended March 31,Average BalanceIncome / ExpenseAverage Yield / Rate
(dollars in thousands)  2020   2019   2020   2019   2020   2019 202120202021202020212020
Loans (a)(d) $1,049,313  $920,946  $10,485  $10,158   3.97%  4.41%$1,051,658$948,035$10,592$10,0964.02%4.26%
Securities (c)(d)  89,220   96,317   606   747   2.72   3.10 103,06289,5966406982.483.12
FHLBB stock  3,440   3,024   34   46   3.96   6.08 1,9483,0419331.854.34
Short term funds (b)  78,306   49,057   52   236   0.27   1.92 101,40123,21825580.101.00
Total earning assets  1,220,279   1,069,344   11,177   11,187   3.64   4.18 
Total interest-earning assets1,258,0691,063,89011,26610,8853.574.09
Other assets  64,943   57,196                 71,25264,438
Total assets $1,285,222  $1,126,540                 $1,329,321$1,128,328
Interest-bearing demand deposits $195,253  $156,803   110   160   0.22   0.41 $218,425$154,6041061190.200.31
Money market accounts  258,257   242,310   195   700   0.30   1.16 288,767240,6801295600.180.93
Savings and other  176,963   165,297   69   323   0.15   0.78 197,526164,174562340.110.57
Certificates of deposit  135,238   152,475   391   697   1.15   1.83 129,603154,8692645960.831.54
Total interest-bearing deposits  765,711   716,885   765   1,880   0.40   1.05 834,321714,3275551,5090.270.84
Repurchase agreements  12,218   7,266   6   9   0.20   0.50 8,4535,672370.150.49
Capital lease  2,928   4,356   35   42   4.80   3.86 
Finance lease2,8243,05032364.604.72
Note payable  221   258   3   4   6.08   6.20 200240346.186.67
Subordinated debt (net of issuance costs)  9,872   9,849   156   156   6.32   6.34 10,1569,8601191564.686.33
FHLBB advances  44,522   31,983   113   266   0.99   3.33 11,82537,118342191.142.36
Total interest-bearing liabilities  835,472   770,597   1,078   2,357   0.51   1.22 867,779770,2677461,9310.351.00
Demand deposits  321,392   238,689                 328,372235,129
Other liabilities  7,592   6,669                 6,8396,856
Shareholders' equity  120,766   110,585                 126,331116,076
Total liabilities & shareholders' equity $1,285,222  $1,126,540                 $1,329,321$1,128,328
Net interest income(d)         $10,099  $8,830         $10,520$8,954
Spread on interest-bearing funds                  3.13   2.96 3.223.09
Net interest margin (e)                  3.29   3.29 3.343.35

(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 $176,000$170,000 and $164,000,$167,000, respectively, for 20202021 and 20192020 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e)Net interest income divided by average interest-earning assets.

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The following table sets forth the changes in FTE interest due to volume and rate.

Three months ended September 30, (in thousands)2020 versus 2019
Three months ended March 31, (in thousands)Three months ended March 31, (in thousands)2021 versus 2020
Change in interest due to  Volume   Rate   Net VolumeRateNet
Loans $1,349  $(1,022) $327 $1,074$(578)$496
Securities  (52)  (89)  (141)94(152)(58)
FHLBB stock  5   (17)  (12)(8)(16)(24)
Short term funds  80   (264)  (184)109(142)(33)
Interest-earning assets  1,382   (1,392)  (10)1,269(888)381
Deposits  88   (1,203)  (1,115)186(1,140)(954)
Repurchase agreements  4   (7)  (3)2(6)(4)
Capital lease  (15)  8   (7)
Note Payable  (1)  —   (1)
Finance lease(3)(1)(4)
Note payable(1)-(1)
Subordinated debt4(41)(37)
FHLBB advances  68   (221)  (153)(112)(73)(185)
Interest-bearing liabilities  144   (1,423)  (1,279)77(1,261)(1,184)
Net change in net interest income $1,238  $31  $1,269 $1,193$373$1,566

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Interest Income

Tax equivalent interest income of $11.2increased $381 thousand, or 3.5%, to $11.3 million for thirdfirst quarter 2021 as compared with first quarter 2020. Loan income as compared to first quarter 2020 was essentially unchanged from third quarter 2019. Loan income increased $0.3 million,$496 thousand, or 3.2%4.91%, compared to third quarter 2019primarily due to a $128.4$103.6 million, or 13.9%10.9%, increase in average loan balances, partiallyloans, partly offset by a 4424 basis point declinedecrease in the average loan yield. Tax equivalent securities income decreased $141$58 thousand, or 18.9%8.3%, for first quarter 2021 as compared to thirdwith first quarter 20192020, primarily due to a $7.1 million, or 7.4%,64 basis point decrease in average balances andyield, partly offset by a 38 basis point decline$13.4 million, or 15.0%, increase in average yield.volume. Income on short-term funds as compared to first quarter 2020 decreased $184$33 thousand, or 80.0%56.9%, compared with third quarter 2019 primarily due to a 16590 basis point decrease in the average yieldshort-term funds yields, partly offset by a $29.2$78.2 million, or 59.5%,336.73% increase in average short-term funds.balances.

Interest Expense

Interest expense of $1.1 million for third quarter 2020 decreased $1.3$1.2 million, or 54.3%61.3%, to $746 thousand for first quarter 2021 as compared with thirdfirst quarter 2019.2020. Interest on deposit accounts decreased $1.1 million,$954 thousand, or 59.3%63.2%, from third quarter 2019 as a result of a 6557 basis pointspoint decrease in average deposit rates, partly offset by a $48.9$120.0 million or 6.8%, increase in the average balances.balances as compared with first quarter 2020. Interest expense on FHLBB borrowings decreased $153$185 thousand, or 57.5%84.5%, from third quarter 2019 primarily as a result of an average balance decrease of $25.2 million as compared with first quarter 2020, and a 122 basis point decrease in the average borrowing rate of 234 basis points, partly offset by an increase in the average balance of $12.5 million, or 39.2%.borrowings rate. Interest expense on subordinated debt totaled $156decreased $37 thousand for both third quarteras a result of an average balance increase of $296 thousand and a 165 basis point decrease in average yield. On December 15, 2020 and 2019.Salisbury's subordinated debt repriced from a fixed rate of 6% to a floating rate based on three month LIBOR plus 430 basis points, or approximately 4.50%.

Provision and Allowance for Loan Losses

TheDuring the first quarter 2021, the allowance for loan losses increased by the provision for loan losses was $686loss expense of $158 thousand compared with $840 thousand for thirdfourth quarter 2020 compared with $94 thousandand $1.7 million for thirdthe first quarter 2019.2020. Net loan charge-offs (recoveries) were $56 thousand and $135$26 thousand for the respective quarters. first quarter 2021, $87 thousand for fourth quarter 2020 and ($17) thousand for the first quarter 2020. The increaseprovision in the provision from thirdfirst quarter 2019 primarily2021 reflected management's assessment of the impact of COVID-19the virus on certain qualitative and environmental factors and impaired loans as well as loan growth.loans. Management will continue to monitor the impact of the virus on its borrowers and adjust the allowance as appropriate. The length

As a result of time required for the economy to substantially recover from the virus will have a direct impact on Salisbury's provision and allowance for loan losses. A longer recovery or another forced shutdown that leads to sustained levels of unemployment will likely result in an increase in Salisbury's provision and allowance for loan losses.

The following table details the principal categories of credit quality ratios:

Three months ended September 30,  2020   2019 
Net charge-offs to average loans receivable, gross  0.01%  0.01%
Non-performing loans to loans receivable, gross  0.45   0.58 
Accruing loans past due 30-89 days to loans receivable, gross  0.16   0.19 
Allowance for loan losses to loans receivable, gross  1.24   0.96 
Allowance for loan losses to non-performing loans  277.76   164.73 
Non-performing assets to total assets  0.36   0.50 

Reservethese factors, reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 1.24% at September 30,excluding PPP loans, was 1.45% for the first quarter 2021, versus 1.44% for the fourth quarter 2020 compared to 0.96% at September 30, 2019 and 1.11% for the first quarter 2020. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans increased to 277.76% at September 30,was 243% for the first quarter of 2021, versus 244% for the fourth quarter of 2020 from 164.73% at September 30, 2019.and 333% for the first quarter of 2020.

The following table details the principal categories of credit quality ratios:

Three months ended March 31,20212020
Net charge-offs (recoveries) to average loans receivable, gross0.00%0.00%
Non-performing loans to loans receivable, gross0.540.33
Accruing loans past due 30-89 days to loans receivable, gross0.230.64
Allowance for loan losses to loans receivable, gross1.321.11
Allowance for loan losses to non-performing loans243.37333.05
Non-performing assets to total assets0.410.28

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $4.7$5.7 million, or 0.45%0.54% of gross loans receivable at September 30, 2020March 31, 2021 as compared to $5.4$5.6 million, or 0.58%0.54% at December 31, 2020 and $3.2 million, or 0.33%, at September 30, 2019.March 31, 2020. Accruing loans past due 30-89 days increased $0.8 million to $1.6were $2.4 million, or 0.16%0.23% of gross loans receivable from $0.8compared with $6.9 million, or 0.09%0.66% of gross loans receivable at September 30, 2019.December 31, 2020 and $6.1 million, or 0.64% of gross loans receivable, at March 31, 2020. See "Financial Condition - Asset Quality”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.

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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.

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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.

In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19. This new loan pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, in second quarter 2020, management increased the risk weights for loans with an internal risk rating of "4”"4" (Watch), "5”"5" (Special Mention) and "6” (Substandard”)"6" (Substandard) to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. In first quarter 2021, management reduced these risk weights back to their pre-COVID-19 levels because the internal risk rating on several loans with a higher degree of credit risk due to COVID-19 was downgraded during the quarter. Such downgrades resulted in a higher loan loss reserve for each affected loan. Management believes that this more targeted approach is prudent because loans to borrowers in certain industries, such as hospitality and entertainment and recreation, have a relatively higher degree of credit risk due to COVID-19. Management will activelycontinue to monitor the population of loans in the new loanCOVID-19 pool and evaluate the risk weightings to determine if further adjustments are warranted based on the impact of COVID-19.warranted.

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 at September 30, 2020.March 31, 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, the FDIC and CTDOB. As an integral part of their examination process, the FDIC and CTDOB review the adequacy and methodology of the Bank's credit risk ratings and allowance for loan losses.

Non-Interest Income

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

Three months ended September 30, (dollars in thousands)2020   2019   2020 vs. 2019 
Three months ended March 31, (dollars in thousands)Three months ended March 31, (dollars in thousands)202120202021 vs. 2020
Trust and wealth advisory $1,068  $1,023  $45   4%$1,146$1,030$11611%
Service charges and fees  711   1,003   (292)  (29)950905455
Gains on sales of mortgage loans, net  707   42   665   1,583 
Mortgage servicing, net  29   76   (47)  (62)
Gain on CRA mutual fund  —   6   (6)  (100)
Gains (loss) on available-for-sale securities, net  34   (9)  43   (478)
Mortgage banking activities, net608128480375
Gains (losses) on CRA mutual fund(16)14(30)(214)
Gain on available-for-sale securities, net-1(1)(100)
BOLI income and gains  719   86   633   736 125134(9)(6)
Other  18   29   (11)  (38)2833(5)(18)
Total non-interest income $3,286  $2,256  $1,030   46%$2,841$2,245$59627%

Non-interest income for thirdincreased $596 thousand, or 27% in the first quarter of 2021 versus the first quarter of 2020. Trust and wealth advisory revenues increased $116 thousand versus first quarter 2020 increased $1.0 million versus third quarter 2019. Trust and Wealth Advisory income increased $45 thousand versus third quarter 2019. The increase primarily reflecteddue to higher asset managementasset-based fees. Assets under administration were $748.2$902.1 million as of September 30, 2020at March 31, 2021 compared with $704.1$944.3 million at June 30,December 31, 2020 and $752.5$639.5 million as of September 30, 2019. at March 31, 2020. Discretionary assets under administration of $515.0$578.2 million at September 30, 2020in first quarter 2021 increased from $480.5$555.0 million at June 30,in fourth quarter 2020 and $475.5$425.4 million at September 30, 2019. The increase from secondin first quarter 2020 primarily reflected higher valuations, whereas the increase from third quarter 2019 was primarily due to new business activity.higher market valuations. Non-discretionary assets under administration of $233.2$323.9 million for thirdin first quarter 2020 increased2021 declined from $223.6$389.4 million at secondin fourth quarter 2020 and declinedincreased from $277.0$214.1 million at thirdin first quarter 2019.2020. The decline versus thirdfrom fourth quarter 20192020 reflected a lower valuation of shares in a partnership for one significant client relationship, and the increase from first quarter 2020 was due to the addition of partnership assets under administration for the same client relationship. The trust and wealth business recordedrecords only a nominal annual fee on this relationship. Historically, trust and wealth advisory income correlates with the value of assets under management. Accordingly, trust and wealth advisory income is likely to be impacted by high levels of market volatility that may result from business disruptions caused by COVID-19.

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Service charges and fees decreased $292increased $45 thousand versus third quarter 2019. During the thirdfirst quarter 2020 Salisbury waived approximately $289 thousand in variousprimarily due higher interchange fees partially offset by lower deposit fees, including overdraftfees. First quarter 2021 income from mortgage sales and ATM fees. Second quarter 2020 gains on mortgage loans, netservicing increased $665$480 thousand due to an increase in sales volume. ThirdMortgage sales in first quarter 2020 mortgage loan sales totaled $26.62021 were $21.3 million versus $5.6compared with $3.2 million for thirdfirst quarter 2019. Mortgage servicing fees2020. The first quarter 2021 included net losses of $16 thousand on investments in CRA Funds compared with net gains of $14 thousand in first quarter 2020. BOLI income of $125 thousand decreased $47$9 thousand compared with thirdto $134 thousand in first quarter 2019. Third quarter 2020 and third quarter 2019 included mortgage servicing amortization and periodic impairment charges (net) of $56 thousand and $13 thousand, respectively. During the third quarter 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. 2020. Other income primarily includes rental property income.

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Non-Interest Expense

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

Three months ended September 30, (dollars in thousands)2020   2019   2020 vs. 2019 
Three months ended March 31, (dollars in thousands)Three months ended March 31, (dollars in thousands)202120202021 vs. 2020
Salaries $3,114  $3,042  $72   2%$2,901$2,850$512%
Employee benefits  1,061   1,181   (120)  (10)1,3121,14616614
Premises and equipment  1,005   974   31   3 954911435
Data processing  569   534   35   7 56554055
Professional fees  635   572   63   11 7116288313
OREO gains, losses and write-downs  —   84   (84)  (100)
Collections and other real estate owned  108   119   (11)  (9)
Collections, OREO, and loan related842559236
FDIC insurance  123   (9)  132   (1,467)1451054038
Marketing and community support  126   141   (15)  (11)82125(43)(34)
Amortization of core deposit intangibles  78   93   (15)  (16)7187(16)(18)
Other  440   453   (13)  (3)434519(85)(16)
Total non-interest expense $7,259  $7,184  $75   1%
Non-interest expense$7,259$6,936$3235%

Non-interest expense for thirdfirst quarter 20202021 increased $75$323 thousand versus thirdfirst quarter 2020. Salaries expense increased $72$51 thousand versus thirdfirst quarter 2019 reflecting2020. The increase reflected higher overtime costssalary, production and productionincentive accruals, due to an increase in loan volume, and severance expense, partly offset by an increase inhigher deferred compensation costsloan origination expenses related to the processing of PPP loans. Employee benefits expense increased $166 thousand versus first quarter 2020 primarily due to higher levels of loan originations. Employee benefits expense decreased $120 thousand from third quarter 2019 due to lower medical insurance costs, as well as lower ESOPpayroll taxes and deferred compensation accruals.BOLI related expenses. Premises and equipment expense increased $31$43 thousand versus thirdfirst quarter 2019. The year-over-year increase primarily reflected increased2020 due to higher building related costs and lease expense partially offset by decreased software and machine maintenance partially offset by lower depreciation expense and lower building maintenance and repair costs.expense. Data processing expense increased $35$5 thousand versus thirdfirst quarter 20192021 primarily due to higher core processing costs and ATM and debit card processing fees. Professional fees increased $83 thousand versus first quarter 2020 primarily as a result of increased audit, legal and investment management fees. Loan and OREO related expenses increased $59 thousand versus first quarter 2020, mainly due to ATM fees and data processing costs partially offset by lower data communications. Professional fees increased $63 thousand versus third quarter 2019 as higher consultation fees were partly offset by lower investment management fees. OREO gains, losses and write-downs decreased $84 thousand versus third quarter 2019. OREO and loan related expenses decreased $11 thousand versus third quarter 2019 as lower OREO carrying costsappraisals, inspections and litigation expense were partially offset by higher appraisal costs. The increase in FDIC insurance reflected an assessment credit of $120 thousand received during third quarter 2019.expenses. Marketing and community support costsexpense decreased $15$43 thousand compared to the prior year thirdversus first quarter 2020 primarily due to the timing of current marketing spend.campaigns and contributions. The decrease in other expenses of $85 thousand primarily reflected lower accruals related to litigation matters occurring in the normal course of business.

Income Taxes

The effective income tax rates for thirdfirst quarter 2021 and first quarter 2020 were 21.61% and third quarter 2019 were 17.28% and 18.02%14.35%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, the lowertax-exempt income as well as a higher level of income in first quarter 2021. The higher tax rate in thirdthe first quarter 20202021 primarily reflected a lower mix of tax-exempt income from municipal bonds, tax advantaged loans and bank-owned life insurance on a comparatively higher level of pre-tax income. Additionally, Salisbury's effective tax rate is generally less than the non-taxable BOLI gainfederal statutory rate due to holdings of $601 thousand recorded during the quarter.tax-exempt municipal bonds and loans as well as bank owned life insurance.

Salisbury did not incur Connecticut income tax in 20202021 (to date) or 2019,2020, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax in the foreseeable future unless there is a change in Connecticut tax law.

For the nine month periods ended September 30, 2020 and 2019

Overview

Net income allocated to common shareholders was $9.0 million, or $3.22 per basic common share, for the nine month period ended September 30, 2020 (nine month period 2020), compared with $8.0 million, or $2.88 per basic common share, for the nine month period ended September 30, 2019 (nine month period 2019).

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Net Interest Income

Tax equivalent net interest income of $28.8 million for the nine months of 2020 increased $2.9 million, or 11.5%, versus the nine months of 2019. Average earning assets increased $93.9 million, or 8.9%, versus the nine months of 2019. Average total interest bearing deposits increased $24.8 million, or 3.5%, versus the nine months of 2019. The net interest margin of 3.32% increased 8 basis points versus 3.24% for the nine months of 2019.

The following table sets forth the components of Salisbury's fully tax-equivalent ("FTE”) net interest and dividend income and yields on average interest-earning assets and interest-bearing liabilities.

Nine months ended September 30, Average Balance Income / Expense Average Yield / Rate
(dollars in thousands)  2020   2019   2020   2019   2020   2019 
Loans (a)(d) $1,012,070  $920,925  $31,010  $30,179   4.07%  4.36%
Securities (c)(d)  88,603   97,337   1,939   2,201   2.92   3.02 
FHLBB stock  3,354   3,487   106   183   4.24   7.03 
Short term funds (b)  50,312   38,682   123   577   0.33   2.00 
Total earning assets  1,154,339   1,060,431   33,178   33,140   3.82   4.16 
Other assets  63,265   56,769                 
Total assets $1,217,604  $1,117,200                 
Interest-bearing demand deposits $174,299  $154,885   331   458   0.25   0.40 
Money market accounts  245,581   217,290   994   1,732   0.54   1.07 
Savings and other  170,880   177,873   405   1,229   0.32   0.92 
Certificates of deposit  149,080   164,979   1,530   2,255   1.37   1.83 
Total interest-bearing deposits  739,840   715,027   3,260   5,674   0.59   1.06 
Repurchase agreements  7,572   4,463   16   16   0.29   0.48 
Capital lease  2,988   4,314   106   135   4.74   4.16 
Note payable  231   266   11   12   6.08   6.06 
Subordinated debt (net of issuance costs)  9,867   9,844   468   468   6.32   6.34 
FHLBB advances  45,667   42,938   473   957   1.36   2.94 
Total interest-bearing liabilities  806,165   776,852   4,334   7,262   0.72   1.25 
Demand deposits  286,608   226,182                 
Other liabilities  6,847   6,560                 
Shareholders' equity  117,984   107,606                 
Total liabilities & shareholders' equity $1,217,604  $1,117,200                 
Net interest income         $28,844  $25,878         
Spread on interest-bearing funds                  3.11   2.93 
Net interest margin (e)                  3.32   3.24 
(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 $514,000 and $432,000, respectively for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.
(e)Net interest income divided by average interest-earning assets.

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The following table sets forth the changes in FTE interest due to volume and rate.

Nine months ended September 30, (in thousands)2020 versus 2019
Change in interest due to  Volume   Rate   Net 
Loans $2,890  $(2,059) $831 
Securities  (194)  (68)  (262)
FHLBB stock  (6)  (71)  (77)
Short term funds  101   (555)  (454)
Interest-earning assets  2,791   (2,753)  38 
Deposits  153   (2,567)  (2,414)
Repurchase agreements  9   (9)  — 
Capital lease  (44)  15   (29)
Note payable  (2)  1   (1)
Subordinated Debt  1   (1)  — 
FHLBB advances  45   (529)  (484)
Interest-bearing liabilities  162   (3,090)  (2,928)
Net change in net interest income $2,629  $337  $2,966 

Interest Income

Tax equivalent interest income of $33.2 million for the nine month period 2020 was essentially unchanged compared with the nine month period 2019. Loan income increased $831 thousand, or 2.8%, compared with the nine months of 2019 primarily due to a $91.1 million, or 9.9%, increase in average loans, partly offset by a 29 basis point decrease in the average yield. Tax equivalent securities income for the nine month period 2020 decreased $262 thousand, or 11.9%, compared with the nine month period 2019, primarily due to a $8.7 million, or 9.0%, decrease in average volume and a 10 basis point decrease in average yield. Income on short-term funds for the nine month period 2020 decreased $454 thousand, or 78.7%, compared with the nine months of 2019 primarily due to a 167 basis point decrease in the average short-term funds yields, partly offset by a $11.6 million, or 30.1%, increase in average short-term funds.

Interest Expense

Interest expense of $4.3 million for the nine month period 2020 decreased $2.9 million compared with the nine month period 2019. Interest on deposit accounts decreased $2.4 million, or 42.5%, as a result of a 47 basis point decrease in average deposit rates, partly offset by a $24.8 million, or 3.5%, increase in the average balances. Interest expense on FHLBB borrowings decreased $484 thousand, or 50.5%, as a result of a 158 basis point decrease in the average borrowing rate and a $2.7 million, or 6.3%, decrease in average balances. Interest expense on subordinated debt totaled $468 thousand for the nine month periods 2020 and 2019.

Provision and Allowance for Loan Losses

The provision for loan losses was $4.2 million or the nine month period ended September 30, 2020 as compared to $539 thousand for the nine month period ended September 30, 2019. Net loan charge-offs were $92 thousand and $187 thousand for the respective nine month periods.

Reserve coverage at September 30, 2020, as measured by the ratio of allowance for loan losses to gross loans, at 1.24%, compared with 0.96% a year ago at September 30, 2019. Excluding PPP loans, the reserve coverage ratio was 1.37% for third quarter 2020. The increase in the coverage ratio primarily reflected higher reserves due to management's assessment of the impact of COVID-19 as well as loan growth. During the first nine months of 2020, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $1.1 million to $4.7 million. Non-performing loans represent 0.45% of gross loans receivable, compared with 0.39% at December 31, 2019. At September 30, 2020, accruing loans past due 30-89 days were $1.6 million or 0.16% of gross loans receivable compared with $2.1 million or 0.22% of gross loans receivable at December 31, 2019. See "Financial Condition - Loan Credit Quality” for further discussion and analysis.

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Non-interest income

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

Nine months ended September 30, (dollars in thousands)2020   2019   2020 vs. 2019 
Trust and wealth advisory $3,129  $2,973  $156   5.2%
Service charges and fees  2,214   2,935   (721)  (25)
Gains on sales of mortgage loans, net  1,020   50   970   1940 
Mortgage servicing, net  162   232   (70)  (30)
Losses on CRA mutual fund  22   29   (7)  24)
Gains on available-for-sale securities, net  216   263   (47)  (18)
BOLI income and gains  986   252   734   291 
Other  97   97   —   n/a 
Total non-interest income $7,846  $6,831  $1,015   15%

Non-interest income for the nine month period ended September 30, 2020 increased $1.0 million versus the same period in 2019. Trust and wealth advisory revenues increased $156 thousand mainly due to growth in asset based fees. Service charges and fees decreased $721 thousand. During the nine month period 2020, Salisbury waived approximately $558 thousand in various deposit fees, including overdraft and ATM fees. Income from sales of mortgage loans increased $970 thousand due to an increase in the volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $44.4 million for the nine month period ended September 30, 2020 compared with $6.1 million for the nine month period ended September 30, 2019. The nine month periods ended September 30, 2020 and 2019 included mortgage servicing amortization of $84 thousand and $36 thousand, respectively. During the nine month period 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. Other income primarily includes rental property income.

Non-interest expense

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

Nine months ended September 30, (dollars in thousands)2020   2019   2020 vs. 2019 
Salaries $8,375  $8,994  ($619)  (7%)
Employee benefits  3,244   3,408   (164)  (5)
Premises and equipment  2,897   2,950   (53)  (2)
Data processing  1,666   1,620   46   3 
Professional fees  2,020   1,690   330   20 
OREO gains, losses and write-downs  —   406   (406)  (100)
Collections and other real estate owned  212   328   (116)  (35)
FDIC insurance  331   294   37   13 
Marketing and community support  419   448   (29)  (6)
Amortization of core deposit intangible assets  247   297   (50)  (17)
Other  1,572   1,398   174   12 
Non-interest expense $20,983  $21,833  ($850)  (4%)

Non-interest expense for the nine month period ended September 30, 2020 decreased $850 thousand versus the same period in 2019. Salaries decreased $619 thousand primarily reflecting the deferral of compensation costs associated with originating loans, including PPP loans. Benefits decreased $164 thousand primarily due to lower medical premiums and lower deferred compensation accruals. Premises and equipment decreased $53 thousand mainly due to lower depreciation, building maintenance and utilities costs, partially offset by increased software expense.Data processing increased $46 thousand mainly due to ATM fees and core data processing costs partially offset by lower Trust and Wealth data processing expense.The increase in professional fees of $330 thousand versus the nine month period 2019 primarily reflected higher consulting and investment management expenses. Collections, OREO and loan related expense decreased $406 thousand due to OREO losses in the nine month period 2019. The increase in FDIC related expense primarily reflected an assessment credit of $120 thousand received in third quarter 2019. Marketing and community support costs decreased $29 thousand compared to the same period in 2019 primarily due to the timing of marketing expenditures. Amortization of intangible assets decreased $50 thousand due to the aging off of expenses related to previous acquisitions. Other expenses increased $174 thousand and primarily reflected litigation related accruals.

Income taxes

The effective income tax rates for the nine month periods ended September 30, 2020 and September 30, 2019 were 16.90% and 17.98%, 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. The lower effective tax rate for the nine month period ended September 30, 2020 also reflected the non-taxable BOLI gain of $601 thousand recorded in third quarter 2020.

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Salisbury did not incur Connecticut income tax in 2020 (to date) or 2019, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum state income tax in the foreseeable future unless there is a change in Connecticut tax law.

CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity was $122.2$127.2 million at September 30, 2020,March 31, 2021, up $8.6$2.5 million from December 31, 2019.2020. Book value and tangible book value per common share were $42.99$44.72 and $37.87,$39.65, respectively, compared with $40.22$43.88 and $34.98,$38.78, respectively, at December 31, 2019.2020. Contributing to the increase in shareholders' equity for year-to-date 20202021 was net income of $9.1$4.5 million unrealized gains on securities available-for-sale, netand restricted stock activity of tax, of $1.3$0.2 million, and issued stock of $0.5 million partiallywhich were partly offset by common stock dividends paid of $2.5$0.8 million and unrealized losses in the available-for-sale securities portfolio of $1.4 million.

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, 2020 December 31, 2019March 31, 2021December 31, 2020
Total Capital (to risk-weighted assets)  13.60%  12.84%14.58%13.57%
Tier 1 Capital (to risk-weighted assets)  12.35   11.83 13.3312.31
Common Equity Tier 1 Capital (to risk-weighted assets)  12.35   11.83 13.3312.31
Tier 1 Capital (to average assets)  8.93   9.60 9.838.90

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.

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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, wasis also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phasedbegan phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until it reached its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

The phase-in period for the final rules began for Salisbury and the Bank on January 1, 2015. As of September 30,December 31, 2020, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as "well-capitalized.”" There are no conditions or events since that notification that management believes have changed the Bank's category.

On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a "Community Bank Leverage Ratio”Ratio" ("CBLR”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”organizations") will be requiredmay elect to report the components of its tierTier 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”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”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%,8 %, the bank may continue to use the framework and will be deemed "well capitalized”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( includingperiod (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.

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On April 6, 2020, the regulators announced that the CBLR will be modified so that: (1) beginning in the second quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the CBLR framework; and (2) community banks will have until January 1, 2022 before the CBLR requirement is re-established at greater than 9%. Under the interim final rules, the CBLR will be 8% beginning in the second quarter 2020 and for the remainder of the calendar year, 8.5% for calendar year 2021 and 9% thereafter. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy.

Share Repurchases

On March 24, 2021 Salisbury announced that its Board of Directors has adopted a share repurchase program. 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 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.

Subordinated Debt

On March 31, 2021 Salisbury completed a private placement of $25.0 million in aggregate principal amount of Fixed to Floating Rate Subordinated Notes due 2031 (the "Notes") to various accredited investors. The Notes have a maturity date of March 31, 2031 and bear interest at an annual rate of 3.50% per annum, from and including the closing date to, but excluding March 31, 2026 or the earlier redemption date, payable quarterly in arrears. From and including March 31, 2026 to, but excluding the maturity date or earlier redemption date, the rate will be a floating per annum rate expected to be equal to the then current three-month SOFR plus 280 basis points, provided, however, that in the event three-month SOFR is less than zero, three-month term SOFR shall be deemed to be zero, payable quarterly in arrears. Interest on the Subordinated Notes will be payable on March 31, June 30, September 30 and December 31 of each year to, but excluding, March 31, 2026 or the earlier redemption date, at the rate of 3.50%, and quarterly thereafter on March 31, June 30, September 30 and December 31 of each year to, but excluding, the maturity date or earlier redemption date at the floating rate. The first interest payment will be made on June 30, 2021.The notes may be redeemed by Salisbury, without penalty, on or after March 31, 2026 and, in certain limited circumstances, prior to that date.

Dividends

Salisbury paid $2.5 million in common stock dividends duringDuring the ninethree month period ended September 30, 2020.March 31, 2021, Salisbury paid $825 thousand in dividends on common stock.

On October 30, 2020,April 21, 2021, the Board of Directors of Salisbury declared a common stock dividend of $0.29$0.30 per common share payable on November 27, 2020May 28, 2021 to shareholders of record on November 13, 2020.May 14, 2021. Common stock dividends, when declared, arewill generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

Salisbury's ability to pay cash dividends is dependent on the Bank's ability to pay cash dividends to Salisbury. There are certain restrictions on the payment of cash dividends and other payments by the Bank to Salisbury. Under Connecticut law, the Bank cannot declare a cash dividend except from net profits, defined as the remainder of all earnings from current operations. The total of all cash dividends declared by the Bank in any calendar year shall not, unless specifically approved by the Banking Commissioner, exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

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FRB Supervisory Letter SR 09-4, February 24, 2009, revised December 31, 2015, states that, as a general matter, the Board of Directors of a Bank Holding Company ("BHC”BHC") should inform the Federal Reserve and should eliminate, defer, or significantly reduce dividends if (1) net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (2) the prospective rate of earnings retention is not consistent with capital needs and overall current and prospective financial condition; or (3) the BHC will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. Moreover, a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the BHC capital position.

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

IMPACT OF INFLATION AND CHANGING PRICES

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q and future filings made by Salisbury with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by Salisbury and the Bank, and oral statements made by executive officers of Salisbury and the Bank, may include forward-looking statements relating to such matters as:

(a)assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and
(b)expectations for revenues and earnings for Salisbury and the Bank.

Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. For those statements, Salisbury claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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Salisbury notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. The risks and uncertainties that may affect the operation, performance, development and results of Salisbury's and the Bank's business include the following:

(a)the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;
(b)changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;
(c)increased competition from other financial and non-financial institutions;
(d)the impact of technological advances and cybersecurity matters;
(e)interest rate fluctuations; and
(f)the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the State of Connecticut and the United States, related to the economy and overall financial stability;
(g)government and regulatory responses to the COVID-19 pandemic; and
(h)(f)other risks identified from time to time in Salisbury's filings with the Securities and Exchange Commission.

Such developments could have an adverse impact on Salisbury's and the Bank's financial position and results of operations.

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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury's financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management's September 30, 2020March 31, 2021 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At September 30, 2020,March 31, 2021, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates - immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates - immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declineschanges in interest rates - little to no change in rates through the end of the first quarter of 2021 with the yield curve rise beginning in the second quartercontinues throughout 2021 and a gradual rise through 20212022 with the treasury yield curve ultimately ending up higher as of September 30, 2022.March 31, 2023. The two year, five year and 10 year treasury rates as of September 30, 2022March 31, 2023 are ultimately 0.57%1.99%, 0.80%1.70% and 0.73%1.51% higher than actual rates as of September 30, 2020 andMarch 31, 2021 but the Fed Funds rate does not increase over this horizon. The yield curve is ultimately positivepositively sloping as treasury yields are projected to increase whilebut the fed funds rate is not projected to increase. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

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As of September 30, 2020,March 31, 2021, net interest income simulations indicated that Salisbury's exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury's financial instruments as of September 30, 2020.March 31, 2021.

As of September 30, 2020 Months 1-12  Months 13-24 
As of March 31, 2021Months 1-12Months 13-24
Immediately rising interest rates + 300bp (static growth assumptions)  (3.80)%  2.50%(0.6)%12.9%
Immediately falling interest rates - 100bp (static growth assumptions)  (1.80)  (2.90)(3.7)(9.3)
Immediately rising interest rates + 400bp (static growth assumptions)  (4.90)  3.10 (0.8)16.6

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

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

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

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The following table summarizes the potential change in market value of available-for-sale debt securities resulting from immediate parallel rate shifts:

As of September 30, 2020 (in thousands)  Rates up 100bp   Rates up 200bp 
U.S. Government agency notes $78  $(10)
Municipal bonds  (737)  (2,615)
Mortgage backed securities        
U.S. Government agencies and U.S. Government- sponsored enterprises  243   (1,064)
Collateralized mortgage obligations        
U.S. Government agencies  737   456 
Corporate bonds  (86)  (244)
Total available-for-sale debt securities $235  $(3,477)
As of March 31, 2021 (in thousands)Rates up 100bpRates up 200bp
U.S. Government Agency notes$(76)$(151)
Municipal bonds(2,789)(5,785)
Mortgage backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises(1,398)(2,822)
Collateralized mortgage obligations:
U.S. Government agencies(312)(768)
Corporate bonds(198)(388)
Total available-for-sale debt securities$(4,773)$(9,914)

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Item 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Salisbury's management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of Salisbury's disclosure controls and procedures as of September 30, 2020.March 31, 2021. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of September 30, 2020.March 31, 2021.

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Disclosure controls and procedures are controls and other procedures that are designed to ensure that the information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act”Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by usSalisbury in ourits reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury's internal control over financial reporting occurred during the quarter ended September 30, 2020March 31, 2021 that has materially affected, or is reasonably likely to materially affect, Salisbury's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

The Bank is involved in various claims and legal proceedings arising in the ordinary course of business, which management currently believes are not material, individually or in the aggregate, to the business, financial condition or operating results of Salisbury or any of its subsidiaries. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the registrant's business, to which Salisbury is a party or of which any of its property is subject.

Item 1A.RISK FACTORS

Except as stated below, during the nine months ended September 30, 2020, thereThere were no material changes to the risk factors previously disclosed in Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019.

The virus has had a substantial impact on numerous aspects of life in the United States, including threats to public health, increased volatility in markets, and significant effects on national and local economies. The ultimate effect of the virus on Salisbury's and the Bank's business will depend on numerous factors and future developments that are highly uncertain and cannot be predicted with certainty.  At this time, it is unknown how long the pandemic will last, or when restrictions on individuals and businesses will be lifted and businesses and their employees will be able to resume normal activities.  Further, additional information may emerge regarding the severity of the virus and additional actions may be taken by federal, state, and local governments to contain it or treat its impact.  Changes in the behavior of customers, businesses and their employees as a result of the pandemic, including social distancing practices, even after formal restrictions have been lifted, are also unknown.  As a result of the pandemic and the actions taken to contain it or reduce its impact, Salisbury may experience changes in the value of collateral securing outstanding loans, reductions in the credit quality of borrowers and the inability of borrowers to repay loans in accordance with their terms.  These and similar factors and events may have substantial negative effects on the business, financial condition, ability to pay dividends and results of operations of Salisbury, the Bank and its customers.2020.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3.DEFAULTS UPON SENIOR SECURITIES

None

Item 4.MINE SAFETY DISCLOSURES

Not Applicable

Item 5.OTHER INFORMATION

None

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Item 6.EXHIBITS

Exhibit No.Description
3.1Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1Amendment to Article Third of Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 11, 2009).
3.1.2Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed March 19, 2009).
3.1.3Certificate of Amendment to Certificate of Incorporation for the Series B Preferred Stock (incorporated by reference to Registrant's Form 8-K filed on August 25, 2011).
3.1.4Certificate of Amendment to Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3.1 of Registrant's Form 8-K filed October 30, 2014).
3.2Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).
4.1Form of Subordinated Note, dated as of December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed December 10, 2015).
4.2Form of Subordinated Note, dated as of March 31, 2021, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1 of Registrant's Form 8-K filed March 31, 2021).
10.1Amendment One (the "Amendment”") to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan, effective as of March 9, 2020 (incorporated by reference to Exhibit 10.16 of Form 10-K filed on March 13, 2020).
10.2Change in Control Agreement with Carla L. Balesano dated July 29, 2020.
31.1Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Chief Executive Officer and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SALISBURY BANCORP, INC.
November 6, 2020May 7, 2021By:/s/ Richard J. Cantele, Jr.
Richard J. Cantele, Jr.,
President and Chief Executive Officer
November 6, 2020May 7, 2021By:/s/ Peter Albero
Peter Albero,
Executive Vice President and Chief Financial Officer

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