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 quarterly period ended ~~September 30, 2022~~March 31, 2023

☐

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 001-14854

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Connecticut	06-1514263
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)

5 Bissell Street, Lakeville, CT	06039
(Address of principal executive offices)	(Zip code)

(860) 435-9801

(Registrant's telephone number, including area code)

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

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

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~~

.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”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act).

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant 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 2, 2022~~May 3, 2023 is ~~5,783,966~~5,807,119.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION	Page
~~PART I.~~Item 1. Financial Statements (unaudited)	~~FINANCIAL INFORMATION~~	3
CONSOLIDATED BALANCE SHEETS AS OF ~~SEPTEMBER 30,~~MARCH 31, 2023 (unaudited) and DECEMBER 31, 2022 ~~(unaudited) AND DECEMBER 31,2021~~	3
CONSOLIDATED STATEMENTS OF INCOME FOR ~~THE~~ THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 and 2022 ~~AND 2021~~ (unaudited)	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~ FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE ~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2023 and 2022 ~~and 2021~~ (unaudited)	7	6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	9	8
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	41	37
Item 4.	CONTROLS AND PROCEDURES	43	39
PART II.	OTHER INFORMATION	43	39
Item 1.	LEGAL PROCEEDINGS	43	39
Item 1A.	RISK FACTORS	43	39
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	43	39
Item 3.	DEFAULTS UPON SENIOR SECURITIES	43	39
Item 4.	MINE SAFETY DISCLOSURES	43	39
Item 5.	OTHER INFORMATION	43	39
Item 6. EXHIBITS	~~EXHIBITS~~	43	40
SIGNATURES	44	41

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)


(in thousands, except share data)		September 30, 2022 (unaudited)			December 31, 2021			March 31, 2023			December 31, 2022
ASSETS
Cash and due from banks	$	6,314		$	6,404		$	6,231		$	5,864
Interest bearing demand deposits with other banks		49,983			168,931			43,613			44,675
Total cash and cash equivalents		56,297			175,335			49,844			50,539
Interest bearing Time Deposits with Financial Institutions		—			750
Securities
Available-for-sale at fair value		189,161			202,396
Available-for-sale, at fair value								187,598			187,410
Mutual funds at fair value		1,882			901			2,068			1,933
Federal Home Loan Bank of Boston stock at cost		1,487			1,397			5,030			1,285
Loans held-for-sale		—			2,684
Loans receivable, net (allowance for loan losses: $14,334 and $12,962)		1,176,493			1,066,750
Loans receivable, net (allowance for credit losses: $16,009 and $14,846)								1,234,632			1,213,671
Bank premises and equipment, net		22,502			22,625			21,597			22,148
Goodwill		13,815			13,815			13,815			13,815
Intangible assets (net of accumulated amortization: $5,612 and $5,462)		269			418
Intangible assets (net of accumulated amortization: $5,691 and $5,654)								188			227
Accrued interest receivable		6,012			6,260			6,383			6,797
Cash surrender value of life insurance policies		30,187			27,738			30,571			30,379
Deferred taxes		8,882			2,588			8,234			8,492
Other assets		5,151			5,527			5,374			4,886
Total Assets	$	1,512,138		$	1,529,184		$	1,565,334		$	1,541,582
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	413,584		$	416,073		$	370,049		$	395,994
Demand (interest bearing)		241,236			233,600			218,902			231,486
Money market		313,987			330,436			296,974			343,965
Savings and other		246,538			237,075			236,755			233,578
Certificates of deposit		109,859			119,009			170,362			153,370
Total deposits		1,325,204			1,336,193			1,293,042			1,358,393
Repurchase agreements		7,109			11,430			3,230			7,228
Federal Home Loan Bank of Boston advances		20,000			7,656			100,000			10,000
Subordinated debt		24,517			24,474			24,545			24,531
Note payable		139			170			117			128
Finance lease obligations		4,296			4,107			4,225			4,262
Accrued interest and other liabilities		7,712			8,554			7,820			8,685
Total Liabilities		1,388,977			1,392,584			1,432,979			1,413,227
Shareholders' Equity¹
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 10,000,000;
Issued: 5,783,966 and 5,723,394
Outstanding: 5,783,966 and 5,723,394		578			286
Issued: 5,807,719 and 5,798,816
Outstanding: 5,807,719 and 5,798,816								581			580
Unearned compensation – restricted stock awards		(1,328	)		(925	)		(961	)		(1,144	)
Paid-in capital		47,252			46,374			47,396			47,466
Retained earnings		98,980			89,995			103,371			102,178
Accumulated other comprehensive (loss) income, net		(22,321	)		870
Accumulated other comprehensive loss, net								(18,032	)		(20,725	)
Total Shareholders' Equity		123,161			136,600			132,355			128,355
Total Liabilities and Shareholders' Equity	$	1,512,138		$	1,529,184		$	1,565,334		$	1,541,582

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three months ended March 31, (in thousands, except per share amounts)		2023		2022
Interest and dividend income
Interest and fees on loans	$	13,250	$	10,163
Interest on debt securities
Taxable		1,068		724
Tax exempt		212		174
Other interest and dividends		393		57
Total interest and dividend income		14,923		11,118
Interest expense
Deposits		2,818		478
Repurchase agreements		16		3
Finance lease		40		41
Note payable		2		2
Subordinated Debt		233		233
Federal Home Loan Bank of Boston advances		687		55
Total interest expense		3,796		812
Net interest and dividend income		11,127		10,306
Provision for credit losses		1,016		363
Net interest and dividend income after provision for credit losses		10,111		9,943
Non-interest income
Trust and wealth advisory		1,153		1,241
Service charges and fees		1,235		1,138
Mortgage banking activities, net		59		355
Gains (losses) on mutual funds		20		(42	)
Gains on sales of available -for-sale securities, net		—		210
BOLI income		192		162
Other		34		30
Total non-interest income		2,693		3,094
Non-interest expense
Salaries		3,721		3,479
Employee benefits		1,468		1,277
Premises and equipment		1,105		1,104
Loss on write-down and sale of assets		158		9
Information processing and services		831		685
Professional fees		945		787
Collections, OREO, and loan related		72		117
FDIC insurance		98		171
Marketing and community support		127		184
Amortization of intangibles		39		54
Other		470		786
Total non-interest expense		9,034		8,653
Income before income taxes		3,770		4,384
Income tax provision		752		816
Net income	$	3,018	$	3,568
Net income available to common shareholders	$	2,968	$	3,508

Basic earnings per common share ¹	$	0.52	$	0.62
Diluted earnings per common share ¹		0.52		0.62
Common dividends per share ¹		0.16		0.16

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

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

Three months ended March 31, (in thousands)		2023			2022
Net income	$	3,018		$	3,568
Other comprehensive income (loss)
Net unrealized income (loss) on securities available-for-sale		3,409			(11,549	)
Reclassification of net realized loss in net income ⁽¹⁾		—			(210	)
Unrealized income (loss) on securities available-for-sale		3,409			(11,759	)
Income tax (expense) benefit		(716	)		2,470
Unrealized income (loss) on securities available-for-sale, net of tax		2,693			(9,289	)
Comprehensive income (loss)	$	5,711		$	(5,721	)

^{(1) Reclassification adjustments include realized security gains. The gains have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statements of income as follows: the pretax amount is reflected as gains on sales and calls on available-for-sale securities, net; the tax effect is included in the income tax provision and the after-tax amount is included in net income. The income tax expense related to reclassification of net realized gains was approximately $0 thousand and $44 thousand for the three-months ended March 31, 2023 and 2022, respectively.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)


Three months ended March 31, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares ¹			Amount		Capital			Earnings			awards			(loss) income			equity
Balances at December 31, 2021		5,723,394		$	286	$	46,374		$	89,995		$	(925	)	$	870		$	136,600
Net income		—			—		—			3,568			—			—			3,568
Other comprehensive loss, net of tax		—			—		—			—			—			(9,289	)		(9,289	)
Common stock dividends declared ($0.16 per share)		—			—		—			(915	)		—			—			(915	)
Issuance of restricted common stock		28,700			2		811			—			(813	)		—			—
Issuance of restricted stock units upon vesting		12,900			—		—			—			—			—			—
Net settlement impact for vesting of performance restricted stock units		(78	)		—		(183	)		—			—			—			(183	)
Stock based compensation-restricted stock awards		—			—		97			—			188			—			285
Balances at March 31, 2022		5,764,916		$	288	$	47,099		$	92,648		$	(1,550	)	$	(8,419	)	$	130,066
Balances at December 31, 2022		5,798,816		$	580	$	47,466		$	102,178		$	(1,144	)	$	(20,725	)	$	128,355
Cumulative effect of accounting changes (Note 1)		—			—		—			(898	)		—			—			(898	)
Net income		—			—		—			3,018			—			—			3,018
Other comprehensive income, net of tax		—			—		—			—			—			2,693			2,693
Common stock dividends declared ($0.16 per share)		—			—		—			(927	)		—			—			(927	)
Issuance of restricted stock units upon vesting		13,473			1		—			—			—			—			1
Net settlement impact of performance restricted stock units upon vesting		(4,570	)		—		(112	)		—			—			—			(112	)
Stock based compensation-restricted stock awards							42						183			—			225
Balances at March 31, 2023		5,807,719		$	581	$	47,396		$	103,371		$	(961	)	$	(18,032	)	$	132,355

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

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three months ended March 31, (in thousands)		2023			2022
Operating Activities
Net income	$	3,018		$	3,568
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion), amortization and depreciation:
Securities		311			361
Bank premises and equipment		396			392
Core deposit intangible		39			53
Modification fees on Federal Home Loan Bank of Boston advances		—			21
Subordinated debt issuance costs		14			14
Mortgage servicing rights		26			39
(Gains) and losses, including write-downs
(Gain) loss on mutual funds		(20	)		42
Gain on sales of securities available-for-sale, net		—			(210	)
Gain on sales of loans, excluding capitalized servicing rights		—			(275	)
Sales/disposals of premises and equipment		158			9
Provision for credit losses		1,016			363
Proceeds from loans sold		—			8,852
Loans originated for sale		—			(6,963	)
Decrease (increase) in deferred loan origination fees and costs, net		126			(476	)
Mortgage servicing rights originated		—			(55	)
Decrease in interest receivable		414			365
Deferred tax (benefit) expense		(172	)		467
Increase in prepaid expenses		(119	)		(111	)
Increase in cash surrender value of life insurance policies		(192	)		(162	)
(Increase) decrease in other assets		(395	)		403
Decrease in income tax receivable		—			79
Decrease in accrued expenses		(2,598	)		(1,537	)
Increase in income tax payable		702			—
Decrease in interest payable		(230	)		(12	)
Increase (decrease) in other liabilities		256			(53	)
Stock based compensation-restricted stock awards		225			285
Net cash provided by operating activities		2,975			5,459
Investing Activities
Net redemptions of Federal Home Loan Bank of Boston stock		(3,745	)		320
Purchases of securities available-for-sale		—			(145,297	)
Purchase/reinvestment of mutual funds		(115	)		(3	)
Proceeds from sales of securities available-for-sale		—			17,718
Proceeds from maturities/principal payments of securities available-for-sale		2,910			102,413
Loan originations and principal collections, net		(22,285	)		641
Recoveries of loans previously charged off		3			6
Capital expenditures		(3	)		(343	)
Net cash utilized by investing activities	$	(23,235	)	$	(24,545	)

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)

Three months ended March 31, (in thousands)		2023			2022
Financing Activities
Decrease in deposit transaction accounts, net	$	(82,343	)	$	(54,923	)
Increase in time deposits, net		16,992			9,204
Decrease in securities sold under agreements to repurchase, net		(3,998	)		(3,269	)
Repayments of Federal Home Loan Bank of Boston long term advances		—			(6,000	)
Federal Home Loan Bank of Boston short term advances(net)		90,000			—
Principal payments on amortizing FHLB Advances		—			(1,258	)
Principal payments on note payable		(11	)		(11	)
Principal payments on finance lease obligations		(37	)		(33	)
Net settlement of restricted stock units		(111	)		(183	)
Common stock dividends paid		(927	)		(915	)
Net cash provided (utilized) by financing activities		19,565			(57,388	)
Net decrease in cash and cash equivalents		(695	)		(76,474	)
Cash and cash equivalents, beginning of period		50,539			175,335
Cash and cash equivalents, end of period	$	49,844		$	98,861
Cash paid during period
Interest		3,567			789
Income taxes		221			270
Non cash investing and financing activities:
Fixed Asset		65			289
Finance lease liability		(65	)		(289	)
Loans transferred to Loans Held for Sale		—			3,389

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

¹ ~~The number of shares for all periods has been adjusted to reflect the two-for-one forwards stock split effective June 30, 2022.~~

~~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) 2022 2021 2022 2021
Interest and dividend income
Interest and fees on loans $ 11,541 $ 10,264 $ 32,280 $ 30,642
Interest on debt securities
Taxable 903 486 2,486 1,398
Tax exempt 213 172 575 506
Other interest and dividends 352 79 517 174
Total interest and dividend income 13,009 11,001 35,858 32,720
Interest expense
Deposits 883 532 1,938 1,652
Repurchase agreements 4 5 11 13
Finance lease 41 33 122 102
Note payable 2 3 7 9
Subordinated debt 233 233 699 767
Federal Home Loan Bank of Boston advances 2 30 57 96
Total interest expense 1,165 836 2,834 2,639
Net interest and dividend income 11,844 10,165 33,024 30,081
Provision (release) for loan losses 695 400 2,158 (517 )
Net interest and dividend income after provision (release) for loan losses 11,149 9,765 30,866 30,598
Non-interest income
Trust and wealth advisory 1,228 1,286 3,762 3,685
Service charges and fees 1,219 1,211 4,080 3,536
Mortgage banking activities, net 64 108 497 912
Losses on mutual fund (47 ) (4 ) (119 ) (18 )
Gains (losses) on securities, net — 7 165 (2 )
Bank-owned life insurance (“BOLI”) income 201 135 615 386
Gain on sale of assets — 73 — 73
Other 28 24 84 81
Total non-interest income 2,693 2,840 9,084 8,653
Non-interest expense
Salaries 3,802 3,361 10,938 9,664
Employee benefits 1,224 1,322 3,789 3,990
Premises and equipment 1,117 1,060 3,200 3,034
Write-down of assets — 144 3 144
Information processing and services 711 632 2,098 1,824
Professional fees 689 735 2,297 2,090
Collections, OREO and loan related 67 120 300 317
FDIC insurance 98 146 391 370
Marketing and community support 214 256 661 552
Amortization of intangibles 46 61 150 198
Other 544 447 1,872 1,448
Total non-interest expense 8,512 8,284 25,699 23,631
Income before income taxes 5,330 4,321 14,251 15,620
Income tax provision 994 868 2,501 3,288
Net income $ 4,336 $ 3,453 $ 11,750 $ 12,332
Net income available to common shareholders $ 4,264 $ 3,400 $ 11,543 $ 12,148
Basic earnings per common share ¹ $ 0.75 $ 0.60 $ 2.04 $ 2.16
Diluted earnings per common share ¹ $ 0.75 $ 0.60 $ 2.03 $ 2.15
Common dividends per share ¹ $ 0.16 $ 0.16 $ 0.48 $ 0.45

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

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

~~Salisbury Bancorp, Inc. and Subsidiary~~

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (unaudited)~~

Three months ended Nine months ended
Periods ended September 30, (in thousands) 2022 2021 2022 2021
Net income $ 4,336 $ 3,453 $ 11,750 $ 12,332
Other comprehensive (loss) income
Net unrealized losses on securities available-for-sale (9,855 ) (1,199 ) (29,191 ) (2,153 )
Reclassification of net realized (gains) losses in net income ⁽¹⁾ — (7 ) (165 ) 2
Unrealized losses on securities available-for-sale (9,855 ) (1,206 ) (29,356 ) (2,151 )
Income tax benefit 2,070 254 6,165 451
Unrealized losses on securities available-for-sale, net of tax (7,785 ) (952 ) (23,191 ) (1,700 )
Comprehensive (loss) income $ (3,449 ) $ 2,501 $ (11,441 ) $ 10,632

^{(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 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, 2022 and 2021 are $0 thousand and $(1) thousand, respectively. The net tax effect for the nine months ending September 30, 2022 and 2021 were $(34) thousand and $1 thousand, respectively.}

~~Salisbury Bancorp, Inc. and Subsidiary~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)~~

Three months ended September 30,
(dollars in thousands)
Common Stock Paid-in Retained Unearned compensation restricted stock Accumulated other comprehensive Total shareholders'
Shares¹ Amount Capital Earnings awards (loss) income equity
Balances at June 30, 2021 5,723,394 $ 286 $ 46,217 $ 84,174 $ (1,224 ) $ 2,256 $ 131,709
Net income — — — 3,453 — — 3,453
Other comprehensive loss, net of tax — — — — — (952 ) (952 )
Common stock dividends declared — — — (887 ) — — (887 )
Stock based compensation-restricted stock awards — — 61 — 149 — 210
Balances at September 30, 2021 5,723,394 $ 286 $ 46,278 $ 86,740 $ (1,075 ) $ 1,304 $ 133,533
Balances at June 30, 2022 5,783,966 $ 578 $ 47,205 $ 95,568 $ (1,512 ) $ (14,536 ) $ 127,303
Net income — — — 4,336 — — 4,336
Other comprehensive loss, net of tax — — — — — (7,785 ) (7,785 )
Common stock dividends declared — — — (924 ) — — (924 )
Stock based compensation-restricted stock awards — — 47 — 184 — 231
Balances at September 30, 2022 5,783,966 $ 578 $ 47,252 $ 98,980 $ (1,328 ) $ (22,321 ) $ 123,161

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

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

Nine months ended September 30,
(dollars in thousands)
Common Stock Paid-in Retained Unearned compensation restricted stock Accumulated other comprehensive Total shareholders'
Shares¹ Amount Capital Earnings awards (loss) income equity
Balances at December 31, 2020 5,686,584 $ 284 $ 45,264 $ 76,974 $ (774 ) $ 3,004 $ 124,752
Net income for period — — — 12,332 — — 12,332
Other comprehensive loss, net of tax — — — — — (1,700 ) (1,700 )
Common stock dividends declared — — — (2,566 ) — — (2,566 )
Stock options exercised 3,510 1 30 — — — 31
Issuance of restricted common stock 27,700 1 623 — (624 ) — —
Issuance of director’s restricted stock awards 5,600 — 126 — (126 ) — —
Stock based compensation-restricted stock awards — — 235 — 449 — 684
Balances at September 30, 2021 5,723,394 $ 286 $ 46,278 $ 86,740 $ (1,075 ) $ 1,304 $ 133,533
Balances at December 31, 2021 5,723,394 $ 286 $ 46,374 $ 89,995 $ (925 ) $ 870 $ 136,600
Net income for period — — — 11,750 — — 11,750
Other comprehensive loss, net of tax — — — — — (23,191 ) (23,191 )
Common stock dividends declared — — — (2,765 ) — — (2,765 )
Issuance of restricted stock awards 28,700 2 811 — (813 ) — —
Stock options exercised 11,070 1 94 — — — 95
Issuance of performance based stock awards 12,822 — (183 ) — — — (183 )
Issuance of director’s restricted stock awards 7,980 — 205 — (205 ) — —
Transfer due to 2-for-1 forward stock split — 289 (289 ) — — — —
Stock based compensation-restricted stock awards — — 240 — 615 — 855
Balances at September 30, 2022 5,783,966 $ 578 $ 47,252 $ 98,980 $ (1,328 ) $ (22,321 ) $ 123,161

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

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

~~Salisbury Bancorp, Inc. and Subsidiary~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)~~

Nine months ended September 30, (in thousands) 2022 2021
Operating Activities
Net income $ 11,750 $ 12,332
Adjustments to reconcile net income to net cash provided by operating activities
(Accretion), amortization and depreciation
Securities 1,082 807
Bank premises and equipment 1,202 1,142
Core deposit intangible 149 198
Modification fees on Federal Home Loan Bank of Boston advances 21 17
Subordinated debt issuance costs 43 159
Mortgage servicing rights 117 167
(Gains) and losses, including write-downs
Sales and calls of securities available-for-sale, net (165 ) 2
CRA Mutual Fund 119 18
Sales of loans, excluding capitalized servicing rights (306 ) (653 )
Loss on write-down of asset 3 144
Gain on sale of premises and equipment — (73 )
Gain on redemption of Bank Owen Life Insurance (89 ) —
Provision (release) for loan losses 2,158 (517 )
Proceeds from loans sold 11,343 30,364
Loans originated for sale (4,444 ) (27,615 )
Increase in deferred loan origination costs, net (717 ) (58 )
Mortgage servicing rights originated (72 ) (276 )
Decrease in interest receivable 248 441
(Increase) decrease in deferred tax benefit (129 ) 87
Increase in prepaid expenses (71 ) (416 )
Increase in cash surrender value of life insurance policies (526 ) (386 )
Decrease (increase) in income tax receivable 452 (429 )
Increase (decrease) in income tax payable 101 (320 )
Increase in other assets (50 ) (509 )
Decrease in accrued expenses (904 ) (290 )
Decrease in interest payable (31 ) (9 )
Increase in other liabilities 122 365
Stock based compensation-restricted stock awards 855 684
Net cash provided by operating activities 22,263 15,378
Investing Activities
Net (purchases) redemption of Federal Home Loan Bank of Boston stock (90 ) 209
Maturity of Interest-Bearing Time Deposits with Financial Institutions 750 0
Purchases of securities available-for-sale (52,176 ) (107,811 )
Proceeds from sales of securities available-for-sale 22,012 3,311
Proceeds from calls of securities available-for-sale 1,500 8,500
Proceeds from principal payments and maturities of securities available-for-sale 11,626 15,883
Reinvestment of CRA Mutual Fund (1,100 ) (8 )
Loan originations and principal collections, net (115,135 ) (29,323 )
Recoveries of loans previously charged off 42 185
Proceeds from sale/ disposal of premises and equipment — 248
Capital expenditures (793 ) (1,889 )
Purchase of life insurance policies (2,507 ) (3,500 )
Proceeds from life insurance policy 672 —
Net cash used by investing activities $ (135,199 ) $ (114,195 )

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

Salisbury Bancorp, Inc. and Subsidiary

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)~~

Nine months ended September 30, (in thousands) 2022 2021
Financing Activities
Increase in deposit transaction accounts, net $ (1,839 ) $ 167,973
Decrease in time deposits, net (9,150 ) (7,419 )
(Decrease) increase in securities sold under agreements to repurchase, net (4,321 ) 3,334
Federal Home Loan Bank of Boston long-term maturities/payments (6,000 ) —
Federal Home Loan Bank of Boston short-term advances, net change 20,000 —
Principal payments on Amortizing Federal Home Loan Bank of Boston advance (1,677 ) (3,751 )
Issuance of Sub Debt, net of issuance costs — 24,418
Repayment of Sub Debt — (10,000 )
Principal payments on note payable (31 ) (28 )
Decrease in finance lease obligation (230 ) (42 )
Stock options exercised 95 31
Net settlement of restricted stock units (183 ) —
Common stock dividends paid (2,766 ) (2,566 )
Net cash (used by) provided by financing activities (6,102 ) 171,950
Net (decrease) increase in cash and cash equivalents (119,038 ) 73,133
Cash and cash equivalents, beginning of period 175,335 93,162
Cash and cash equivalents, end of period $ 56,297 $ 166,295

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

~~Salisbury Bancorp, Inc. and Subsidiary~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)~~

Supplemental Cash Flow Information:
Cash paid for interest $ 2,801 $ 2,472
Cash paid for income taxes 2,077 3,948
Non cash investing and financing activities:
Fixed Assets $ 419 $ —
Finance lease liability (419 ) —
Transfers from Fixed Assets to Other Assets — 727
Loans transferred to Loans Held for Sale 3,909 —

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

S~~alisbury Bancorp, Inc. and Subsidiary~~

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The interim ~~unaudited~~(unaudited) consolidated financial statements of Salisbury Bancorp, Inc. ("Salisbury") include those of Salisbury and its wholly owned subsidiary, Salisbury Bank and Trust Company (the "Bank"). In the opinion of management, the interim unaudited consolidated financial statements include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the consolidated financial position of Salisbury and the consolidated statements of income, comprehensive income (loss) ~~income,~~, changes in shareholders’ equity and cash flows for the interim periods ~~presented (collectively, the financial statements).~~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~~credit losses and unrealized gains and losses related to available-for-sale securities.

Salisbury increased the number of issued and authorized common shares and effected a two-for-one forward stock split of the Company’s common stock on June 30, 2022. The par value of common stock was not adjusted as a result of the forward stock split. All share and per share amounts in the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this forward stock split.

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, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's ~~2021~~2022 Annual Report on Form 10-K for the year ended December 31, ~~2021.~~

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. 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.

~~Recent Accounting Pronouncements~~2022.

In June 2016, the ~~Financial Accounting Standards Board (FASB)~~FASB issued Accounting Standards Update (ASU) ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and related subsequent amendments, which ~~adds a new Topic 326~~replaces the incurred loss methodology with an expected loss methodology that is referred to as the ~~Codification and removes~~current expected credit loss (“CECL”) methodology. The measurement of expected losses under the ~~thresholds that companies apply~~CECL methodology is applicable to ~~measure credit losses on~~ financial ~~instruments~~assets measured at amortized cost, ~~such~~ as well as unfunded commitments that are considered off-balance sheet credit exposures at the reporting date. The measurement is based on historical experience, current conditions, and reasonable and supportable forecasts. Financial Institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The update requires enhanced disclosures to help investors and other financial statements users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. The current expected credit loss measurement will be used to estimate the allowance for credit losses (“ACL”) over the life of the financial assets.

Salisbury adopted CECL on January 1, 2023. Under CECL, the Bank determines its allowance for credit losses on loans ~~receivables,~~using pools of assets with similar risk characteristics. The Bank segments its loan portfolio by loan type, to evaluate loans with similar risk characteristics for credit risk. The Bank’s lifetime credit loss models are based on historical data and ~~held-to-maturity~~incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Non-economic qualitative factors are also evaluated for each loan segment. A four-quarter reasonable and supportable forecast period is currently used for all loan portfolios. When the risk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, non-accrual loans and collateral dependent loans are individually assessed.

The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually assessed and the expected credit loss is based on the fair value of the collateral. The fair value is reduced for estimated costs to sell if the value of the collateral is expected to be realized through sale.

The Bank has elected to present accrued interest receivable separately from the amortized cost basis on the balance sheet and is not estimating an allowance for credit loss on accrued interest. This election applies to loans as well as debt securities. ~~Under current U.S. GAAP, companies generally recognize~~The Bank’s non-accrual polices have not changed as a result of adopting CECL.

On January 1, 2023 Salisbury adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost. Results for the reporting periods after January 1, 2023 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. On the adoption date, the Bank increased the allowance for credit losses ~~when it is probable that~~for loans by $0.2 million and increased the ~~loss has been incurred.~~allowance for credit losses for unfunded loan commitments by $0.9 million (in other liabilities). The ~~revised guidance~~new ASU removes ~~all recognition thresholds~~the ability to offset a charge-off against the remaining loan discount and requires ~~companies to recognize~~ an allowance for credit losses to be recognized in addition to the loan discount. The impact of adopting the ASU, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, composition of our loans and available for sale securities portfolio, along with management judgments. The FASB provided transition relief, allowing entities to irrevocably elect, upon adoption of CECL, the fair value option (FVO) on financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20 if the instruments are eligible for the ~~difference between~~FVO under ASC 825-10. The adoption of ASC 326 was applied through a cumulative-effect adjustment to retained earnings. The impact of the January 1 2023, adoption entry is summarized in the table below:

(in thousands)	December 31, 2022 Pre-ASC 326 Adoption			Impact of ASC 326 Adoption			January 1, 2023 Post-ASC Adoption
Assets:
Loans	$	1,228,517		$	—		$	1,228,517
Allowance for credit losses on loans		(14,846	)		(271	)		(15,117	)
Deferred tax assets, net		8,492			286			8,778
Liabilities and shareholders’ equity:
Other liabilities (ACL unfunded loan commitments)		178			913			1,091
Retained Earnings		102,178			(898	)		101,280

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three year period the day one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

Allowance for Credit Losses – Available-For-Sale Securities: For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis ~~of a financial instrument and~~is written down to fair value through income. For debt securities available-for-sale that do not meet the ~~amount of~~aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that ~~the company expects to collect over the instrument’s contractual life. ASU 2016-13 also amends the~~a credit loss ~~measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019,~~exists, the ~~FASB issued ASU 2019-04 which clarifies the treatment~~present value of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarifies that expected recoveries of amounts previously written off andcash flows expected to be ~~written off should be included in~~collected from 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 addedsecurity are compared to the amortized cost basis of the ~~financial asset(s) should not exceed amounts previously written off. In November 2019,~~security. If the ~~FASB issued ASU 2019-10, which delayed~~present value of cash flows expected to be collected is less than 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~~amortized cost basis, a smaller reporting company. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarifies or addresses specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarify the following: (1) Thecredit loss exists and an allowance for credit losses ~~(ACL)~~is recorded for ~~purchased financial assets with~~the credit ~~deterioration should include expected recoveries of amounts previously written off and expected to be written off~~loss, limited by the ~~entity and should not exceed~~amount that the ~~aggregate of amounts of~~fair value is less than the amortized cost ~~basis previously written off and expected to be written off by~~basis. Any impairment that has not been recorded through an ~~entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected~~allowance for credit losses ~~expected recoveries should not include any amounts that result~~is recognized 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. other comprehensive income.

Recent Accounting Pronouncements

In ~~March~~December 2022, the FASB issued ASU ~~2022-02,~~2022-06, “Reference Rate Reform (Topic 848).” In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which ~~clarifies~~provides optional guidance to ease the ~~treatment of accrued interest when measuring credit losses. The amendments~~potential burden in ~~this Update eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the~~ accounting for ~~other loan modifications) whether~~(or recognizing the ~~modification represents~~effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a ~~new loan~~sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a ~~continuation~~result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of ~~an existing loan. The amendments enhance existing disclosure requirements~~all currencies and ~~introduce new requirements related to certain~~tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications ~~of receivables made to borrowers experiencing financial difficulty. For public business entities,~~may take place, the amendments in this Update ~~require that an entity disclose current-period gross write-offs by year~~defer the sunset date of ~~origination for financing receivables and net investment~~Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in ~~leases within the scope of Subtopic 326-20.~~Topic 848. The amendments in this ASU were effective upon issuance.

~~Upon adoption,~~

NOTE 2 – ACQUISITIONS AND DISPOSITIONS

Pending Acquisition

On December 5, 2022, Salisbury and NBT Bancorp Inc. (“NBT”) announced that they entered into a definitive agreement under which Salisbury will ~~apply~~merge with and into NBT, with NBT as the ~~standards’ provisions~~surviving entity, in an all-stock transaction. Immediately thereafter, the Bank will merge with and into NBT Bank, with NBT Bank as ~~a cumulative effect adjustment to retained earnings as~~the surviving bank. Under the terms of the agreement, each share of Salisbury common stock will be converted into the right to receive 0.745 shares of NBT common stock. The merger is expected to be consummated in second quarter 2023, subject to regulatory approval. Merger-related expenses totaling $385 thousand related to this transaction were recorded in 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.quarter 2023.

The Bank is working towards the completion of its ACL methodology. To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, Salisbury will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.

The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury estimates that under the CECL framework, the ACL would be $14.2 million compared with the allowance for loan losses of $14.3 million reported on the consolidated balance sheet at September 30, 2022. In addition, Salisbury estimates that the ACL for unfunded commitments would be approximately $1.1 million compared with the allowance of $0.2 million recorded on its consolidated balance sheet as of September 30, 2022. Salisbury will continue to refine its ACL methodology prior to implementation of CECL on January 1, 2023. In addition, the estimated ACL and allowance for unfunded commitments under both the Incurred Loss method and CECL will be affected by various factors, which include but are not limited to, changes in the composition and balance of Salisbury’s loan portfolio and unfunded commitments, changes to internal risk ratings of borrowers, changes to the risk-profile of the loan portfolio, changes in various macro-economic indicators, the impact of geo-political events on the business environment, and other factors.

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

In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815) Fair Value Hedging – Portfolio Layer Method.” The amendments in this update clarified the following: (1) The current last-of-layer method that permits only one hedged layer has been expanded to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method; (2) The scope of the portfolio layer method has been expanded to include non-pre-payable financial assets; (3) Eligible hedging instruments in a single-layer hedge may include spot-starting or forward-starting constant-notional swaps, or spot-or forward-starting amortizing-notional swaps and that the number of hedged layers (that is, single or multiple) corresponds with the number of hedges designated; (4) Additional guidance is provided on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method whether a single hedged layer or multiple hedged layers are designated; and (5) How hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Early adoption is permitted for any entity that has adopted the amendments in ASU 2017-12 for the corresponding period. Salisbury does not expect the implementation of ASU 2022-01 to have a material impact on its consolidated financial statements.

NOTE 23 - 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, 2022
Available-for-sale
U.S. Treasury $ 19,266 $ — $ 2,289 $ 16,977
U.S. Government Agency notes 30,552 114 2,742 27,924
Municipal bonds 55,260 — 10,650 44,610
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises 72,163 30 8,713 63,480
Collateralized mortgage obligations:
U.S. Government agencies 25,925 — 3,334 22,591
Corporate bonds 14,250 — 671 13,579
Total securities available-for-sale $ 217,416 $ 144 $ 28,399 $ 189,161
Mutual fund $ 1,882
Non-marketable securities
Federal Home Loan Bank of Boston stock $ 1,487 $ — $ — $ 1,487
(in thousands) Amortized cost basis Gross un-realized gains Gross un-realized losses Fair value
December 31, 2021
Available-for-sale
U.S. Treasury $ 15,301 $ 12 $ 182 $ 15,131
U.S. Government Agency notes 31,623 237 256 31,604
Municipal bonds 46,469 1,557 204 47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises 74,703 643 805 74,541
Collateralized mortgage obligations:
U.S. Government agencies 20,948 135 185 20,898
Corporate bonds 12,250 158 8 12,400
Total securities available-for-sale $ 201,294 $ 2,742 $ 1,640 $ 202,396
Mutual fund $ 901
Non-marketable securities
Federal Home Loan Bank of Boston stock $ 1,397 $ — $ — $ 1,397

(in thousands)		Amortized cost basis		Gross un-realized gains		Gross un-realized losses		Fair value
March 31, 2023
Available-for-sale
U.S. Treasury	$	19,299	$	—	$	1,820	$	17,479
U.S. Government Agency notes		29,017		58		2,231		26,844
Municipal bonds		55,099		—		6,900		48,199
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		67,804		19		7,273		60,550
Collateralized mortgage obligations:
U.S. Government agencies		24,954		—		3,039		21,915
Corporate bonds		14,250		—		1,639		12,611
Total securities available-for-sale	$	210,423	$	77	$	22,902	$	187,598
Mutual funds							$	2,068
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	5,030	$	—	$	—	$	5,030

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

Salisbury did not sell any available-for-sale securities during the ~~three month~~three-month periods ended ~~September 30, 2022 and September 30, 2021.~~March 31, 2023. Salisbury sold $~~22.0~~17.7 million of available-for-sale securities during the ~~nine month~~three-month period ended ~~September 30,~~March 31, 2022 realizing gains of $451 thousand and losses of $241 thousand resulting in a ~~pre-tax~~net gain of $~~165~~210 thousand and a related tax expense of $3544 thousand. ~~Salisbury sold $3.3~~ ~~million of available-for-sale securities during the nine month period ended September 30, 2021 realizing a pre-tax loss of $~~2 ~~thousand and a related tax benefit of $0.4~~ ~~thousand.~~

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

Less than 12 Months 12 Months or Longer Total
September 30, 2022 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale
U.S. Treasury $ 8,091 $ 763 $ 8,886 $ 1,526 $ 16,977 $ 2,289
U.S. Government Agency notes 4,804 589 15,151 2,153 19,955 2,742
Municipal bonds 37,026 8,290 7,584 2,360 44,610 10,650
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises 28,503 3,960 29,335 4,753 57,838 8,713
Collateralized mortgage obligations 21,173 3,056 1,418 278 22,591 3,334
Corporate bonds 8,579 671 — — 8,579 671
Total temporarily impaired securities $ 108,176 $ 17,329 $ 62,374 $ 11,070 $ 170,550 $ 28,399

Less than 12 Months 12 Months or Longer Total
December 31, 2021 (in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses
Available-for-sale
U.S. Treasury $ 12,155 $ 182 $ — $ — $ 12,155 $ 182
U.S. Government Agency notes 22,137 235 2,019 21 24,156 256
Municipal bonds 12,496 204 552 — 13,048 204
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises 52,619 740 3,195 65 55,814 805
Collateralized mortgage obligations 11,554 185 — — 11,554 185
Corporate bonds 1,742 8 — — 1,742 8
Total temporarily impaired securities $ 112,703 $ 1,554 $ 5,766 $ 86 $ 118,469 $ 1,640


	Less than 12 Months				12 Months or Longer				Total
March 31, 2023 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	—	$	—	$	17,479	$	1,820	$	17,479	$	1,820
U.S. Government Agency notes		2,839		123		18,567		2,108		21,406		2,231
Municipal bonds		8,334		326		39,864		6,574		48,198		6,900
Mortgage- backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		4,826		8		53,266		7,265		58,092		7,273
Collateralized mortgage obligations:
U.S. Government agencies		2,648		191		19,267		2,848		21,915		3,039
Corporate bonds		7,892		858		4,719		781		12,611		1,639
Total temporarily impaired securities	$	26,539	$	1,506	$	153,162	$	21,396	$	179,701	$	22,902


	Less than 12 Months				12 Months or Longer				Total
December 31, 2022 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	6,435	$	484	$	10,698	$	1,666	$	17,133	$	2,150
U.S. Government Agency notes		3,106		158		17,467		2,478		20,573		2,636
Municipal bonds		37,277		5,950		9,261		2,691		46,538		8,641
Mortgage-backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		18,861		1,559		39,909		6,452		58,770		8,011
Collateralized mortgage obligations		14,333		1,782		7,603		1,652		21,936		3,434
Corporate bonds		11,251		1,249		1,523		227		12,774		1,476
Total temporarily impaired securities	$	91,263	$	11,182	$	86,461	$	15,166	$	177,724	$	26,348

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.

September 30, 2022 (in thousands) Maturity Amortized cost Fair value Yield⁽¹⁾
U.S. Treasury After 1 year but within 5 years $ 7,871 $ 7,239 1.32 %
After 5 year but within 10 years 11,395 9,738 1.18
Total 19,266 16,977 1.24
U.S. Government Agency notes After 1 year but within 5 years 4,979 4,319 0.97
After 5 year but within 10 years 10,938 9,189 1.35
Total 15,917 13,508 1.23
Municipal bonds After 1 year but within 5 years 511 459 1.74
After 5 year but within 10 years 15,282 12,445 2.31
After 10 years but within 15 years 12,842 10,382 2.53
After 15 years 26,625 21,324 2.84
Total 55,260 44,610 2.61
Mortgage-backed securities and Collateralized mortgage obligations Securities not due at a single maturity date 112,723 100,487 2.29
Total 112,723 100,487 2.29
Corporate bonds After 5 years but within 10 years 13,250 12,596 4.32
After 10 years but within 15 years 1,000 983 6.25
Total 14,250 13,579 4.46
Securities available-for-sale $ 217,416 $ 189,161 2.45 %

March 31, 2023 (in thousands)	Maturity	Amortized cost			Fair value	Yield⁽¹⁾
U.S. Treasury	After 1 year but within 5 years	$	10,814	$	10,005	1.29	%
	After 5 year but within 10 years		8,485		7,474	1.17
	Total		19,299		17,479	1.24
U.S. Government Agency notes	After 1 year but within 5 years		7,964		7,100	1.05
	After 5 year but within 10 years		7,960		6,863	1.42
	Total		15,924		13,963	1.23
Municipal bonds	After 1 year but within 5 years		1,486		1,343	2.11
	After 5 year but within 10 years		14,308		12,054	2.31
	After 10 years but within 15 years		15,458		13,580	2.33
	After 15 years		23,847		21,222	2.73
	Total		55,099		48,199	2.49
Mortgage-backed securities, U.S. Government Agency and Collateralized mortgage obligations	Securities not due at a single maturity date		105,851		95,346	2.95
	Total		105,851		95,346	2.95
Corporate bonds	After 5 years but within 10 years		14,250		12,611	4.46
	After 10 years but within 15 years		—		—
	Total		14,250		12,611	4.46
Securities available-for-sale		$	210,423	$	187,598	2.79	%

⁽¹⁾Yield is based on amortized cost.

~~Salisbury evaluates~~For the three months ended March 31, 2023 and 2022, the unrealized losses on the Company’s available-for-sale debt securities ~~for OTTI where the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers whether it has the intent~~have not been recognized into income because management does not intend to sell ~~each debt security~~ and ~~whether~~ it is ~~more likely than~~ not ~~that~~more-likely-than-not it will be required to sell any of the ~~security~~available-for-sale debt securities before ~~its anticipated recovery. If either~~recovery of ~~these conditions is met, Salisbury recognizes an OTTI charge to earnings equal to the entire difference between the security’s~~its amortized cost ~~basis~~basis. Furthermore, the unrealized losses were due to changes in interest rates and ~~its fair value at~~other market conditions and were not reflective of credit events. The issuers continue to make timely principal and interest payments on the ~~balance sheet date. For securities that meet neither~~bonds. Agency-backed and government sponsored have a long 40 year history with no credit losses, including during times of ~~these conditions, an analysis~~severe stress such as the 2007-2008 financial crisis. The principal and interest payments on agency guaranteed debt 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 securities were OTTI at September 30, 2022.~~

~~U.S. Treasury notes: The contractual cash flows are guaranteed~~backed by the U.S. government. ~~Ten securities had unrealized losses at September 30, 2022, which approximated 11.88% of their amortized cost. Changes in fair values are a function of changes in investment spreads~~Government-sponsored enterprises similarly guarantee principal and interest ~~rate movements~~payments and ~~not changes in~~carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit ~~quality since time of purchase. Management expects to recover~~losses.

At March 31, 2023 and December 31, 2022, total accrued interest receivable on available-for-sale debt securities, which has been excluded from the ~~entire~~reported amortized cost basis on available-for-sale debt securities, was $0.62 million and $0.56 million, respectively, and was reported within accrued interest receivable on the consolidated balance sheets. An allowance was not carried on the accrued interest receivable at either date.

NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Salisbury segregates its loan portfolio into discrete loan pools for purposes of ~~these securities. Furthermore, Salisbury evaluates these securities~~evaluating credit risk. Each loan pool possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of March 31, 2023, the Company aggregated the individual loan pools as follows:

Commercial & Industrial - Commercial loans consist of revolving and term loan obligations extended to businesses, municipalities and educational facilities for ~~strategic fit~~the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may ~~reduce its position~~be secured or unsecured.

Commercial Real Estate – Commercial real estate loans include non-owner-occupied and owner-occupied properties as well as loans for agricultural purposes and land development. Commercial real estate loans consist of mortgage loans to finance investments in ~~these securities, although it~~real property such as multi-family residential, commercial/retail, office, industrial, hotels, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Residential Real Estate - Residential real estate loans are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one-to four-family residences, including for investment purposes.

Consumer - Home equity loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one-to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable. Consumer loans may be secured or unsecured.

The table below provides the composition of loans receivable. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.

(In thousands)		March 31, 2023			December 31, 2022¹
Commercial & Industrial	$	232,033		$	239,997
Commercial real estate		515,266			491,659
Residential real estate		457,506			449,652
Consumer		44,961			46,208
Total Loans		1,249,766			1,227,516
Deferred loan origination costs, net		875			1,001
Allowance for credit losses		(16,009	)		(14,846	)
Loans receivable, net	$	1,234,632		$	1,213,671

¹Certain loan categories were reclassified from prior filings based on loan type.

On January 1, 2023, the Bank adopted ASU 326 to calculate the allowance for credit losses. The impact of adopting this standard during first quarter 2023 was a net increase in the allowance for credit losses of $0.3 million. See Note 1 for a summary of the impact of adopting this standard during first quarter 2023.

Also included within scope of the CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process”, which reflect loans that are not in Salisbury’s gross loans receivable balance as of the balance sheet date but rather negotiated loan/line of credit terms and rates that the Bank has offered to customers and is committed to honoring. In reference to “in-process” credits, the Bank defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not ~~more likely than not~~unconditionally cancellable.

The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that ~~Salisbury~~obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet exposures includes consideration of the likelihood that funding will ~~be required to sell these securities before recovery~~occur and an estimate 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~~expected credit losses ~~were temporary in nature. Therefore, management does not consider these investments~~on commitments to be ~~other-than temporarily impaired at September 30, 2022.~~funded over its estimated life.

~~U.S. Government Agency notes: The contractual cash flows are guaranteed by~~At March 31, 2023, the ~~U.S. government. Twenty two securities had unrealized~~allowance for off-balance-sheet credit losses was $1.2 million compared with $0.2 million at ~~September 30, 2022, which approximated 12.08% of their amortized cost. Changes~~December 31, 2022. This balance is included in ~~fair values are a function of changes in investment spreads and interest rate movements and not changes~~“other liabilities” on Salisbury’s consolidated balance sheet. During first quarter 2023, the Bank recorded $92 thousand in credit ~~quality since time of purchase. Management expects to recover~~loss expense for off-balance-sheet items compared with $0.2 million for first quarter 2022. These balances are included in 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, 2022.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixty six securities had unrealized losses at September 30, 2022, which approximated 19.27% 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, 2022.

U.S. Government agency and U.S. Government-sponsored enterprise securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Ninety two securities had unrealized losses at September 30, 2022, which approximated 13.03% 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, 2022.

~~Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio~~“provision for credit ~~quality. Eleven securities had unrealized losses at September 30,~~losses” for 2023 and “other non-interest expense” in 2022 which approximated 7.26% 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, 2022.on Salisbury’s Consolidated Income Statement.

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, 2022. Deterioration of the FHLBB’s capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.

~~NOTE 3 – LOANS~~

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

(In thousands) September 30, 2022 December 31, 2021
Residential 1-4 family $ 414,957 $ 373,131
Residential 5+ multifamily 70,459 52,325
Construction of residential 1-4 family 21,527 19,738
Home equity lines of credit 24,895 23,270
Residential real estate 531,838 468,464
Commercial 367,257 310,923
Construction of commercial 45,762 58,838
Commercial real estate 413,019 369,761
Farm land 4,225 2,807
Vacant land 14,796 14,182
Real estate secured 963,878 855,214
Commercial and industrial ex PPP Loans 186,527 169,543
PPP Loans 469 25,589
Total Commercial and industrial 186,996 195,132
Municipal 18,607 16,534
Consumer 20,344 12,547
Loans receivable, gross 1,189,825 1,079,427
Deferred loan origination costs, net 1,002 285
Allowance for loan losses (14,334 ) (12,962 )
Loans receivable, net $ 1,176,493 $ 1,066,750
Loans held-for-sale
Residential 1-4 family $ — $ 2,684

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

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

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $~~58.5~~66.5 million and $~~77.5~~64.1 million, respectively.

Concentrations of Credit Risk

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

Salisbury’s commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges due to the COVID-19 virus pandemic (“virus”). Approximately ~~36%~~32% of the Bank’s commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 9%10% of the Bank’s commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank’s commercial loans are to educational institutions and approximately 4% of Salisbury’s commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury’s commercial real estate exposure as a percentage of the Bank’s total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately ~~192%~~209% as of ~~September 30, 2022~~March 31, 2023 and ~~179%~~198% at December 31, ~~2021~~2022 compared to the regulatory monitoring guideline of 300%.

Salisbury’s commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors. Rising interest rates, unemployment and an economic recession may cause the Bank to experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

~~At September 30, 2022 Salisbury had PPP loan balances, net of deferred fees, of $0.4~~ ~~million on its consolidated balance sheet compared with approximately $~~25 ~~million at December 31, 2021.~~ The PPP loans are reported on Salisbury’s balance sheet 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 are amortized as an adjustment to yield over the lives of the related loans, which is predominately five years. ~~For the three months ended September 30, 2022, Salisbury recorded interest income and net origination fees of $~~3 ~~thousand and $~~69 ~~thousand, respectively, on PPP loans compared with $133~~ ~~thousand and $711~~ ~~thousand, respectively, for the three months ended September 30, 2021. For the nine months ended September 30, 2022, Salisbury recorded interest income and net origination fees of $~~71 ~~thousand and $740~~ ~~thousand, respectively, on PPP loans compared with $569~~ ~~thousand and $2.5~~ ~~million, respectively, for the comparable period ended September 30, 2021. As of September 30, 2022, Salisbury has substantially recognized all of the origination fees on PPP loans.~~

Credit Quality

Salisbury uses credit risk ratings as part of its determination of the allowance for ~~loan~~credit losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. The rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are considered not criticized and are aggregated as pass ~~ratings~~rated, and 5 through 8 are criticized as defined by the regulatory agencies. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

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

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

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

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

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

Based on the most recent analysis performed, the risk category of loans by segment and by vintage, reported under the CECL methodology, is presented below. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.

(in thousands)	2023			2022			2021			2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of March 31, 2023
Commercial & industrial
Risk rating
Pass	$	6,472		$	55,315		$	41,258		$	30,157	$	16,644	$	39,817	$	34,648	$	—	$	224,311
Special mention		—			300			—			—		—		5,584		350		—		6,234
Substandard		—			—			—			—		633		154		701		—		1,488
Doubtful		—			—			—			—		—		—		—		—		—
Loss		—			—			—			—		—		—		—		—		—
Total commercial & industrial	$	6,472		$	55,615		$	41,258		$	30,157	$	17,277	$	45,555	$	35,699	$	—	$	232,033
Commercial real estate
Risk rating
Pass	$	26,352		$	147,533		$	109,300		$	67,765	$	25,899	$	126,509	$	—	$	—	$	503,358
Special mention		—			—			—			3,576		—		2,942		—		—		6,518
Substandard		—			—			—			—		3,751		1,639		—		—		5,390
Doubtful		—			—			—			—		—		—		—		—		—
Loss		—			—			—			—		—		—		—		—		—
Total commercial real estate	$	26,352		$	147,533		$	109,300		$	71,341	$	29,650	$	131,090	$	—	$	—	$	515,266
Residential real estate
Risk rating
Pass	$	12,583		$	104,906		$	115,289		$	64,488	$	27,118	$	127,790	$	165	$	—	$	452,339
Special mention		—			—			—			21		—		3,239		—		—		3,260
Substandard		—			—			668			—		—		1,239		—		—		1,907
Doubtful		—			—			—			—		—		—		—		—		—
Loss		—			—			—			—		—		—		—		—		—
Total residential real estate	$	12,583		$	104,906		$	115,957		$	64,509	$	27,118	$	132,268	$	165	$	—	$	457,506
Consumer
Risk rating
Pass	$	790		$	1,653		$	945		$	256	$	408	$	15,492	$	22,808	$	2,439	$	44,791
Special mention		—			—			—			—		—		—		97		61		158
Substandard		—			—			—			—		—		4		8		—		12
Doubtful		—			—			—			—		—		—		—		—		—
Loss		—			—			—			—		—		—		—		—		—
Total consumer	$	790		$	1,653		$	945		$	256	$	408	$	15,496	$	22,913	$	2,500	$	44,961
Total loans	$	46,197		$	309,707		$	267,460		$	166,263	$	74,453	$	324,409	$	58,777	$	2,500	$	1,249,766
Total Gross Charge-offs	$	(18	)	$	(13	)	$	(4	)	$	—	$	—	$	—	$	—	$	—	$	(35	)
Total Recoveries		3			—			—			—		—		—		—		—		3
Total Net Charge-offs	$	(15	)	$	(13	)	$	(4	)	$	—	$	—	$	—		—	$	—	$	(32	)

The composition of loans receivable by risk rating grade, under the incurred loss methodology is as follows:

(in thousands) Pass Special mention Substandard Doubtful Loss Total
September 30, 2022
Residential 1-4 family $ 410,458 $ 3,030 $ 1,469 $ — $ — $ 414,957
Residential 5+ multifamily 70,308 72 79 — — 70,459
Construction of residential 1-4 family 21,527 — — — — 21,527
Home equity lines of credit 24,730 165 — — — 24,895
Residential real estate 527,023 3,267 1,548 — — 531,838
Commercial 348,824 13,079 5,354 — — 367,257
Construction of commercial 45,762 — — — — 45,762
Commercial real estate 394,586 13,079 5,354 — — 413,019
Farm land 2,402 1,426 397 — — 4,225
Vacant land 14,764 32 — — — 14,796
Real estate secured 938,775 17,804 7,299 — — 963,878
Commercial and industrial 184,584 696 1,716 — — 186,996
Municipal 18,607 — — — — 18,607
Consumer 20,344 — — — — 20,344
Loans receivable, gross $ 1,162,310 $ 18,500 $ 9,015 $ — $ — $ 1,189,825
(in thousands) Pass Special mention Substandard Doubtful Loss Total
December 31, 2021
Residential 1-4 family $ 367,225 $ 3,543 $ 2,363 $ — $ — $ 373,131
Residential 5+ multifamily 50,588 79 1,658 — — 52,325
Construction of residential 1-4 family 19,738 — — — — 19,738
Home equity lines of credit 23,037 212 21 — — 23,270
Residential real estate 460,588 3,834 4,042 — — 468,464
Commercial 271,821 16,034 23,068 — — 310,923
Construction of commercial 58,838 — — — — 58,838
Commercial real estate 330,659 16,034 23,068 — — 369,761
Farm land 1,162 1,214 431 — — 2,807
Vacant land 14,143 39 — — — 14,182
Real estate secured 806,552 21,121 27,541 — — 855,214
Commercial and industrial 191,857 688 2,587 — — 195,132
Municipal 16,534 — — — — 16,534
Consumer 12,547 — — — — 12,547
Loans receivable, gross $ 1,027,490 $ 21,809 $ 30,128 $ — $ — $ 1,079,427

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2022
Commercial & industrial	$	232,259	$	6,195	$	1,543	$	—	$	—	$	239,997
Commercial real estate		477,006		8,798		5,855		—		—		491,659
Residential real estate		444,778		2,995		1,879		—		—		449,652
Consumer		46,041		162		5		—		—		46,208
Loans receivable, gross	$	1,200,084	$	18,150	$	9,282	$	—	$	—	$	1,227,516

A financial asset is considered collateral dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. Significant quarter over quarter changes are reflective of changes in nonaccrual status and not necessarily associated with credit quality indicators like appraisal value. The following table presents the amortized cost basis of individually analyzed collateral-dependent loans by loan portfolio segment:

The following table presents the amortized cost basis of collateral-dependent non-accrual loans as of March 31, 2023. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.


		Collateral Type
(in thousands)		Real Estate		Business Assets		Total Collateral-Dependent Non-Accrual Loans
March 31, 2023
Commercial & industrial	$	—	$	144	$	144
Commercial real estate		1,222		—		1,222
Residential real estate		858		—		858
Consumer		8		9		17
Total	$	2,088	$	153	$	2,241

The following is a summary of loans by past due status at March 31, 2023:


			Past due
(in thousands)	Current		30-59 days		60-89 days		90 days or Greater Past Due		Total Past Due		Total Loans Outstanding		Loans Greater than 90 Days Past Due and Accruing
March 31, 2023
Commercial & industrial	$	231,733	$	300	$	—	$	—	$	300	$	232,033	$	—
Commercial real estate		514,822		359		—		85		443		515,266		—
Residential real estate		456,300		1,124		67		15		1,207		457,506		—
Consumer		44,513		373		58		17		448		44,961		—
Total	$	1,247,368	$	2,156	$	125	$	117	$	2,398	$	1,249,766	$	—

The ~~composition~~following is a summary of the amortized cost basis of loans ~~receivable~~on non-accrual status.


		March 31, 2023						December 31, 2022
(in thousands)		Non-Accrual Loans with an Allowance		Non-Accrual Loans without an Allowance		Total Non-Accrual Loans		Total Non-Accrual Loans
Commercial & industrial	$	—	$	144	$	144	$	189
Commercial real estate		—		1,222		1,222		1,648
Residential real estate		—		858		858		820
Consumer		9		8		17		5
Total	$	9	$	2,232	$	2,241	$	2,662


			Past due

									180		30		Accruing
(in thousands)									days		days		90 days
			30-59		60-89		90-179		and		and		and		Non-
	Current		days		days		days		over		over		over		accrual
December 31, 2022
Commercial & industrial	$	239,847	$	149	$	1	$	—	$	—	$	150	$	—	$	189
Commercial real estate		491,574		—		—		85		—		85		—		1,648
Residential real estate		448,935		672		30		—		15		717		—		820
Consumer		45,677		442		84		5		—		531		—		5
Loans receivable, gross	$	1,226,033	$	1,263	$	115	$	90	$	15	$	1,483	$	—	$	2,662

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset origination. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. Salisbury uses a probability of default/loss given default model to determine the allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses as a result of the measurement methodologies used to estimate the allowance, a change in the allowance for credit losses is generally not recorded upon modification. In certain instances, Salisbury will modify a loan by ~~delinquency~~providing multiple types of concessions. Typically, one type of concession, such as term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as an interest rate reduction, may be granted. Salisbury did not restructure any troubled debt in the first quarter of 2023 or 2022.

The components of troubled debt restructured loans at December 31, 2022 are as follows:

(in thousands)		December 31, 2022
Commercial & industrial	$	—
Commercial real estate		1,381
Residential real estate		1,289
Consumer		—
Accruing troubled debt restructured loans		2,670
Commercial & industrial		—
Commercial real estate		—
Residential real estate		67
Consumer		—
Non-accrual troubled debt restructured loans		67
Troubled debt restructured loans	$	2,737

The past due status of troubled debt restructured loans at December 31, 2022 is as follows:

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
September 30, 2022
Residential 1-4 family $ 414,910 $ 20 $ 12 $ — $ 15 $ 47 $ — $ 137
Residential 5+ multifamily 70,459 — — — — — — —
Construction of residential 1-4 family 21,527 — — — — — — —
Home equity lines of credit 24,778 117 — — — 117 — —
Residential real estate 531,674 137 12 — 15 164 — 137
Commercial 367,172 — 85 — — 85 — 1,199
Construction of commercial 45,762 — — — — — — —
Commercial real estate 412,934 — 85 — — 85 — 1,199
Farm land 4,225 — — — — — — 397
Vacant land 14,796 — — — — — — —
Real estate secured 963,629 137 97 — 15 249 — 1,733
Commercial and industrial 186,861 23 12 100 — 135 100 27
Municipal 18,607 — — — — — — —
Consumer 20,223 116 5 — — 121 — —
Loans receivable, gross $ 1,189,320 $ 276 $ 114 $ 100 $ 15 $ 505 $ 100 $ 1,760

(in thousands)		December 31, 2022
Current	$	2,670
Past due 30-59 days		—
Past due 60-89 days		—
Accruing troubled debt restructured loans		2,670
Current		—
Past due 30-59 days		67
Past due 180 days and over		—
Non-accrual troubled debt restructured loans		67
Total troubled debt restructured loans	$	2,737

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, 2021
Residential 1-4 family $ 372,620 $ 223 $ 135 $ 63 $ 90 $ 511 $ — $ 750
Residential 5+ multifamily 51,464 — — — 861 861 — 861
Construction of residential 1-4 family 19,668 — 70 — — 70 — —
Home equity lines of credit 23,000 165 98 — 7 270 — 21
Residential real estate 466,752 388 303 63 958 1,712 — 1,632
Commercial 310,331 87 251 — 254 592 — 1,924
Construction of commercial 58,838 — — — — — — —
Commercial real estate 369,169 87 251 — 254 592 — 1,924
Farm land 2,807 — — — — — — 432
Vacant land 14,182 — — — — — — —
Real estate secured 852,910 475 554 63 1,212 2,304 — 3,988
Commercial and industrial 194,838 250 32 1 11 294 11 200
Municipal 16,534 — — — — — — —
Consumer 12,503 40 4 — — 44 — —
Loans receivable, gross $ 1,076,785 $ 765 $ 590 $ 64 $ 1,223 $ 2,642 $ 11 $ 4,188

~~Troubled Debt Restructurings (TDRs)~~Allowance for Credit Losses for Loans

The ACL on loans at March 31, 2023, was $16.0 million, an increase of $1.2 million, or 7.8%, since December 31, 2022. The increase was driven by the adoption of CECL, effective January 1, 2023, and the estimate of expected credit losses based on certain macro-economic factors. At March 31, 2023, the ACL on loans estimate used a reasonable and supportable forecast period of one year across all of its loan segments. At March 31, 2023, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) Commercial & Industrial – National Gross Domestic Product (“GDP”) and National Unemployment; (ii) Commercial Real Estate - National GDP and National Unemployment; (iii) Residential Real Estate – National Housing Price Index and National Unemployment; (iv) Consumer - National Unemployment. National GDP and National Unemployment are sourced from the Federal Reserve Open Market Committee’s published forecast whereas the National Housing Price Index is sourced from the Federal National Mortgage Association’s published forecast. The Company's qualitative factors at March 31, 2023, included consideration of the level of uncertainty surrounding the impact of macro-economic factors such as interest rates, inflation, supply chain disruption, geo-political events as well as other factors. At March 31, 2023, the ACL estimate for loans used a reversion period of two years for each loan segment.

The increase in the ACL on loans at March 31, 2023 compared with March 31, 2022, for the commercial & industrial and commercial real estate loan segments was primarily driven by changes in loan balances as well as changes in current and forecasted economic conditions between reporting periods. The increase in the ACL on loans in the residential real estate and consumer loan segments was primarily driven by changes in loan balances and a decline in the national housing price index between reporting periods.

The activity in Salisbury’s allowance for credit losses for loans is presented below. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.


	Three Months Ended March 31, 2023
(in thousands)	Beginning balance		Impact of Adopting ASC 326			Subtotal		Provision for Credit Losses			Charge-offs			Recoveries		Ending balance
Commercial & industrial	$	1,921	$	2,447		$	4,368	$	(89	)	$	—		$	—	$	4,279
Commercial real estate		8,425		(3,236	)		5,189		705			—			—		5,894
Residential real estate		4,108		831			4,939		287			—			—		5,226
Consumer		392		229			621		21			(35	)		3		610
Total allowance for credit losses	$	14,846	$	271		$	15,117	$	924		$	(35	)	$	3	$	16,009

~~For the three and nine month periods ended September 30,~~


	Three months ended March 31, 2022
(in thousands)	Beginning balance		Provision			Charge-offs			Recoveries		Ending balance
Commercial & industrial	$	1,811	$	(173	)	$	(46	)	$	1	$	1,593
Commercial real estate		6,973		261			(334	)		—		6,900
Residential real estate		3,020		252			(16	)		—		3,253
Consumer		277		37			(17	)		5		302
Unallocated		881		(14	)		—			—		867
Totals	$	12,962	$	363		$	(416	)	$	6	$	12,915

Charge-offs for first quarter 2022 ~~there were no troubled debt restructurings. For the three and nine month periods ended September 30, 2021, one residential loan with~~included a ~~loan balance~~write-down of $74374 thousand to reduce the carrying value on $3.8 million of non-performing and under-performing loans, which Salisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately $239 thousand due to higher final bids. This increase was ~~modified~~recorded in mortgage banking activities, net in Salisbury’s consolidated statement of income.

The Bank’s allowance for credit losses on unfunded commitments is recognized as a ~~troubled debt restructuring~~liability (in other liabilities on consolidated balance sheet), with adjustments to the reserve recognized in the provision for ~~term extension.~~

~~Allowance for Loan Losses~~

~~Changes~~credit losses in the consolidated income statement. The Bank’s activity in the allowance for ~~loan~~credit losses ~~are~~on unfunded commitments for the three months ended March 31, 2023 and 2022 was as follows:

Three months ended September 30, 2022 Three months ended September 30, 2021
Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance
Residential 1-4 family $ 3,286 $ 127 $ (45 ) $ 25 $ 3,393 $ 2,377 $ 393 $ (35 ) $ 5 $ 2,740
Residential 5+ multifamily 1,157 71 — — 1,228 545 156 — — 701
Construction of residential 1-4 family 333 (103 ) (25 ) — 205 95 41 — — 136
Home equity lines of credit 205 14 — — 219 190 26 (20 ) — 196
Residential real estate 4,981 109 (70 ) 25 5,045 3,207 616 (55 ) 5 3,773
Commercial 5,169 598 — — 5,767 6,212 (165 ) — 119 6,166
Construction of commercial 872 (115 ) — — 757 668 118 — — 786
Commercial real estate 6,041 483 — — 6,524 6,880 (47 ) — 119 6,952
Farm land 27 11 — — 38 32 (1 ) — — 31
Vacant land 108 4 — — 112 87 (1 ) — — 87
Real estate secured 11,157 607 (70 ) 25 11,719 10,206 567 (55 ) 125 10,843
Commercial and industrial 1,480 5 — — 1,485 1,256 73 — 3 1,332
Municipal 35 4 — — 39 32 (1 ) — — 31
Consumer 130 11 (25 ) 6 122 66 62 (19 ) 6 115
Unallocated 901 68 — — 969 1,148 (301 ) — — 847
Totals $ 13,703 $ 695 $ (95 ) $ 31 $ 14,334 $ 12,708 $ 400 $ (74 ) $ 134 $ 13,168

	Three months ended March 31, 2023
Balance at the beginning of period December 31, 2022	$	178
Impact of adopting ASC 326		913
Subtotal		1,091
Provision for credit losses		92
Balance at the end of period March 31, 2023	$	1,183

	Three months ended March 31, 2022
Balance at the beginning of period December 31, 2021	$	146
Other expense – unfunded commitments		37
Balance at the end of period March 31, 2022	$	183

Nine months ended September 30, 2022 Nine months ended September 30, 2021
Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance Beginning balance Provision (Benefit) Charge- offs Reco- veries Ending balance
Residential 1-4 family $ 2,846 $ 595 $ (73 ) $ 25 $ 3,393 $ 2,646 $ 129 $ (44 ) $ 9 $ 2,740
Residential 5+ multifamily 817 642 (231 ) — 1,228 686 15 — — 701
Construction of residential 1-4 family 186 44 (25 ) — 205 65 71 — — 136
Home equity lines of credit 198 32 (11 ) — 219 252 (36 ) (20 ) — 196
Residential real estate 4,047 1,313 (340 ) 25 5,045 3,649 179 (64 ) 9 3,773
Commercial 5,416 722 (372 ) 1 5,767 6,546 (509 ) (7 ) 136 6,166
Construction of commercial 1,025 (268 ) — — 757 596 208 (18 ) — 786
Commercial real estate 6,441 454 (372 ) 1 6,524 7,142 (301 ) (25 ) 136 6,952
Farm land 21 17 — — 38 59 (28 ) — — 31
Vacant land 95 17 — — 112 180 (94 ) — 1 87
Real estate secured 10,604 1,801 (712 ) 26 11,719 11,030 (244 ) (89 ) 146 10,843
Commercial and industrial 1,364 166 (46 ) 1 1,485 1,397 17 (131 ) 49 1,332
Municipal 31 8 — — 39 43 (12 ) — — 31
Consumer 82 95 (70 ) 15 122 77 82 (34 ) (10 ) 115
Unallocated 881 88 — — 969 1,207 (360 ) — — 847
Totals $ 12,962 $ 2,158 $ (828 ) $ 42 $ 14,334 $ 13,754 $ (517 ) $ (254 ) $ 185 $ 13,168

The composition of loans receivable and the allowance for ~~loan~~credit losses is ~~as follows:~~presented in the tables below. The loan categories for previously reported periods have been updated to conform to the current presentation.


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
March 31, 2023
Commercial & industrial	$	231,889	$	4,279	$	144	$	—	$	232,033	$	4,279
Commercial real estate		514,044		5,894		1,222		—		515,266		5,894
Residential real estate		456,648		5,226		858		—		457,506		5,226
Consumer		44,953		610		8		—		44,961		610
Totals	$	1,247,534	$	16,009	$	2,232	$	—	$	1,249,766	$	16,009

(in thousands) Collectively evaluated Individually evaluated Total portfolio
Loans Allowance Loans Allowance Loans Allowance
September 30, 2022
Residential 1-4 family $ 413,456 $ 3,393 $ 1,501 $ — $ 414,957 $ 3,393
Residential 5+ multifamily 70,380 1,228 79 — 70,459 1,228
Construction of residential 1-4 family 21,527 205 — — 21,527 205
Home equity lines of credit 24,895 219 — — 24,895 219
Residential real estate 530,258 5,045 1,580 — 531,838 5,045
Commercial 364,729 5,745 2,528 22 367,257 5,767
Construction of commercial 45,762 757 — — 45,762 757
Commercial real estate 410,491 6,502 2,528 22 413,019 6,524
Farm land 3,828 38 397 — 4,225 38
Vacant land 14,796 112 — — 14,796 112
Real estate secured 959,373 11,697 4,505 22 963,878 11,719
Commercial and industrial 186,969 1,485 27 — 186,996 1,485
Municipal 18,607 39 — — 18,607 39
Consumer 20,344 122 — — 20,344 122
Unallocated allowance — 969 — — — 969
Totals $ 1,185,293 $ 14,312 $ 4,532 $ 22 $ 1,189,825 $ 14,334

(in thousands) Collectively evaluated Individually evaluated Total portfolio
Loans Allowance Loans Allowance Loans Allowance
December 31, 2021
Residential 1-4 family $ 370,558 $ 2,845 $ 2,573 $ 1 $ 373,131 $ 2,846
Residential 5+ multifamily 51,376 817 949 — 52,325 817
Construction of residential 1-4 family 19,738 186 — — 19,738 186
Home equity lines of credit 23,249 198 21 — 23,270 198
Residential real estate 464,921 4,046 3,543 1 468,464 4,047
Commercial 307,377 5,388 3,546 28 310,923 5,416
Construction of commercial 58,838 1,025 — — 58,838 1,025
Commercial real estate 366,215 6,413 3,546 28 369,761 6,441
Farm land 2,375 21 432 — 2,807 21
Vacant land 14,182 95 — — 14,182 95
Real estate secured 847,694 10,575 7,520 29 855,214 10,604
Commercial and industrial 194,856 1,297 276 67 195,132 1,364
Municipal 16,534 31 — — 16,534 31
Consumer 12,547 82 — — 12,547 82
Unallocated allowance — 881 — — — 881
Totals $ 1,071,630 $ 12,866 $ 7,797 $ 96 $ 1,079,427 $ 12,962


(in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2022
Commercial & industrial	$	239,808	$	1,780	$	189	$	—	$	239,997	$	1,780
Commercial real estate		488,630		7,781		3,029		22		491,659		7,803
Residential real estate		447,543		3,805		2,109		—		449,652		3,805
Consumer		46,203		363		5		—		46,208		363
Unallocated allowance		—		1,095		—		—		—		1,095
Totals	$	1,222,184	$	14,824	$	5,332	$	22	$	1,227,516	$	14,846

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

September 30, 2022 (in thousands) Collectively evaluated Individually evaluated Total portfolio
Loans Allowance Loans Allowance Loans Allowance
Performing loans $ 1,178,589 $ 12,928 $ — $ — $ 1,178,589 $ 12,928
Potential problem loans ¹ 6,704 415 — — 6,704 415
Impaired loans — — 4,532 22 4,532 22
Unallocated allowance — 969 — — — 969
Totals $ 1,185,293 $ 14,312 $ 4,532 $ 22 $ 1,189,825 $ 14,334

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

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

A specific valuation allowance is established for the impairment amount of each impaired loan, calculated using the present value of expected cash flows or 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:~~presented in the tables below.

Impaired loans with specific allowance Impaired loans with no specific allowance
(in thousands) Loan balance Specific Income Loan balance Income
Recorded Investment Note Average allowance recognized Recorded Investment Note Average recognized
September 30, 2022
Residential $ — $ — $ 398 $ — $ — $ 1,580 $ 1,677 $ 2,321 $ 40
Home equity lines of credit — — — — — — — 11 —
Residential real estate — — 398 — — 1,580 1,677 2,332 40
Commercial 572 572 616 22 22 1,956 2,467 2,397 32
Construction of commercial — — — — — — — — —
Farm land — — — — — 397 447 415 —
Vacant land — — — — — — — — —
Real estate secured 572 572 1,014 22 22 3,933 4,591 5,144 72
Commercial and industrial — — 84 — — 27 30 55 —
Consumer — — — — — — — — —
Totals $ 572 $ 572 $ 1,098 $ 22 $ 22 $ 3,960 $ 4,621 $ 5,199 $ 72

~~Note:~~ The ~~income recognized is~~loan categories for previously reported periods have been updated to conform to the ~~nine month period ended September 30, 2022.~~current presentation.

Impaired loans with specific allowance Impaired loans with no specific allowance
(in thousands) Loan balance Specific Income Loan balance Income
Recorded Investment Note Average allowance recognized Recorded Investment Note Average recognized
September 30, 2021
Residential $ 45 $ 47 $ 1,120 $ 3 $ 2 $ 3,989 $ 4,404 $ 3,642 $ 52
Home equity lines of credit — — 22 — — 86 127 156 —
Residential real estate 45 47 1,142 3 2 4,075 4,531 3,798 52
Commercial 1,007 1,033 1,921 43 33 2,866 3,377 3,002 47
Construction of commercial — — — — — — — — —
Farm land — — — — — 576 756 415 —
Vacant land — — 73 — — 35 39 52 —
Real estate secured 1,052 1,080 3,136 46 35 7,552 8,703 7,267 99
Commercial and industrial 221 228 336 44 3 100 270 91 —
Consumer — — 8 — — 18 18 15 1
Totals $ 1,273 $ 1,308 $ 3,480 $ 90 $ 38 $ 7,670 $ 8,991 $ 7,373 $ 100


	Loans with no specific allowance
	Loan balance						Income
	Book		Note		Average		Recognized
March 31, 2023
Commercial & industrial	$	144	$	244	$	165	$	—
Commercial real estate		1,222		1,748		1,619		14
Residential real estate		858		941		1,170		—
Consumer		8		8		31		—
Totals	$	2,232	$	2,941	$	2,985	$	14

~~Note: The income recognized is for the nine month period ended September 30, 2021.~~

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the ~~year~~three months ended ~~December~~March 31, ~~2021:~~2022:

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


	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
March 31, 2022
Commercial & industrial	$	76	$	76	$	146	$	3	$	1	$	28	$	25	$	79	$	—
Commercial real estate		598		598		602		23		7		3,174		3,785		3,282		11
Residential real estate		—		—		21		—		—		1,938		2,020		2,944		14
Consumer		—		—		—		—		—		—		—		15		—
Totals	$	674	$	674	$	769	$	26	$	8	$	5,140	$	5,830	$	6,320	$	25

1918

NOTE 45 – LEASES

The Bank leases facilities and equipment with various expiration dates. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance expenses are to be paid by Salisbury. The following table provides the assets and liabilities as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, as well as the costs of operating and financial leases, which are included in the Bank’s consolidated income statement for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

($ in thousands, except lease term and discount rate) Classification September 30, 2022 December 31, 2021
Assets
Operating Other assets $ 1,231 $ 1,021
Finance Bank premises and equipment ¹ 3,912 3,791
Total Leased Assets $ 5,143 $ 4,812
Liabilities
Operating Other liabilities $ 1,231 $ 1,021
Finance Finance lease 4,296 4,107
Total Lease Liabilities $ 5,527 $ 5,128
¹ Net of accumulated depreciation of $664 thousand and $496 thousand, respectively.

Lease cost Classification Nine months ended Three months ended
September 30, 2022 September 30, 2022
Operating leases Premises and equipment $ 218 $ 72
Finance leases:
Amortization of leased assets Premises and equipment 167 55
Interest on finance leases Interest expense 41 41
Total lease cost $ 426 $ 168

Lease cost Classification Nine months ended Three months ended
September 30, 2021 September 30, 2021
Operating leases Premises and equipment $ 221 $ 74
Finance leases:
Amortization of leased assets Premises and equipment 76 25
Interest on finance leases Interest expense 103 36
Total lease cost $ 400 $ 135

Weighted Average Remaining Lease Term September 30, 2022 December 31, 2021
Operating leases 6.1 years 6.9 years
Financing leases 21.7 years 23.5 years
Weighted Average Discount Rate ¹
Operating leases 3.6 % 3.6 %
Financing leases 3.7 % 5.0 %
¹ Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate.

($ in thousands, except lease term and discount rate)	Classification		March 31, 2023		December 31, 2022
Assets
Operating	Other assets	$	1,183	$	1,175
Finance	Bank premises and equipment ¹		3,800		3,856
Total leased assets		$	4,983	$	5,031
Liabilities
Operating	Other liabilities	$	1,183	$	1,175
Finance	Finance lease		4,225		4,262
Total lease liabilities		$	5,408	$	5,437

¹ Net of accumulated depreciation of $776 thousand and $720 thousand, respectively.

Lease cost	Classification		Three Months Ended		Three Months Ended
			March 31, 2023		March 31, 2022
Operating leases	Premises and equipment	$	76	$	74
Finance leases:
Amortization of leased assets	Premises and equipment		56		35
Interest on finance leases	Interest expense		40		41
Total lease cost		$	172	$	150

Weighted Average Remaining Lease Term	March 31, 2023		December 31, 2022
Operating leases	5.6 years		5.9 years
Financing leases	21.5 years		21.5 years
Weighted Average Discount Rate ¹
Operating leases	3.74	%	3.63	%
Financing leases	3.76	%	3.74	%
¹ Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate.

The following is a schedule by years of the present value of the net minimum lease payments as of ~~September 30, 2022.~~March 31, 2023.

Future minimum lease payments (in thousands) Operating Leases Finance Leases
2022 $ 80 $ 74
2023 241 304
2024 204 314
2025 213 324
2026 137 334
Thereafter 507 4,968
Total future minimum lease payments 1,382 6,317
Less amount representing interest (151 ) (2,022 )
Total present value of net future minimum lease payments $ 1,231 $ 4,295

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2023	$	201		$	228
2024		270			314
2025		218			323
2026		213			334
2027		188			344
Thereafter		242			4,924
Total future minimum lease payments		1,333			6,167
Less amount representing interest		(150	)		(1,941	)
Total present value of net future minimum lease payments	$	1,183		$	4,225

2019

NOTE 56 - MORTGAGE SERVICING RIGHTS

(in thousands)		September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Residential mortgage loans serviced for others	$	135,656	$	140,623	$	130,275	$	133,100
Fair value of mortgage servicing rights		1,401		1,043		1,309		1,376

Changes in mortgage servicing rights are as follows:


		Three months ended						Nine months ended
Periods ended September 30, (in thousands)		2022			2021			2022			2021
Three months ended March 31, (in thousands)														2023			2022
Mortgage Servicing Rights
Balance, beginning of period	$	694		$	748		$	700		$	621		$	630		$	700
Originated		—			18			72			276			—			55
Amortization ⁽¹⁾		(39	)		(36	)		(117	)		(167	)		(26	)		(39	)
Balance, end of period	$	655		$	730		$	655		$	730		$	604		$	716
Valuation Allowance
Balance, beginning of period		—			—			—			(9	)		—			—
Decrease in impairment reserve ⁽¹⁾		—			—			—			9			—			—
Balance, end of period		—			—			—			—			—			—
Mortgage servicing rights, net	$	655		$	730		$	655		$	730		$	604		$	716

⁽¹⁾

Amortization expense and changes in the impairment reserve are recorded in mortgage ~~banking activities,~~servicing, net.

NOTE 67 - 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, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Securities available-for-sale (at fair value)	$	78,001	$	75,737	$	80,456	$	74,303
Loans receivable (at book value)		375,645		378,845		381,740		380,787
Total pledged assets	$	453,646	$	454,582	$	462,196	$	455,090

At ~~September 30, 2022,~~March 31, 2023, securities were pledged as follows: $~~70.88~~77.3 million to secure public deposits and $~~7.10~~3.2 million to secure repurchase ~~agreements and $0.02~~ ~~million to secure FHLBB advances.~~agreements. In addition to securities, 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.

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

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

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

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

As of December 31, 2021
(in thousands) Notional Amount
Balance Sheet
Location
Derivatives designated as hedge instruments
Interest Rate Products $ 10,000 Other assets $ 18
Total Derivatives designated as hedge instruments $ 18

~~The tables below present the effect of the Company’s derivative financial instruments on the Income Statement for the three and nine months ended September 30, 2022 and 2021.~~

Three months ended September 30, 2022 Nine months ended September 30, 2022
(in thousands) Interest
Income Interest
Expense Interest
Income Interest
Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded $ 45 $ — $ 64 $ —

Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items 45 — 18 —
Derivatives designated as hedging instruments $ — $ — $ 46 $ —

Three months ended September 30, 2021 Nine months ended September 30, 2021
(in thousands) Interest
Income Interest
Expense Interest
Income Interest
Expense
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded $ 1 $ — $ — $ —

Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items 4 — 3 —
Derivatives designated as hedging instruments $ (3 ) $ — $ (3 ) $ —

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. All per share data has been adjusted to reflect the two-for-one forward common stock split, which was effective on June 30, 2022.~~indicated:


		Three months ended						Nine months ended
Periods ended September 30, (in thousands, except per share data)		2022			2021			2022			2021
Three months ended March 31, (in thousands, except per share data)														2023			2022
Net income	$	4,336		$	3,453		$	11,750		$	12,332		$	3,018		$	3,568
Less: Undistributed earnings allocated to participating securities		(72	)		(53	)		(207	)		(184	)		(50	)		(60	)
Net income allocated to common stock	$	4,264		$	3,400		$	11,543		$	12,148		$	2,968		$	3,508
Weighted-average common shares issued		5,784			5,724			5,765			5,706			5,799			5,734
Less: Unvested restricted stock awards		(97	)		(90	)		(101	)		(85	)		(97	)		(98	)
Weighted average common shares outstanding used to calculate basic earnings per common share		5,687			5,634			5,663			5,621			5,702			5,636
Add: Dilutive effect of stock options		26			52			33			39
Add: Dilutive effect of stock options and restricted stock units														12			58
Weighted-average common shares outstanding used to calculate diluted earnings per common share		5,713			5,686			5,696			5,660			5,714			5,694
Earnings per common share (basic)	$	0.75		$	0.60		$	2.04		$	2.16		$	0.52		$	0.62
Earnings per common share (diluted)	$	0.75		$	0.60		$	2.03		$	2.15		$	0.52		$	0.62

2220

NOTE 9 – ~~CONTINGENCIES~~

~~In July 2022, Salisbury management discovered that the Bank’s trust department terminated a trust account in May 2020 and distributed approximately $1.0~~ million that should have been retained in continuance of the trust account. Salisbury has engaged legal counsel and is currently evaluating the Company’s potential financial exposure. At this time, management believes that Salisbury’s exposure is not yet known or knowable and could potentially range from zero to approximately $~~1.0~~ ~~million depending upon the facts and circumstances and the scope of Salisbury’s insurance coverage.~~

~~NOTE 10 –~~ SHAREHOLDERS’ EQUITY

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional and discretionary actions by the regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. ~~As of September 30, 2022, the Company and the Bank met each of their capital requirements.~~

The ~~Company and the~~ Bank ~~became~~is subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as “well capitalized” under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At ~~September 30, 2022,~~March 31, 2023, the Bank exceeded the minimum requirement for the capital conservation buffer. As of ~~September 30,2022,~~March 31, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

OnIn March ~~31, 2021,~~2022, Salisbury ~~issued $~~25 ~~million~~announced that its Board of ~~subordinated debt that matures~~Directors renewed a share repurchase program, which provides for the repurchase of Salisbury’s common stock in ~~2031. During the first~~amounts up to an aggregate of 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. At March 31, 2021, $15 ~~million~~percent (5%) of the ~~net proceeds was retained at~~outstanding shares of Salisbury’s common stock from time to time over the ~~holding company level and the remainder was allocated to the Bank. On May 28, 2021, Salisbury redeemed in full the $~~10 ~~million of subordinated debt that was issued in 2015 and retained at the holding company.~~

~~As of September 30, 2022,~~next twelve months. Salisbury did not repurchase any ~~of its common~~ shares pursuant to ~~the Common Stock Repurchase Plan approved by the Board of Directors in March 2021.~~such program.

The Bank’s risk-weighted assets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were $~~1,241.1~~1,280.9 million and $~~1,085.4~~1,256.6 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:


	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions					Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2022

March 31, 2023
Total Capital (to risk-weighted assets)	$	164,325		13.24	%	$	99,290		8.0	%	$	130,318		10.5	%	$	124,112		10.0	%	$	171,829		13.41	%	$	102,472		8.0	%	$	134,495		10.5	%	$	128,090		10.0	%

Tier 1 Capital (to risk-weighted assets)		149,805		12.07			74,467		6.0			105,495		8.5			99,290		8.0			155,812		12.16			76,854		6.0			108,877		8.5			102,472		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		149,805		12.07			55,850		4.5			86,878		7.0			80,673		6.5			155,812		12.16			57,641		4.5			89,663		7.0			83,259		6.5

Tier 1 Capital (to average assets)	$	149,805		9.83		$	60,933		4.0		$	60,933		4.0		$	76,166		5.0		$	155,812		9.98		$	62,444		4.0		$	62,444		4.0		$	78,055		5.0
December 31, 2021

Total Capital (to risk-weighted assets)	$	152,789		14.08	%	$	86,832		8.0	%	$	113,968		10.5	%	$	108,541		10.0	%

Tier 1 Capital (to risk-weighted assets)		139,681		12.87			65,124		6.0			92,259		8.5			86,832		8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		139,681		12.87			48,843		4.5			75,978		7.0			70,551		6.5

Tier 1 Capital (to average assets)	$	139,681		9.42		$	59,285		4.0		$	59,285		4.0		$	74,106		5.0

December 31, 2022
Total Capital (to risk-weighted assets)	$	168,786	13.43	%	$	100,525	8.0	%	$	131,939	10.5	%	$	125,656	10.0	%

Tier 1 Capital (to risk-weighted assets)		153,762	12.24			75,394	6.0			106,808	8.5			100,525	8.0

Common Equity Tier 1 Capital (to risk-weighted assets)		153,762	12.24			56,545	4.5			87,959	7.0			81,677	6.5

Tier 1 Capital (to average assets)	$	153,762	9.99		$	61,540	4.0		$	61,540	4.0		$	76,925	5.0

Restrictions on Cash Dividends to Common Shareholders

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

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

NOTE 1110 – 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 $~~311~~328 thousand and $~~253~~294 thousand, respectively, for the ~~three month~~three-month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021, and $862~~ ~~thousand and $847~~ ~~thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.~~2022.

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 $8598 thousand and $5535 thousand, respectively, for the ~~three month~~three-month periods ended ~~September 30,~~March 31, 2023 and 2022. On December 21, 2022, ~~and 2021, and $168~~ ~~thousand and $184~~ ~~thousand, respectively, for~~ the ~~nine month periods ended September 30, 2022 and 2021.~~Board of Directors of the Company adopted resolutions to terminate the Plan effective on the date immediately preceding the closing date of the pending merger with NBT (see Note 2). Upon termination, the employees participating in the Plan will become fully vested in the Company’s contributions to the Plan.

Other Retirement Plans

Split-Dollar Life Insurance

Salisbury adopted ASC 715-60, “Compensation - Retirement Benefits - Defined Benefit Plans - Other Postretirement" and recognized a liability for Salisbury’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $~~702~~694 thousand and $~~779~~702 thousand at ~~September 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, respectively. The Bank realized a credit of $698 thousand for the three months ended ~~September 30, 2022~~March 31, 2023 and ~~recorded an expense~~2022.

Supplemental Retirement Agreement

The Bank assumed a Supplemental Retirement Plan Agreement with a former Chief Executive Officer of Riverside Bank that provides for supplemental post retirement payments for a fifteen-year period ending in 2025 as described in the agreement. The related liability was $86199 thousand ~~for the three months ended September 30, 2021. The Bank realized a credit of~~and $77212 thousand at March 31, 2023 and December 31, 2022, respectively. The related expenses were immaterial for ~~the nine months ended September 30, 2022 and an expense of $~~all periods presented.

~~259~~ ~~thousand for the nine months ended September 30, 2021.~~Non-Qualified Deferred Compensation Plan

A Non-Qualified Deferred Compensation Plan (the "Plan") was adopted effective January 1, 2013. This Plan was adopted by the Bank for the benefit of certain key employees ("Executive" or "Executives") who have been selected and approved by the Bank to participate in this Plan and who have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such ~~Section. In 2022 and 2021, the Bank awarded seven (7) Executives with discretionary contributions to the plan.~~Section

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

The amended and restated Plan allows participant deferrals and provides greater flexibility in participant elections and investment options. The amended and restated Plan also provides additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified date before separation from service, and allows a participant to elect for each year’s contributions the manner in which such distributions will be paid. Installment distributions can be made in monthly, quarterly or annual installments. Payment of benefits under the Plan, other than benefits payable as a result of base salary deferrals, are conditioned on the participant’s covenant to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one year following the participant’s separation from service. The Bank has established a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally owned by the participants. In ~~second~~first quarter 2023, the Bank awarded one (1) Executive with a discretionary contribution to the plan. In first quarter 2022, ~~Salisbury contributed $100~~ ~~thousand~~the Bank awarded seven (7) Executives with discretionary contributions to the ~~amended and restated Plan for Mr. Cantele, President and Chief Executive Officer.~~ plan. Salisbury’s expense for this plan was $47145 thousand and $2947 thousand, respectively, for the three-month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021, and $141~~ ~~thousand and $~~86 ~~thousand, respectively, for the nine-month periods ended September 30, 2022 and 2021.~~2022.

Management Agreements

Management Agreements: Salisbury or the Bank has entered into various management agreements with its named executive officers (“NEOs”), including a severance agreement with Mr. Cantele, President and Chief Executive Officer, a change in control agreement with Mr. Albero, Executive Vice President and Chief Financial Officer, and a severance agreement with Mr. Davies, President of the New York Region and Chief Lending Officer. In addition to these agreements, Salisbury has change in control agreements or a severance agreement, with change in control provisions, with ten other executives with payouts ranging from 0.5 to 1.0 times base salary, annual cash bonus and other benefits. Such agreements, and their subsequent amendments, are designed to allow Salisbury to retain the services of the designated executives while reducing, to the extent possible, unnecessary disruptions to Salisbury’s operations.

2422

NOTE 1211 – LONG TERM INCENTIVE PLANS

Restricted stock

~~Restricted~~Salisbury did not grant restricted stock ~~expense was~~awards in first quarter 2023. Expense in first quarter 2023 and 2022 related to employee and directors’ stock-based compensation totaled $~~184~~183 thousand and $~~149~~188 thousand, ~~respectively, for the three month periods ended September 30, 2022 and 2021, and $615~~ ~~thousand and $449~~ ~~thousand, respectively, for the nine month periods ended September 30, 2022 and 2021. The tax benefit from restricted stock expense was $~~33 ~~thousand and $~~27 ~~thousand, respectively, for the three month periods ended September 30, 2022 and 2021; and $111~~ ~~thousand and $~~81 ~~thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.~~

~~In second quarter 2022, Salisbury granted a total of~~ ~~18,340~~ ~~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 $1.0~~ ~~million. 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, 2023 and 2022 ~~and 2021~~ totaled $~~1,328~~961 thousand and $~~1,075~~1.6 ~~thousand,~~million, respectively. There were no forfeitures in the ~~third~~first quarter of 2023 or ~~year to date for 2022 or 2021.~~2022.

Performance-based restricted stock units

On March 29, 2019, the Compensation Committee granted 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 paid out the final tranche of these awards in January 2021. The performance goal for awards granted under the RSU plan in 2019 was based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. The vesting ranged from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance This tranche of awards vested in second quarter 2022 at 150% for achieving tangible book value per share growth in excess of target payout performance. The vesting of these awards occurred prior to June 30, 2022 and was not affected by the two-for-one forward stock split.

On July 29, 2020, the Compensation Committee granted an additional 14,500 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank’s tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is ~~achieved, vesting will occur no later than March 15, 2023. The number~~achieved. These awards vested in first quarter 2023 at 94% of ~~units awarded~~target for ~~this tranche has been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.~~achieving below target payout performance.

On June 23, 2021, the Compensation Committee granted an additional 14,800 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($4.50 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 15, 2024. The number of units awarded and the performance goals for this tranche have been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.

On February 28, 2022, the Compensation Committee granted an additional 13,900 units under the RSU plan. The performance goal for this tranche is based on the increase in the Bank’s tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($4.50 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 15, 2025. The number of units awarded and the performance goals for this tranche have been adjusted to reflect the two-for-one forward stock split, which was effective on June 30, 2022.

The fair value of the awards granted under the RSU plan at the grant date was $~~462~~394 thousand and $~~622~~354 thousand, respectively, for those grants awarded in 2022 and 2021. Compensation expense of $4742 thousand and $6197 thousand was recorded with respect to ~~these~~all RSUs granted to date for the three months ended ~~September~~March 31, 2023 and 2022, ~~and 2021, and $240~~ ~~thousand and $235~~ ~~thousand for the nine months ended September 30, 2022 and 2021,~~ 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 $~~276~~315 thousand and $~~210~~267 thousand for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, and expenses of $814~~ ~~thousand and $757~~ ~~thousand for the first nine months of 2022 and 2021,~~ respectively. ~~The tax benefit from (STIP) expense was $~~50 ~~thousand and $~~38 ~~thousand, respectively, for the three-month periods ended September 30, 2022 and 2021; and $147~~ ~~thousand and $136~~ ~~thousand, respectively, for the nine month periods ended September 30, 2022 and 2021.~~

~~Options~~

~~Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In third quarter 2022 and third quarter 2021, no stock options were exercised.~~

NOTE 1312 – 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~~funds are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as ~~assets and~~ 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”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:

•

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

•

Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

•

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

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

•

Securities available-for-sale and ~~the CRA~~ mutual ~~fund.~~funds. Securities available-for-sale and ~~the CRA~~ mutual ~~fund~~funds are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

•

Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

•

Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.

•

Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

•

~~Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.~~

Assets measured at fair value are as follows:

Fair Value Measurements Using Assets at
(in thousands) Level 1 Level 2 Level 3 fair value
September 30, 2022
Assets at fair value on a recurring basis
U.S. Treasury $ — $ 16,977 $ — $ 16,977
U.S. Government Agency notes — 27,924 — 27,924
Municipal bonds — 44,610 — 44,610
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises — 63,480 — 63,480
Collateralized mortgage obligations:
U.S. Government agencies — 22,591 — 22,591
Corporate bonds — 13,579 — 13,579
Securities available-for-sale $ — $ 189,161 $ — $ 189,161
Mutual funds 1,882 — — 1,882
Derivative financial instruments — — — —
December 31, 2021
Assets at fair value on a recurring basis
U.S. Treasury $ — $ 15,131 $ — $ 15,131
U.S. Government Agency notes — 31,604 — 31,604
Municipal bonds — 47,822 — 47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises — 74,541 — 74,541
Collateralized mortgage obligations:
U.S. Government agencies — 20,898 — 20,898
Corporate bonds — 12,400 — 12,400
Securities available-for-sale $ — $ 202,396 $ — $ 202,396
Mutual fund 901 — — 901
Derivative financial instruments — 18 — 18
Assets at fair value on a non-recurring basis
Assets held for sale ¹ $ 700 $ — $ — $ 700


	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
March 31, 2023
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	17,479	$	—	$	17,479
U.S. Government Agency notes		—		26,844		—		26,844
Municipal bonds		—		48,199		—		48,199
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		60,550		—		60,550
Collateralized mortgage obligations:
U.S. Government agencies		—		21,915		—		21,915
Corporate bonds		834		11,777		—		12,611
Securities available-for-sale	$	834	$	186,764	$	—	$	187,598
Mutual funds		2,068		—		—		2,068

¹ ~~Prior to~~


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

At March 31, 2023 and December 31, 2021, the Bank entered into an agreement with a third party to sell the building that housed its Poughkeepsie, New York retail branch and relocate the branch to leased space nearby. This sale was completed in January 2022. At September 30, 2022, Salisbury did not have any assets measured at fair value on a non-recurring basis.

2724

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, 2022
Financial Assets
Cash and cash equivalents $ 56,297 $ 56,297 $ 56,297 $ — $ —
Securities available-for-sale, net 189,161 189,161 — 189,161 —
Mutual funds 1,882 1,882 1,882 — —
Federal Home Loan Bank of Boston stock 1,487 1,487 — 1,487 —
Loans receivable, net 1,176,493 1,154,834 — — 1,154,834
Accrued interest receivable 6,012 6,012 — 6,012 —
Cash surrender value of life insurance policies 30,187 30,187 — 30,187 —
Financial Liabilities
Demand (non-interest-bearing) $ 413,584 $ 413,584 $ — $ 413,584 $ —
Demand (interest-bearing) 241,236 241,236 — 241,236 —
Money market 313,987 313,987 — 313,987 —
Savings and other 246,538 246,538 — 246,538 —
Certificates of deposit 109,859 109,536 — 109,536 —
Deposits 1,325,204 1,324,881 — 1,324,881 —
Repurchase agreements 7,109 7,109 — 7,109 —
FHLBB advances 20,000 20,000 — 20,000 —
Subordinated debt 24,517 21,514 — 21,517 —
Note payable 139 135 — 135 —
Finance lease obligation 4,296 3,916 — — 3,916
Accrued interest payable 18 18 — 18 —
December 31, 2021
Financial Assets
Cash and cash equivalents $ 175,335 $ 175,335 $ 175,335 $ — $ —
Interest bearing time deposits with financial institutions 750 750 750 — —
Securities available-for-sale 202,396 202,396 — 202,396 —
Mutual funds 901 901 901 — —
Federal Home Loan Bank of Boston stock 1,397 1,397 — 1,397 —
Loans held-for-sale 2,684 2,721 — — 2,721
Loans receivable, net 1,066,750 1,066,733 — — 1,066,733
Accrued interest receivable 6,260 6,260 — 6,260 —
Cash surrender value of life insurance policies 27,738 27,738 — 27,738 —
Derivative financial instruments 18 18 — 18 —
Financial Liabilities
Demand (non-interest-bearing) $ 416,073 $ 416,073 $ — $ 416,073 $ —
Demand (interest-bearing) 233,600 233,600 — 233,600 —
Money market 330,436 330,436 — 330,436 —
Savings and other 237,075 237,075 — 237,075 —
Certificates of deposit 119,009 119,716 — 119,716 —
Deposits 1,336,193 1,336,900 — 1,336,900 —
Repurchase agreements 11,430 11,430 — 11,430 —
FHLBB advances 7,656 7,714 — 7,714 —
Subordinated debt 24,474 24,409 — 24,409 —
Note payable 170 171 — 171 —
Finance lease liability 4,107 4,223 — — 4,223
Accrued interest payable 49 49 — 49 —


(in thousands)	Carrying		Estimated		Fair value measurements using
	value		fair value		Level 1		Level 2		Level 3
March 31, 2023
Financial Assets
Cash and cash equivalents	$	49,844	$	49,844	$	49,844	$	—	$	—
Securities available-for-sale, net		187,598		187,598		834		186,764		—
Mutual funds		2,068		2,068		2,068		—		—
Federal Home Loan Bank of Boston stock		5,030		5,030		—		5,030		—
Loans held-for-sale		—		—		—		—		—
Loans receivable, net		1,234,632		1,193,272		—		—		1,193,272
Accrued interest receivable		6,383		6,383		—		6,383		—
Cash surrender value of life insurance policies		30,571		30,571		—		30,571		—
Financial Liabilities
Demand (non-interest-bearing)	$	370,049	$	370,049	$	—	$	370,049	$	—
Demand (interest-bearing)		218,902		218,902		—		218,902		—
Money market		296,974		296,974		—		296,974		—
Savings and other		236,755		236,755		—		236,755		—
Certificates of deposit		170,362		170,806		—		170,806		—
Deposits		1,293,042		1,293,486		—		1,293,486		—
Repurchase agreements		3,230		3,230		—		3,230		—
FHLBB advances		100,000		99,999		—		99,999		—
Subordinated debt		24,545		21,022		—		21,022		—
Note payable		117		114		—		114		—
Finance lease obligation		4,225		3,449		—		—		3,449
Accrued interest payable		425		425		—		425		—

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.


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

NOTE 1413 – SUBSEQUENT EVENTS

On ~~October 19, 2022~~April 12, 2023, Salisbury shareholders approved the merger with NBT. The merger is expected to close in second quarter 2023 subject to regulatory approval.

On April 26, 2023 the Board of Directors declared a quarterly dividend of $0.16 per common share payable on ~~November 25, 2022~~May 26, 2023 to shareholders of record as of ~~November 11, 2022.~~May 12, 2023.

2825

Item 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. (“Salisbury” or the ~~��Company”~~“Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).

~~BUSINESS~~

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”.~~“SAL.” Salisbury's principal business consists of its operation and control of the business of the Bank.

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

Critical Accounting Policies and Estimates

Salisbury’s consolidated financial statements follow GAAP as applied to the banking industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.

Salisbury’s significant accounting policies are presented in Note 1 of Notes to Consolidated Financial Statements, which, along with this Management’s Discussion and Analysis, provide information on how significant assets are valued in the financial statements and how those values are determined. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating Salisbury’s reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for ~~Loan~~Credit Losses on Loans (“ACL”)

Effective January 1, 2023, the Company adopted the new accounting standard for credit losses, ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13). This new accounting standard, commonly referred to as "CECL," significantly changed our methodology for accounting for reserves on loans, unfunded off-balance sheet credit exposures, including certain unfunded loan commitments and standby guarantees. ASU 2016-13 replaced the "incurred loss" methodology used to establish an allowance on loans and off-balance sheet credit exposures, with an "expected loss" approach. Under CECL, the ACL at each reporting period serves as our best estimate of projected credit losses over the contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and forecasts as of the valuation date.

The recorded ACL on loans is determined based on the amortized cost basis of the assets and may be determined at various levels, including homogeneous loan pools and individual credits with unique risk factors. Salisbury has elected to use a discounted cash flow approach to calculate the ACL for each loan segment. Within the discounted cash flow model, a probability of default (“PD”) and loss given default (“LGD”) assumption is applied to calculate the expected loss for each loan segment. PD is the probability the asset will default within a given timeframe and LGD is the percentage of the assets not expected to be collected due to default. PD and LGD data are derived from internal historical default and loss experience as well as the use of external data where there are not statistically meaningful loss events for a loan segment.

CECL may create more volatility in the Bank’s ACL for loans and for off-balance sheet credit exposures. Under CECL, Salisbury’s ACL may increase or decrease period to period based on many factors, including, but not limited to: (i) macroeconomic forecasts and conditions; (ii) forecast period and reversion speed; (iii) prepayment speed assumption; (iv) loan portfolio volumes and changes in mix; (v) credit quality; and (vi) various qualitative factors outlined in ASU 2016-13.

ASU 2016-13 also changed the methodology and accounting for credit losses within Salisbury’s investment portfolio designated as AFS. To the extent the fair value of a security designated as AFS is less than its amortized cost and the Bank either (i) intends to sell the security or (ii) it is more-likely-than-not that the Bank will be required to sell the security before recovery of its amortized cost basis, then the investment is permanently impaired and the amortized cost basis is written down to fair value and a corresponding impairment charge is recorded within the consolidated statement of income. If neither of the above is true, but the fair value of the investment is below its amortized cost basis at the reporting date, then an allowance is established on the AFS investment for the portion of the impairment that is due to credit reasons (e.g. credit rating downgrades, past due receivables, and/or other macro- or micro-adverse trends). The allowance established on an AFS investment due to credit losses is limited to the amount the fair value of the investment is below its amortized cost basis as of the reporting date. If the fair value of the investment is below its amortized cost basis for non-credit-related reasons (e.g. interest rate environment), then the impairment continues to be recognized within shareholders' equity through AOCI, as it did prior to the adoption of ASU 2016-13.

Management considers the ACL on loans to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses over the expected contractual life of the loans in its portfolio. Determining the appropriateness of the allowance is a key management function that requires significant judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the current loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance in future periods. While our current evaluation indicates that the ACL is appropriate, the allowance may need to be increased under adversely different conditions or assumptions.

The allowance for ~~loan~~credit losses represents management’s estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for ~~loan~~credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on ~~impaired~~individually evaluated loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet.

The significant key assumptions used with the ACL calculation at March 31, 2023 using the CECL methodology, included:

• Macroeconomic factors (loss drivers): Salisbury monitors and assesses National Unemployment, changes in National GDP and changes in National Housing Price Index at least annually to determine if these macroeconomic factors continue to be the most predictive indicator of losses within our loan portfolio. Factors considered in determining the ACL may change from time to time.

• Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable is four quarters. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. "reversion speed"), management considers factors, which include but are not limited to, historical loan loss experience over previous economic cycles, as well as what stage of the economic cycle management believes the economy is in.

• Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing industry benchmark data due to the stability and increased number of observations. The prepayment speed assumption is utilized with the discounted cash flow model (i.e. the CECL model) to forecast expected cashflows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.

• Qualitative factors: As within previous accounting guidance used for the "incurred loss" model, ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. Salisbury continues to consider qualitative factors in determining and arriving at the ACL each reporting period.

As of March 31, 2023, the recorded ACL was $16.0 million and represented management’s best estimate. However, management may adjust its assumptions to account for differences between expected and actual losses from period to period. A future change of management’s assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in key CECL assumptions and asset quality, and consider their impact on the Company's financial condition. A discussion of the factors driving changes in the amount of the allowance for ~~loan~~credit losses is included in the “Provision and Allowance for ~~Loan~~Credit Losses” section of Management’s Discussion and Analysis.

Refer to Note 1 of the consolidated financial statements for further details on the Company's policies and accounting elections made.

Salisbury considers the ACL for off-balance sheet credit exposures to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover management’s estimate of all expected credit losses on expected future loan advances of primarily, unfunded loan commitments for those that are not unconditionally cancellable by the Company. The expected credit loss factors for each loan segment determined using the ACL on loans methodology described above, as well as within Note 1 of the consolidated financial statements, is used to calculate the ACL on off-balance sheet credit exposures for each applicable loan segment, and, thus, are subject to the same level of estimation risk and volatility previously described. In addition, one other key assumption is used to derive the ACL on off-balance sheet credit exposures and that is the expected funding rate. The expected funding rate is derived using historical loan-level data for credit line usage, and is applied to total off-balance sheet credit exposures at each reporting date, excluding any that are unconditionally cancellable by the Company, to determine the expected funding amount. As unfunded loan commitments are funded, the allowance migrates from that provided for off-balance sheet credit exposures to the ACL on loans. If the expected funding rate or any other key assumption used is not reasonable, then this could have an adverse impact on the total ACL upon funding.

As of March 31, 2023, the recorded ACL on off-balance sheet credit exposures of $1.2 million is recorded within accrued interest and other liabilities on Salisbury’s consolidated balance sheet. Increases (decreases) to the allowance are presented within provision (credit) for credit losses on the consolidated statements of income. The allowance at March 31, 2023, represented management’s best estimate, however, management may adjust various assumptions to account for differences between expected and actual losses from period to period. A future change to certain assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on off-balance sheet credit exposures is reviewed on a quarterly basis by the Company's Loan Committee, and subsequently ratified by the Company’s Board of Directors.

As of March 31, 2023, the Company had not identified indications of credit risk and did not carry any allowance for credit losses on its AFS portfolio, nor did it record any permanent impairments during first quarter 2023.

FINANCIAL CONDITION

Securities and Short Term Funds

~~The fair~~As of March 31, 2023, the market value of Salisbury’s available-for-sale (AFS) investment portfolio ~~decreased $12.2~~was $187.6 million ~~from year end 2021 to $192.5 million at September 30, 2022. The fair market value included net unrealized pre-tax losses~~or 12.0% of ~~$28.3 million at September 30, 2022~~total assets. compared with ~~net unrealized pre-tax gains~~$187.4 million, or 12.2% of ~~$1.1 million~~total assets at December 31, ~~2021. The net unrealized losses reflected the sharp increase in market interest rates that has occurred in the last nine months.~~2022. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) of $49.8 million at March 31, 2023 decreased ~~$119.0~~$0.7 million, or ~~67.9%, to $56.3~~1.4% from December 31, 2022.

The decline in market interest rates in first quarter 2023 resulted in inception-to-date after-tax unrealized losses in Salisbury’s AFS portfolio of $18.0 million at ~~September 30,~~March 31, 2023 compared with an after-tax unrealized losses of $20.7 million at December 31, 2022. ~~This decrease was driven by strong loan growth~~These unrealized losses and ~~normal customer activity during the nine-month period ended September 30, 2022.~~

gains are recorded in accumulated other comprehensive loss, net on Salisbury’s consolidated balance sheet. Salisbury evaluates securities for ~~OTTI where~~impairment when the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an ~~OTTI~~impairment charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for ~~OTTI.~~impairment. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be ~~OTTI~~impaired at ~~September 30, 2022.~~March 31, 2023.

Loans

Net loans receivable ~~increased $109.7 million, or 10.3%, to $1.18~~of $1.235 billion at ~~September 30, 2022, compared with $1.07~~March 31, 2023 increased from $1.214 billion at December 31, ~~2021. PPP loan balances declined from $25.6 million at~~2022. At March 31, 2023 and December 31, ~~2021 to $0.4~~2022, Salisbury had approximately $0.2 million ~~at September 30, 2022 due to the forgiveness~~ of ~~such loans by the SBA. Excluding~~ PPP loans ~~net loans receivable increased by $136.2 million, or 12.9%, compared with December 31, 2021.~~on its balance sheet. The increase in net ~~loans~~loan receivable ~~was broad-based and~~balances primarily reflected growth in residential ~~consumer,~~mortgage, commercial real estate and commercial construction balances, partially offset by lower commercial & industrial, ~~loans.~~consumer and municipal loan balances. Salisbury did not sell any residential loans to FHLB Boston in first quarter 2023 or fourth quarter 2022. The ~~allowance~~ratio of gross loans to deposits for loan losses increased by $1.4 million from December 2021 primarily due to significant loan growth, management’s current assessment of certain qualitative and environmental factors and charge-off activity during the nine-month period ending September 30,first quarter 2023 was 96.7% compared with 90.4% for fourth quarter 2022.

Asset Quality

During the first ~~nine~~three months of ~~2022,~~2023, overall asset quality ~~continued to improve.~~ remained strong. Non-performing assets ~~of $1.9~~decreased $0.4 million to $2.2 million, or ~~0.16%~~0.14% of ~~gross loans receivable declined $2.3~~assets at March 31, 2023, from $2.7 million, or ~~55.7% from year end 2021. In addition, total impaired and potential problem loans declined $21.6 million, or 65.8%, from $32.8 million, or 3.04%~~0.17% of gross loans receivable to $11.2 million, or 0.9% of gross loans receivable at September 30, 2022. The decrease in the balance from year end 2021 primarily reflected management’s upgrade of the internal risk rating on loans to businesses in the hospitality and entertainment and recreation industries, which were previously downgraded due to concerns over COVID-19. Such businesses have demonstrated a return to pre-pandemic levels of activity and liquidity.As of September 30, 2022, Salisbury did not have any outstanding loan payment deferrals and the Bank had approximately $0.4 million of PPP loans on its balance sheet compared with approximately $26 millionassets at December 31, ~~2021.~~

2022. Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

Past Due Loans

Loans past due 30 days or more ~~decreased $2.1 million for the nine months ended September 30, 2022~~increased during first quarter 2023 to ~~$0.5~~$2.4 million, or ~~0.04%~~0.19% of gross loans receivable at March 31, 2023 compared with ~~$2.6~~$1.5 million, or ~~0.24%~~0.12% of gross loans receivable at December 31, ~~2021. The decline in past due loans from year end 2021 primarily reflected the sale and charge-off of certain non-performing loans during the nine-month period ending September 30,~~ 2022.

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

(in thousands)		September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Past due 30-59 days	$	276	$	751	$	2,156	$	1,195
Past due 60-89 days		114		590		78		115
Past due 90-179 days		100		1		—		—
Past due 180 days and over		—		10		—		—
Accruing loans		490		1,352		2,234		1,310
Past due 30-59 days		—		14		—		68
Past due 60-89 days		—		—		48		—
Past due 90-179 days		—		63		16		90
Past due 180 days and over		15		1,213		100		15
Non-accrual loans		15		1,290		164		173
Total loans past due 30 days or greater	$	505	$	2,642	$	2,398	$	1,483

Credit Risk Ratings

Salisbury assigns credit risk ratings to loans receivable in order to manage credit risk and to determine the allowance for ~~loan~~credit losses. Credit risk ratings categorize loans by common financial and structural characteristics that measure the credit strength of a borrower. Salisbury’s rating model has eight risk rating grades, with each grade corresponding to a progressively greater risk of default. Grades 1 through 4 are pass ratings and 5 through 8 are ratings (special mention, substandard, doubtful, and loss) defined by the bank's regulatory agencies, the FDIC and CTDOB. Risk ratings are assigned to differentiate risk within the portfolio and are reviewed on an ongoing basis and revised, if needed, to reflect changes in the borrowers' current financial position and outlook, risk profiles and the related collateral and structural positions.

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

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

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

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

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

~~Credit Quality Segments~~

~~Salisbury categorizes loans receivable into the following credit quality segments:~~

Impaired loans consist of all non-accrual loans and troubled debt restructured loans and represent loans for which it is probable that Salisbury will not be able to collect all principal and interest amounts due according to the contractual terms of the loan agreements.

Non-accrual loans, a sub-set of impaired loans, are loans for which the accrual of interest has been discontinued because, in the opinion of management, full collection of principal or interest is unlikely.

Non-performing loans consist of non-accrual loans and accruing loans past due 90 days and over that are well collateralized, in the process of collection and where full collection of principal and interest is reasonably assured. Non-performing assets consist of non-performing loans plus real estate acquired in settlement of loans.

Troubled debt restructured loans are loans for which concessions such as reduction of interest rates, other than normal market rate adjustments, or deferral of principal or interest payments, extension of maturity dates, or reduction of principal balance or accrued interest, have been granted due to a borrower’s financial condition. Loan restructuring is employed when management believes the granting of a concession will increase the probability of the full or partial collection of principal and interest.

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

~~Impaired Loans~~

~~Impaired loans include all modified loans classified as troubled debt restructurings (TDRs) and loans on non-accrual status. The components of impaired loans are as follows:~~

(in thousands) September 30, 2022 December 31, 2021
Non-accrual loans, excluding troubled debt restructured loans $ 1,692 $ 2,838
Non-accrual troubled debt restructured loans 68 1,350
Accruing troubled debt restructured loans 2,772 3,609
Total impaired loans $ 4,532 $ 7,797

~~Non-Performing Assets~~

Non-performing assets decreased $2.3 million to $1.9 million, or 0.12% of assets for the nine months ended September 30, 2022, from $4.2 million, or 0.27% of assets at December 31, 2021. The 55.7% decrease in non-performing assets in the first nine months 2022 resulted primarily from the sale and charge-off of certain non-performing loans during the period.

~~The components of non-performing assets are as follows:~~

(in thousands) September 30, 2022 December 31, 2021
Residential 1-4 family $ 137 $ 750
Residential 5+ multifamily — 861
Home equity lines of credit — 21
Commercial 1,199 1,924
Farm land 397 432
Vacant land — —
Real estate secured 1,733 3,988
Commercial and industrial 27 200
Consumer — —
Non-accrual loans 1,760 4,188
Accruing loans past due 90 days and over 100 11
Non-performing loans 1,860 4,199
Foreclosed assets — —
Non-performing assets $ 1,860 $ 4,199

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

(in thousands) September 30, 2022 December 31, 2021
Current $ 1,745 $ 2,898
Past due 30-59 days — 14
Past due 60-89 days — —
Past due 90-179 days 100 64
Past due 180 days and over 15 1,223
Total non-performing loans $ 1,860 $ 4,199

~~At September 30, 2022, 93.82% of non-performing loans were current with respect to loan payments, compared with 69.02% at December 31, 2021.~~

~~Total Outstanding Troubled Debt Restructured Loans~~

Total outstanding troubled debt restructured loans decreased $2.1 million, or 42.7%, during the first nine months of 2022 to $2.8 million, or 0.24% of gross loans receivable at September 30, 2022, compared to $5.0 million, or 0.46% of gross loans receivable at December 31, 2021. The reduction in loan balance from year end 2021 primarily reflected the sale and charge-off of loans during the nine month period ended September 30, 2022.

~~The components of troubled debt restructured loans are as follows:~~

(in thousands) September 30, 2022 December 31, 2021
Residential 1-4 family $ 1,364 $ 1,824
Residential 5+ multifamily 79 87
Commercial 1,329 1,622
Real estate secured 2,772 3,533
Commercial and industrial — 76
Accruing troubled debt restructured loans 2,772 3,609
Residential 1-4 family 68 256
Residential 5+ multifamily — 861
Commercial — 233
Real estate secured $ 68 $ 1,350
Non-accrual troubled debt restructured loans 68 1,350
Troubled debt restructured loans $ 2,840 $ 4,959

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

(in thousands) September 30, 2022 December 31, 2021
Current $ 2,772 $ 3,540
Past due 30-59 days — 37
Past due 60-89 days — 32
Accruing troubled debt restructured loans 2,772 3,609
Current 68 414
Past due 180 days and over — 936
Non-accrual troubled debt restructured loans 68 1,350
Total troubled debt restructured loans $ 2,840 $ 4,959

~~At September 30, 2022, 100.00% of troubled debt restructured loans were current with respect to loan payments, as compared with 79.73% at December 31, 2021.~~

~~Potential Problem Loans~~

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans decreased $18.3 million during the first nine months of 2022 to $6.7 million, or 0.56% of gross loans receivable at September 30, 2022, compared with $25.0 million, or 2.32% of gross loans receivable at December 31, 2021. The decrease primarily reflected internal credit risk rating upgrades on loans to businesses primarily in the hospitality, health care and entertainment and recreation industries which were previously downgraded due to concerns over the impact of COVID-19. These businesses have demonstrated a return to pre-pandemic levels of activity and liquidity, warranting the improvement in risk rating.

~~The components of potential problem loans are as follows:~~

(in thousands) September 30, 2022 December 31, 2021
Residential 1-4 family $ 858 $ 999
Residential 5+ multifamily — 709
Residential real estate 858 1,708
Commercial 4,156 20,998
Construction of commercial — —
Commercial real estate 4,156 20,998
Farm land — —
Real estate secured 5,014 22,706
Commercial and industrial 1,690 2,310
Consumer — —
Total potential problem loans $ 6,704 $ 25,016

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

(in thousands) September 30, 2022 December 31, 2021
Current $ 6,672 $ 24,977
Past due 30-59 days 20 23
Past due 60-89 days 12 16
Total potential problem loans $ 6,704 $ 25,016

At September 30, 2022, 99.52% of potential problem loans were current with respect to loan payments, as compared with 99.84% at December 31, 2021. Management cannot predict the extent to which economic or other factors may impact such borrowers’ future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Deposits and Borrowings

~~Deposits~~Total deposits of $1.3 billion at March 31, 2023 decreased ~~$11.0~~$65.4 million, or ~~0.1%~~4.8%, ~~to $1.325 billion at September 30,~~from December 31, 2022 and increased $2.6 million, or 0.2%, from March 31, 2022. Salisbury accumulates deposits from a diverse customer base. At March 31, 2023, the composition of Salisbury’s deposit balances was as follows: retail: 45%; commercial: 39%; municipalities: 8%; brokered funds: 4%; Wealth Advisory: 3%; and educational institutions: 1%. At March 31, 2023, the balance of Salisbury’s deposits that were not insured by the FDIC and not collateralized by marketable securities owned by Salisbury was approximately $344 million, or 27%, of total deposits.

At March 31, 2023, Salisbury had outstanding brokered deposits balances of $53.2 million compared with $1.336 billion at December 31, 2021. The decrease reflected normal customer activity as deposit levels returned to pre-pandemic levels. Retail repurchase agreements decreased $4.3 million during 2022 to $7.1 million at September 30, 2022, from $11.4balances of $45.0 million at December 31, ~~2021.~~2022. Salisbury did not have any outstanding brokered deposit balances at March 31, 2022. Brokered deposits are included in the certificates of deposit balances on Salisbury’s consolidated balance sheet. Management utilized brokered deposits in first quarter 2023 to fund loan growth and as a source of liquidity. Excluding brokered funds, Salisbury’s deposits declined $73.5 million, or 5.6%, from fourth quarter 2022 and declined $50.6 million, or 3.9%, from first quarter 2022. Average total deposits were $1.3 billion for first quarter 2023, fourth quarter 2022 and first quarter 2022. Average total deposits for first quarter 2023 included average brokered deposits of $47.9 million compared with $25.8 million for fourth quarter 2022 and $7.5 million for first quarter 2022.

~~The distribution~~Salisbury has access to various sources of ~~average total deposits by account type is as follows:~~

September 30, 2022 December 31, 2021
(in thousands) Average Balance Percent Weighted
Average Interest Rate Average Balance Percent Weighted
Average Interest Rate
Demand deposits $ 391,492 29.58 % 0.00 % $ 366,953 29.28 % 0.00 %
Interest-bearing checking accounts 233,547 17.64 0.18 224,763 17.93 0.19
Regular savings accounts 246,101 18.59 0.29 315,469 25.17 0.17
Money market savings 320,552 24.22 0.44 215,300 17.18 0.11
Certificates of deposit (CD’s)¹ 131,918 9.97 0.73 130,879 10.44 0.72
Total deposits $ 1,323,610 100.00 % 0.26 % $ 1,253,364 100.00 % 0.17 %

¹~~CD’s~~ ~~also include~~ ~~brokered certificates~~liquidity, including the FHLBB and ~~there were none~~the Federal Reserve Bank. Salisbury had $100.0 million of outstanding advances from FHLBB at ~~September 30, 2022~~ ~~and $7.9~~March 31, 2023 compared with $10.0 million at December 31, ~~2021.~~

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

Interest rates (in thousands) September 30, 2022 December 31, 2021
Less than 1.00% $ 79,245 $ 97,099
1.00% to 1.99% 14,589 14,919
2.00% to 2.99% 15,787 6,493
3.00% to 3.99% 238 498
Total $ 109,859 $ 119,009

~~The distribution of certificates of deposit by interest rate~~2022 and ~~maturity is as follows:~~

At September 30, 2022
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
Less than 1.00% $ 58,315 $ 11,841 $ 3,764 $ 5,325 $ 79,245 72.13 %
1.00% to 1.99% 8,530 3,814 2,245 — 14,589 13.28
2.00% to 2.99% 8,274 5,016 2,497 — 15,787 14.37
3.00% to 3.99% 238 — — — 238 0.22
Total $ 75,357 $ 20,671 $ 8,506 $ 5,325 $ 109,859 100.00 %

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

September 30, 2022 (in thousands) Within
3 months
3-6 months
6-12 months Over
1 year Total
Certificates of deposit $100,000 and over $ 23,015 $ 6,479 $ 18,252 $ 19,351 $ 67,097

$0.4 million at March 31, 2022, respectively. Salisbury’s excess borrowing capacity at FHLBB was approximately $145 million at March 31, 2023. Additionally, at March 31, 2023, Salisbury had ~~$20.0~~approximately $100 million of ~~outstanding FHLBB advances at September 30, 2022 compared with an outstanding balance of $7.7 million at December 31, 2021.~~ eligible collateral that could be posted to the Federal Reserve to secure funds under the Bank Term Funding Program. Salisbury has not borrowed funds under this program.

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, 2022,~~March 31, 2023, $20.0 million of letters of credit were ~~outstanding.~~outstanding compared with $20.0 million at December 31, 2022.

~~Liquidity~~

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

	March 31, 2023								December 31, 2022
(in thousands)	Average Balance		Percent			Weighted-Average Interest Rate			Average Balance		Percent			Weighted-Average Interest Rate
Demand deposits	$	382,586		28.99	%		0.00	%	$	395,848		30.01	%		0.00	%
Interest-bearing checking accounts		223,742		16.95			0.22			231,970		17.59			0.18
Regular savings accounts		232,162		17.59			0.70			240,695		18.25			0.26
Money market savings		320,015		24.25			1.61			318,302		24.13			0.49
Certificates of deposit (CD’s)		161,300		12.22			2.58			132,192		10.02			0.84
Total deposits	$	1,319,806		100.00	%		0.87	%	$	1,319,007		100.00	%		0.28	%

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

Interest rates		March 31, 2023		December 31, 2022
Less than 1.00%	$	48,809	$	104,261
1.00% to 1.99%		10,437		11,739
2.00% to 2.99%		18,734		19,907
3.00% to 3.99%		29,781		17,463
4.00% to 4.99%		62,601		—
Total	$	170,362	$	153,370

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

	At March 31, 2023
Interest rates	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
Less than 1.00%	$	32,823	$	7,998	$	4,329	$	3,659	$	48,809		28.65	%
1.00% to 1.99%		6,041		4,301		95		—		10,437		6.12
2.00% to 2.99%		14,501		1,735		2,498		—		18,734		11.0
3.00% to 3.99%		29,781		—		—		—		29,781		17.48
4.00% to 4.99%		56,928		5,673		—		—		62,601		36.75
Total	$	140,074	$	19,707	$	6,922	$	3,659	$	170,362		100.00	%

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

March 31, 2023 (in thousands)		Within 3 months				3-6 months				6-12 months				Over 1 year				Total
Certificates of deposit $100,000 and over		$	62,218			$	9,819			$	36,930			$	15,960			$	124,926

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. During first quarter 2023, Salisbury increased its utilization of brokered deposits by $5.3 million and increased its borrowings from FHLBB by $90.0 million to fund loan growth and to provide liquidity. At ~~September 30, 2022,~~March 31, 2023, Salisbury’s outstanding borrowings and excess borrowing capacity at FHLBB ~~was approximately $233.0 million.~~were $100 million and $145 million, respectively. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury’s net interest margin. If ~~a deterioration in~~an extended economic ~~conditions or other factors cause~~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-month~~three-month period ended ~~September 30, 2022~~March 31, 2023 provided net cash of ~~$22.3~~$3.0 million. Investing activities utilized net cash of ~~$135.2~~$23.2 million ~~principally from $115.1 million of~~due to the net loan originations ~~and principal collections, $52.2~~of $22.3 million, ofnet purchases of ~~securities available-for-sale, $2.5~~FHLB stock of $3.7 million ~~in purchase~~and other activity of ~~Bank Owned Life Insurance (BOLI) and $0.8~~$0.2 million, ~~of capital expenditures,~~ partly offset by ~~proceeds of $13.1 million from calls, maturities and principle payments on securities available-for-sale, and $22.0~~$3.0 million from the ~~sale~~maturities/principal paydowns of ~~available-for-sale-securities.~~available-for-sale (AFS) securities. Financing activities ~~utilized~~provided net cash of ~~$6.1million principally~~$19.6 million primarily due to athe increase of short-term FHLB borrowings of $90 million, increase in time deposits $17.0 million partly off-set by the decrease ~~in deposit transaction accounts~~ of ~~$1.8~~savings deposits of $82.4 million, a decrease of ~~$9.2~~$4.0 million in ~~time deposits, a decrease of $4.3 million for~~ securities sold under agreements to repurchase ~~agreements, payments of $6.0 million for long-term FHLB borrowings, payments of $1.7 million on amortizing FHLBB advances,~~ and ~~the payment of common stock dividends of $2.8 million, partially offset by $20.0~~$1.0 million in ~~FHLB short term advances.~~dividends paid.

At ~~September 30, 2022,~~March 31, 2023, Salisbury had outstanding commitments to fund new loan originations of ~~$57.6~~$42.6 million and unused lines of credit of ~~$250.2~~$253.0 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.

3330

RESULTS OF OPERATIONS

For the ~~three-month~~three month periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~

~~OVERVIEW~~

OVERVIEW

Net income allocated to common ~~stock~~shareholders was ~~$4.3~~$3.0 million, or ~~$0.75~~$0.52 basic earnings per ~~basic~~ common share, for the ~~third~~first quarter ended ~~September 30, 2022 (third~~March 31, 2023 (first quarter ~~2022)~~2023), compared with ~~$3.4~~$4.1 million, or ~~$0.60~~$0.71 basic earnings per ~~basic~~ common share, for the ~~third~~fourth quarter ended ~~September 30, 2021 (third~~December 31, 2022 (fourth quarter ~~2021)~~2022), and ~~$3.8~~$3.5 million, or ~~$0.67~~$0.62 basic earnings per ~~basic~~ common share, for the ~~second~~first quarter ended ~~June 30,~~March 31, 2022 ~~(second~~(first quarter 2022). The decrease from fourth quarter 2022 primarily reflected lower net interest income of $0.9 million, a higher provision for credit losses of $0.4 million and higher non-interest expenses of $0.2 million. The decrease from first quarter 2022 primarily reflected a higher provision for credit losses of $0.6 million, lower non-interest income of $0.4 million and higher non-interest expense of $0.5 million, partially offset by higher net interest income of $0.8 million. First quarter 2023 included cost of $385 thousand related to the pending merger with NBT.

Net Interest Income

Tax equivalent net interest income ~~of $12.1 million~~ for ~~the third~~first quarter ~~2022~~2023 increased ~~$1.7 million,~~$834 thousand, or ~~16.5%~~8.0%, versus ~~third~~first quarter ~~2021.~~2022. Average total earning assets for the first quarter 2023 increased ~~$53.8~~$82.5 million, or ~~3.8%~~5.8%, versus ~~third~~first quarter ~~2021.~~2022. Average total interest bearing deposits for the first quarter 2023 increased ~~$33.6~~$19.4 million, or ~~3.7%~~2.1%, versus ~~third~~first quarter ~~2021.~~ 2022. The tax equivalent net interest margin for the ~~third~~first quarter ~~2022~~2023 was ~~3.27%~~2.99% compared with ~~2.92%~~2.95% for the ~~third~~first quarter ~~2021.~~2022. Excluding PPP ~~loan,~~loans, the tax equivalent net interest margin for the ~~third~~first quarter ~~2022~~2023 was ~~3.25%~~2.99% compared with ~~2.78%~~2.86% for ~~the third~~first quarter ~~2021. The increase in net interest margin from third quarter 2021 primarily reflected a $111.7 million, or 10.6%, increase in average loans and~~ ~~an increase of 5 basis points in average loan yields as well as a $70.7 million, or 46.9% increase in average securities balances and an increase of 24 basis points in average yields.~~2022.

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

Three months ended September 30, Average Balance Income / Expense Average Yield / Rate
(dollars in thousands) 2022 2021 2022 2021 2022 2021
Loans (a)(d) $ 1,168,037 $ 1,056,266 $ 11,675 $ 10,382 3.95 % 3.90 %
Securities (c)(d) 221,620 150,841 1,192 720 2.15 1.91
FHLBB stock 1,191 1,743 8 6 2.92 1.38
Short term funds (b) 68,818 196,997 344 73 1.98 0.15
Total earning assets 1,459,666 1,405,847 13,219 11,181 3.58 3.15
Other assets 60,283 72,547
Total assets $ 1,519,949 $ 1,478,394
Interest-bearing demand deposits $ 233,547 $ 227,291 106 111 0.18 0.19
Money market accounts 320,552 327,861 356 140 0.44 0.17
Savings and other 246,101 217,541 179 58 0.29 0.11
Certificates of deposit 131,918 125,768 242 223 0.73 0.70
Total interest-bearing deposits 932,118 898,461 883 532 0.38 0.23
Repurchase agreements 9,684 14,296 4 5 0.18 0.15
Finance lease 5,318 2,685 41 33 3.05 4.98
Note payable 142 183 2 3 6.15 6.11
Subordinated debt (net of issuance costs) 24,508 24,452 233 233 3.80 3.82
FHLBB advances 217 9,329 2 30 3.15 1.28
Total interest-bearing liabilities 971,987 949,406 1,165 836 0.48 0.35
Demand deposits 410,861 388,557
Other liabilities 7,065 6,965
Shareholders’ equity 130,036 133,466
Total liabilities & shareholders’ equity $ 1,519,949 $ 1,478,394
Net interest income $ 12,054 $ 10,345
Spread on interest-bearing funds 3.11 2.80
Net interest margin (e) 3.27 2.92

Three months ended March 31,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2023		2022		2023		2022		2023		2022
Loans (a)(d)	$	1,236,778	$	1,079,610	$	13,367	$	10,277		4.29	%	3.79	%
Securities (c)(d)		214,246		208,140		1,353		962		2.53		1.85
FHLBB stock		3,436		1,434		19		7		2.29		2.05
Short term funds (b)		40,689		123,454		375		50		3.72		0.16
Total interest-earning assets		1,495,149		1,412,638		15,114		11,296		4.02		3.19
Other assets		55,022		74,795
Total assets	$	1,550,171	$	1,487,433
Interest-bearing demand deposits	$	223,742	$	232,464		119		99		0.22		0.17
Money market accounts		320,015		321,198		1,270		126		1.61		0.16
Savings and other		232,162		233,092		402		64		0.70		0.11
Certificates of deposit		161,300		131,059		1,027		189		2.58		0.59
Total interest-bearing deposits		937,219		917,813		2,818		478		1.22		0.21
Repurchase agreements		3,961		7,146		16		3		1.65		0.14
Finance lease		5,397		5,097		40		41		2.96		3.23
Note payable		121		163		2		2		6.17		6.12
Subordinated debt (net of issuance costs)		24,536		24,480		233		233		3.80		3.81
FHLBB advances		57,056		2,974		687		55		4.82		7.46
Total interest-bearing liabilities		1,028,290		957,673		3,796		812		1.49		0.34
Demand deposits		382,601		386,884
Other liabilities		8,427		7,036
Shareholders’ equity		130,853		135,840
Total liabilities & shareholders’ equity	$	1,550,171	$	1,487,433
Net interest income (d)					$	11,318	$	10,484
Spread on interest-bearing funds										2.54		2.84
Net interest margin (e)										2.99		2.95

(a)

Includes ~~non-accrual~~non-accural 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 ~~$211,000~~$190,000 and ~~$180,000,~~$178,000, respectively, for ~~2022~~2023 and ~~2021~~2022 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. ~~The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2022 and 2021.~~

(e)

Net interest income divided by average interest-earning assets.

3431

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

Three months ended September 30, (in thousands) 2022 versus 2021
Change in interest due to Volume Rate Net
Loans $ 1,159 $ 134 $ 1,293
Securities 360 112 472
FHLBB stock (4 ) 6 2
Short term funds (337 ) 608 271
Interest-earning assets 1,178 860 2,038
Deposits 10 341 351
Repurchase agreements (2 ) 1 (1 )
Finance lease 27 (19 ) 8
Note Payable (1 ) — (1 )
Subordinated Debt 1 (1 ) —
FHLBB advances (50 ) 22 (28 )
Interest-bearing liabilities (15 ) 344 329
Net change in net interest income $ 1,193 $ 516 $ 1,709

Three months ended March 31, (in thousands)	2023 versus 2022
Change in interest due to		Volume			Rate			Net
Loans	$	1,633		$	1,457		$	3,090
Securities		34			357			391
FHLBB stock		11			1			12
Short term funds		(405	)		730			325
Interest-earning assets		1,273			2,545			3,818
Deposits		(7	)		2,347			2,340
Repurchase agreements		(8	)		21			13
Finance lease		2			(3	)		(1	)
Subordinated debt and notes payable		1			(1	)		—
FHLBB advances		830			(198	)		632
Interest-bearing liabilities		818			2,166			2,984
Net change in net interest income	$	455		$	379		$	834

Interest Income

Tax equivalent interest income ~~of $13.2~~increased $3.8 million, or 33.8%, to $15.1 million for ~~third~~first quarter 2023 compared with first quarter 2022. Loan income compared with first quarter 2022 increased ~~$2.0~~$3.1 million, or ~~18.2% from third quarter 2021. Loan income increased $1.3 million, or 12.5%~~30.0%, ~~compared to third quarter 2021~~primarily due to a 50 basis point increase in the average loan yield ~~of 5bps,~~ and a ~~$111.7~~$157.2 million, or ~~10.6%~~14.6%, increase in average ~~loan balances.~~loans. Tax equivalent securities income increased ~~$472~~$391 thousand, or ~~65.6%~~40.6%, for first quarter 2023 compared ~~to third~~with first quarter ~~2021~~2022, primarily due to a ~~$70.7~~$6.1 million, or ~~46.9%~~2.9%, increase in average balances and a 2468 basis point increase in average yield. Income on short-term funds compared with first quarter 2022 increased ~~$271~~$325 thousand, or ~~371.2%~~650.0%, ~~compared with third quarter 2021~~ primarily due to a ~~183~~356 basis point increase in the average ~~yield,~~short-term funds yields, partially offset by ~~a decrease of $128.1~~an $82.7 million, or ~~65.0%,~~67.0% decrease in average ~~short-term funds due to the funding of loans and normal customer activity.~~balances.

Interest Expense

Interest expense ~~of $1.2~~increased $3.0 million, or 367.5%, to $3.8 million for ~~third~~first quarter ~~2022 increased $329 thousand, or 39.4%,~~2023 compared with ~~third~~first quarter ~~2021.~~2022. Interest on deposit accounts increased ~~$351 thousand,~~$2.3 million, or ~~66.0%~~489.5%, ~~from third quarter 2021~~ as a result of a 15101 basis ~~points~~point increase in average deposit rates and a ~~$33.7~~$19.4 million, or ~~3.7%~~2.1%, increase in the average ~~balances.~~balances compared with first quarter 2022. Interest expense on FHLBB borrowings ~~decreased $28~~increased $632 thousand, or ~~93.3%~~1,149.1%, ~~from third~~compared with first quarter ~~2021 primarily as~~2022 due to an average balance increase of $54.1 million, or 1,818.5%, partially offset by a ~~result of a~~264 basis point decrease in the average ~~balance of $9.1 million, or 97.6%, partly offset by an increase in the average borrowing rate of 187 basis points.~~borrowings rate. Interest expense on ~~subordinated debt remained unchanged at $233 thousand,~~FHLBB borrowings for ~~third~~first quarter 2022 ~~and third quarter 2021.~~included a non-recurring expense of approximately $30 thousand to pay off a $6.0 million advance due in December 2022.

Provision and Allowance for ~~Loan~~Credit Losses

ADuring first quarter 2023, the allowance for credit losses on loans increased by the provision for credit losses on loans of $0.9 million compared with a provision expense of ~~$0.7~~$0.5 million ~~was recorded~~ for ~~third~~fourth quarter 2022 ~~compared with~~and a provision expense of $0.4 million for ~~third~~first quarter ~~2021.~~2022. The provision expense for ~~third~~first quarter ~~2022~~2023 primarily reflected loan growth during the quarter as well as ~~adjustments to~~changes in the forecast of certain ~~qualitative~~macro-economic factors, ~~due to rising interest rates, persistent inflation and~~which underpin the ~~increased risk of an economic recession.~~Bank’s CECL model. Net loan charge-offs ~~(recoveries)~~ were ~~$64~~$32 thousand for ~~third~~the first quarter 2023, $13 thousand for fourth quarter 2022 ~~compared with ($60)~~and $410 thousand for ~~third~~the first quarter ~~2021. Management will continue~~2022. Charge-offs for first quarter 2022 included a write-down of $374 thousand to ~~evaluate~~reduce the carrying value on $3.8 million of non-performing and under-performing residential and commercial loans, which Salisbury sold during the quarter, to the initial bid prices. Upon the adoption of ASU 326, Salisbury increased its ACL for off-balance sheet credit ~~risk in~~exposures by $0.9 million. In first quarter 2023, Salisbury increased the ~~loan portfolio to ensure~~ACL for this exposure by $92 thousand.

(in thousands)	March 31, 2023			March 31, 2022
At or For the Three Months Ended	(CECL)			(Incurred Loss)
ACL on loans, beginning of period	$	14,846		$	12,962
Impact of CECL adoption		271			—
Provision for credit losses		924			363
Charge-offs:
Commercial & industrial		—			(46	)
Commercial real estate		—			(334	)
Residential real estate		—			(19	)
Consumer		(35	)		(17	)
Total loan charge-offs		(35	)		(416	)
Recoveries:
Commercial & industrial		—			1
Commercial real estate		—			—
Residential real estate		—			—
Consumer		3			5
Total loan recoveries		3			6
Net charge-offs	$	(32	)	$	(410	)
ACL on loans, end of the period	$	16,009		$	12,915
ACL on unfunded commitments, beginning of period	$	183		$	146
Impact of CECL adoption		913			—
Provision for credit losses		92			37
ACL on unfunded commitments, end of period	$	1,183		$	183
Components of ACL:
ACL on loans	$	16,009		$	12,915
ACL on unfunded commitments		1,183			183
ACL, end of period	$	17,192		$	13,098
Net charge-offs to average loans
Provision for credit losses on loans to average loans		0.07	%		0.03	%
ACL on loans to total loans		1.28	%		1.20	%

As a ~~commensurate level~~result of ~~loan loss reserves. A deterioration in economic conditions may result in an increase in delinquencies, which may subsequently necessitate an increase in loan loss reserves.~~

~~The~~these factors, reserve coverage, as measured by the ratio of the allowance for ~~loan~~credit losses to gross loans, excluding PPP loans, was ~~1.20%~~1.28% for ~~third~~the first quarter ~~2022,~~2023, versus ~~1.20%~~1.21% for ~~second~~the fourth quarter 2022 and ~~1.28%~~1.20% for ~~third~~the first quarter ~~2021.~~2022. Similarly, reserve coverage, as measured by the ratio of the allowance for ~~loan~~credit losses to non-performing loans was ~~770%~~714% for ~~third~~first quarter of ~~2022,~~2023, versus ~~324%~~558% for ~~second~~fourth quarter of 2022 and ~~263%~~467% for ~~third~~first quarter of ~~2021.~~2022.

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

Three months ended September 30,	2022		2021
Three months ended March 31,					2023		2022
Net charge-offs (recoveries) to average loans receivable, gross	0.07	%	(0.01	%)	0.00	%	0.04	%
Non-performing loans to loans receivable, gross	0.16		0.47		0.18		0.26
Accruing loans past due 30-89 days to loans receivable, gross	0.03		0.08		0.18		0.22
Allowance for loan losses to loans receivable, gross	1.20		1.23
Allowance for loan losses to non-performing loans	770.49		263.30
Allowance for credit losses to loans receivable, gross					1.28		1.20
Allowance for credit losses to non-performing loans					714.35		467.27
Non-performing assets to total assets	0.12		0.34		0.14		0.19

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were ~~$1.9~~$2.4 million, or ~~0.16%~~0.18% of gross loans receivable at ~~September 30, 2022~~March 31, 2023 as compared ~~with $5.0~~to $2.7 million, or ~~0.47%~~0.22% at December 31, 2022 and $2.8 million, or 0.26%, at ~~September 30, 2021.~~March 31, 2022. Accruing loans past due 30-89 days ~~decreased $0.5 million to $0.4~~were $2.2 million, or ~~0.03% of gross loans receivable, from $0.9 million, or 0.08%~~0.18% of gross loans receivable at ~~September 30, 2021.~~March 31, 2023 compared with $1.3 million, or 0.11% of gross loans receivable at December 31, 2022 and $2.3 million, or 0.22% of gross loans receivable, at March 31, 2022. See “Financial Condition – ~~Loan Credit~~Asset Quality” above for further discussion and analysis.

~~The allowance~~Salisbury adopted CECL on January 1, 2023. Under CECL, the Bank’s lifetime credit loss models are based on historical data and incorporate forecasts of macroeconomic variables, expected prepayments and recoveries. Non-economic qualitative factors are also evaluated for each loan ~~losses represents management’s estimate of~~segment. A four-quarter reasonable and supportable forecast period is currently used for all loan portfolios. When 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 portionrisk characteristics of a loan no longer match the characteristics of the collective pool, the loan is removed from the pool and individually assessed for credit losses. Generally, non-accrual loans and collateral dependent loans are individually assessed.

Salisbury segregates its loan portfolio into discrete loan pools for purposes of evaluating credit risk. Each loan pool possesses unique risk characteristics that are considered when determining the appropriate level of allowance. See Note 4 for a description of these discrete loan pools.

At March 31, 2023, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) Commercial & Industrial – National Gross Domestic Product (“GDP”) and National Unemployment; (ii) Commercial Real Estate - National GDP and National Unemployment; (iii) Residential Real Estate – National Housing Price Index and National Unemployment; (iv) Consumer - National Unemployment. National GDP and National Unemployment are sourced from the Federal Reserve Open Market Committee’s published forecast whereas the National Housing Price Index is sourced from the Federal National Mortgage Association’s published forecast. The Company's qualitative factors at March 31, 2023, included consideration of the level of uncertainty surrounding the impact of macro-economic factors such as interest rates, inflation, supply chain disruption, geo-political events as well as other factors. At March 31, 2023, the ACL estimate for loans used a reversion period of two years for each loan segment.

The individual assessment for credit impairment is generally based on a discounted cash flow approach unless the asset is collateral dependent. A loan is considered collateral dependent when repayment is expected to be ~~uncollectible. The allowance for loan losses~~provided substantially through the operation or sale of the collateral and the borrower is ~~computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired~~experiencing financial difficulty. Collateral dependent loans are ~~segmented into pools of loans~~individually assessed and the expected credit loss is based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower’s aggregate loan exposure, using either the fair value of the ~~collateral, less~~collateral. The fair value is reduced for 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~~is expected to be realized through sale.

Also included within scope of CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process” reflect loans not in Salisbury’s gross loans receivable balance as of the ~~loan~~balance sheet date but rather negotiated loan/line of credit terms and rates that the Bank has offered to customers and is ~~lower than~~committed to honoring. In reference to “in-process” credits, the ~~carrying value of~~Bank defines an unfunded commitment as a credit that ~~loan.~~

has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable. The ~~component~~Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that obligation in unconditionally cancellable by the Bank. The allowance for credit losses on losses on off-balance sheet exposures includes consideration of the ~~allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments~~likelihood that funding will occur and credit risk ratings and then applying management's general loss allocation factors. The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.

~~The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s~~an 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.expected credit losses on commitments to be funded over its estimated life.

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at ~~September 30, 2021.~~March 31, 2023.

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)		2022			2021			2022 vs. 2021
Three months ended March 31, (dollars in thousands)												Three months ended March 31, (dollars in thousands)		2023		2022			2023 vs. 2022
Trust and wealth advisory	$	1,228		$	1,286		($	58	)	(4.5	%)		$	1,153	$	1,241		($	88	)	(7.1	%)
Service charges and fees		1,219			1,211			8		0.7				1,235		1,138			97		8.5
Mortgage banking activities, net		64			108			(44	)	(40.7	)			59		355			(296	)	(83.4	)
Losses on mutual fund		(47	)		(4	)		(43	)	1,075.0
Gains (losses) on mutual funds														20		(42	)		62		147.6
Gains on securities, net		—			7			(7	)	(100.0	)			—		210			(210	)	(100.0	)
Bank-owned life insurance (“BOLI”) income		201			135			66		48.9				192		162			30		18.5
Gain on sale of assets		—			73			(73	)	(100.0	)
Other		28			24			4		16.7				34		30			4		13.3
Total non-interest income	$	2,693		$	2,840		($	147	)	(5.2	%)		$	2,693	$	3,094		($	401	)	(13.0	%)

Non-interest income ~~for third~~decreased $401 thousand, or 13.0% in first quarter ~~2022~~of 2023 versus first quarter of 2022. Trust and wealth advisory revenues decreased ~~$147~~$88 thousand versus ~~third~~first quarter ~~2021. Trust and Wealth Advisory income decreased $58 thousand versus third quarter 2021~~2022 primarily due to lower asset management fees. Assets under administration were ~~$1.2~~$1.30 billion ~~as of September 30, 2022~~at March 31, 2023 compared with ~~$973.2 million as of September 30, 2021.~~ $1.29 billion at December 31, 2022 and $1.0 billion at March 31, 2022. Discretionary assets under administration of ~~$522.1~~$588.4 million ~~at September 30,~~in first quarter 2023 increased from $561.1 million in fourth quarter 2022 and decreased from ~~$608.2~~$625.3 million ~~at September 30, 2021~~in first quarter 2022. The variance from the comparative quarters primarily ~~due to lower equity~~reflected changes in market valuations. Non-discretionary assets under administration of ~~$710.2~~$712.7 million ~~for third~~in first quarter 2023 declined from $728.9 million in fourth quarter 2022 and increased from ~~$365.0~~$423.9 million ~~at third~~in first quarter ~~2021 due to a higher~~2022. The variance from the comparative periods primarily reflected changes in the valuation of certain partnership assets for an existing client relationship. The trust and wealth business records only a nominal annual fee on this relationship.

Service charges and fees ~~of $1.2 million for third~~increased $97 thousand versus first quarter 2022 ~~were essentially unchanged from third~~and primarily reflected higher deposit fees and interchange fees. First quarter ~~2021. Net fees~~2023 income from mortgage ~~banking activities were slightly below third quarter 2021~~sales and servicing decreased $296 thousand due to a lower volume of sales ~~volume.~~of residential mortgage loans to the FHLB Boston. Salisbury did not sell any residential loans to FHLBB during ~~third~~first quarter ~~2022~~2023 compared with sales of ~~$1.7~~$5.5 million in ~~third~~first quarter ~~2021.~~2022. Mortgage banking activities, net for first quarter 2022 also included a pre-tax gain of $239 thousand on the sale of $3.8 million of non-performing and under-performing commercial and residential loans.

The first quarter 2023 included net gains of $20 thousand on investments in mutual funds compared with net losses of $42 thousand in first quarter 2022. Non-interest income for first quarter 2022 included a pre-tax gain on the sale of available-for-sale (“AFS”) securities of $210 thousand. Salisbury did not sell any AFS securities in first quarter 2023.

BOLI income of $192 thousand increased $30 thousand compared to $162 thousand in first quarter 2022. Other income primarily includes rental property income.

Non-Interest Expense

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


Three months ended September 30, (dollars in thousands)		2022		2021		2022 vs. 2021
Three months ended March 31, (dollars in thousands)										Three months ended March 31, (dollars in thousands)		2023		2022		2023 vs. 2022
Salaries	$	3,802	$	3,361	$	441		13.1	%		$	3,721	$	3,479	$	242		7.0	%
Employee benefits		1,224		1,322		(98	)	(7.4	)			1,468		1,277		191		15.0
Premises and equipment		1,117		1,060		57		5.4				1,105		1,104		1		0.1
Write-down of assets		—		144		(144	)	(100.0	)
Loss on write-down and sale of assets												158		9		149		1655.6
Information processing and services		711		632		79		12.5				831		685		146		21.3
Professional fees		689		735		(46	)	(6.3	)			945		787		158		20.1
Collections, OREO, and loan related		67		120		(53	)	(44.2	)			72		117		(45	)	(38.5	)
FDIC insurance		98		146		(48	)	(32.9	)			98		171		(73	)	(42.7	)
Marketing and community support		214		256		(42	)	(16.4	)			127		184		(57	)	(31.0	)
Amortization of intangibles		46		61		(15	)	(24.6	)
Amortization of core deposit intangibles												39		54		(15	)	(27.8	)
Other		544		447		97		21.7				470		786		(316	)	(40.2	)
Total non-interest expense	$	8,512	$	8,284	$	228		2.8	%
Non-interest expense											$	9,034	$	8,653	$	381		4.4	%

Non-interest expense for ~~third~~first quarter ~~2021~~2023 increased ~~$228~~$381 thousand versus ~~third~~first quarter ~~2021.~~2022. Non-interest expense for first quarter 2023 included costs of approximately $385 thousand associated with the pending NBT merger. Non-interest expense for first quarter 2023 also included a non-recurring charge of $158 thousand to write off fixed assets in the Red Oaks Mill, New York branch, which will be closed on April 30, 2023. Salaries expense increased ~~$441~~$242 thousand versus ~~third~~first quarter ~~2021~~2022. The increase primarily ~~reflecting~~reflected higher base salary expense and higher incentive accruals as well as ~~higher production and incentive accruals.~~lower deferred compensation expense. Employee benefits expense ~~decreased $98~~increased $191 thousand ~~from third~~versus first quarter ~~2021~~2022 primarily due to ~~a reduction of deferred compensation expense, partially offset by~~ higher ~~401k~~medical insurance costs and ESOP ~~accruals. Premises~~ and equipment expense increased $57 thousand versus third quarter 2021 due to increased finance lease and software costs. Third quarter 2021 also included a pre-tax loss of $144 thousand on the pending sale of the building housing the Bank’s branch in Poughkeepsie, New York. Data401k expense. Information processing expense increased ~~$79~~$146 thousand versus ~~third~~first quarter ~~2021 mainly~~2022 primarily due to higher ~~data~~core processing costs and ATM and debit card processing ~~fees and increased website expense.~~ fees. Professional fees ~~decreased $46~~increased $158 thousand versus ~~third~~first quarter ~~2021~~2022 primarily as ~~higher~~ a result of increased audit and legal ~~audit & exam fees~~fees. Loan and ~~internal audit fees offset by lower consulting and investment management fees. Collections,~~ OREO ~~and loan~~ related expenses decreased ~~$53~~$45 thousand versus ~~third~~first quarter ~~2021 primarily~~2022, mainly due to lower ~~litigation~~appraisal expenses and ~~appraisal costs. FDIC insurance decreased $48 thousand versus third quarter 2021 on lower deposit balances.~~mortgage recording taxes. Marketing and community support ~~costs~~expense decreased ~~$42~~$57 thousand ~~compared to the prior year third~~versus first quarter 2022. The decrease in other expenses of $316 thousand primarily ~~due to timing~~reflected two isolated instances of ~~current marketing campaigns and contributions as well as branding related costs incurred~~debit card or check cashing fraud-related losses aggregating $251 thousand in ~~the prior year.~~first quarter 2022.

3634

~~Other Matters~~

In July 2022, Salisbury management discovered that the Bank’s trust department terminated a trust account in May 2020 and distributed approximately $1.0 million that should have been retained in continuance of the trust account. Salisbury has engaged legal counsel and is currently evaluating the Company’s potential financial exposure. At this time, management believes that Salisbury’s exposure is not yet known or knowable and could potentially range from zero to approximately $1.0 million depending upon the facts and circumstances and the scope of Salisbury’s insurance coverage.

Income Taxes

The effective income tax rates for ~~third~~first quarter 2023 and first quarter 2022 were 19.95% and ~~third quarter 2021 were 18.65% and 20.09%~~18.60%, respectively. ~~Generally, fluctuations~~The higher tax rate in the ~~effective tax rate result from changes in the~~first quarter 2023 primarily reflected a lower mix of ~~taxable~~tax-exempt income from municipal bonds, tax advantaged loans and ~~tax exempt~~bank-owned life insurance on a comparatively lower level of pre-tax income.

Salisbury did not incur Connecticut income tax in ~~2022~~2023 (to date) or ~~2021,~~2022, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay ~~other than minimum~~Connecticut state income tax, ~~in the foreseeable future unless there is a change in Connecticut tax law.~~

~~For the nine month periods ended September 30, 2022 and 2021~~

~~Overview~~

Net income allocated to common shareholders was $11.5 million, or $2.04 per basic common share, for the nine month period ended September 30, 2022 (nine month period 2022), compared with $12.1 million, or $2.16 per basic common share, for the nine month period ended September 30, 2021 (nine month period 2021).

~~Net Interest Income~~

Tax equivalent net interest income of $33.6 million for the nine month period 2022 increased $3.0 million, or 9.8%, versus the nine month period 2021. Average total earning assets increased $75.8 million, or 5.6%, versus the nine month period 2021. Average total interest bearing deposits increased $39.0 million, or 4.4%, versus the nine month period 2021. The net interest margin of 3.12% increased 11 basis points from 3.01% for the nine month period 2021. Excluding PPP loans, the net interest margin for the nine month period ended September 30, 2022 was approximately 3.06% compared with 2.90% for the same period in 2021. The increase in net interest margin for the nine month period ended September 30, 2022 compared to the prior year period primarily reflected a $66.8 million, or 6.3%, increase in average loan balances, partially offset by a 5 basis point decline in average yield. This increase in interest income was partially offset by a $0.3 million increase in deposit costs due to a $39.1 million increase in average interest-bearing balances and a 3 basis point increase in average deposit costs.

The following table sets forth the components of 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) 2022 2021 2022 2021 2022 2021
Loans (a)(d) $ 1,120,246 $ 1,053,451 $ 32,646 $ 30,989 3.85 % 3.90 %
Securities (c)(d) 218,455 130,864 3,270 2,080 2.00 2.12
FHLBB stock 1.281 1.840 26 26 2.69 1.89
Short term funds (b) 82,075 160,055 491 148 0.80 0.12
Total earning assets 1,422,057 1,346,210 36,433 33,243 3.39 3.27
Other assets 65,570 71,421
Total assets $ 1,487,627 $ 1,417,631
Interest-bearing demand deposits $ 231,883 $ 224,479 313 332 0.18 0.20
Money market accounts 313,871 310,908 639 408 0.27 0.18
Savings and other 238,688 209,180 339 173 0.19 0.11
Certificates of deposit 133,339 134,143 647 739 0.65 0.74
Total interest-bearing deposits 917,781 878,710 1,938 1,652 0.28 0.25
Repurchase agreements 9,024 11,608 11 13 0.16 0.15
Finance lease 5,233 2,753 122 102 3.12 4.95
Note payable 153 192 7 9 6.14 6.13
Subordinated debt (net of issuance costs) 24,495 21,851 699 767 3.80 4.68
FHLBB advances 1,054 10,567 57 96 7.16 1.20
Total interest-bearing liabilities 957,740 925,681 2,834 2,639 0.40 0.38
Demand deposits 391,537 355,352
Other liabilities 6,818 6,897
Shareholders’ equity 131,532 129,701
Total liabilities & shareholders’ equity $ 1,487,627 $ 1,417,631
Net interest income $ 33,599 $ 30,604
Spread on interest-bearing funds 3.00 2.89
Net interest margin (e) 3.12 3.01

~~(a)~~

~~Includes non-accrual loans.~~

~~(b)~~

~~Includes interest-bearing deposits in other banks and federal funds sold.~~

~~(c)~~

~~Average balances of securities are based on historical cost.~~

~~(d)~~

~~Includes~~ ~~tax exempt income benefit of $575,000 and $523,000, respectively for 2022 and 2021 on~~ ~~tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2022 and 2021.~~

~~(e)~~

~~Net interest income divided by average interest-earning assets.~~

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

Nine months ended September 30, (in thousands) 2022 versus 2021
Change in interest due to Volume Rate Net
Loans $ 2,200 $ (543 ) $ 1,657
Securities 1,400 (210 ) 1,190
FHLBB stock (12 ) 12 —
Short term funds (480 ) 823 343
Interest-earning assets 3,108 82 3,190
Deposits 17 269 286
Repurchase agreements (3 ) 1 (2 )
Finance lease 93 (73 ) 20
Note payable (2 ) — (2 )
Subordinated Debt 136 (204 ) (68 )
FHLBB advances (385 ) 346 (39 )
Interest-bearing liabilities (144 ) 339 195
Net change in net interest income $ 3,252 $ (257 ) $ 2,995

~~Interest Income~~

~~Tax equivalent interest income of $36.4 million for~~ ~~the nine month period 2022 increased $3.2 million or 9.6%, compared with the nine month period 2021.~~ ~~Loan income increased $1.7 million, or 5.3%, compared with~~ ~~the nine months of 2021~~ ~~primarily due to a $66.7 million, or 6.3%, increase in average loan balances, partially offset by a 5 basis point decrease in the average yield. Tax equivalent securities income for~~ ~~the nine month period 2022~~ ~~increased $1.2 million, or 57.2%, compared with~~ ~~the nine month period 2021~~, primarily due to a $87.6 million, or 66.9%, increase in average balances, partially offset by an 12 basis point decrease in average yield. Income on short-term funds for the nine month period 2022 increased $343 thousand, or 231.8%, compared with the nine months of 2021 primarily due to a 68 basis point increase in the average short-term funds yields, partially offset by a $78.0 million, or 48.7%, decrease in average short-term funds, ~~due to~~ ~~due to the funding of loans, the investment of cash into securities and normal customer activity.~~

~~Interest Expense~~

~~Interest expense of $2.8 million for the nine month period 2022 increased $195 thousand, or 7.4%, compared with~~ ~~the nine month period 2021~~. Interest on deposit accounts increased $286 thousand, or 17.3%, as a result of a $39.0 million, or 4.4%, increase in the average balances and a 3 basis point increase in average deposit rates. Interest expense on FHLBB borrowings decreased $39 thousand, or 40.6%, due to a $9.5 million, or 90.0%, decrease in average balances, partially offset by a 596 basis point increase in the average borrowing rate. Interest expense on subordinated debt for the nine month period 2022 decreased $68 thousand, or 8.9%, due to a 88 basis point decrease in average yield, partially offset by a $2.6 million, or 12.1% increase in the average balance.

~~Provision and Allowance for Loan Losses~~

A provision of $2.2 million was recorded for the nine-month period ended September 30, 2022 compared to a net credit reserve release of $0.5 million for the nine-month period ended September 30, 2021. Net loan charge-offs were $786 thousand and $69 thousand for the respective periods. The provision expense for nine-month period of 2022 reflected significant loan growth and adjustments to qualitative factors due to the uncertain macro-economic environment. The provision expense also reflected a release of credit reserves of $0.6 million due to management’s upgrade of the internal risk rating on certain loans related to the hospitality and entertainment and recreation industries. In 2021 management reduced credit reserves as a result of an improvement in the business environment in Salisbury’s market areas due to the rollout out of vaccinations and the lifting of COVID-19 restrictions.

Charge-off’s for the nine-month period in 2022 included a write-down of $374 thousand in first quarter 2022 to reduce the carrying value on $3.8 million of non-performing and under-performing residential and commercial loans, which Salisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately $239 thousand due to higher final bids. This increase was recorded as a pre-tax gain on sale in Salisbury’s consolidated statement of income in first quarter 2022. In second quarter 2022, Salisbury charged off $312 thousand, which primarily related to a discrete commercial loan. Net charge-offs were $64 thousand for third quarter 2022.

Reserve coverage at September 30, 2022, as measured by the ratio of allowance for loan losses to gross loans, at 1.20%, compares with 1.23% a year ago at September 30, 2021. Excluding PPP loans, the reserve coverage ratio was 1.20% for September 30, 2022 compared with 1.28% for September 30, 2021. Management will continue to evaluate credit risk in the loan portfolio to ensure a commensurate level of loan loss reserves. A resurgence of the pandemic or a deterioration in economic conditions due to high inflation and rising interest rates, which results in loan payment delinquencies, may subsequently necessitate an increase in loan loss reserves.

~~Non-interest income~~

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

Nine months ended September 30, (dollars in thousands) 2022 2021 2022 vs. 2021
Trust and wealth advisory $ 3,762 $ 3,685 $ 77 2.1 %
Service charges and fees 4,080 3,536 544 15.4
Mortgage banking activities, net 497 912 (415 ) (45.5 )
Losses on mutual fund (119 ) (18 ) (101 ) 561.1
Gains (losses) gains on securities, net 165 (2 ) 167 (8350.0 )
Bank-owned life insurance (“BOLI”) income 615 386 229 59.3
Gain on sale of assets — 73 (73 ) (100.0 )
Other 84 81 3 3.7
Total non-interest income $ 9,084 $ 8,653 $ 431 5.0 %

Non-interest income for the nine month period ended September 30, 2022 increased $431 thousand versus the same period in 2021. Trust and wealth advisory revenues increased $77 thousand mainly on higher estate planning fees. Service charges and fees increased $544 thousand primarily due to non-recurring loan prepayment fees. Net fees ~~from~~ ~~mortgage banking activities~~ decreased $415 thousand due to lower volume of mortgage loans sold to FHLB Boston. Mortgage loans sales totaled $7.5 million for the nine month period ended September 30, 2022 compared with $29.7 million for the nine month period ended September 30, 2021. The nine month periods ended September 30, 2022 and 2021 included mortgage servicing amortization of $117 thousand and $167 thousand, respectively. BOLI income and gains increased $229 thousand versus the same period in 2021. The increase included a non-recurring non-taxable gain of $89 thousand related to proceeds receivable from a bank-owned life insurance policy (“BOLI”) due to the death of a former covered employee. Non-interest income for the nine month period ended September 30, 2021 also included a one-time pre-tax gain of $73 thousand primarily from the sale of Salisbury’s operations center in Canaan, Connecticut. Other income primarily includes rental property income.

~~Non-interest expense~~

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

Nine months ended September 30, (dollars in thousands) 2022 2021 2022 vs. 2021
Salaries $ 10,938 $ 9,664 $ 1,274 13.2 %
Employee benefits 3,789 3,990 (201 ) (5.0 )
Premises and equipment 3,200 3,034 166 5.5
Write-down of assets 3 144 (141 ) (97.9 )
Information processing and services 2,098 1,824 274 15.0
Professional fees 2,297 2,090 207 9.9
Collections, OREO, and loan related 300 317 (17 ) (5.4 )
FDIC insurance 391 370 21 5.7
Marketing and community support 661 552 109 19.7
Amortization of intangibles 150 198 (48 ) (24.2 )
Other 1,872 1,448 424 29.3
Total non-interest expense $ 25,699 $ 23,631 $ 2,068 8.8 %

Non-interest expense for the nine month period ended September 30, 2022 increased $2.1 million versus the same period in 2021. Salaries increased $1.3 million primarily due to higher base salaries and incentives. ~~Benefits decreased $201 thousand primarily due~~ lower medical insurance costs, 401K employer match and deferred compensation related expenses. Premises and equipment increased $166 thousand mainly due to higher building depreciation and facilities related expenses. The nine month period ended September 30, 2021 also included a pre-tax loss of $144 thousand on the sale of the building housing the Bank’s branch in Poughkeepsie, New York. Data processing increased $274 thousand mainly due to ATM fees, data processing costs and website costs. The increase in professional fees of $207 thousand versus the nine month period 2021 primarily reflected higher legal, consulting and investment management expenses. Collections, OREO and loan related expense decreased $17 thousand ~~primarily due to lower mortgage recording costs~~. FDIC related expense increased $21 thousand compared to the same period in 2021 reflecting higher deposit balances. Marketing and community support costs increased $109 thousand compared to the same period in 2021 primarily due to Salisbury’s ongoing branding initiatives and marketing campaigns. Amortization of intangible assets decreased $48 thousand due to the aging off of expenses related to previous acquisitions. ~~Other expenses increased $424 thousand primarily due fraud charges incurred in 2022 as well as higher Director fees and training costs.~~

~~Income taxes~~

The effective income tax rates for the nine month periods ended September 30, 2022 and September 30, 2021 were 17.55% and 21.05%, respectively. Fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Salisbury’s effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds, tax-exempt loans and bank owned life insurance and other tax advantaged assets.

Salisbury did not incur Connecticut income tax in 2022 (to date) or 2021, other than minimum state income tax, as a result of a Connecticut law that permits banks to shelter certain mortgage income from the Connecticut corporation business tax through the use of a special purpose entity called a Passive Investment Company or PIC. In 2004, Salisbury availed itself of this benefit by forming a PIC, SBT Mortgage Service Corporation. Salisbury's income tax provision reflects the full impact of the Connecticut legislation. Salisbury does not expect to pay other than minimum Connecticut state income tax, in the foreseeable future unless there is a change in Connecticut tax law.

CAPITAL RESOURCES

Shareholders’ Equity

Shareholders’ equity ~~decreased $13.4~~increased $4.0 million in ~~nine months~~first quarter to ~~$123.2~~$132.4 million at ~~September 30, 2022~~March 31, 2023 as unrealized ~~after-tax losses~~gains in the available-for-sale securities (“AFS”) portfolio of ~~$23.2~~$2.7 million, net income of $3.0 million and other activity of $0.1 million were partially offset by common stock dividends paid of ~~$2.8 million were partially offset by net income of $11.8~~$0.9 million and ~~issued stock and stock-based compensation totaling~~a reduction of ~~$0.6 million. The unrealized losses in~~$0.9 million due to the ~~AFS portfolio, which reflected the sharp increase in market interest rates during first nine months~~adoption of ~~2022, reduced both book value and tangible book value at September 30, 2022.~~CECL. Book value per common share of ~~$21.29~~$22.79 at ~~September 30, 2022 decreased $0.72~~March 31, 2023 increased $0.66 from ~~second~~fourth quarter 2022 and ~~decreased $2.04~~increased $0.23 from ~~third~~first quarter ~~2021.~~2022. Tangible book value per common share of ~~$18.86~~$20.38 at ~~September 30, 2022 decreased $0.71~~March 31, 2023 increased $0.67 from ~~second~~fourth quarter 2022 and ~~decreased $1.97~~increased $0.28 from ~~third~~first quarter ~~2021.~~2022.

At March 31, 2023 and December 31, 2022, the ratio of Salisbury’s tangible common shareholders’ equity, which included the after-tax unrealized losses on available-for-sale securities, to tangible total assets were as follows:

	March 31, 2023			December 31, 2022
Common shareholders’ equity	$	132,355		$	128,355
Less: Goodwill		(13,815	)		(13,815	)
Less: Intangible assets		(188	)		(227	)
Tangible common shareholders’ equity	$	118,352		$	114,313

Total assets	$	1,565,334		$	1,541,582
Less: Goodwill		(13,815	)		(13,815	)
Less: Intangible assets		(188	)		(227	)
Tangible total assets	$	1,551,331		$	1,527,540
Tangible common shareholders’ equity to tangible total assets		7.63	%		7.48	%

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. The unrealized losses in the AFS portfolio noted above do not affect the Bank’s regulatory capital ratios. As a ~~result,~~well-capitalized financial institution, the Bank pays lower federal deposit insurance premiums than those banks that are not “well-capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:

	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Total Capital (to risk-weighted assets)		13.24	%		14.08	%		13.41	%		13.43	%
Common Equity Tier 1 Capital								12.16			12.24
Tier 1 Capital (to risk-weighted assets)		12.07			12.87			12.16			12.24
Common Equity Tier 1 Capital (to risk-weighted assets)		12.07			12.87
Tier 1 Capital (to average assets)		9.83			9.42			9.98			9.99

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

The FRB’s final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, ~~was~~is also established above the regulatory minimum capital requirements. This capital conservation buffer ~~was fully phased~~began phasing in January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until it reached its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

As of ~~September 30, 2022,~~March 31, 2023, the Company and the Bank met each of their capital requirements and the most recent notification from the FDIC categorized the Bank as “well-capitalized.” There are no conditions or events since that notification that management believes have changed the Bank’s category.

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

~~Stock Repurchase Plan~~Share Repurchases

On March 23, 2022 Salisbury announced that its Board of Directors has renewed its share repurchase program that was established in March 2021. The share repurchase program provides for the potential repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over a period of the next twelve (12) months through privately negotiated transactions and/or market purchases at appropriate prices, subject to price and market conditions on terms determined to be in the best interests of Salisbury. ~~However, there is no assurance that Salisbury will complete repurchases of 5% of its outstanding shares over the next twelve (12) months.~~ Salisbury did not repurchase any shares during ~~the nine-month period ended September 30, 2022.~~

~~Subordinated Debt~~

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. On May 28, 2021, Salisbury redeemed in full the $10.0 million of subordinated debt issued in 2015.first quarter 2023.

Dividends

During the three-month period ended March 31, 2023, Salisbury paid ~~$2.8 million~~$927 thousand in dividends on common ~~stock dividends during the nine month period ended September 30, 2022.~~stock. On ~~October 19, 2022,~~April 26, 2023, the Board of Directors of Salisbury declared a ~~common stock~~ dividend of $0.16 per common share payable on ~~November 25, 2022~~May 26, 2023 to shareholders of record on ~~November 11, 2022. Common stock dividends, when declared, are generally 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.~~12, 2023.

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

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

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

IMPACT OF INFLATION AND CHANGING PRICES

Salisbury’s consolidated financial statements and related notes thereto presented elsewhere in this Form 10-Q are prepared in conformity with GAAP, which require the measurement of financial condition and operating results in terms of historical dollars without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike some other types of companies, the financial nature of Salisbury’s consolidated financial statements is more clearly affected by changes in interest rates than by inflation. Interest rates do not necessarily fluctuate in the same direction or in the same magnitude as the prices of goods and services. However, inflation does affect Salisbury to some extent because, as prices increase, the money supply grows and interest rates are affected by inflationary expectations. Additionally, the effects of inflation on commercial and consumer customers can have implications with respect to their borrowing needs and saving and deposit practices. Potentially, if sustained, inflation could precipitate recessionary trends that could affect commercial development and residential construction. Inflation could also increase the cost of labor and products and services used by the Bank and thereby hinder efficiencies in the Bank’s ability to deliver products and services. There is no precise method, however, to measure the effects of inflation on Salisbury’s consolidated financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation. Although not a material factor in recent years, inflation could impact earnings in future periods.

FORWARD-LOOKING STATEMENTS

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

(a)

assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which Salisbury and the Bank do business; and

(b)

expectations for revenues and earnings for Salisbury and the Bank.

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

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

(a)

the risk of adverse changes in business conditions in the banking industry generally and in the specific markets in which the Bank operates;

(b)

changes in the legislative and regulatory environment that negatively impacts Salisbury and the Bank through increased operating expenses;

(c)

increased competition from other financial and non-financial institutions;

(d)

the impact of technological advances and cybersecurity matters;

(e)

interest rate fluctuations;

(f)

the effect of the COVID-19 pandemic on Salisbury, the communities served by the Bank, the State of Connecticut and the United States, related to the economy and overall financial stability;

(g)

the risk of adverse changes in business conditions due to geo-political ~~tensions;~~tensions and;

(h)

~~government and regulatory responses to~~ the ~~COVID-19 pandemic;~~risk that the pending merger with NBT will not be completed; and

(i)

changes in Salisbury’s liquidity risk profile due to uncertain economic conditions and competition for deposits; and

(j)

other risks identified from time to time in Salisbury’s filings with the Securities and Exchange Commission.

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

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The ALCO manages interest rate risk using income simulation to measure interest rate risk inherent in Salisbury’s financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 24-month horizon. In management’s ~~September 30, 2022~~March 31, 2023 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations ~~consider~~take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

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

ALCO uses four interest rate scenarios to evaluate interest risk exposure and may vary these interest rate scenarios to show the effect of steepening or flattening changes in yield curves as well as parallel changes in interest rates. At ~~September 30, 2022,~~March 31, 2023, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of ~~300~~400 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of ~~200~~300 basis points across the yield curve; and (4) gradual and non-parallel changes in interest rates – the yield curve is assumed to rise ~~throughout 2022 and into the first half~~through most of 2023 ~~with~~before flattening out and declining toward the ~~treasury yield curve then declining in the second half~~latter part of 2023 and into 2024. The ~~Fed~~Federal Funds ~~rate~~rates increases ~~through March~~to 5.25% by May 2023 and ~~then declines~~remains flat until a projected 0.25% rate cut in December 2023 and several additional rate cuts throughout 2024 to reach a terminal rate of 2.00%. Through the ~~second half~~remaining nine months of ~~the year so that the Fed Funds rate is 0.75% higher at September 30, 2023 than it was at September 30, 2022. As of September 30,~~ 2023, the ~~two-year,~~two year, five year, and 10 year treasury ~~rates~~ are projected to ~~be 0.30%~~increase by 0.47%, ~~0.40%~~0.58%, and ~~0.50% higher than actual rates as of September 30, 2022. The Fed Funds rate is then projected to decline 1.50% from September 30, 2023 to September 30,~~0.73%, respectively. In 2024, ~~with~~ the ~~two-year,~~two year, five year, and 10 year treasury ~~declining~~decline by ~~1.66%~~3.00%, ~~1.45%~~2.02%, and ~~1.15% respectively, over that time period.~~1.03%, respectively. Simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of ~~September 30, 2022,~~March 31, 2023, net interest income simulations indicated that Salisbury’s exposure to changing interest rates over the simulation horizons remained within its tolerance levels.

The following table sets forth the estimated change in net interest income from an unchanged interest rate scenario over the periods indicated for changes in market interest rates using Salisbury’s financial instruments as of ~~September 30, 2022.~~March 31, 2023.

As of September 30, 2022	Months 1-12			Months 13-24
As of March 31, 2023							Months 1-12			Months 13-24
Immediately rising interest rates + 200bp (static growth assumptions)		(2.40	)%		2.30	%		(7.2	)%		(2.3	)%
Immediately rising interest rates + 100bp (static growth assumptions)		(1.00	)		1.40			(3.3	)		(0.9	)
Immediately falling interest rates - 100bp (static growth assumptions)		(1.70	)		(4.30	)		(0.1	)		(3.0	)
Immediately falling interest rates - 200bp (static growth assumptions)								(1.6	)		(8.5	)

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

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

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

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, 2022(in thousands)		Rates up 100bp			Rates up 200bp
As of March 31, 2023 (in thousands)								Rates up 100bp			Rates up 200bp
U.S. Treasury	$	(715	)	$	(1,392	)	$	(659	)	$	(1,287	)
U.S. Government agency notes		(944	)		(1,739	)		(1,164	)		(1,907	)
Municipal bonds		(3,292	)		(6,306	)		(3,353	)		(6,546	)
Mortgage backed securities
U.S. Government agencies and U.S. Government- sponsored enterprises		(2,953	)		(5,763	)		(2,867	)		(5,598	)
Collateralized mortgage obligations
U.S. Government agencies		(1,444	)		(2,901	)		(1,394	)		(2,783	)
Corporate bonds		(515	)		(931	)		(426	)		(808	)
Total available-for-sale debt securities	$	(9,863	)	$	(19,032	)	$	(9,863	)	$	(18,929	)

4238

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, 2022.~~March 31, 2023. 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, 2022.~~March 31, 2023.

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

Changes in Internal Controls

In addition, based on an evaluation of its internal controls over financial reporting, no change in Salisbury’s internal control over financial reporting occurred during the quarter ended ~~September 30, 2022~~March 31, 2023 that has materially affected, or is reasonably likely to materially affect, Salisbury’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

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

Item 1A.

RISK FACTORS

~~Please refer~~There were no material changes to ~~the note on forward-looking statements in this Quarterly Report on Form 10-Q. In addition, please consider~~ the risk factors ~~discussed~~previously disclosed in Salisbury’s Annual Report on Form 10-K for the year ended December 31, ~~2021. There were no material changes to the risk factors previously disclosed in such Annual Report.~~2022.

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

Item 6.

EXHIBITS

Exhibit No.	Description

2.1	Agreement and Plan of Merger by and among NBT Bancorp Inc., NBT Bank, N.A., Salisbury Bancorp, Inc., and Salisbury Bank and Trust Company dated December 5, 2022 (incorporated by reference to Exhibit 2.1 of Form 8-K filed on December 5, 2022).

3.1	Certificate of Incorporation of Salisbury Bancorp, Inc.~~, as amended~~ (incorporated by reference to Exhibit 3.1 of Registrant’s 1998 Registration Statement on Form ~~10-Q~~S-4 filed ~~on August 15, 2022)~~April 23, 1998, File No.: 33-50857).

3.1.1	Amendment 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).

3.1.2	Certificate 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).

3.1.3	Certificate 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).

3.1.4	Certificate 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).

3.2	Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of Form 8-K filed November 25, 2014).

4.1	Form 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).

10.1	~~Amendment Number Two to the Salisbury Bancorp, Inc. 2017 Long Term Incentive~~Amended and Restated Non-Qualified Deferred Compensation Plan effective January 1, 2022 (incorporated by reference to Exhibit 10.1 of Form 8-K filed ~~June 23, 2022)~~December 29, 2021).

31.1	Chief Executive Officer Certification Pursuant to 17 CFR 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Chief Financial Officer Certification Pursuant to 17 CF 240.13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Chief 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.

4340

~~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 4, 2022~~May 5, 2023	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

~~November 4, 2022~~May 5, 2023	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer


Supplemental Cash Flow Information:
Cash paid for interest	$	2,801		$	2,472
Cash paid for income taxes		2,077			3,948
Non cash investing and financing activities:
Fixed Assets	$	419		$	—
Finance lease liability		(419	)		—
Transfers from Fixed Assets to Other Assets		—			727
Loans transferred to Loans Held for Sale		3,909			—

September 30, 2022 (in thousands)	Maturity	Amortized cost			Fair value	Yield⁽¹⁾
U.S. Treasury	After 1 year but within 5 years	$	7,871	$	7,239	1.32	%
	After 5 year but within 10 years		11,395		9,738	1.18
	Total		19,266		16,977	1.24
U.S. Government Agency notes	After 1 year but within 5 years		4,979		4,319	0.97
	After 5 year but within 10 years		10,938		9,189	1.35
	Total		15,917		13,508	1.23
Municipal bonds	After 1 year but within 5 years		511		459	1.74
	After 5 year but within 10 years		15,282		12,445	2.31
	After 10 years but within 15 years		12,842		10,382	2.53
	After 15 years		26,625		21,324	2.84
	Total		55,260		44,610	2.61
Mortgage-backed securities and Collateralized mortgage obligations	Securities not due at a single maturity date		112,723		100,487	2.29
	Total		112,723		100,487	2.29
Corporate bonds	After 5 years but within 10 years		13,250		12,596	4.32
	After 10 years but within 15 years		1,000		983	6.25
	Total		14,250		13,579	4.46
Securities available-for-sale		$	217,416	$	189,161	2.45	%

		Three months ended September 30, 2022												Three months ended September 30, 2021
		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	3,286	$	127		$	(45	)	$	25	$	3,393	$	2,377	$	393		$	(35	)	$	5	$	2,740
Residential 5+ multifamily		1,157		71			—			—		1,228		545		156			—			—		701
Construction of residential 1-4 family		333		(103	)		(25	)		—		205		95		41			—			—		136
Home equity lines of credit		205		14			—			—		219		190		26			(20	)		—		196
Residential real estate		4,981		109			(70	)		25		5,045		3,207		616			(55	)		5		3,773
Commercial		5,169		598			—			—		5,767		6,212		(165	)		—			119		6,166
Construction of commercial		872		(115	)		—			—		757		668		118			—			—		786
Commercial real estate		6,041		483			—			—		6,524		6,880		(47	)		—			119		6,952
Farm land		27		11			—			—		38		32		(1	)		—			—		31
Vacant land		108		4			—			—		112		87		(1	)		—			—		87
Real estate secured		11,157		607			(70	)		25		11,719		10,206		567			(55	)		125		10,843
Commercial and industrial		1,480		5			—			—		1,485		1,256		73			—			3		1,332
Municipal		35		4			—			—		39		32		(1	)		—			—		31
Consumer		130		11			(25	)		6		122		66		62			(19	)		6		115
Unallocated		901		68			—			—		969		1,148		(301	)		—			—		847
Totals	$	13,703	$	695		$	(95	)	$	31	$	14,334	$	12,708	$	400		$	(74	)	$	134	$	13,168

		Nine months ended September 30, 2022												Nine months ended September 30, 2021
		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries		Ending balance		Beginning balance		Provision (Benefit)			Charge- offs			Reco- veries			Ending balance
Residential 1-4 family	$	2,846	$	595		$	(73	)	$	25	$	3,393	$	2,646	$	129		$	(44	)	$	9		$	2,740
Residential 5+ multifamily		817		642			(231	)		—		1,228		686		15			—			—			701
Construction of residential 1-4 family		186		44			(25	)		—		205		65		71			—			—			136
Home equity lines of credit		198		32			(11	)		—		219		252		(36	)		(20	)		—			196
Residential real estate		4,047		1,313			(340	)		25		5,045		3,649		179			(64	)		9			3,773
Commercial		5,416		722			(372	)		1		5,767		6,546		(509	)		(7	)		136			6,166
Construction of commercial		1,025		(268	)		—			—		757		596		208			(18	)		—			786
Commercial real estate		6,441		454			(372	)		1		6,524		7,142		(301	)		(25	)		136			6,952
Farm land		21		17			—			—		38		59		(28	)		—			—			31
Vacant land		95		17			—			—		112		180		(94	)		—			1			87
Real estate secured		10,604		1,801			(712	)		26		11,719		11,030		(244	)		(89	)		146			10,843
Commercial and industrial		1,364		166			(46	)		1		1,485		1,397		17			(131	)		49			1,332
Municipal		31		8			—			—		39		43		(12	)		—			—			31
Consumer		82		95			(70	)		15		122		77		82			(34	)		(10	)		115
Unallocated		881		88			—			—		969		1,207		(360	)		—			—			847
Totals	$	12,962	$	2,158		$	(828	)	$	42	$	14,334	$	13,754	$	(517	)	$	(254	)	$	185		$	13,168


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

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


	As of December 31, 2021
(in thousands)	Notional Amount		Balance Sheet Location
Derivatives designated as hedge instruments
Interest Rate Products	$	10,000	Other assets	$	18
Total Derivatives designated as hedge instruments				$	18

Interest rates (in thousands)		September 30, 2022		December 31, 2021
Less than 1.00%	$	79,245	$	97,099
1.00% to 1.99%		14,589		14,919
2.00% to 2.99%		15,787		6,493
3.00% to 3.99%		238		498
Total	$	109,859	$	119,009


	At September 30, 2022
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
Less than 1.00%	$	58,315	$	11,841	$	3,764	$	5,325	$	79,245		72.13	%
1.00% to 1.99%		8,530		3,814		2,245		—		14,589		13.28
2.00% to 2.99%		8,274		5,016		2,497		—		15,787		14.37
3.00% to 3.99%		238		—		—		—		238		0.22
Total	$	75,357	$	20,671	$	8,506	$	5,325	$	109,859		100.00	%


Three months ended September 30, (in thousands)	2022 versus 2021
Change in interest due to		Volume			Rate			Net
Loans	$	1,159		$	134		$	1,293
Securities		360			112			472
FHLBB stock		(4	)		6			2
Short term funds		(337	)		608			271
Interest-earning assets		1,178			860			2,038
Deposits		10			341			351
Repurchase agreements		(2	)		1			(1	)
Finance lease		27			(19	)		8
Note Payable		(1	)		—			(1	)
Subordinated Debt		1			(1	)		—
FHLBB advances		(50	)		22			(28	)
Interest-bearing liabilities		(15	)		344			329
Net change in net interest income	$	1,193		$	516		$	1,709


Nine months ended September 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2022		2021		2022		2021		2022		2021
Loans (a)(d)	$	1,120,246	$	1,053,451	$	32,646	$	30,989		3.85	%	3.90	%
Securities (c)(d)		218,455		130,864		3,270		2,080		2.00		2.12
FHLBB stock		1.281		1.840		26		26		2.69		1.89
Short term funds (b)		82,075		160,055		491		148		0.80		0.12
Total earning assets		1,422,057		1,346,210		36,433		33,243		3.39		3.27
Other assets		65,570		71,421
Total assets	$	1,487,627	$	1,417,631
Interest-bearing demand deposits	$	231,883	$	224,479		313		332		0.18		0.20
Money market accounts		313,871		310,908		639		408		0.27		0.18
Savings and other		238,688		209,180		339		173		0.19		0.11
Certificates of deposit		133,339		134,143		647		739		0.65		0.74
Total interest-bearing deposits		917,781		878,710		1,938		1,652		0.28		0.25
Repurchase agreements		9,024		11,608		11		13		0.16		0.15
Finance lease		5,233		2,753		122		102		3.12		4.95
Note payable		153		192		7		9		6.14		6.13
Subordinated debt (net of issuance costs)		24,495		21,851		699		767		3.80		4.68
FHLBB advances		1,054		10,567		57		96		7.16		1.20
Total interest-bearing liabilities		957,740		925,681		2,834		2,639		0.40		0.38
Demand deposits		391,537		355,352
Other liabilities		6,818		6,897
Shareholders’ equity		131,532		129,701
Total liabilities & shareholders’ equity	$	1,487,627	$	1,417,631
Net interest income					$	33,599	$	30,604
Spread on interest-bearing funds										3.00		2.89
Net interest margin (e)										3.12		3.01