10-Q

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 June 30, 2020

OR

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission file number 0-24751

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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)

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.

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 August 5, 2020 is 2,843,292.

TABLE OF CONTENTS

	PART 1 FINANCIAL INFORMATION	Page
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2020 (unaudited) and DECEMBER 31, 2019		3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited)		4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited)		5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited)		5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2020 and 2019 (unaudited)		7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		9
Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	40
Item 4.	CONTROLS AND PROCEDURES	42
	PART II. OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	42
Item 1A.	RISK FACTORS	42
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	42
Item 3.	DEFAULTS UPON SENIOR SECURITIES	42
Item 4.	MINE SAFETY DISCLOSURES	42
Item 5.	OTHER INFORMATION	42
Item 6.	EXHIBITS	43
SIGNATURES		43

2

PART I - FINANCIAL INFORMATION

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)		June 30, 2020			December 31, 2019
ASSETS		(unaudited)
Cash and due from banks	$	7,391		$	7,406
Interest bearing demand deposits with other banks		77,104			19,479
Total cash and cash equivalents		84,495			26,885
Interest bearing Time Deposits with Financial Institutions		750			750
Securities
Available-for-sale at fair value		89,452			91,801
CRA mutual fund at fair value		912			882
Federal Home Loan Bank of Boston stock at cost		3,353			3,242
Loans held-for-sale		5,313			332
Loans receivable, net (allowance for loan losses: $12,371 and $8,895)		1,040,358			927,413
Other real estate owned		—			314
Bank premises and equipment, net		17,950			17,385
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $5,054 and $4,884)		825			995
Accrued interest receivable		3,988			3,415
Cash surrender value of life insurance policies		20,846			20,580
Deferred taxes		1,935			1,249
Other assets		3,145			3,390
Total Assets	$	1,287,137		$	1,112,448
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	325,531		$	237,852
Demand (interest bearing)		188,487			153,314
Money market		251,242			239,504
Savings and other		170,537			161,112
Certificates of deposit		149,802			127,724
Total deposits		1,085,599			919,506
Repurchase agreements		7,809			8,530
Federal Home Loan Bank of Boston advances		55,118			50,887
Subordinated debt		9,871			9,859
Note payable		228			246
Finance lease obligations		1,696			1,718
Accrued interest and other liabilities		8,372			8,047
Total Liabilities		1,168,693			998,793
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 5,000,000
Issued: 2,843,292 and 2,825,912
Outstanding: 2,843,292 and 2,825,912		284			283
Unearned compensation - restricted stock awards		(1,031	)		(795	)
Paid-in capital		45,096			44,490
Retained earnings		71,461			68,320
Accumulated other comprehensive income, net		2,634			1,357
Total Shareholders' Equity		118,444			113,655
Total Liabilities and Shareholders' Equity	$	1,287,137		$	1,112,448

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

3

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

		Three months ended				Six months ended
Periods ended June 30, (in thousands, except per share amounts)		2020		2019		2020		2019
Interest and dividend income
Interest and fees on loans	$	10,313	$	9,880	$	20,300	$	19,814
Interest on debt securities:
Taxable		409		583		864		1,204
Tax exempt		171		117		356		189
Other interest and dividends		51		252		142		479
Total interest and dividend income		10,944		10,832		21,662		21,686
Interest expense
Deposits		988		1,999		2,497		3,795
Repurchase agreements		4		4		10		7
Finance lease		35		46		71		92
Note payable		4		4		7		8
Subordinated debt		156		156		312		312
Federal Home Loan Bank of Boston advances		140		279		359		691
Total interest expense		1,327		2,488		3,256		4,905
Net interest and dividend income		9,617		8,344		18,406		16,781
Provision for loan losses		1,806		151		3,512		445
Net interest and dividend income after provision for loan losses		7,811		8,193		14,894		16,336
Non-interest income
Trust and wealth advisory		1,031		1,044		2,061		1,950
Service charges and fees		598		1,012		1,503		1,932
Gains on sales of mortgage loans, net		252		1		313		8
Mortgage servicing, net		66		80		133		156
Gains on CRA mutual fund		8		12		22		23
Gains on available-for-sale securities, net		181		281		182		272
BOLI income and gains		133		87		266		166
Other		47		31		80		68
Total non-interest income		2,316		2,548		4,560		4,575
Non-interest expense
Salaries		2,411		2,959		5,261		5,952
Employee benefits		1,037		1,042		2,183		2,227
Premises and equipment		981		1,004		1,891		1,976
Data processing		557		577		1,098		1,086
Professional fees		758		583		1,385		1,118
OREO gains, losses and write-downs, net		—		270		—		322
Collections, OREO, and loan related		79		79		104		209
FDIC insurance		103		140		208		303
Marketing and community support		169		151		293		307
Amortization of core deposit intangibles		83		99		170		203
Other		611		535		1,133		947
Total non-interest expense		6,789		7,439		13,726		14,650
Income before income taxes		3,338		3,302		5,728		6,261
Income tax provision		604		599		947		1,124
Net income	$	2,734	$	2,703	$	4,781	$	5,137
Net income allocated to common stock	$	2,691	$	2,671	$	4,704	$	5,079
Basic earnings per common share	$	0.96	$	0.96	$	1.68	$	1.83
Diluted earnings per common share	$	0.96	$	0.95	$	1.68	$	1.82
Common dividends per share	$	0.29	$	0.28	$	0.58	$	0.56

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

4

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2020			2019			2020			2019
Net income	$	2,734		$	2,703		$	4,781		$	5,137
Other comprehensive income
Net unrealized gains on securities available-for-sale		470			1,261			1,799			2,390
Reclassification of net realized gains in net income (1)		(181	)		(281	)		(182	)		(272	)
Unrealized gains on securities available-for-sale		289			980			1,617			2,118
Income tax (expense)		(61	)		(206	)		(340	)		(444	)
Unrealized gains on securities available-for-sale, net of tax		228			774			1,277			1,674
Comprehensive income	$	2,962		$	3,477		$	6,058		$	6,811

^{(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains 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 June 30, 2020 and 2019 are $38 thousand and $59 thousand, respectively. The net tax effect for the six month periods ending June 30, 2020 and 2019 are $38 thousand and $57 thousand, respectively.}

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended June 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive		Total shareholders'
	Shares			Amount		Capital			Earnings			awards			(loss) income		equity
Balances at March 31, 2019		2,806,681		$	281	$	43,765		$	61,989		$	(606	)	$	680	$	106,109
Net income		—			—		—			2,703			—			—		2,703
Other comprehensive income, net of tax		—			—		—			—			—			774		774
Common stock dividends declared		—			—		—			(787	)		—			—		(787	)
Issuance of restricted stock awards		11,530			1		457			—			(458	)		—		—
Stock options exercised		2,025			—		34			—			—			—		34
Forfeiture of stock awards		(360	)		—		(16	)		—			16			—		—
Issuance of director's restricted stock awards		3,600			—		142			—			(142	)		—		—
Stock based compensation-restricted stock awards		—			—		—			—			115			—		115
Balances at June 30, 2019		2,823,476		$	282	$	44,382		$	63,905		$	(1,075	)	$	1,454	$	108,948
Balances at March 31, 2020		2,829,017		$	283	$	44,566		$	69,547		$	(659	)	$	2,406	$	116,143
Net income		—			—		—			2,734			—			—		2,734
Other comprehensive income, net of tax		—			—		—			—			—			228		228
Common stock dividends declared		—			—		—			(820	)		—			—		(820	)
Issuance of restricted stock awards		11,775			1		421			—			(422	)		—		—
Stock options exercised		—			—		—			—			—			—		—
Forfeiture of stock awards		(700	)		—		(29	)		—			29			—		—
Issuance of director's restricted stock awards		3,200			—		114			—			(114	)		—		—
Stock based compensation-restricted stock awards		—			—		24			—			135			—		159
Balances at June 30, 2020		2,843,292		$	284	$	45,096		$	71,461		$	(1,031	)	$	2,634	$	118,444

5

Six months ended June 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares			Amount		Capital			Earnings			awards			(loss) income			equity
Balances at December 31, 2018		2,806,781		$	281	$	43,770		$	60,339		$	(711	)	$	(220	)	$	103,459
Net income		—			—		—			5,137			—			—			5,137
Other comprehensive income, net of tax		—			—		—			—			—			1,674			1,674
Common stock dividends declared		—			—		—			(1,571	)		—			—			(1,571	)
Issuance of restricted stock awards		11,530			1		457			—			(458	)		—			—
Stock options exercised		2,025			—		34			—			—			—			34
Forfeiture of restricted stock awards		(460	)		—		(21	)		—			21			—			—
Issuance of director's restricted stock awards		3,600			—		142			—			(142	)		—			—
Stock based compensation-restricted stock awards		—			—		—			—			215			—			215
Balances at June 30, 2019		2,823,476		$	282	$	44,382		$	63,905		$	(1,075	)	$	1,454		$	108,948
Balances at December 31, 2019		2,825,912		$	283	$	44,490		$	68,320		$	(795	)	$	1,357		$	113,655
Net income		—			—		—			4,781			—			—			4,781
Other comprehensive income, net of tax		—			—		—			—			—			1,277			1,277
Common stock dividends declared		—			—		—			(1,640	)		—			—			(1,640	)
Issuance of restricted stock awards		11,775			1		421			—			(422	)		—			—
Stock options exercised		3,105			—		53			—			—			—			53
Forfeiture of restricted stock awards		(700	)		—		(29	)		—			29			—			—
Issuance of director's restricted stock awards		3,200			—		114			—			(114	)		—			—
Stock based compensation-restricted stock awards		—			—		47			—			271			—			318
Balances at June 30, 2020		2,823,292		$	284	$	45,096		$	71,461		$	(1,031	)	$	2,634		$	118,444

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

6

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Six months ended June 30, (in thousands)		2020			2019
Operating Activities
Net income	$	4,781		$	5,137
Adjustments to reconcile net income to net cash provided by operating activities
Amortization(accretion) and depreciation
Securities		231			137
Bank premises and equipment		720			813
Core deposit intangible		170			203
Modification fees on Federal Home Loan Bank of Boston advances		59			115
Subordinated debt issuance costs		12			12
Mortgage servicing rights		28			24
Fair value adjustment on loans		—			(64	)
Fair value adjustment on deposits		(2	)		(4	)
Gain on sales and calls of securities available-for-sale, net		(182	)		(272	)
Gain on CRA mutual fund		(22	)		(23	)
Gain on sales of loans, excluding capitalized servicing rights		(295	)		(7	)
OREO losses and write-downs		—			322
Provision for loan losses		3,512			445
Proceeds from loans sold		18,117			458
Loans originated for sale		(22,803	)		(854	)
Decrease in deferred loan origination fees and costs, net		2,701			92
Mortgage servicing rights originated		(143	)		(5	)
Increase in interest receivable		(573	)		(291	)
(Increase) decrease in deferred tax benefit		(1,026	)		125
Decrease in prepaid expenses		367			101
Increase in cash surrender value of life insurance policies		(266	)		(167	)
Decrease in income tax receivable		—			13
(Increase) decrease in other assets		(8	)		694
Increase in income taxes payable		1,728			—
Decrease in accrued expenses		(1,556	)		(1,072	)
Increase in interest payable		109			339
Increase (decrease) in other liabilities		44			(378	)
Stock based compensation-restricted stock awards		318			215
Net cash provided by operating activities	$	6,021		$	6,108
Investing Activities
Net (purchases) redemptions of Federal Home Loan Bank of Boston stock		(111	)		1,657
Purchases of securities available-for-sale		(15,417	)		(41,255	)
Proceeds from sales of securities available-for-sale		10,598			28,170
Proceeds from calls of securities available-for-sale		655			25
Proceeds from maturities of securities available-for-sale		8,082			6,982
Reinvestment of CRA mutual fund		(8	)		(10	)
Loan originations and principal collections, net		(119,192	)		(1,813	)
Recoveries of loans previously charged off		34			46
Proceeds from sales of other real estate owned		314			1,087
Capital expenditures		(1,285	)		(247	)
Purchase of life insurance policies		—			(750	)
Net cash utilized by investing activities	$	(116,330	)	$	(6,108	)

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

7

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)		2020			2019
Financing Activities
Increase in deposit transaction accounts, net	$	144,015		$	13,442
Increase in time deposits, net		22,080			10,546
(Decrease) increase in securities sold under agreements to repurchase, net		(721	)		2,204
Federal Home Loan Bank of Boston short-term advances, net change		(20,000	)		(9,500	)
Advances, (principal payments) on Federal Home Loan Bank of Boston advances		25,000			(25,000	)
Principal payments on Amortizing FHLB Advances		(828	)		—
Principal payments on note payable		(18	)		(17	)
Decrease in finance lease obligation		(22	)		(70	)
Stock options exercised		53			34
Common stock dividends paid		(1,640	)		(1,571	)
Net cash provided (utilized) by financing activities		167,919			(9,932	)
Net increase (decrease) in cash and cash equivalents		57,610			(9,932	)
Cash and cash equivalents, beginning of period		26,885			58,445
Cash and cash equivalents, end of period	$	84,495		$	48,513
Cash paid during period
Interest	$	3,078		$	4,443
Income taxes		245			986
Non-cash transfers
Finance lease obligation
Adoption of ASU 2016-02 - Other assets		—			1,552
Adoption of ASU 2016-02 – Other Liabilities		—			(1,552	)

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

8

Salisbury Bancorp, Inc. and Subsidiary

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

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

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

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

Risks and Uncertainties

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

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

9

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan and losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Entities should apply the guidance prospectively. On January 1, 2020, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.

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

10

Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and are effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a “smaller reporting company” and an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of “accelerated filer” and expands the category of “non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
June 30, 2020
Available-for-sale
U.S. Government Agency notes	$	4,186	$	176	$	1	$	4,361
Municipal bonds		24,701		1,207		12		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		30,881		1,179		35		32,025
Collateralized mortgage obligations:
U.S. Government agencies		20,349		699		—		21,048
Corporate bonds		6,000		147		25		6,122
Total securities available-for-sale	$	86,117	$	3,408	$	73	$	89,452
CRA mutual fund							$	912
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,353	$	—	$	—	$	3,353
(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2019
Available-for-sale
U.S. Government Agency notes	$	4,520	$	125	$	1	$	4,644
Municipal bonds		26,562		704		73		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		28,961		420		24		29,357
Collateralized mortgage obligations:
U.S. Government agencies		25,041		468		10		25,499
Corporate bonds		5,000		108		—		5,108
Total securities available-for-sale	$	90,084	$	1,825	$	108	$	91,801
CRA mutual fund							$	882
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,242	$	—	$	—	$	3,242

Salisbury sold $10.6 million of available-for-sale securities during the six month period ended June 30, 2020 realizing a pre-tax gain of $182 thousand and a related tax expense of $38 thousand. Salisbury sold $10.6 million in securities available-for-sale during the three month period ended June 30, 2020 realizing a pre-tax gain of $181 thousand and related tax expense of $38 thousand. Salisbury sold $28.2 million of available-for-sale securities during the six month period ended June 30, 2019 realizing a pre-tax gain of $272 thousand and a related tax expense of $57 thousand. Salisbury sold $27.2 million in securities available-for-sale during the three month period ended June 30, 2019 realizing a pre-tax gain of $281 thousand and related tax expense of $59 thousand.

11

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

	Less than 12 Months				12 Months or Longer				Total
June 30, 2020 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	102	$	1	$	102	$	1
Municipal bonds		2,074		12		—		—		2,074		12
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		4,160		34		105		1		4,265		35
Corporate bonds		725		25		—		—		725		25
Total temporarily impaired securities	$	6,959	$	71	$	207	$	2	$	7,166	$	73
	Less than 12 Months				12 Months or Longer				Total
December 31, 2019 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	195	$	1	$	195	$	1
Municipal bonds		6,273		73		—		—		6,273		73
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		5,781		22		704		2		6,485		24
Collateralized mortgage obligations:
U.S. Government Agencies		1,438		10		—		—		1,438		10
Total temporarily impaired securities	$	13,492	$	105	$	899	$	3	$	14,391	$	108

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

June 30, 2020 (in thousands)	Maturity	Amortized cost			Fair value	Yield(1)
U.S. Government Agency notes	After 5 year but within 10 years	$	2,496	$	2,557	3.48	%
	Total		2,496		2,557	3.48
Municipal bonds	After 5 year but within 10 years		1,720		1,881	3.16
	After 10 years		22,981		24,015	3.07
	Total		24,701		25,896	3.08
Mortgage-backed securities and Collateralized mortgage obligations	U.S. Government agencies		52,920		54,877	2.85
Corporate bonds	After 5 years but within 10 years		6,000		6,122	5.21
Securities available-for-sale		$	86,117	$	89,452	3.17	%

⁽¹⁾ Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Three securities had unrealized losses at June 30, 2020, which approximated 0.95% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Three securities had unrealized losses at June 30, 2020, which approximated 0.60% 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 June 30, 2020.

12

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Six securities had unrealized losses at June 30, 2020, which approximated 0.81% 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 June 30, 2020.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. One security had unrealized losses at June 30, 2020, which approximated 3.29% 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 June 30, 2020.

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 June 30, 2020. 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)		June 30, 2020			December 31, 2019
Residential 1-4 family	$	357,518		$	346,299
Residential 5+ multifamily		38,353			35,455
Construction of residential 1-4 family		11,041			11,889
Home equity lines of credit		30,286			33,798
Residential real estate		437,198			427,441
Commercial		309,935			289,795
Construction of commercial		13,699			8,466
Commercial real estate		323,634			298,261
Farm land		3,324			3,641
Vacant land		13,879			7,893
Real estate secured		778,035			737,236
Commercial and industrial (1)		247,440			169,411
Municipal		20,707			21,914
Consumer		7,886			6,385
Loans receivable, gross		1,054,068			934,946
Deferred loan origination (fees) and costs, net		(1,339	)		1,362
Loans receivable, gross	$	1,052,729		$	936,308
Allowance for loan losses		(12,371	)		(8,895	)
Loans receivable, net	$	1,040,358		$	927,413
Loans held-for-sale
Residential 1-4 family	$	5,313		$	332

⁽¹⁾ Commercial and industrial balance as of June 30, 2020 includes $98.9 million of Paycheck Protection Program loans.

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 June 30, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $61.9 million and $67.0 million, respectively.

13

Concentrations of Credit Risk

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

Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 35% of the Bank's commercial gross loans receivable are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15% of the Bank's gross commercial loan receivables is to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of gross commercial loan receivables is to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables is to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. 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. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

Credit Quality

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

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

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

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

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

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

14

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2020
Residential 1-4 family	$	350,494	$	3,357	$	3,667	$	—	$	—	$	357,518
Residential 5+ multifamily		36,539		96		1,718		—		—		38,353
Construction of residential 1-4 family		11,041		—		—		—		—		11,041
Home equity lines of credit		29,689		332		265		—		—		30,286
Residential real estate		427,763		3,785		5,650		—		—		437,198
Commercial		292,546		3,081		14,237		71		—		309,935
Construction of commercial		13,464		—		235		—		—		13,699
Commercial real estate		306,010		3,081		14,472		71		—		323,634
Farm land		1,637		—		1,687		—		—		3,324
Vacant land		13,785		55		39		—		—		13,879
Real estate secured		749,195		6,921		21,848		71		—		778,035
Commercial and industrial		245,768		581		731		360		—		247,440
Municipal		20,707		—		—		—		—		20,707
Consumer		7,851		3		32		—		—		7,886
Loans receivable, gross	$	1,023,521	$	7,505	$	22,611	$	431	$	—	$	1,054,068
(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Residential 1-4 family	$	337,302	$	4,278	$	4,719	$	—	$	—	$	346,299
Residential 5+ multifamily		33,619		99		1,737		—		—		35,455
Construction of residential 1-4 family		11,889		—		—		—		—		11,889
Home equity lines of credit		33,381		312		105		—		—		33,798
Residential real estate		416,191		4,689		6,561		—		—		427,441
Commercial		271,708		10,964		7,052		71		—		289,795
Construction of commercial		8,225		—		241		—		—		8,466
Commercial real estate		279,933		10,964		7,293		71		—		298,261
Farm land		1,934		—		1,707		—		—		3,641
Vacant land		7,834		59		—		—		—		7,893
Real estate secured		705,892		15,712		15,561		71		—		737,236
Commercial and industrial		167,458		443		1,510		—		—		169,411
Municipal		21,914		—		—		—		—		21,914
Consumer		6,344		3		38		—		—		6,385
Loans receivable, gross	$	901,608	$	16,158	$	17,109	$	71	$	—	$	934,946

The composition of loans receivable by delinquency status 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
June 30, 2020
Residential 1-4 family	$	356,297	$	349	$	618	$	217	$	37	$	1,221	$	—	$	1,410
Residential 5+ multifamily		37,492		—		—		—		861		861		—		861
Construction of residential 1-4 family		11,041		—		—		—		—		—		—		—
Home equity lines of credit		29,825		62		159		73		167		461		—		265
Residential real estate		434,655		411		777		290		1,065		2,543		—		2,536
Commercial		308,473		954		—		437		71		1,462		—		1,281
Construction of commercial		13,699		—		—		—		—		—		—		—
Commercial real estate		322,172		954		—		437		71		1,462		—		1,281
Farm land		3,155		—		169		—		—		169		—		174
Vacant land		13,879		—		—		—		—		—		—		39
Real estate secured		773,861		1,365		946		727		1,136		4,174		—		4,030
Commercial and industrial		246,535		781		—		—		124		905		11		774
Municipal		20,707		—		—		—		—		—		—		—
Consumer		7,853		3		30		—		—		33		—		—
Loans receivable, gross	$	1,048,956	$	2,149	$	976	$	727	$	1,260	$	5,112	$	11	$	4,804

15

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

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

	For the three months ending June 30, 2020						For the three months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		—		—		—		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		—		—		—		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665

	For the six months ending June 30, 2020						For the six months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		1		133		133		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		1		133		133		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665

For the second quarter 2020, there were no troubled debt restructurings, and for the same period in 2019, two residential loans with a combined loan balance of $623 thousand and one consumer loan of $42 thousand were modified in troubled debt restructurings for rate reductions. For the six months ended June 2020, one troubled debt restructuring of $133 thousand was modified to extend new funds to pay outstanding taxes and for the same period in 2019, three troubled debt restructurings with a combined loan balance of $665 thousand were modified for a rate reduction.

16

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended June 30, 2020												Three months ended June 30, 2019
(in thousands)	Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance		Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance
Residential 1-4 family	$	2,706	$	342		$	—		$	—	$	3,048	$	1,980	$	95		($	1	)	$	—	$	2,074
Residential 5+ multifamily		508		122			(41	)		—		589		466		29			—			—		495
Construction of residential 1-4 family		87		—			—			—		87		77		2			—			—		79
Home equity lines of credit		278		5			—			—		283		209		15			—			—		224
Residential real estate		3,579		469			(41	)		—		4,007		2,732		141			(1	)		—		2,872
Commercial		4,519		645			(4	)		—		5,160		3,803		(13	)		(14	)		1		3,777
Construction of commercial		126		79			—			—		205		143		(16	)		—			—		127
Commercial real estate		4,645		724			(4	)		—		5,365		3,946		(29	)		(14	)		1		3,904
Farm land		52		8			—			—		60		47		—			—			—		47
Vacant land		144		38			—			—		182		89		—			—			—		89
Real estate secured		8,420		1,239			(45	)		—		9,614		6,814		112			(15	)		1		6,912
Commercial and industrial		1,071		444			—			—		1,515		1,233		(67	)		(19	)		29		1,176
Municipal		53		(17	)		—			—		36		14		16			—			—		30
Consumer		102		(20	)		(13	)		5		74		51		40			(18	)		8		81
Unallocated		972		160			—			—		1,132		638		50			—			—		688
Totals	$	10,618	$	1,806		($	58	)	$	5	$	12,371	$	8,750	$	151		($	52	)	$	38	$	8,887

In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer”, gross loans receivable and the allowance for loan losses increased by $663 thousand. The balance of net loans receivable did not change as a result of this transfer.

	Six months ended June 30, 2020												Six months ended June 30, 2019
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Acquisition Discount Transfer		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,393	$	647		$	—		$	8	$	3,048	$	2,149	$	10	($	85	)	$	(1	)	$	1	$	2,074
Residential 5+ multifamily		446		185			(42	)		—		589		413		—		82			—			—		495
Construction of residential 1-4 family		75		12			—			—		87		83		—		(4	)		—			—		79
Home equity lines of credit		197		86			—			—		283		219		1		4			—			—		224
Residential real estate		3,111		930			(42	)		8		4,007		2,864		11		(3	)		(1	)		1		2,872
Commercial		3,742		1,402			(3	)		19		5,160		3,048		488		262			(23	)		2		3,777
Construction of commercial		104		101			—			—		205		122		—		5			—			—		127
Commercial real estate		3,846		1,503			(3	)		19		5,365		3,170		488		267			(23	)		2		3,904
Farm land		47		13			—			—		60		33		—		14			—			—		47
Vacant land		71		111			—			—		182		100		—		(11	)		—			—		89
Real estate secured		7,075		2,557			(45	)		27		9,614		6,167		499		267			(24	)		3		6,912
Commercial and industrial		1,145		370			—			—		1,515		1,158		164		(127	)		(50	)		31		1,176
Municipal		46		(10	)		—			—		36		12		—		18			—			—		30
Consumer		60		32			(25	)		7		74		56		—		37			(24	)		12		81
Unallocated		569		563			—			—		1,132		438		—		250			—			—		688
Totals	$	8,895	$	3,512		($	70	)	$	34	$	12,371	$	7,831	$	663	$	445		($	98	)	$	46	$	8,887

17

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

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2020
Residential 1-4 family	$	352,590	$	2,642	$	4,928	$	406	$	357,518	$	3,048
Residential 5+ multifamily		37,382		589		971		—		38,353		589
Construction of residential 1-4 family		11,041		87		—		—		11,041		87
Home equity lines of credit		30,021		263		265		20		30,286		283
Residential real estate		431,034		3,581		6,164		426		437,198		4,007
Commercial		305,393		4,836		4,542		324		309,935		5,160
Construction of commercial		13,699		205		—		—		13,699		205
Commercial real estate		319,092		5,041		4,542		324		323,634		5,365
Farm land		3,150		60		174		—		3,324		60
Vacant land		13,705		179		174		3		13,879		182
Real estate secured		766,981		8,861		11,054		753		778,035		9,614
Commercial and industrial		246,544		1,139		896		376		247,440		1,515
Municipal		20,707		36		—		—		20,707		36
Consumer		7,855		55		31		19		7,886		74
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2019
Residential 1-4 family	$	340,847	$	2,117	$	5,452	$	276	$	346,299	$	2,393
Residential 5+ multifamily		34,478		446		977		—		35,455		446
Construction of residential 1-4 family		11,889		75		—		—		11,889		75
Home equity lines of credit		33,693		197		105		—		33,798		197
Residential real estate		420,907		2,835		6,534		276		427,441		3,111
Commercial		285,462		3,333		4,333		409		289,795		3,742
Construction of commercial		8,466		104		—		—		8,466		104
Commercial real estate		293,928		3,437		4,333		409		298,261		3,846
Farm land		3,455		47		186		—		3,641		47
Vacant land		7,713		66		180		5		7,893		71
Real estate secured		726,003		6,385		11,233		690		737,236		7,075
Commercial and industrial		169,285		1,143		126		2		169,411		1,145
Municipal		21,914		46		—		—		21,914		46
Consumer		6,349		59		36		1		6,385		60
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

¹ For a further discussion of the allowance for loan losses, see “Provision and allowance for loan losses” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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

June 30, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,027,217	$	9,157	$	—	$	—	$	1,027,217	$	9,157
Potential problem loans 1		14,870		934		—		—		14,870		934
Impaired loans		—		—		11,981		1,148		11,981		1,148
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

December 31, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	913,648	$	7,251	$	—	$	—	$	913,648	$	7,251
Potential problem loans 1		9,903		382		—		—		9,903		382
Impaired loans		—		—		11,395		693		11,395		693
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

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

18

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:

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2020
Residential	$	4,203	$	4,345	$	4,066	$	406	$	45	$	1,696	$	2,043	$	1,919	$	13
Home equity lines of credit		227		540		79		20		—		38		74		100		—
Residential real estate		4,430		4,885		4,145		426		45		1,734		2,117		2,019		13
Commercial		3,727		3,818		3,452		324		75		816		1,411		899		16
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		174		325		181		—
Vacant land		39		41		40		3		—		134		151		137		5
Real estate secured		8,196		8,744		7,637		753		120		2,858		4,004		3,236		34
Commercial and industrial		896		901		241		376		7		—		151		64		—
Consumer		31		31		34		19		1		—		—		—		—
Totals	$	9,123	$	9,676	$	7,912	$	1,148	$	128	$	2,858	$	4,155	$	3,300	$	34

Note: The income recognized is for the six month period ended June 30, 2020.

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2019
Residential	$	4,629	$	4,985	$	3,032	$	172	$	66	$	1,991	$	2,659	$	3,299	$	13
Home equity lines of credit		43		43		45		1		1		483		575		442		—
Residential real estate		4,672		5,028		3,077		173		67		2,474		3,234		3,741		13
Commercial		2,565		2,571		2,239		186		51		1,236		2,519		2,287		27
Construction of commercial		—		—		143		—		—		—		3		72		—
Farm land		—		—		—		—		—		204		428		211		—
Vacant land		42		42		42		2		1		143		163		145		5
Real estate secured		7,279		7,641		5,501		361		119		4,057		6,347		6,456		45
Commercial and industrial		3		3		—		—		—		135		236		395		3
Consumer		41		41		6		35		—		—		—		6		—
Totals	$	7,323	$	7,685	$	5,507	$	396	$	119	$	4,192	$	6,583	$	6,857	$	48

Note: The income recognized is for the six month period ended June 30, 2019.

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

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
December 31, 2019
Residential	$	4,111	$	4,190	$	3,725	$	276	$	162	$	2,318	$	3,081	$	2,940	$	52
Home equity lines of credit		—		—		52		—		—		105		450		391		—
Residential real estate		4,111		4,190		3,777		276		162		2,423		3,531		3,331		52
Commercial		3,309		3,335		2,574		409		90		1,024		1,733		1,747		54
Construction of commercial		—		—		77		—		—		—		—		39		—
Farm land		—		—		—		—		—		186		329		203		—
Vacant land		41		41		42		5		3		139		157		143		10
Real estate secured		7,461		7,566		6,470		690		255		3,772		5,750		5,463		116
Commercial and industrial		93		97		16		2		4		33		188		265		4
Consumer		36		36		21		1		—		—		—		3		—
Totals	$	7,590	$	7,699	$	6,507	$	693	$	259	$	3,805	$	5,938	$	5,731	$	120

19

NOTE 4 – LEASES

The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of June 30, 2020 and consolidated income statements for the six months and three months ended June 30, 2020.

($ in thousands, except lease term and discount rate)	Classification		June 30, 2020		December 31, 2019
Assets
Operating	Other assets	$	1,258	$	1,360
Finance	Bank premises and equipment 1		1,453		1,503
Total Leased Assets		$	2,711	$	2,863
Liabilities
Operating	Other liabilities	$	1,258	$	1,360
Finance	Finance lease		1,696		1,718
Total lease liabilities		$	2,954	$	3,078
1 Net of accumulated depreciation of $344 thousand and $294 thousand, respectively.
Lease cost	Classification		Six months ended June 30, 2020		Three months ended June 30, 2020
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		51		25
Interest on finance leases	Interest expense		71		36
Total lease cost		$	245	$	122
Lease cost	Classification		Six months ended June 30, 2019		Three months ended June 30, 2019
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		120		47
Interest on finance leases	Interest expense		92		46
Total lease cost		$	335	$	154
Weighted Average Remaining Lease Term			June 30, 2020		December 31, 2019
Operating leases			8.3 years		8.6 years
Financing leases			14.9 years		13.1 years
Weighted Average Discount Rate1
Operating leases			3.73%		3.70%
Financing leases			8.38%		6.20%
1 Salisbury uses the FHLB five-year Advance rate as the discount rate, as our leases do not provide an implicit rate.

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

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2020	$	128		$	93
2021		250			192
2022		198			195
2023		148			197
2024		129			200
Thereafter		654			1,980
Total future minimum lease payments		1,507			2,857
Less amount representing interest		(249	)		(1,161	)
Total present value of net future minimum lease payments	$	1,258		$	1,696

NOTE 5 - MORTGAGE SERVICING RIGHTS

The following tables provide the balance of the residential mortgage loans serviced for others as well as the balance of mortgage servicing rights associated with those loans. The increase in balances from December 31, 2019 reflected the sale of additional loans to FHLB Boston for which the Bank retained servicing rights.

(in thousands)		June 30, 2020		December 31, 2019
Residential mortgage loans serviced for others	$	110,933	$	106,255
Fair value of mortgage servicing rights		613		813

20

Changes in mortgage servicing rights are as follows:

		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2020			2019			2020			2019
Mortgage Servicing Rights
Balance, beginning of period	$	255		$	221		$	238		$	228
Originated		110			1			143			5
Amortization (1)		(12	)		(13	)		(28	)		(24	)
Balance, end of period	$	353		$	209		$	353		$	209

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

NOTE 6 - PLEDGED ASSETS

(in thousands)		June 30, 2020		December 31, 2019
Securities available-for-sale (at fair value)	$	54,195	$	52,845
Loans receivable (at book value)		428,772		434,329
Total pledged assets	$	482,967	$	487,174

At June 30, 2020, securities were pledged as follows: $45.68 million to secure public deposits, $8.47 million to secure repurchase agreements and $0.05 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 7 – EARNINGS PER SHARE

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

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

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

		Three months ended						Six months ended
Periods ended June 30, (in thousands, except per share data)		2020			2019			2020			2019
Net income	$	2,734		$	2,703		$	4,781		$	5,137
Less: Undistributed earnings allocated to participating securities		(43	)		(32	)		(77	)		(58	)
Net income allocated to common stock	$	2,691		$	2,671		$	4,704		$	5,079
Weighted-average common shares issued		2,834			2,813			2,831			2,810
Less: Unvested restricted stock awards		(38	)		(33	)		(38	)		(31	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,796			2,780			2,793			2,779
Add: Dilutive effect of stock options		7			20			8			16
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,803			2,800			2,801			2,795
Earnings per common share (basic)	$	0.96		$	0.96		$	1.68		$	1.83
Earnings per common share (diluted)	$	0.96		$	0.95		$	1.68		$	1.82

NOTE 8 – SHAREHOLDERS' EQUITY

Capital Requirements

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

The requirements of the final rules approved by the Federal Reserve Board (“FRB”) and FDIC, include a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. As of June 30, 2020, the Bank exceeded the regulatory requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. A bank can be considered “well-capitalized” even if it does not maintain the capital conservation buffer as long as it meets the “well-capitalized” levels set forth below (and provided it is not subject to any written order, agreement, capital directive, etc.). A bank with a capital conservation buffer of at least 2.5% means that it generally will not be subject to certain limitations regarding capital distributions, such as dividend payments, discretionary payments on tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers.

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The Bank's risk-weighted assets at June 30, 2020 and December 31, 2019 were $918.5 million and $891.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2020
Total Capital (to risk-weighted assets)	$	120,802		13.15	%	$	73,480		8.0	%	$	96,443		10.5	%	$	91,850		10.0	%
Tier 1 Capital (to risk-weighted assets)		109,309		11.90			55,110		6.0			78,073		8.5			73,480		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		109,309		11.90			41,333		4.5			64,295		7.0			59,703		6.5
Tier 1 Capital (to average assets)	$	109,309		8.95		$	48,856		4.0		$	48,856		4.0		$	61,071		5.0
December 31, 2019
Total Capital (to risk-weighted assets)	$	114,421		12.84	%	$	71,278		8.0	%	$	93,553		10.5	%	$	89,098		10.0	%
Tier 1 Capital (to risk-weighted assets)		105,430		11.83			53,459		6.0			75,733		8.5			71,278		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		105,430		11.83			40,094		4.5			62,368		7.0			57,914		6.5
Tier 1 Capital (to average assets)	$	105,430		9.60		$	43,944		4.0		$	43,944		4.0		$	54,930		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 9 – BENEFITS

Salisbury's 401(k) Plan expense was $200 thousand and $192 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $438 thousand and $431 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $14 thousand and $27 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $38 thousand and $48 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $56 thousand and $53 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $113 thousand and $102 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

Other Retirement Plans

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 have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $33 thousand and $29 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $67 thousand and $58 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

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Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense was $135 thousand and $115 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $271 thousand and $215 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. The second quarter 2020 included an expense of $32 thousand for the accelerated vesting of restricted stock awards previously granted to certain Directors, who retired from Salisbury's Board of Directors during the quarter. The tax benefit from restricted stock expense was $25 thousand and $21 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $49 thousand and $39 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. In second quarter 2020, Salisbury granted a total of 14,975 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $536 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of June 30, 2020 and 2019 totaled $1,031 thousand and $1,075 thousand, respectively. There were forfeitures of $29 thousand or 700 shares in the second quarter of 2020 and forfeitures of $29 thousand or 700 shares for year to date. There were forfeitures of $16 thousand or 360 shares in the second quarter of 2019 and forfeitures of $21 thousand or 460 shares for year to date.

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. The performance goal is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. A total of 6,800 performance-based restricted stock units were granted, including 3,500 units to three Named Executive Officers. Mr. Cantele received 1,500 units, Mr. Davies received 1,000 units and Mr. Albero received 1,000 units. Compensation expense was recorded with respect to these RSUs, for the quarter a total of $24 thousand and $21 thousand, and year to date $47 thousand and $39 thousand, were expensed in 2020 and 2019, respectively. No performance-based restricted stock units were awarded to date in 2020 and prior to March 29, 2019.

Options

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

NOTE 10 – 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 are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

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

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

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Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
June 30, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,361	$	—	$	4,361
Municipal bonds		—		25,896		—		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		32,025		—		32,025
Collateralized mortgage obligations:
U.S. Government agencies		—		21,048		—		21,048
Corporate bonds		—		6,122		—		6,122
Securities available-for-sale	$	—	$	89,452	$	—	$	89,452
CRA mutual funds		912		—		—		912
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,282	$	1,282
Other real estate owned	$	—	$	—	$	—	$	—
December 31, 2019
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,644	$	—	$	4,644
Municipal bonds		—		27,193		—		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		29,357		—		29,357
Collateralized mortgage obligations:
U.S. Government agencies		—		25,499		—		25,499
Corporate bonds		—		5,108		—		5,108
Securities available-for-sale	$	—	$	91,801	$	—	$	91,801
CRA mutual funds		882		—		—		882
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,593	$	1,593
Other real estate owned	$	—	$	—	$	314	$	314

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

(in thousands)	Carrying		Estimated		Fair value measurements using
	value		fair value		Level 1		Level 2		Level 3
June 30, 2020
Financial Assets
Cash and cash equivalents	$	84,495	$	84,495	$	84,495	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale, net		89,452		89,452		—		89,452		—
CRA mutual fund		912		912		912		—		—
Federal Home Loan Bank of Boston stock		3,353		3,353		3,353		—		—
Loans held-for-sale		5,313		5,392		—		—		5,392
Loans receivable, net		1,040,358		1,062,289		—		—		1,062,289
Accrued interest receivable		3,988		3,988		3,988		—		—
Cash surrender value of life insurance policies		20,846		20,846		20,846		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	325,531	$	325,531	$	—	$	325,531	$	—
Demand (interest-bearing)		188,487		188,487		—		188,487		—
Money market		251,242		251,242		—		251,242		—
Savings and other		170,537		170,537		—		170,537		—
Certificates of deposit		149,802		151,315		—		151,315		—
Deposits		1,085,599		1,087,112		—		1,087,112		—
Repurchase agreements		7,809		7,809		—		7,809		—
FHLBB advances		55,118		55,377		—		55,377		—
Subordinated debt		9,871		9,910		9,910		—		—
Note payable		228		231		—		231		—
Finance lease obligation		1,696		1,902		—		—		1,902
Accrued interest payable		187		187		187		—		—
December 31, 2019
Financial Assets
Cash and cash equivalents	$	26,885	$	26,885	$	26,885	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		91,801		91,801		—		91,801		—
CRA mutual fund		882		882		882		—		—
Federal Home Loan Bank of Boston stock		3,242		3,242		3,242		—		—
Loans held-for-sale		332		334		—		—		334
Loans receivable, net		927,413		933,287		—		—		933,287
Accrued interest receivable		3,415		3,415		3,415		—		—
Cash surrender value of life insurance policies		20,580		20,580		20,580		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	237,852	$	237,852	$	—	$	237,852	$	—
Demand (interest-bearing)		153,314		153,314		—		153,314		—
Money market		239,504		239,504		—		239,504		—
Savings and other		161,112		161,112		—		161,112		—
Certificates of deposit		127,724		128,629		—		128,629		—
Deposits		919,506		920,411		—		920,411		—
Repurchase agreements		8,530		8,530		—		8,530		—
FHLBB advances		50,887		51,028		—		51,028		—
Subordinated debt		9,859		10,113		10,113		—		—
Note payable		246		251		—		251		—
Finance lease liability		1,718		1,967		—		—		1,967
Accrued interest payable		78		78		78		—		—

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

NOTE 11 – SUBSEQUENT EVENTS

In July 2020, Salisbury was notified of the death of a former employee who was covered under a Bank Owned Life Insurance policy (“BOLI”). Under the terms of the BOLI policy, the Bank will record a tax-free gain of $600 thousand in July 2020.

On July 29, 2020, the Compensation Committee of the Board of Directors approved grants of performance-based restricted stock units (“RSUs”) to named executive officers (“NEOs”) and other key employees under the Company’s 2017 Long Term Incentive Plan. The Compensation Committee granted a total of 7,250 RSUs, including 3,500 RSUs to NEOs. Richard J. Cantele, Jr., President and Chief Executive Officer received 1,500 target RSUs; John M. Davies, President of NY Region and Chief Lending Officer received 1,000 target RSUs; and Peter Albero, Executive Vice President and Chief Financial Officer received 1,000 target RSUs. The maximum number of shares deliverable upon vesting of RSUs assuming 150% of the TBV growth target is met or exceeded, will be 10,875.

On July 31, 2020 the Board of Directors declared a dividend of $0.29 per common share payable on August 28, 2020 to shareholders of record as of August 14, 2020.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations of Salisbury Bancorp, Inc. (“Salisbury” or the “Company”) and its subsidiary should be read in conjunction with Salisbury's Annual Report on Form 10-K for the year ended December 31, 2019. Readers should also review other disclosures Salisbury files from time to time with the Securities and Exchange Commission (the “SEC”).

BUSINESS

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

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

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

Critical Accounting Policies and Estimates

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

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

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on the balance sheet. A discussion of the factors driving changes in the amount of the allowance for loan losses is included in the “Provision and Allowance for Loan Losses” section of Management's Discussion and Analysis.

Goodwill and Intangible Assets

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

Available-For-Sale Securities

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

FINANCIAL CONDITION

Impact of COVID-19 Virus

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

• The Bank is practicing social distancing following the guidelines of the Center for Disease Control and requires many of its employees to work from home or from alternate locations.

• On July 8, 2020, the lobbies to the Bank's branches reopened to customers and banking is also available to customers by appointment.

• The Bank continues to leverage the drive-up windows in twelve of its fourteen branches as well as its electronic banking platform to continue to serve customers.

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

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Securities and Short Term Funds

During the first six months of 2020, securities decreased $2.2 million to $93.7 million at June 30, 2020. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) increased $57.6 million to $84.5 million at June 30, 2020.

Salisbury evaluates securities for OTTI 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 charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for OTTI. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be OTTI at June 30, 2020.

Loans

Net loans receivable increased $113.0 million to $1,040.4 million at June 30, 2020, compared with $927.4 million at December 31, 2019. The increase primarily reflected PPP loan balances of $96.3 million, net of deferred fees, and growth in commercial real estate loans receivable. In addition, residential loans receivable increased approximately $9.8 million from year end 2019, partly reflecting higher demand for homes in less densely populated areas as a result of COVID-19. These increases were partly offset by a $3.5 million increase in the allowance for loan losses, which primarily reflected the uncertainty surrounding the impact of COVID-19 as well as loan growth during the period.

Asset Quality

During the first six months of 2020, non-performing assets increased $0.9 million, which primarily reflected an increase of $0.8 million in commercial and industrial loans, and an increase of $0.4 million in real estate secured loans, offset by the sale of OREO properties of $0.3 million. During the first six months of 2020, total impaired and potential problem loans increased by $5.6 million to $26.9 million, or 2.55% of gross loans receivable at June 30, 2020, from $21.3 million, or 2.28% of gross loans receivable at December 31, 2019.

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

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

As of June 30, 2020, 124 residential and consumer loans ($35 million loan balances) and 196 commercial loans ($137 million loan balances) were granted payment deferrals. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. The CARES Act provides emergency economic relief to individuals and businesses impacted by the virus. The CARES Act authorized the SBA to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).  As a qualified SBA lender, the Bank was automatically qualified to originate loans under the PPP. As of June 30, 2020, Salisbury processed 890 PPP loans for a principal balance of approximately $99 million primarily for existing customers. The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to spend on payroll costs, mortgage interest, rent and utilities during the covered period after the loans are funded. On June 5, 2020 the Paycheck Protection Program Flexibility Act (“PPPFA”) was signed into law. The PPPFA increased the covered period from eight weeks to twenty four weeks, reduced the portion of the loan that must be spent on payroll costs from 75% to 60% and extended the term of loans that are not forgiven from two years to five years. For PPP loans originated prior to June 5, 2020, borrowers and lenders may mutually agree to increase the loan term to five years. The vast majority of PPP loans processed by Salisbury have a two year term. Management has funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank (“FHLB”) advances, and brokered deposits. Salisbury has not participated in the Federal Reserve's Paycheck Protection Program Liquidity Facility (“PPPLF”).

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Past Due Loans

Loans past due 30 days or more increased $0.7 million for the six months ended June 30, 2020 to $5.1 million, or 0.49% of gross loans receivable compared with $4.4 million, or 0.47% of gross loans receivable at December 31, 2019.

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

(in thousands)		June 30, 2020		December 31, 2019
Past due 30-59 days	$	1,849	$	1,351
Past due 60-89 days		807		726
Past due 90-179 days		—		3
Past due 180 days and over		11		—
Accruing loans		2,667		2,080
Past due 30-59 days		300		290
Past due 60-89 days		169		—
Past due 90-179 days		727		271
Past due 180 days and over		1,249		1,775
Non-accrual loans		2,445		2,336
Total loans past due 30 days or greater	$	5,112	$	4,416

Credit Risk Ratings

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

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

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

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

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

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

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.

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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)		June 30, 2020		December 31, 2019
Non-accrual loans, excluding troubled debt restructured loans	$	3,297	$	2,604
Non-accrual troubled debt restructured loans		1,507		1,013
Accruing troubled debt restructured loans		7,177		7,778
Total impaired loans	$	11,981	$	11,395

Non-Performing Assets

Non-performing assets increased $0.9 million to $4.8 million or 0.37% of assets at June 30, 2020, from $3.9 million, or 0.35% of assets at December 31, 2019, and decreased $0.8 million from $5.4 million, or 0.49% of assets at June 30, 2019.

The 22.4% increase in non-performing assets in the first six months of 2020 primarily reflected an increase of $0.8 million in commercial and industrial loans and an increase in real estate secured loans of $0.4 million, partly offset by the sale of $0.3 million of OREO properties.

The components of non-performing assets are as follows:

(in thousands)		June 30, 2020		December 31, 2019
Residential 1-4 family	$	1,410	$	1,551
Residential 5+ multifamily		861		861
Home equity lines of credit		265		105
Commercial		1,281		914
Farm land		174		186
Vacant land		39		—
Real estate secured		4,030		3,617
Commercial and industrial		774		—
Non-accruing loans		4,804		3,617
Accruing loans past due 90 days and over		11		3
Non-performing loans		4,815		3,620
Other Real Estate Owned (OREO)		—		314
Non-performing assets	$	4,815	$	3,934

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

(in thousands)		June 30, 2020		December 31, 2019
Current	$	2,358	$	1,281
Past due 30-59 days		300		290
Past due 60-89 days		169		—
Past due 90-179 days		727		274
Past due 180 days and over		1,261		1,775
Total non-performing loans	$	4,815	$	3,620

At June 30, 2020, 48.97% of non-performing loans were current with respect to loan payments, compared with 35.39% at December 31, 2019.

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Total Outstanding Troubled Debt Restructured Loans

Total outstanding troubled debt restructured loans improved slightly during the first six months of 2020 to $8.7 million, or 0.82% of gross loans receivable at June 30, 2020, compared to $8.8 million, or 0.94% of gross loans receivable at December 31, 2019.

The components of troubled debt restructured loans are as follows:

(in thousands)		June 30, 2020		December 31, 2019
Residential 1-4 family	$	3,518	$	3,901
Residential 5+ multifamily		109		116
Personal		31		36
Vacant land		134		180
Commercial		3,263		3,419
Real estate secured		7,055		7,652
Commercial and industrial		122		126
Accruing troubled debt restructured loans		7,177		7,778
Residential 1-4 family		335		152
Residential 5+ multifamily		861		861
Vacant land		39		—
Commercial		272		—
Real estate secured		1,507		1,013
Non-accrual troubled debt restructured loans		1,507		1,013
Troubled debt restructured loans	$	8,684	$	8,791

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

(in thousands)		June 30, 2020		December 31, 2019
Current	$	7,080	$	7,227
Past due 30-59 days		—		470
Past due 60-89 days		97		81
Accruing troubled debt restructured loans		7,177		7,778
Current		374		19
Past due 90-179 days		272		133
Past due 180 days and over		861		861
Non-accrual troubled debt restructured loans		1,507		1,013
Total troubled debt restructured loans	$	8,684	$	8,791

At June 30, 2020, 85.84% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.43% at December 31, 2019.

Potential Problem Loans

Potential problem loans consist of performing loans that have been assigned a substandard credit risk rating and are not classified as impaired. Potential problem loans increased $5.0 million during the first six months of 2020 to $14.9 million, or 1.41% of gross loans receivable at June 30, 2020, compared with $9.9 million, or 1.06% of gross loans receivable at December 31, 2019. The increase primarily reflected the downgrade of certain commercial loans of $7.0 million, partly offset by the upgrade of both commercial and industrial loans of $1.2 million and residential 1-4 family loans of $0.8 million.

The components of potential problem loans are as follows:

(in thousands)		June 30, 2020		December 31, 2019
Residential 1-4 family	$	1,346	$	2,109
Residential 5+ multifamily		748		760
Home equity lines of credit		—		—
Residential real estate		2,094		2,869
Commercial		10,832		3,886
Construction of commercial		235		241
Commercial real estate		11,067		4,127
Farm land		1,513		1,521
Real estate secured		14,674		8,517
Commercial and industrial		195		1,384
Consumer		1		2
Total potential problem loans	$	14,870	$	9,903

30

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

(in thousands)		June 30, 2020		December 31, 2019
Current	$	14,486	$	9,654
Past due 30-59 days		384		108
Past due 60-89 days		—		138
Past due 90-179 days		—		3
Total potential problem loans	$	14,870	$	9,903

At June 30, 2020, 97.42% of potential problem loans were current with respect to loan payments, as compared with 97.49% at December 31, 2019. Management cannot predict the extent to which economic or other factors may impact such borrowers' future payment capacity, and there can be no assurance that such loans will not be placed on nonaccrual status, restructured, or require increased provisions for loan losses.

Goodwill

Management evaluates goodwill and identifiable intangible assets for impairment at least annually using valuation techniques that involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. The virus triggered significant volatility in the global financial markets. On June 30, 2020, Salisbury's closing stock price was $40.99 per share compared with its book value of $41.66 per share. Salisbury's stock price has declined approximately 10% from December 31, 2019 whereas financial stocks, as measured by the SNL US Bank $1 billion - $5 billion index, declined approximately 31% over the same period. As a result of the stock market volatility, the Bank was required to assess whether it was more likely than not that the goodwill on its consolidated balance sheet had been impaired. Management evaluated several qualitative factors including macroeconomic conditions, the Bank's financial performance and the short-term volatility in its share price to determine if it was more likely than not that the fair value of the goodwill declined below its carrying value on a sustained basis. Management concluded that there is still much uncertainty surrounding the impact of COVID-19 to determine if it is more likely than not that the Bank's fair value has fallen below carrying value on a sustained basis. As a result, the Bank did not record an impairment charge for goodwill for the second quarter 2020.

Deposits and Borrowings

Deposits increased $166.1 million during the first six months of 2020, or 18.1%, to $1.1 billion at June 30, 2020, compared with $919.5 million at December 31, 2019. The increase partly reflected the funding of $98.9 million of PPP loans as well as an increase in brokered certificate of deposit balances of $33.0 million. Retail repurchase agreements decreased $0.7 million during 2020 to $7.8 million at June 30, 2020, compared with $8.5 million at December 31, 2019.

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

	June 30, 2020								December 31, 2019
(in thousands)	Average Balance		Percent			Weighted Interest Rate			Average Balance		Percent			Weighted Interest Rate
Demand deposits	$	269,047		26.68	%		0.00	%	$	231,169		24.50	%		0.00	%
Interest-bearing checking accounts		172,811		17.14	%		0.39	%		155,463		16.48			0.39
Regular savings accounts		171,436		17.00	%		0.61	%		175,011		18.55			0.87
Money market savings		237,667		23.57	%		1.07	%		222,090		23.54			1.05
Certificates of deposit (CD's)1		157,288		15.60	%		1.88	%		159,863		16.94			1.80
Total deposits	$	1,008,249		100.00	%		0.72	%	$	943,596		100.00	%		0.78	%

¹CD's included Certificate of Deposit Account Registry Service (“CDARS”) one-way buys of $5.2 million at June 30, 2020 and $2.9 million at December 31, 2019. CDARS is a product offered by Promontory Interfinancial Network that enables participating financial institutions to buy or sell excess funds to other members to manage liquidity. CD's also include brokered certificates of deposits of $33.0 million at June 30, 2020. Salisbury did not have any brokered certificates of deposit outstanding at December 31, 2019.

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

Interest rates (in thousands)		June 30, 2020		December 31, 2019
Less than 1.00%	$	47,899	$	34,261
1.00% to 1.99%		46,808		46,502
2.00% to 2.99%		54,597		46,463
3.00% to 3.99%		498		498
Total	$	149,802	$	127,724

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

	At June 30, 2020
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%	$	37,424	$	8,644	$	269	$	1,562	$	47,899		31.97	%
1.00% to 1.99%		26,570		7,732		5,832		6,674		46,808		31.25	%
2.00% to 2.99%		44,381		4,530		159		5,527		54,597		36.45	%
3.00% to 3.99%		—		498		—		—		498		0.33	%
Total	$	108,375	$	21,404	$	6,260	$	13,763	$	149,802		100.00	%

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

June 30, 2020 (in thousands)	Within 3 months		3-6 months		6-12 months		Over 1 year		Total
Certificates of deposit $100,000 and over	$	47,832	$	29,043	$	21,565	$	22,783	$	121,223

FHLBB advances increased $4.2 million during the first six months of 2020 to $55.1 million at June 30, 2020, compared with $50.9 million at December 31, 2019. 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 June 30, 2020, $15 million of letters of credit were outstanding.

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

(dollars in thousands)		June 30, 2020		December 31, 2019
Highest month-end balance during period	$	15,000	$	47,000
Ending balance		10,000		30,000
Average balance during period		11,868		5,670

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. At June 30, 2020, Salisbury's excess borrowing capacity at FHLBB was approximately $223.1 million. Salisbury did not experience a significant outflow of deposits or draw downs on credit lines due to the virus. In addition, Salisbury may pledge the loans approved by the SBA under the PPP program to the Federal Reserve to collateralize borrowings. The face amount of the PPP loans will not be discounted by the Federal Reserve. The PPP loans are guaranteed by the SBA and therefore carry a 0% risk weight. As a result, the Bank's Tier 1 and Total capital ratios will not be affected by loans made under this program. Additionally, PPP loans pledged as collateral to the Federal Reserve will not be included in the Bank's Tier 1 leverage ratio. Salisbury has not pledged any PPP loans to the Federal Reserve. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury's net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

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

Operating activities for the six-month period ended June 30, 2020 provided net cash of $6.0 million. Investing activities utilized net cash of $116.3 million principally from $119.2 million of net loan originations and principal collections, $15.4 million of purchases of securities available-for-sale and $1.3 million of capital expenditures, partly offset by proceeds of $8.7 million from calls and maturities of securities available-for-sale, $10.6 million from the sale of available-for-sale-securities and $0.3 million from the sale of other real estate owned. Financing activities provided net cash of $168.0 million, principally due to increase of deposits of $144.0 million and an increase in time deposits of $22.1 million and $25.0 million in long-term FHLBB advances offset by repayment of FHLBB short term advances of $20.0 and the payment of common stock dividends of $1.6 million.

At June 30, 2020, Salisbury had outstanding commitments to fund new loan originations of $31.1 million and unused lines of credit of $137.1 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

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RESULTS OF OPERATIONS

For the three-month periods ended June 30, 2020 and 2019

OVERVIEW

Net income allocated to common stock was $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2020 (second quarter 2020), compared with $2.7 million, or $0.96 per common share, for the second quarter ended June 30, 2019 (second quarter 2019), and $2.0 million, or $0.72 per common share, for the first quarter ended March 31, 2020 (first quarter 2020).

Net Interest Income

Tax equivalent net interest income for the second quarter 2020 increased $832 thousand, or 9.3%, versus first quarter 2020, and increased $1.3 million, or 15.3%, versus second quarter 2019. Average earning assets increased $114 million versus first quarter 2020, and increased $116.5 million versus second quarter 2019. Average total interest bearing deposits increased $24.8 million versus first quarter 2020 and increased $11.3 million versus second quarter 2019. The tax equivalent net interest margin for the second quarter 2020 was 3.31% compared with 3.35% for the first quarter 2020 and 3.19% for the second quarter 2019. The increase in the net interest margin primarily reflected the lower cost of borrowing from the FHLBB and the repricing of deposits at lower interest rates. In addition, net interest income for the second quarter 2019 was reduced by $140 thousand for the write-off of unamortized premiums on purchased loans which paid off during the quarter. This write-off of premiums reduced second quarter 2019 tax equivalent net interest margin by approximately 0.05%.

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 June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2020		2019		2020		2019		2020		2019
Loans (a)(d)	$	1,038,551	$	923,513	$	10,428	$	9,984		4.02	%	4.31	%
Securities (c)(d)		86,987		99,050		634		738		2.92		2.98
FHLBB stock		3,580		3,258		39		66		4.36		8.09
Short term funds (b)		49,105		35,853		12		186		0.10		2.08
Total earning assets		1,178,223		1,061,674		11,113		10,974		3.77		4.13
Other assets		60,288		56,081
Total assets	$	1,238,511	$	1,117,755
Interest-bearing demand deposits	$	172,811	$	156,597		103		154		0.24		0.39
Money market accounts		237,667		209,351		239		558		0.40		1.07
Savings and other		171,436		184,346		102		456		0.24		0.99
Certificates of deposit		157,288		177,535		544		831		1.38		1.88
Total interest-bearing deposits		739,202		727,829		988		1,999		0.53		1.10
Repurchase agreements		4,773		3,334		4		4		0.34		0.47
Capital lease		2,987		4,509		35		46		4.69		4.07
Note payable		231		266		4		4		6.93		6.06
Subordinated Debt (net of issuance costs)		9,866		9,843		156		156		6.32		6.34
FHLBB/FRB borrowings		55,374		37,462		140		279		1.01		2.94
Total interest-bearing liabilities		812,433		783,243		1,327		2,488		0.65		1.27
Demand deposits		302,965		221,012
Other liabilities		6,029		5,862
Shareholders' equity		117,084		107,638
Total liabilities & shareholders' equity	$	1,238,511	$	1,117,755
Net interest income					$	9,786	$	8,486
Spread on interest-bearing funds										3.12		2.86
Net interest margin (e)										3.31		3.19

(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 $170,000 and $142,000, respectively, for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.

(e) Net interest income divided by average interest-earning assets.

33

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

Three months ended June 30, (in thousands)	2020 versus 2019
Change in interest due to		Volume			Rate			Net
Loans	$	1,164		$	(720	)	$	444
Securities		(89	)		(15	)		(104	)
FHLBB stock		5			(32	)		(27	)
Short term funds		36			(210	)		(174	)
Interest-earning assets		1,116			(977	)		139
Deposits		23			(1,034	)		(1,011	)
Repurchase agreements		1			(1	)		—
Capital lease		(17	)		6			(11	)
Note payable		(1	)		1			—
Subordinated Debt		—			—			—
FHLBB/FRB borrowings		85			(224	)		(139	)
Interest-bearing liabilities		91			(1,252	)		(1,161	)
Net change in net interest income	$	1,025		$	275		$	1,300

Interest Income

Tax equivalent interest income increased $139 thousand to $11.1 million for second quarter 2020 as compared with $11.0 million in second quarter 2019. Loan income as compared to second quarter 2019 increased $444 thousand, or 4.4%, primarily due to a $115.1 million, or 12.5%, increase in average loans. Tax equivalent securities income decreased $104 thousand, or 14.1%, for second quarter 2020 as compared with second quarter 2019, primarily due to a $12.0 million, or 12.2%, decrease in average balances. Income on short-term funds as compared to second quarter 2019 decreased $174 thousand, or 93.5%, primarily due to a 198 basis point decrease in the average short-term funds yields, which was partly offset by a $13.3 million, or 37.0%, increase in the average balance.

Interest Expense

Interest expense decreased $1.2 million to $1.3 million for second quarter 2020 as compared with $2.5 million in second quarter 2019. Interest on deposit accounts decreased $1.0 million, or 50.6%, as a result of a $11.4 million increase in the average balances and an average decrease in deposit rates of 57 basis points as compared with second quarter 2019. Interest expense on FHLBB borrowings decreased $139 thousand as a result of an average balance increase of $17.9 million as compared with second quarter 2019, partly offset by a 193 basis point decrease in the average borrowing rate. Interest expense on subordinated debt totaled $156 thousand for the second quarter in both 2020 and 2019.

Provision and Allowance for Loan Losses

The provision for loan losses was $1.8 million for second quarter 2020, compared with $151 thousand for second quarter 2019. Net loan charge-offs were $53 thousand and $14 thousand for the respective quarters. The increase in the provision from second quarter 2019 primarily reflected management's assessment of the impact of COVID-19 on certain qualitative and environmental factors and impaired loans as well as loan growth. Management will continue to monitor the impact of the virus on its borrowers and adjust the allowance as appropriate. The length of time required for the economy to substantially recover from the virus will have a direct impact on Salisbury's provision and allowance for loan losses. A longer recovery or another forced shutdown that leads to sustained levels of unemployment will likely result in an increase in Salisbury's provision and allowance for loan losses.

As a result of these factors, reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, was 1.18% for the second quarter 2020, versus 0.95% for the fourth quarter 2019 and 0.97% for the second quarter 2019. Similarly, reserve coverage, as measured by the ratio of the allowance for loan losses to non-performing loans was 257% for the second quarter of 2020, versus 246% for the fourth quarter of 2019 and 176% for the second quarter of 2019.

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

Three months ended June 30,	2020		2019
Net charge-offs to average loans receivable, gross	0.00	%	0.00	%
Non-performing loans to loans receivable, gross	0.46		0.55
Accruing loans past due 30-89 days to loans receivable, gross	0.25		0.27
Allowance for loan losses to loans receivable, gross	1.18		0.97
Allowance for loan losses to non-performing loans	256.89		175.56
Non-performing assets to total assets	0.37		0.49

Reserve coverage, as measured by the ratio of the allowance for loan losses to gross loans, increased to 1.18% at June 30, 2020 compared to 0.97% at June 30, 2019 and the ratio of the allowance for loan losses to non-performing loans increased to 256.89% at June 30, 2020 from 175.56% at June 30, 2019. In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, gross loans receivable and the allowance for loan losses increased by $663 thousand and the coverage ratios also increased. The balance of net loans receivable did not change as a result of this transfer.

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $4.8 million or 0.46% of gross loans receivable at June 30, 2020 as compared to $5.1 million, or 0.55%, at June 30, 2019. Accruing loans past due 30-89 days increased $0.2 million to $2.7 million, or 0.25% of gross loans receivable from $2.5 million, or 0.27% of gross loans receivable, at June 30, 2019. See “Financial Condition – Loan Credit Quality” above for further discussion and analysis.

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The allowance for loan losses represents management's estimate of the probable credit losses inherent in the loan portfolio as of the reporting date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by loan charge-offs. Loan charge-offs are recognized when management determines a loan, or portion of a loan, to be uncollectible. The allowance for loan losses is computed by segregating the portfolio into three components: (1) loans collectively evaluated for impairment: general loss allocation factors for non-impaired loans are segmented into pools of loans based on similar risk characteristics such as loan product, collateral type and loan-to-value, loan risk rating, historical loss experience, delinquency factors and other similar economic indicators, (2) loans individually evaluated for impairment: individual loss allocations for loans deemed to be impaired based on discounted cash flows or collateral value, and (3) unallocated: general loss allocations for other environmental factors.

Impaired loans and certain potential problem loans, when warranted, are individually evaluated for impairment. Impairment is measured for each individual loan, or for a borrower's aggregate loan exposure, using either the fair value of the collateral, less estimated costs to sell if the loan is collateral dependent, or the present value of expected future cash flows discounted at the loan's effective interest rate. A specific allowance is generally established when the collateral value or discounted cash flows of the loan is lower than the carrying value of that loan.

The component of the allowance for loan losses for loans collectively evaluated for impairment is estimated by stratifying loans into segments and credit risk ratings and then applying management's general loss allocation factors.  The general loss allocation factors are based on expected loss experience adjusted for historical loss experience and other qualitative factors, including levels or trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  The qualitative factors are determined based on the various risk characteristics of each loan segment and are risk-weighted such that higher risk loans generally have a higher reserve percentage.  In second quarter 2020, management added a new discrete loan pool for loans deemed to be a higher risk due to COVID-19. This new loan pool included commercial real estate and commercial and industrial loans that were deemed by management to be a higher risk of default as a result of the pandemic as well as residential and consumer loans which have been granted a second loan payment deferral by management. In addition, management increased the risk weights for loans with an internal risk rating of “4” (Watch), “5” (Special Mention) and “6” (Substandard”) to reflect the higher degree of inherent credit risk associated with these loans as a result of COVID-19. Management will actively monitor the population of loans in the new loan pool and evaluate the risk weightings to determine if further adjustments are warranted based on the impact of COVID-19.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management's estimate of probable losses. It reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. Additionally, reserves are established for off balance sheet exposures.

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at June 30, 2020.

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 June 30, (dollars in thousands)		2020		2019		2020 vs. 2019
Trust and wealth advisory	$	1,031	$	1,044	$	(13	)	(1.2	)%
Service charges and fees		598		1,012		(414	)	(40.9	)
Gains on sales of mortgage loans, net		252		1		251		n/a
Mortgage servicing, net		66		80		(14	)	(17.5	)
Gains (losses) on CRA mutual fund		8		12		(4	)	(33.3	)
Gains on available-for-sale securities, net		181		281		(100	)	(35.6	)
BOLI income and gains		133		87		46		52.9
Other		47		131		(84	)	(64.1	)
Total non-interest income	$	2,316	$	2,548	$	(232	)	(9.1	)%

Non-interest income decreased $232 thousand, or 9.1% in the second quarter 2020 versus second quarter 2019. Trust and wealth advisory revenues decreased $13 thousand versus second quarter 2019 primarily due to lower asset-based fees. Assets under administration were $704.1 million at June 30, 2020 compared with $639.5 million at March 31, 2020 and $713.3 million at June 30, 2019. Discretionary assets under administration of $480.5 million at June 30, 2020 increased from $425.4 million at March 31, 2020 and $464.5 million at June 30, 2019. The increase from first quarter 2020 primarily reflected higher valuations, whereas the increase from second quarter 2019 was primarily due to new business activity. Non-discretionary assets under administration of $223.6 million in second quarter 2020 increased from $214.1 million at first quarter 2020 and declined from $248.8 million in second quarter 2019. The decline versus second quarter 2019 was due to a lower valuation of shares in a partnership for one significant client relationship. The trust and wealth business recorded only a nominal annual fee on this relationship. Historically, trust and wealth advisory income correlates with the value of assets under management. Accordingly, trust and wealth advisory income is likely to be impacted by high levels of market volatility that may result from business disruptions caused by COVID-19.

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Service charges and fees decreased $414 thousand versus second quarter 2019. During the second quarter 2020, Salisbury waived approximately $240 thousand in various deposit fees, including overdraft and ATM fees. Salisbury will continue to waive such fees to help its customers and surrounding communities until economic conditions improve. Second quarter 2020 gains on mortgage loans, net increased $251 thousand due to an increase in sales volume. Mortgage sales in second quarter 2020 were $14.7 million compared with $0.1 million for second quarter 2019. Mortgage servicing fees decreased $14 thousand compared with second quarter 2019 on lower servicing income. Second quarter 2020 and second quarter 2019 included mortgage servicing amortization and periodic impairment charges (net) of $12 thousand and $13 thousand, respectively. BOLI income of $133 thousand increased $46 thousand compared to $87 thousand in second quarter 2019. Other income primarily includes rental property income.

Non-Interest Expense

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

Three months ended June 30, (dollars in thousands)		2020		2019		2020 vs. 2019
Salaries	$	2,411	$	2,959	$	(548	)	(18.5	)%
Employee benefits		1,037		1,042		(5	)	(0.5	)
Premises and equipment		981		1,004		(23	)	(2.3	)
Data processing		557		577		(20	)	(3.5	)
Professional fees		758		583		175		30.0
OREO gains, losses and write-downs		—		270		(270	)	(100.0	)
Collections and other real estate owned		79		79		—		—
FDIC insurance		103		140		(37	)	(26.4	)
Marketing and community support		169		151		18		11.9
Amortization of core deposit intangibles		83		99		(16	)	(16.2	)
Other		611		535		76		14.2
Non-interest expense	$	6,789	$	7,439	$	(650	)	(8.7	)%

Non-interest expense for second quarter 2020 decreased $650 thousand versus second quarter 2019. Total compensation expense decreased $553 thousand versus the second quarter 2019. The decline from the comparative quarters primarily reflected the deferral of compensation costs associated with originating PPP loans. This expense will be amortized into income over the term of the loans as a reduction to interest income and net interest margin. Premises and equipment expense decreased $23 thousand versus second quarter 2019 primarily due to lower depreciation and utilities expense. Data processing expense decreased $20 thousand versus second quarter 2019 primarily due lower ATM network processing fees, data communications expenses and lower Trust & Wealth data processing charges. Professional fees increased $175 thousand versus second quarter 2019 primarily due to higher consulting, legal and investment management fees. Collections, OREO and loan related expenses decreased $270 thousand versus second quarter 2019 primarily as a result of OREO losses in second quarter 2019. Marketing and community support expense increased $18 thousand versus first quarter 2019 primarily due to timing of current marketing campaigns and contributions. The increase in other expenses of $76 thousand primarily reflected litigation related accruals.

Income Taxes

The effective income tax rates for second quarter 2020 and second quarter 2019 were 18.1% and 18.1%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax-exempt income. Additionally, Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

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

For the six month periods ended June 30, 2020 and 2019

Overview

Net income allocated to common stock was $4.7 million, or $1.68 per common share, for the six month period ended June 30, 2020 (six month period 2020), compared with $5.1 million, or $1.83 per common share, for the six month period ended June 30, 2019 (six month period 2019).

Net Interest Income

Tax equivalent net interest income for the six month period 2020 increased $1.7 million, or 9.9%, versus the six month period 2019. Average earning assets increased $65.2 million versus the six month period 2019. Average total interest bearing deposits increased $12.7 million, or 1.8%, versus the six month period 2019. The net interest margin of 3.33% increased 11 basis points from 3.22% for the six month period 2019. The increase in the net interest margin primarily reflected lower interest rates on interest-bearing deposits.

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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.

Six months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2020		2019		2020		2019		2020		2019
Loans (a)(d)	$	993,293	$	920,915	$	20,524	$	20,021		4.13	%	4.35	%
Securities (c)(d)		88,292		97,856		1,332		1,454		3.02		2.97
FHLBB stock		3,310		3,723		72		138		4.35		7.41
Short term funds (b)		36,161		33,408		70		341		0.39		2.04
Total earning assets		1,121,056		1,055,902		21,998		21,954		3.92		4.16
Other assets		62,365		56,552
Total assets	$	1,183,421	$	1,112,454
Interest-bearing demand deposits	$	163,707	$	153,910		222		298		0.27		0.39
Money market accounts		239,173		204,572		799		1,032		0.67		1.01
Savings and other		167,805		184,266		336		907		0.40		0.98
Certificates of deposit		156,078		171,334		1,140		1,558		1.46		1.82
Total interest-bearing deposits		726,763		714,082		2,497		3,795		0.69		1.06
Repurchase agreements		5,223		3,039		10		7		0.38		0.46
Capital lease		3,019		4,293		71		92		4.70		4.29
Note payable		235		271		7		8		5.96		5.90
Subordinated Debt (net of issuance costs)		9,864		9,841		312		312		6.33		6.34
FHLBB/FRB borrowings		46,247		48,507		359		691		1.55		2.85
Total interest-bearing liabilities		791,351		780,033		3,256		4,905		0.82		1.26
Demand deposits		269,031		219,825
Other liabilities		6,460		6,504
Shareholders' equity		116,579		106,092
Total liabilities & shareholders' equity	$	1,183,421	$	1,112,454
Net interest income					$	18,742	$	17,049
Spread on interest-bearing funds										3.10		2.90
Net interest margin (e)										3.33		3.22

(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 $337,000 and $268,000, respectively for 2020 and 2019 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2020 and 2019.

(e) Net interest income divided by average interest-earning assets.

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

Six months ended June 30, (in thousands)	2020 versus 2019
Change in interest due to		Volume			Rate			Net
Loans	$	1,535		$	(1,032	)	$	503
Securities		(143	)		21			(122	)
FHLBB stock		(12	)		(54	)		(66	)
Short term funds		17			(288	)		(271	)
Interest-earning assets		1,397			(1,353	)		44
Deposits		55			(1,353	)		(1,298	)
Repurchase agreements		5			(2	)		3
Capital lease		(29	)		8			(21	)
Note payable		(1	)		—			(1	)
Subordinated Debt		1			(1	)		—
FHLBB/FRB borrowings		(25	)		(307	)		(332	)
Interest-bearing liabilities		6			1,655			1,649
Net change in net interest income	$	1,391		$	302		$	1,693

Interest Income

Tax equivalent interest income of $22.0 million was essentially unchanged for the six month periods 2020 and 2019. Loan income, as compared to the six months of 2019, increased $503 thousand, or 2.5%, primarily due to a $72.4 million, or 7.9%, increase in average loans, which was partly offset by a 22 basis point decrease in the average yield. Tax equivalent securities income decreased $122 thousand, or 8.4%, for the six month period 2020 as compared with the six month period 2019, primarily due to a $9.5 million decrease in average volume, which was partly offset by a 5 basis point increase in average yield. Income on short-term funds as compared to six month period 2019 decreased $271 thousand, or 79.5%, primarily due to a 165 basis point decrease in the average short-term funds yields, partly offset by a $2.8 million, or 8.2%, increase in average short-term funds.

Interest Expense

Interest expense decreased $1.6 million, or 33.6%, to $3.3 million for the six month period 2020 compared with $4.9 million for the six month period 2019. Interest on deposit accounts decreased $1.3 million, or 34.2%, as a result of a decrease in average deposit rates of 37 basis points compared with the six month period 2019, which was partially offset by a $12.7 million increase in the average balance. Interest expense on FHLBB/FRB borrowings decreased $332 thousand, or 48.0%, as a result of an average balance decrease of $2.3 million compared with the six month period 2019 and a 130 basis point decrease in the average borrowings rate. Interest expense on subordinated debt totaled $312 thousand for the six month periods 2020 and 2019.

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Provision and Allowance for Loan Losses

The provision for loan losses was $3.5 million for the six month period ended June 30, 2020 as compared to $445 thousand for the six month period ended June 30, 2019. Net loan charge-offs were $36 thousand and $53 thousand for the respective periods.

Reserve coverage at June 30, 2020, as measured by the ratio of allowance for loan losses to gross loans, at 1.18%, compares with 0.97% a year ago at June 30, 2019. The increase in the coverage ratio primarily reflected higher reserves due to management's assessment of the impact of COVID-19 as well as loan growth. During the first six months of 2020, non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $1.2 million to $4.8 million. Non-performing loans represent 0.46% of gross loans receivable, an increase from 0.39% at December 31, 2019. At June 30, 2020, accruing loans past due 30-89 days increased $0.6 million to $2.7 million or 0.25% of gross loans receivable from 0.22% at December 31, 2019. See “Financial Condition – Loan Credit Quality” for further discussion and analysis.

Non-interest income

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

Six months ended June 30, (dollars in thousands)		2020		2019		2020 vs. 2019
Trust and wealth advisory	$	2,061	$	1,950	$	111		5.7	%
Service charges and fees		1,503		1,932		(429	)	(22.2	)
Gains on sales of mortgage loans, net		313		8		305		3,812.5
Mortgage servicing, net		133		156		(23	)	(14.7	)
Losses on CRA mutual fund		22		23		(1	)	(4.3	)
Gain(Losses) on available-for-sale securities, net		182		272		(90	)	(33.1	)
BOLI income and gains		266		166		100		60.2
Other		80		68		12		17.6
Total non-interest income	$	4,560	$	4,575	$	(15	)	(0.3	)%

Non-interest income for the six month period ended June 30, 2020 decreased $15 thousand versus the same period in 2019. Trust and wealth advisory revenues increased $111 thousand mainly due to growth in asset based fees. Service charges and fees decreased $429 thousand. During the six month period 2020, Salisbury waived approximately $269 thousand in various deposit fees, including overdraft and ATM fees. Salisbury will continue to waive such fees to help its customers and surrounding communities until economic conditions improve. Income from sales of mortgage loans increased $305 thousand substantially due to higher gains on sales of fixed rate residential mortgage loans to FHLB Boston. Mortgage loans sales totaled $17.8 million for the six month period ended June 30, 2020 compared with $0.5 million for the six month period ended June 30, 2019. The six month periods ended June 30, 2020 and 2019 included mortgage servicing amortization of $28 thousand and $24 thousand, respectively.

Non-interest expense

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

Six months ended June 30, (dollars in thousands)		2020		2019		2020 vs. 2019
Salaries	$	5,261	$	5,952	($	691	)	(11.6	)%
Employee benefits		2,183		2,227		(44	)	(2.0	)
Premises and equipment		1,891		1,976		(85	)	(4.3	)
Data processing		1,098		1,086		12		1.1
Professional fees		1,385		1,118		267		23.9
OREO gains, losses and write-downs		—		322		(322	)	(100.0	)
Collections and other real estate owned		104		209		(105	)	(50.2	)
FDIC insurance		208		303		(95	)	(31.4	)
Marketing and community support		293		307		(14	)	(4.6	)
Amortization of core deposit intangible assets		170		203		(33	)	(16.3	)
Other		1,133		947		186		19.6
Non-interest expense	$	13,726	$	14,650	($	924	)	(6.3	)%

Non-interest expense for the six month period ended June 30, 2020 decreased $924 thousand versus the same period in 2019. Salaries decreased $691 thousand primarily reflecting the deferral of compensation costs associated with originating loans, including PPP loans. Benefits decreased $44 thousand primarily due to lower medical premiums. Premises and equipment decreased $85 thousand primarily due to lower depreciation, building maintenance and utilities partially offset by increased software expense. Data processing increased $12 thousand mainly due to higher ATM fees and data processing costs partially offset by lower Trust and Wealth data processing expense. The increase in professional fees of $267 thousand versus the six month period 2019 primarily reflected higher consulting and investment management expenses. Collections, OREO and loan related expense decreased $322 thousand due to OREO losses in the six month period 2019. Marketing and community support decreased $14 thousand primarily due to timing of current marketing campaigns. Other expenses increased $186 thousand and primarily reflected litigation related accruals.

Income taxes

The effective income tax rates for the six month periods ended June 30, 2020 and June 30, 2019 were 16.54% and 17.95%, respectively. Generally, fluctuations in the effective tax rate result from changes in the mix of taxable and tax exempt income. Additionally, Salisbury's effective tax rate is generally less than the federal statutory rate due to holdings of tax-exempt municipal bonds and loans as well as bank owned life insurance.

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

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CAPITAL RESOURCES

Shareholders' Equity

Shareholders' equity was $118.4 million at June 30, 2020, up $4.8 million from December 31, 2019. Book value and tangible book value per common share were $41.66 and $36.51, respectively, compared with $40.22 and $34.98, respectively, at December 31, 2019. Contributing to the increase in shareholders' equity for year-to-date 2020 was net income of $4.8 million, unrealized gains on securities available-for-sale, net of tax, of $1.3 million and issued stock of $0.3 million partially offset by common stock dividends of $1.6 million.

Capital Requirements

Under current regulatory definitions, the Bank meets all capital adequacy requirements to which it is subject and the Bank is considered to be well-capitalized. As a result, the Bank pays lower federal deposit insurance premiums than those banks that are not “well-capitalized.” Requirements for classification as a well-capitalized institution and for minimum capital adequacy along with the Bank's regulatory capital ratios are as follows:

	June 30, 2020			December 31, 2019
Total Capital (to risk-weighted assets)		12.97	%		12.84	%
Tier 1 Capital (to risk-weighted assets)		11.90			11.83
Common Equity Tier 1 Capital (to risk-weighted assets)		11.90			11.83
Tier 1 Capital (to average assets)		8.95			9.60

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

The FRB's final rules implementing the Basel Committee on Banking Supervision's capital guidelines for bank holding companies and their bank subsidiaries include a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, was also established above the regulatory minimum capital requirements. This capital conservation buffer was fully phased in on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules.

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

On September 17, 2019, the Office of the Comptroller of the Currency, the FRB and the FDIC published its final rule establishing a “Community Bank Leverage Ratio” (“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”) will be required 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.

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

Dividends

Salisbury paid $1.640 million in common stock dividends during the six month period ended June 30, 2020.

On July 31, 2020, the Board of Directors of Salisbury declared a common stock dividend of $0.29 per common share payable on August 28, 2020 to shareholders of record on August 14, 2020. Common stock dividends, when declared, will generally be paid the last Friday of February, May, August and November, although Salisbury is not obligated to pay dividends on those dates or at any other time.

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

39

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. 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) government and regulatory responses to the COVID-19 pandemic; and

(f) other risks identified from time to time in Salisbury's filings with the Securities and Exchange Commission.

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

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 June 30, 2020 analysis, the simulations incorporate static growth assumptions over the simulation horizons for regulatory compliance and interest rate risk measurement purposes. In the dynamic growth scenarios, allowances are made for loan, deposit and security product mix shifts in selected interest rate scenarios, such as movements between lower rate savings and money market deposit accounts and higher rate time deposits, and changes in the reinvestment of loan and securities cash flows. Additionally, the simulations take into account the specific re-pricing, maturity and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios.

40

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 June 30, 2020, ALCO used the following interest rate scenarios: (1) unchanged interest rates; (2) immediately rising interest rates – immediate parallel upward shift in market interest rates of 300 basis points across the yield curve; (3) immediately falling interest rates – immediate parallel downward shift in market interest rates of 100 basis points across the yield curve; and (4) gradual and non-parallel declines in interest rates – an increase in the treasury yield curve beginning in the fourth quarter 2020 and into 2021 with the treasury yield curve ultimately ending up higher as of June 30, 2022 and the Federal Reserve conducting its first rate increase in the second quarter 2022. The two year, five year and ten year treasury as of June 30, 2022 ultimately 0.89%, 1.08% and 0.99% higher than actual rates as of June 30, 2020 and the Federal Funds rate is increased by 25 basis points during the second quarter 2022. The yield curve is ultimately positive sloping as treasury yields increased while the Federal Funds rate has not yet increased materially. Income simulations do not reflect adjustments in strategy that the ALCO could implement in response to rate shifts.

As of June 30, 2020, 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 June 30, 2020.

As of June 30, 2020	Months 1-12			Months 13-24
Immediately rising interest rates + 300bp (static growth assumptions)		(8.20	)%		(3.60	)%
Immediately falling interest rates - 100bp (static growth assumptions)		(1.50	)		(2.60	)
Immediately rising increase rates + 400bp (static growth assumptions)		(10.90	)		(5.20	)

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

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

Salisbury also monitors the potential change in market value of its available-for-sale debt securities in changing interest rate environments. The purpose is to determine market value exposure that may not be captured by income simulation, but which might result in changes to Salisbury's capital and liquidity position. Results are calculated using industry-standard analytical techniques and securities data. Available-for-sale 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 June 30, 2020 (in thousands)		Rates up 100bp			Rates up 200bp
U.S. Government Agency notes	$	86		$	(12	)
Municipal bonds		(849	)		(2,697	)
Mortgage backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		292			(899	)
Collateralized mortgage obligations:
U.S. Government agencies		655			257
Corporate bonds		(33	)		(169	)
Total available-for-sale debt securities	$	151		$	(3,520	)

41

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 June 30, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective as of June 30, 2020.

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 Salisbury in 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 June 30, 2020 that has materially affected, or is reasonably likely to materially affect, Salisbury's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

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

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

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

42

Item 6. EXHIBITS

‘

Exhibit No.	Description
3.1	Certificate of Incorporation of Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 3.1 of Registrant's 1998 Registration Statement on Form S-4 filed April 23, 1998, File No.: 33-50857).
3.1.1	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 December 10, 2015, issued by Salisbury Bancorp, Inc. (incorporated by reference to Exhibit 4.1of Registrant's Form 8-K filed December 10, 2015).
10.1	Amendment One (the “Amendment”) to the Salisbury Bancorp, Inc. 2017 Long Term Incentive Plan, effective as of March 9, 2020 (incorporated by reference to Exhibit 10.16 of Form 10-K filed on March 13, 2020).
10.2	Severance Agreement between Salisbury Bank and Trust Company and Mr. Richard J. Cantele, Jr. dated January 24, 2020 (incorporated by reference to Exhibit 10.1 of Registrant's Form 8-K filed January 30, 2020).
10.3	Severance Agreement between Salisbury Bank and Trust Company and John M. Davies dated January 24, 2020 (incorporated by reference to Exhibit 10.2 of Form 8-K filed January 30, 2020).
10.4	Change in Control Agreement with Peter Albero dated January 24, 2020 (incorporated by reference to Exhibit 10.3 of Form 8-K filed January 30, 2020).
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.

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.
August 7, 2020	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer
August 7, 2020	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer

 43

EX-31.1

SALISBURY BANCORP, INC.

Form 10-Q

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(a)

I, Richard J. Cantele, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 7, 2020	By:	/s/ Richard J. Cantele, Jr.
		Richard J. Cantele, Jr.,
		President and Chief Executive Officer

EX-31.2

SALISBURY BANCORP, INC.

Form 10-Q

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a-14(a)/15d-14(a)

I, Peter Albero, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Salisbury Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function):

a) all significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

August 7, 2020	By:	/s/ Peter Albero
		Peter Albero,
		Executive Vice President and Chief Financial Officer

EX-32

SALISBURY BANCORP, INC.

Form 10-Q

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Salisbury Bancorp, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Cantele, Jr., President and Chief Executive Officer of the Company, and I, Peter Albero, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

August 7, 2020	By:	/s/ Richard J. Cantele, Jr.	By:	/s/ Peter Albero
		Richard J. Cantele, Jr.,		Peter Albero,
		President and Chief Executive Officer		Executive Vice President and Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2020	Aug. 05, 2020
Document And Entity Information
Entity Registrant Name	SALISBURY BANCORP INC
Entity Central Index Key	0001060219
Document Type	10-Q
Document Period End Date	Jun. 30, 2020
Entity Incorporation, State or Country Code	CT
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity File Number	000-24751
Is Entity's Reporting Status Current?	Yes
Entity Interactive Data Current	Yes
Is Entity Emerging Growth Company?	false
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Common Stock, Shares Outstanding		2,843,292
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2020
Entity Shell Company	false

XML

CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
ASSETS
Cash and due from banks	$ 7,391	$ 7,406
Interest bearing demand deposits with other banks	77,104	19,479
Total cash and cash equivalents	84,495	26,885
Interest bearing Time Deposits with Financial Institutions	750	750
Securities
Available-for-sale at fair value	89,452	91,801
CRA mutual fund at fair value	912	882
Federal Home Loan Bank of Boston stock at cost	3,353	3,242
Loans held-for-sale	5,313	332
Loans receivable, net (allowance for loan losses: $12,371 and $8,895)	1,040,358	927,413
Other real estate owned		314
Bank premises and equipment, net	17,950	17,385
Goodwill	13,815	13,815
Intangible assets (net of accumulated amortization: $5,054 and $4,884)	825	995
Accrued interest receivable	3,988	3,415
Cash surrender value of life insurance policies	20,846	20,580
Deferred taxes	1,935	1,249
Other assets	3,145	3,390
Total Assets	1,287,137	1,112,448
Deposits
Demand (non-interest bearing)	325,531	237,852
Demand (interest bearing)	188,487	153,314
Money market	251,242	239,504
Savings and other	170,537	161,112
Certificates of deposit	149,802	127,724
Total deposits	1,085,599	919,506
Repurchase agreements	7,809	8,530
Federal Home Loan Bank of Boston advances	55,118	50,887
Subordinated debt	9,871	9,859
Note payable	228	246
Finance lease obligations	1,696	1,718
Accrued interest and other liabilities	8,372	8,047
Total Liabilities	1,168,693	998,793
Shareholders' Equity
Common stock - $.10 per share par value; Authorized: 5,000,000; Issued: 2,843,292 and 2,825,912; Outstanding: 2,843,292 and 2,825,912	284	283
Unearned compensation - restricted stock awards	(1,031)	(795)
Paid-in capital	45,096	44,490
Retained earnings	71,461	68,320
Accumulated other comprehensive income, net	2,634	1,357
Total Shareholders' Equity	118,444	113,655
Total Liabilities and Shareholders' Equity	$ 1,287,137	$ 1,112,448

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
ASSETS
Allowance for loan losses, loans receivable	$ 12,371	$ 8,895
Accumulated amortization, intangible assets	$ 5,054	$ 4,884
Shareholders' Equity
Common stock, par value	$ 0.10	$ 0.10
Common stock, authorized	5,000,000	5,000,000
Common stock, issued	2,843,292	2,825,912
Common stock, outstanding	2,843,292	2,825,912

XML

CONSOLIDATED STATEMENTS OF INCOME (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Interest and dividend income
Interest and fees on loans	$ 10,313	$ 9,880	$ 20,300	$ 19,814
Interest on debt securities
Taxable	409	583	864	1,204
Tax exempt	171	117	356	189
Other interest and dividends	51	252	142	479
Total interest and dividend income	10,944	10,832	21,662	21,686
Interest expense
Deposits	988	1,999	2,497	3,795
Repurchase agreements	4	4	10	7
Finance lease	35	46	71	92
Note payable	4	4	7	8
Subordinated Debt	156	156	312	312
Federal Home Loan Bank of Boston advances	140	279	359	691
Total interest expense	1,327	2,488	3,256	4,905
Net interest and dividend income	9,617	8,344	18,406	16,781
Provision for loan losses	1,806	151	3,512	445
Net interest and dividend income after provision for loan losses	7,811	8,193	14,894	16,336
Non-interest income
Trust and wealth advisory	1,031	1,044	2,061	1,950
Service charges and fees	598	1,012	1,503	1,932
Gains on sales of mortgage loans, net	252	1	313	8
Mortgage servicing, net	66	80	133	156
Gains on CRA mutual fund	8	12	22	23
Gains on available-for-sale securities, net	181	281	182	272
BOLI income and gains	133	87	266	166
Other	47	31	80	68
Total non-interest income	2,316	2,548	4,560	4,575
Non-interest expense
Salaries	2,411	2,959	5,261	5,952
Employee benefits	1,037	1,042	2,183	2,227
Premises and equipment	981	1,004	1,891	1,976
Data processing	557	577	1,098	1,086
Professional fees	758	583	1,385	1,118
OREO gains, losses and write-downs, net		270		322
Collections, OREO, and loan related	79	79	104	209
FDIC insurance	103	140	208	303
Marketing and community support	169	151	293	307
Amortization of core deposit intangibles	83	99	170	203
Other	611	535	1,133	947
Total non-interest expense	6,789	7,439	13,726	14,650
Income before income taxes	3,338	3,302	5,728	6,261
Income tax provision	604	599	947	1,124
Net income	2,734	2,703	4,781	5,137
Net income allocated to common stock	$ 2,691	$ 2,671	$ 4,704	$ 5,079
Basic earnings per common share	$ 0.96	$ 0.96	$ 1.68	$ 1.83
Diluted earnings per common share	0.96	0.95	1.68	1.82
Common dividends per share	$ 0.29	$ 0.28	$ 0.58	$ 0.56

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Income Statement [Abstract]
Net income	$ 2,734	$ 2,703	$ 4,781	$ 5,137
Other comprehensive income
Net unrealized gains on securities available-for-sale	470	1,261	1,799	2,390
Reclassification of net realized gains in net income	(181)	(281)	(182)	(272)
Unrealized gains on securities available-for-sale	289	980	1,617	2,118
Income tax (expense)	(61)	(206)	(340)	(444)
Unrealized gains on securities available-for-sale, net of tax	228	774	1,277	1,674
Comprehensive income	$ 2,962	$ 3,477	$ 6,058	$ 6,811

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) - USD ($) $ in Thousands	Common Stock	Paid-in capital	Retained earnings	Unearned compensation restricted stock awards	Accumulated other comprehensive (loss) income	Total
Balance - Beginning, shares at Dec. 31, 2018	2,806,781
Balance - Beginning, amount at Dec. 31, 2018	$ 281	$ 43,770	$ 60,339	$ (711)	$ (220)	$ 103,459
Net income			5,137			5,137
Other comprehensive income, net of tax					1,674	1,674
Common stock dividends declared			(1,571)			(1,571)
Issuance of restricted stock awards, shares	11,530
Issuance of restricted stock awards, amount	$ 1	457		(458)
Stock options exercised, shares	2,025
Stock options exercised, amount		34				34
Forfeiture of restricted stock awards, shares	(460)
Forfeiture of restricted stock awards, amount		(21)		21
Issuance of director's restricted stock awards, shares	3,600
Issuance of director's restricted stock awards, amount		142		(142)
Stock based compensation - restricted stock awards				215		215
Balance - Ending, shares at Jun. 30, 2019	2,823,476
Balance - Ending, amount at Jun. 30, 2019	$ 282	44,382	63,905	(1,075)	1,454	108,948
Balance - Beginning, shares at Mar. 31, 2019	2,806,681
Balance - Beginning, amount at Mar. 31, 2019	$ 281	43,765	61,989	(606)	680	106,109
Net income			2,703			2,703
Other comprehensive income, net of tax					774	774
Common stock dividends declared			(787)			(787)
Issuance of restricted stock awards, shares	11,530
Issuance of restricted stock awards, amount	$ 1	457		(458)
Stock options exercised, shares	2,025
Stock options exercised, amount		34				34
Forfeiture of restricted stock awards, shares	(360)
Forfeiture of restricted stock awards, amount		(16)		16
Issuance of director's restricted stock awards, shares	3,600
Issuance of director's restricted stock awards, amount		142		(142)
Stock based compensation - restricted stock awards				115		115
Balance - Ending, shares at Jun. 30, 2019	2,823,476
Balance - Ending, amount at Jun. 30, 2019	$ 282	44,382	63,905	(1,075)	1,454	108,948
Balance - Beginning, shares at Dec. 31, 2019	2,825,912
Balance - Beginning, amount at Dec. 31, 2019	$ 283	44,490	68,320	(795)	1,357	113,655
Net income			4,781			4,781
Other comprehensive income, net of tax					1,277	1,277
Common stock dividends declared			(1,640)			(1,640)
Issuance of restricted stock awards, shares	11,775
Issuance of restricted stock awards, amount	$ 1	421		(422)
Stock options exercised, shares	3,105
Stock options exercised, amount		53				53
Forfeiture of restricted stock awards, shares	(700)
Forfeiture of restricted stock awards, amount		(29)		29
Issuance of director's restricted stock awards, shares	3,200
Issuance of director's restricted stock awards, amount		114		(114)
Stock based compensation - restricted stock awards		47		271		318
Balance - Ending, shares at Jun. 30, 2020	2,843,292
Balance - Ending, amount at Jun. 30, 2020	$ 284	45,096	71,461	(1,031)	2,634	118,444
Balance - Beginning, shares at Mar. 31, 2020	2,829,017
Balance - Beginning, amount at Mar. 31, 2020	$ 283	44,566	69,547	(659)	2,406	116,143
Net income			2,734			2,734
Other comprehensive income, net of tax					228	228
Common stock dividends declared			(820)			(820)
Issuance of restricted stock awards, shares	11,775
Issuance of restricted stock awards, amount	$ 1	421		(422)
Stock options exercised, shares
Stock options exercised, amount
Forfeiture of restricted stock awards, shares	(700)
Forfeiture of restricted stock awards, amount		(29)		29
Issuance of director's restricted stock awards, shares	3,200
Issuance of director's restricted stock awards, amount		114		(114)
Stock based compensation - restricted stock awards		24		135		159
Balance - Ending, shares at Jun. 30, 2020	2,843,292
Balance - Ending, amount at Jun. 30, 2020	$ 284	$ 45,096	$ 71,461	$ (1,031)	$ 2,634	$ 118,444

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019
Operating Activities
Net income	$ 4,781	$ 5,137
Amortization (accretion) and depreciation
Securities	231	137
Bank premises and equipment	720	813
Core deposit intangible	170	203
Modification fees on Federal Home Loan Bank of Boston advances	59	115
Subordinated debt issuance costs	12	12
Mortgage servicing rights	28	24
Fair value adjustment on loans		(64)
Fair value adjustment on deposits	(2)	(4)
Gains on sales and calls of securities available-for-sale, net	182	272
Gain on CRA mutual fund	(22)	(23)
Gain on sales of loans, excluding capitalized servicing rights	(295)	(7)
OREO losses and write-downs		322
Provision for loan losses	3,512	445
Proceeds from loans sold	18,117	458
Loans originated for sale	(22,803)	(854)
Decrease in deferred loan origination fees and costs, net	2,701	92
Mortgage servicing rights originated	(143)	(5)
Increase in interest receivable	(573)	(291)
(Increase) decrease in deferred tax benefit	(1,026)	125
Decrease in prepaid expenses	367	101
Increase in cash surrender value of life insurance policies	(266)	(167)
Decrease in income tax receivable		13
(Increase) decrease in other assets	(8)	694
Increase in income tax payable	1,728
Decrease in accrued expenses	(1,556)	(1,072)
Increase in interest payable	109	339
Increase (decrease) in other liabilities	44	(378)
Stock based compensation - restricted stock awards	318	215
Net cash provided by operating activities	6,021	6,108
Investing Activities
Net (purchases) redemptions of Federal Home Loan Bank of Boston stock	(111)	1,657
Purchases of securities available-for-sale	(15,417)	(41,255)
Proceeds from sales of securities available-for-sale	10,598	28,170
Proceeds from calls of securities available-for-sale	655	25
Proceeds from maturities of securities available-for-sale	8,082	6,982
Reinvestment of CRA mutual fund	(8)	(10)
Loan originations and principle collections, net	(119,192)	(1,813)
Recoveries of loans previously charged off	34	46
Proceeds from sales of other real estate owned	314	1,087
Capital expenditures	(1,285)	(247)
Purchase of life insurance policies		(750)
Net cash utilized by investing activities	(116,330)	(6,108)
Financing Activities
Increase in deposit transaction accounts, net	144,015	13,442
Increase in time deposits, net	22,080	10,546
(Decrease) increase in securities sold under agreements to repurchase, net	(721)	2,204
Federal Home Loan Bank of Boston short-term advances, net change	(20,000)	(9,500)
Advances (principal payments) on Federal Home Loan Bank of Boston long term advances	25,000	(25,000)
Principal payments on Amortizing FHLB Advances	(828)
Principal payments on note payable	(18)	(17)
Decrease in finance lease obligation	(22)	(70)
Stock options exercised	53	34
Common stock dividends paid	(1,640)	(1,571)
Net cash provided (utilized) by financing activities	167,919	(9,932)
Net increase (decrease) in cash and cash equivalents	57,610	(9,932)
Cash and cash equivalents, beginning of period	26,885	58,445
Cash and cash equivalents, end of period	84,495	48,513
Cash paid during period
Interest	3,078	4,443
Income taxes	245	986
Non-cash investing and financing activities
Finance lease obligation
Adoption of new accounting principle - Other assets		1,552
Adoption of new accounting principle - Other liabilities		$ (1,552)

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BASIS OF PRESENTATION

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

BASIS OF PRESENTATION

NOTE 1 - BASIS OF PRESENTATION

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

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

Certain financial information, which is normally included in financial statements prepared in accordance with generally accepted accounting principles, but which is not required for interim reporting purposes, has been condensed or omitted. Operating results for the interim period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

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

Risks and Uncertainties

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

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

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company because its public float is less than $250 million. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero. Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan and losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU is intended to allow companies to simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. The FASB is researching whether similar amendments should be considered for other entities, including public business entities. ASU 2017-04 is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019 and interim periods within those years. Entities should apply the guidance prospectively. On January 1, 2020, the Bank adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. On January, 1, 2020, the Bank adopted the new standard, which only revised disclosure requirements and did not have a material impact on Salisbury's Consolidated Financial Statements.

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

Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and are effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a “smaller reporting company” and an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of “accelerated filer” and expands the category of “non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

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SECURITIES

6 Months Ended

Jun. 30, 2020

Investments, Debt and Equity Securities [Abstract]

SECURITIES

NOTE 2 - SECURITIES

The composition of securities is as follows:

(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
June 30, 2020
Available-for-sale
U.S. Government Agency notes	$	4,186	$	176	$	1	$	4,361
Municipal bonds		24,701		1,207		12		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		30,881		1,179		35		32,025
Collateralized mortgage obligations:
U.S. Government agencies		20,349		699		—		21,048
Corporate bonds		6,000		147		25		6,122
Total securities available-for-sale	$	86,117	$	3,408	$	73	$	89,452
CRA mutual fund							$	912
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,353	$	—	$	—	$	3,353
(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2019
Available-for-sale
U.S. Government Agency notes	$	4,520	$	125	$	1	$	4,644
Municipal bonds		26,562		704		73		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		28,961		420		24		29,357
Collateralized mortgage obligations:
U.S. Government agencies		25,041		468		10		25,499
Corporate bonds		5,000		108		—		5,108
Total securities available-for-sale	$	90,084	$	1,825	$	108	$	91,801
CRA mutual fund							$	882
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,242	$	—	$	—	$	3,242

Salisbury sold $10.6 million of available-for-sale securities during the six month period ended June 30, 2020 realizing a pre-tax gain of $182 thousand and a related tax expense of $38 thousand. Salisbury sold $10.6 million in securities available-for-sale during the three month period ended June 30, 2020 realizing a pre-tax gain of $181 thousand and related tax expense of $38 thousand. Salisbury sold $28.2 million of available-for-sale securities during the six month period ended June 30, 2019 realizing a pre-tax gain of $272 thousand and a related tax expense of $57 thousand. Salisbury sold $27.2 million in securities available-for-sale during the three month period ended June 30, 2019 realizing a pre-tax gain of $281 thousand and related tax expense of $59 thousand.

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

	Less than 12 Months				12 Months or Longer				Total
June 30, 2020 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	102	$	1	$	102	$	1
Municipal bonds		2,074		12		—		—		2,074		12
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		4,160		34		105		1		4,265		35
Corporate bonds		725		25		—		—		725		25
Total temporarily impaired securities	$	6,959	$	71	$	207	$	2	$	7,166	$	73
	Less than 12 Months				12 Months or Longer				Total
December 31, 2019 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	195	$	1	$	195	$	1
Municipal bonds		6,273		73		—		—		6,273		73
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		5,781		22		704		2		6,485		24
Collateralized mortgage obligations:
U.S. Government Agencies		1,438		10		—		—		1,438		10
Total temporarily impaired securities	$	13,492	$	105	$	899	$	3	$	14,391	$	108

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

June 30, 2020 (in thousands)	Maturity	Amortized cost			Fair value	Yield(1)
U.S. Government Agency notes	After 5 year but within 10 years	$	2,496	$	2,557	3.48	%
	Total		2,496		2,557	3.48
Municipal bonds	After 5 year but within 10 years		1,720		1,881	3.16
	After 10 years		22,981		24,015	3.07
	Total		24,701		25,896	3.08
Mortgage-backed securities and Collateralized mortgage obligations	U.S. Government agencies		52,920		54,877	2.85
Corporate bonds	After 5 years but within 10 years		6,000		6,122	5.21
Securities available-for-sale		$	86,117	$	89,452	3.17	%

⁽¹⁾ Yield is based on amortized cost.

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

The following summarizes, by security type, the basis for evaluating if the applicable securities were OTTI at June 30, 2020.

U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Three securities had unrealized losses at June 30, 2020, which approximated 0.95% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at June 30, 2020.

Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Three securities had unrealized losses at June 30, 2020, which approximated 0.60% 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 June 30, 2020.

U.S. Government agency and U.S. Government-sponsored mortgage-backed securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Six securities had unrealized losses at June 30, 2020, which approximated 0.81% 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 June 30, 2020.

Corporate bonds: Salisbury regularly monitors and analyzes its corporate bond portfolio for credit quality. One security had unrealized losses at June 30, 2020, which approximated 3.29% 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 June 30, 2020.

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 June 30, 2020. 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.

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LOANS

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

LOANS

NOTE 3 – LOANS

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

(In thousands)		June 30, 2020			December 31, 2019
Residential 1-4 family	$	357,518		$	346,299
Residential 5+ multifamily		38,353			35,455
Construction of residential 1-4 family		11,041			11,889
Home equity lines of credit		30,286			33,798
Residential real estate		437,198			427,441
Commercial		309,935			289,795
Construction of commercial		13,699			8,466
Commercial real estate		323,634			298,261
Farm land		3,324			3,641
Vacant land		13,879			7,893
Real estate secured		778,035			737,236
Commercial and industrial (1)		247,440			169,411
Municipal		20,707			21,914
Consumer		7,886			6,385
Loans receivable, gross		1,054,068			934,946
Deferred loan origination (fees) and costs, net		(1,339	)		1,362
Loans receivable, gross	$	1,052,729		$	936,308
Allowance for loan losses		(12,371	)		(8,895	)
Loans receivable, net	$	1,040,358		$	927,413
Loans held-for-sale
Residential 1-4 family	$	5,313		$	332

⁽¹⁾ Commercial and industrial balance as of June 30, 2020 includes $98.9 million of Paycheck Protection Program loans.

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 June 30, 2020 and December 31, 2019, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $61.9 million and $67.0 million, respectively.

Concentrations of Credit Risk

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

Salisbury's commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges from the economic downturn caused by the COVID-19 virus pandemic (“virus”). Approximately 35% of the Bank's commercial gross loans receivable are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 15% of the Bank's gross commercial loan receivables is to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 8% of gross commercial loan receivables is to educational institutions and approximately 5% of Salisbury's gross commercial loan receivables is to entertainment and recreation related businesses, which include a ski resort, bowling alleys and amusement parks. 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. The duration of the economic shutdown and the time required for businesses to recover may adversely affect the ability of some borrowers to make timely loan payments. During such economic shutdown and recovery, the Bank may experience higher loan payment delinquencies and higher loan charge-offs, which could warrant increased provisions for loan losses.

Credit Quality

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

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

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

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

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

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

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

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2020
Residential 1-4 family	$	350,494	$	3,357	$	3,667	$	—	$	—	$	357,518
Residential 5+ multifamily		36,539		96		1,718		—		—		38,353
Construction of residential 1-4 family		11,041		—		—		—		—		11,041
Home equity lines of credit		29,689		332		265		—		—		30,286
Residential real estate		427,763		3,785		5,650		—		—		437,198
Commercial		292,546		3,081		14,237		71		—		309,935
Construction of commercial		13,464		—		235		—		—		13,699
Commercial real estate		306,010		3,081		14,472		71		—		323,634
Farm land		1,637		—		1,687		—		—		3,324
Vacant land		13,785		55		39		—		—		13,879
Real estate secured		749,195		6,921		21,848		71		—		778,035
Commercial and industrial		245,768		581		731		360		—		247,440
Municipal		20,707		—		—		—		—		20,707
Consumer		7,851		3		32		—		—		7,886
Loans receivable, gross	$	1,023,521	$	7,505	$	22,611	$	431	$	—	$	1,054,068
(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Residential 1-4 family	$	337,302	$	4,278	$	4,719	$	—	$	—	$	346,299
Residential 5+ multifamily		33,619		99		1,737		—		—		35,455
Construction of residential 1-4 family		11,889		—		—		—		—		11,889
Home equity lines of credit		33,381		312		105		—		—		33,798
Residential real estate		416,191		4,689		6,561		—		—		427,441
Commercial		271,708		10,964		7,052		71		—		289,795
Construction of commercial		8,225		—		241		—		—		8,466
Commercial real estate		279,933		10,964		7,293		71		—		298,261
Farm land		1,934		—		1,707		—		—		3,641
Vacant land		7,834		59		—		—		—		7,893
Real estate secured		705,892		15,712		15,561		71		—		737,236
Commercial and industrial		167,458		443		1,510		—		—		169,411
Municipal		21,914		—		—		—		—		21,914
Consumer		6,344		3		38		—		—		6,385
Loans receivable, gross	$	901,608	$	16,158	$	17,109	$	71	$	—	$	934,946

The composition of loans receivable by delinquency status 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
June 30, 2020
Residential 1-4 family	$	356,297	$	349	$	618	$	217	$	37	$	1,221	$	—	$	1,410
Residential 5+ multifamily		37,492		—		—		—		861		861		—		861
Construction of residential 1-4 family		11,041		—		—		—		—		—		—		—
Home equity lines of credit		29,825		62		159		73		167		461		—		265
Residential real estate		434,655		411		777		290		1,065		2,543		—		2,536
Commercial		308,473		954		—		437		71		1,462		—		1,281
Construction of commercial		13,699		—		—		—		—		—		—		—
Commercial real estate		322,172		954		—		437		71		1,462		—		1,281
Farm land		3,155		—		169		—		—		169		—		174
Vacant land		13,879		—		—		—		—		—		—		39
Real estate secured		773,861		1,365		946		727		1,136		4,174		—		4,030
Commercial and industrial		246,535		781		—		—		124		905		11		774
Municipal		20,707		—		—		—		—		—		—		—
Consumer		7,853		3		30		—		—		33		—		—
Loans receivable, gross	$	1,048,956	$	2,149	$	976	$	727	$	1,260	$	5,112	$	11	$	4,804

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

Troubled Debt Restructurings (TDRs)

Troubled debt restructurings are as follows:

	For the three months ending June 30, 2020						For the three months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		—		—		—		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		—		—		—		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665

	For the six months ending June 30, 2020						For the six months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		1		133		133		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		1		133		133		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665

For the second quarter 2020, there were no troubled debt restructurings, and for the same period in 2019, two residential loans with a combined loan balance of $623 thousand and one consumer loan of $42 thousand were modified in troubled debt restructurings for rate reductions. For the six months ended June 2020, one troubled debt restructuring of $133 thousand was modified to extend new funds to pay outstanding taxes and for the same period in 2019, three troubled debt restructurings with a combined loan balance of $665 thousand were modified for a rate reduction.

Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

	Three months ended June 30, 2020												Three months ended June 30, 2019
(in thousands)	Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance		Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance
Residential 1-4 family	$	2,706	$	342		$	—		$	—	$	3,048	$	1,980	$	95		($	1	)	$	—	$	2,074
Residential 5+ multifamily		508		122			(41	)		—		589		466		29			—			—		495
Construction of residential 1-4 family		87		—			—			—		87		77		2			—			—		79
Home equity lines of credit		278		5			—			—		283		209		15			—			—		224
Residential real estate		3,579		469			(41	)		—		4,007		2,732		141			(1	)		—		2,872
Commercial		4,519		645			(4	)		—		5,160		3,803		(13	)		(14	)		1		3,777
Construction of commercial		126		79			—			—		205		143		(16	)		—			—		127
Commercial real estate		4,645		724			(4	)		—		5,365		3,946		(29	)		(14	)		1		3,904
Farm land		52		8			—			—		60		47		—			—			—		47
Vacant land		144		38			—			—		182		89		—			—			—		89
Real estate secured		8,420		1,239			(45	)		—		9,614		6,814		112			(15	)		1		6,912
Commercial and industrial		1,071		444			—			—		1,515		1,233		(67	)		(19	)		29		1,176
Municipal		53		(17	)		—			—		36		14		16			—			—		30
Consumer		102		(20	)		(13	)		5		74		51		40			(18	)		8		81
Unallocated		972		160			—			—		1,132		638		50			—			—		688
Totals	$	10,618	$	1,806		($	58	)	$	5	$	12,371	$	8,750	$	151		($	52	)	$	38	$	8,887

In first quarter 2019 Salisbury transferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bank to the allowance for loan loss reserves. As a result of this transfer, which is reflected in the table below as the “acquisition discount transfer”, gross loans receivable and the allowance for loan losses increased by $663 thousand. The balance of net loans receivable did not change as a result of this transfer.

	Six months ended June 30, 2020												Six months ended June 30, 2019
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Acquisition Discount Transfer		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,393	$	647		$	—		$	8	$	3,048	$	2,149	$	10	($	85	)	$	(1	)	$	1	$	2,074
Residential 5+ multifamily		446		185			(42	)		—		589		413		—		82			—			—		495
Construction of residential 1-4 family		75		12			—			—		87		83		—		(4	)		—			—		79
Home equity lines of credit		197		86			—			—		283		219		1		4			—			—		224
Residential real estate		3,111		930			(42	)		8		4,007		2,864		11		(3	)		(1	)		1		2,872
Commercial		3,742		1,402			(3	)		19		5,160		3,048		488		262			(23	)		2		3,777
Construction of commercial		104		101			—			—		205		122		—		5			—			—		127
Commercial real estate		3,846		1,503			(3	)		19		5,365		3,170		488		267			(23	)		2		3,904
Farm land		47		13			—			—		60		33		—		14			—			—		47
Vacant land		71		111			—			—		182		100		—		(11	)		—			—		89
Real estate secured		7,075		2,557			(45	)		27		9,614		6,167		499		267			(24	)		3		6,912
Commercial and industrial		1,145		370			—			—		1,515		1,158		164		(127	)		(50	)		31		1,176
Municipal		46		(10	)		—			—		36		12		—		18			—			—		30
Consumer		60		32			(25	)		7		74		56		—		37			(24	)		12		81
Unallocated		569		563			—			—		1,132		438		—		250			—			—		688
Totals	$	8,895	$	3,512		($	70	)	$	34	$	12,371	$	7,831	$	663	$	445		($	98	)	$	46	$	8,887

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

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2020
Residential 1-4 family	$	352,590	$	2,642	$	4,928	$	406	$	357,518	$	3,048
Residential 5+ multifamily		37,382		589		971		—		38,353		589
Construction of residential 1-4 family		11,041		87		—		—		11,041		87
Home equity lines of credit		30,021		263		265		20		30,286		283
Residential real estate		431,034		3,581		6,164		426		437,198		4,007
Commercial		305,393		4,836		4,542		324		309,935		5,160
Construction of commercial		13,699		205		—		—		13,699		205
Commercial real estate		319,092		5,041		4,542		324		323,634		5,365
Farm land		3,150		60		174		—		3,324		60
Vacant land		13,705		179		174		3		13,879		182
Real estate secured		766,981		8,861		11,054		753		778,035		9,614
Commercial and industrial		246,544		1,139		896		376		247,440		1,515
Municipal		20,707		36		—		—		20,707		36
Consumer		7,855		55		31		19		7,886		74
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2019
Residential 1-4 family	$	340,847	$	2,117	$	5,452	$	276	$	346,299	$	2,393
Residential 5+ multifamily		34,478		446		977		—		35,455		446
Construction of residential 1-4 family		11,889		75		—		—		11,889		75
Home equity lines of credit		33,693		197		105		—		33,798		197
Residential real estate		420,907		2,835		6,534		276		427,441		3,111
Commercial		285,462		3,333		4,333		409		289,795		3,742
Construction of commercial		8,466		104		—		—		8,466		104
Commercial real estate		293,928		3,437		4,333		409		298,261		3,846
Farm land		3,455		47		186		—		3,641		47
Vacant land		7,713		66		180		5		7,893		71
Real estate secured		726,003		6,385		11,233		690		737,236		7,075
Commercial and industrial		169,285		1,143		126		2		169,411		1,145
Municipal		21,914		46		—		—		21,914		46
Consumer		6,349		59		36		1		6,385		60
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

¹ For a further discussion of the allowance for loan losses, see “Provision and allowance for loan losses” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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

June 30, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,027,217	$	9,157	$	—	$	—	$	1,027,217	$	9,157
Potential problem loans 1		14,870		934		—		—		14,870		934
Impaired loans		—		—		11,981		1,148		11,981		1,148
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

December 31, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	913,648	$	7,251	$	—	$	—	$	913,648	$	7,251
Potential problem loans 1		9,903		382		—		—		9,903		382
Impaired loans		—		—		11,395		693		11,395		693
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

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:

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2020
Residential	$	4,203	$	4,345	$	4,066	$	406	$	45	$	1,696	$	2,043	$	1,919	$	13
Home equity lines of credit		227		540		79		20		—		38		74		100		—
Residential real estate		4,430		4,885		4,145		426		45		1,734		2,117		2,019		13
Commercial		3,727		3,818		3,452		324		75		816		1,411		899		16
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		174		325		181		—
Vacant land		39		41		40		3		—		134		151		137		5
Real estate secured		8,196		8,744		7,637		753		120		2,858		4,004		3,236		34
Commercial and industrial		896		901		241		376		7		—		151		64		—
Consumer		31		31		34		19		1		—		—		—		—
Totals	$	9,123	$	9,676	$	7,912	$	1,148	$	128	$	2,858	$	4,155	$	3,300	$	34

Note: The income recognized is for the six month period ended June 30, 2020.

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2019
Residential	$	4,629	$	4,985	$	3,032	$	172	$	66	$	1,991	$	2,659	$	3,299	$	13
Home equity lines of credit		43		43		45		1		1		483		575		442		—
Residential real estate		4,672		5,028		3,077		173		67		2,474		3,234		3,741		13
Commercial		2,565		2,571		2,239		186		51		1,236		2,519		2,287		27
Construction of commercial		—		—		143		—		—		—		3		72		—
Farm land		—		—		—		—		—		204		428		211		—
Vacant land		42		42		42		2		1		143		163		145		5
Real estate secured		7,279		7,641		5,501		361		119		4,057		6,347		6,456		45
Commercial and industrial		3		3		—		—		—		135		236		395		3
Consumer		41		41		6		35		—		—		—		6		—
Totals	$	7,323	$	7,685	$	5,507	$	396	$	119	$	4,192	$	6,583	$	6,857	$	48

Note: The income recognized is for the six month period ended June 30, 2019.

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

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
December 31, 2019
Residential	$	4,111	$	4,190	$	3,725	$	276	$	162	$	2,318	$	3,081	$	2,940	$	52
Home equity lines of credit		—		—		52		—		—		105		450		391		—
Residential real estate		4,111		4,190		3,777		276		162		2,423		3,531		3,331		52
Commercial		3,309		3,335		2,574		409		90		1,024		1,733		1,747		54
Construction of commercial		—		—		77		—		—		—		—		39		—
Farm land		—		—		—		—		—		186		329		203		—
Vacant land		41		41		42		5		3		139		157		143		10
Real estate secured		7,461		7,566		6,470		690		255		3,772		5,750		5,463		116
Commercial and industrial		93		97		16		2		4		33		188		265		4
Consumer		36		36		21		1		—		—		—		3		—
Totals	$	7,590	$	7,699	$	6,507	$	693	$	259	$	3,805	$	5,938	$	5,731	$	120

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LEASES

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

LEASES

NOTE 4 – LEASES

The following table provides the assets and liabilities as well as the costs of operating and finance leases that are included in the Bank's consolidated balance sheet as of June 30, 2020 and consolidated income statements for the six months and three months ended June 30, 2020.

($ in thousands, except lease term and discount rate)	Classification		June 30, 2020		December 31, 2019
Assets
Operating	Other assets	$	1,258	$	1,360
Finance	Bank premises and equipment 1		1,453		1,503
Total Leased Assets		$	2,711	$	2,863
Liabilities
Operating	Other liabilities	$	1,258	$	1,360
Finance	Finance lease		1,696		1,718
Total lease liabilities		$	2,954	$	3,078
1 Net of accumulated depreciation of $344 thousand and $294 thousand, respectively.
Lease cost	Classification		Six months ended June 30, 2020		Three months ended June 30, 2020
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		51		25
Interest on finance leases	Interest expense		71		36
Total lease cost		$	245	$	122
Lease cost	Classification		Six months ended June 30, 2019		Three months ended June 30, 2019
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		120		47
Interest on finance leases	Interest expense		92		46
Total lease cost		$	335	$	154
Weighted Average Remaining Lease Term			June 30, 2020		December 31, 2019
Operating leases			8.3 years		8.6 years
Financing leases			14.9 years		13.1 years
Weighted Average Discount Rate1
Operating leases			3.73%		3.70%
Financing leases			8.38%		6.20%
1 Salisbury uses the FHLB five-year Advance rate as the discount rate, as our leases do not provide an implicit rate.

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

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2020	$	128		$	93
2021		250			192
2022		198			195
2023		148			197
2024		129			200
Thereafter		654			1,980
Total future minimum lease payments		1,507			2,857
Less amount representing interest		(249	)		(1,161	)
Total present value of net future minimum lease payments	$	1,258		$	1,696

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MORTGAGE SERVICING RIGHTS

6 Months Ended

Jun. 30, 2020

SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]

MORTGAGE SERVICING RIGHTS

NOTE 5 - MORTGAGE SERVICING RIGHTS

The following tables provide the balance of the residential mortgage loans serviced for others as well as the balance of mortgage servicing rights associated with those loans. The increase in balances from December 31, 2019 reflected the sale of additional loans to FHLB Boston for which the Bank retained servicing rights.

(in thousands)		June 30, 2020		December 31, 2019
Residential mortgage loans serviced for others	$	110,933	$	106,255
Fair value of mortgage servicing rights		613		813

Changes in mortgage servicing rights are as follows:

		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2020			2019			2020			2019
Mortgage Servicing Rights
Balance, beginning of period	$	255		$	221		$	238		$	228
Originated		110			1			143			5
Amortization (1)		(12	)		(13	)		(28	)		(24	)
Balance, end of period	$	353		$	209		$	353		$	209

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

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PLEDGED ASSETS

6 Months Ended

Jun. 30, 2020

Guarantees [Abstract]

PLEDGED ASSETS

NOTE 6 - PLEDGED ASSETS

(in thousands)		June 30, 2020		December 31, 2019
Securities available-for-sale (at fair value)	$	54,195	$	52,845
Loans receivable (at book value)		428,772		434,329
Total pledged assets	$	482,967	$	487,174

At June 30, 2020, securities were pledged as follows: $45.68 million to secure public deposits, $8.47 million to secure repurchase agreements and $0.05 million to secure FHLBB advances. Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE 7 – EARNINGS PER SHARE

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

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

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

		Three months ended						Six months ended
Periods ended June 30, (in thousands, except per share data)		2020			2019			2020			2019
Net income	$	2,734		$	2,703		$	4,781		$	5,137
Less: Undistributed earnings allocated to participating securities		(43	)		(32	)		(77	)		(58	)
Net income allocated to common stock	$	2,691		$	2,671		$	4,704		$	5,079
Weighted-average common shares issued		2,834			2,813			2,831			2,810
Less: Unvested restricted stock awards		(38	)		(33	)		(38	)		(31	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,796			2,780			2,793			2,779
Add: Dilutive effect of stock options		7			20			8			16
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,803			2,800			2,801			2,795
Earnings per common share (basic)	$	0.96		$	0.96		$	1.68		$	1.83
Earnings per common share (diluted)	$	0.96		$	0.95		$	1.68		$	1.82

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SHAREHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2020

Equity [Abstract]

SHAREHOLDERS' EQUITY

NOTE 8 – SHAREHOLDERS' EQUITY

Capital Requirements

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

The requirements of the final rules approved by the Federal Reserve Board (“FRB”) and FDIC, include a common equity Tier 1 capital risk-weighted assets minimum ratio of 4.5%, minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, require a minimum ratio of Total capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. As of June 30, 2020, the Bank exceeded the regulatory requirement for the capital conservation buffer. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. A bank can be considered “well-capitalized” even if it does not maintain the capital conservation buffer as long as it meets the “well-capitalized” levels set forth below (and provided it is not subject to any written order, agreement, capital directive, etc.). A bank with a capital conservation buffer of at least 2.5% means that it generally will not be subject to certain limitations regarding capital distributions, such as dividend payments, discretionary payments on tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers.

The Bank's risk-weighted assets at June 30, 2020 and December 31, 2019 were $918.5 million and $891.0 million, respectively. Actual regulatory capital position and minimum capital requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2020
Total Capital (to risk-weighted assets)	$	120,802		13.15	%	$	73,480		8.0	%	$	96,443		10.5	%	$	91,850		10.0	%
Tier 1 Capital (to risk-weighted assets)		109,309		11.90			55,110		6.0			78,073		8.5			73,480		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		109,309		11.90			41,333		4.5			64,295		7.0			59,703		6.5
Tier 1 Capital (to average assets)	$	109,309		8.95		$	48,856		4.0		$	48,856		4.0		$	61,071		5.0
December 31, 2019
Total Capital (to risk-weighted assets)	$	114,421		12.84	%	$	71,278		8.0	%	$	93,553		10.5	%	$	89,098		10.0	%
Tier 1 Capital (to risk-weighted assets)		105,430		11.83			53,459		6.0			75,733		8.5			71,278		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		105,430		11.83			40,094		4.5			62,368		7.0			57,914		6.5
Tier 1 Capital (to average assets)	$	105,430		9.60		$	43,944		4.0		$	43,944		4.0		$	54,930		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.

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BENEFITS

6 Months Ended

Jun. 30, 2020

Retirement Benefits [Abstract]

BENEFITS

NOTE 9 – BENEFITS

Salisbury's 401(k) Plan expense was $200 thousand and $192 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $438 thousand and $431 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019. Other post-retirement benefit obligation expense for endorsement split-dollar life insurance arrangements was $14 thousand and $27 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $38 thousand and $48 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury's ESOP expense was $56 thousand and $53 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $113 thousand and $102 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

Other Retirement Plans

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 have evidenced their participation by execution of a Non-Qualified Deferred Compensation Plan Participation Agreement ("Participation Agreement") in a form provided by the Bank. This Plan is intended to comply with Internal Revenue Code ("Code") Section 409A and any regulatory or other guidance issued under such Section. Salisbury's expense for this plan was $33 thousand and $29 thousand, respectively, for the three-month periods ended June 30, 2020 and 2019, and $67 thousand and $58 thousand, respectively, for the six-month periods ended June 30, 2020 and 2019.

Grants of Restricted Stock and Options

Restricted stock

Restricted stock expense was $135 thousand and $115 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $271 thousand and $215 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. The second quarter 2020 included an expense of $32 thousand for the accelerated vesting of restricted stock awards previously granted to certain Directors, who retired from Salisbury's Board of Directors during the quarter. The tax benefit from restricted stock expense was $25 thousand and $21 thousand, respectively; for the three-month periods ended June 30, 2020 and 2019, and $49 thousand and $39 thousand, respectively; for the six-month periods ended June 30, 2020 and 2019. In second quarter 2020, Salisbury granted a total of 14,975 shares of restricted stock to certain employees and Directors pursuant to its 2017 Long Term Incentive Plan. The fair value of the stock at grant date was approximately $536 thousand. The restricted stock will vest three years from the grant date. Unrecognized compensation cost relating to the awards as of June 30, 2020 and 2019 totaled $1,031 thousand and $1,075 thousand, respectively. There were forfeitures of $29 thousand or 700 shares in the second quarter of 2020 and forfeitures of $29 thousand or 700 shares for year to date. There were forfeitures of $16 thousand or 360 shares in the second quarter of 2019 and forfeitures of $21 thousand or 460 shares for year to date.

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. The performance goal is based on the increase in the Bank's tangible book value by $3.50 per share over the performance period for threshold performance. Vesting will range from 75% of target for achieving threshold performance, to 100% of target for achieving target payout performance ($5.00 increase in tangible book value per share) to 150% of target for achieving in excess of target payout performance and, if the performance goals are achieved, vesting will occur no later than March 29, 2022. A total of 6,800 performance-based restricted stock units were granted, including 3,500 units to three Named Executive Officers. Mr. Cantele received 1,500 units, Mr. Davies received 1,000 units and Mr. Albero received 1,000 units. Compensation expense was recorded with respect to these RSUs, for the quarter a total of $24 thousand and $21 thousand, and year to date $47 thousand and $39 thousand, were expensed in 2020 and 2019, respectively. No performance-based restricted stock units were awarded to date in 2020 and prior to March 29, 2019.

Options

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

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FAIR VALUE OF ASSETS AND LIABILITIES

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

FAIR VALUE OF ASSETS AND LIABILITIES

NOTE 10 – 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 are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

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

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

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

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
June 30, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,361	$	—	$	4,361
Municipal bonds		—		25,896		—		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		32,025		—		32,025
Collateralized mortgage obligations:
U.S. Government agencies		—		21,048		—		21,048
Corporate bonds		—		6,122		—		6,122
Securities available-for-sale	$	—	$	89,452	$	—	$	89,452
CRA mutual funds		912		—		—		912
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,282	$	1,282
Other real estate owned	$	—	$	—	$	—	$	—
December 31, 2019
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,644	$	—	$	4,644
Municipal bonds		—		27,193		—		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		29,357		—		29,357
Collateralized mortgage obligations:
U.S. Government agencies		—		25,499		—		25,499
Corporate bonds		—		5,108		—		5,108
Securities available-for-sale	$	—	$	91,801	$	—	$	91,801
CRA mutual funds		882		—		—		882
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,593	$	1,593
Other real estate owned	$	—	$	—	$	314	$	314

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
June 30, 2020
Financial Assets
Cash and cash equivalents	$	84,495	$	84,495	$	84,495	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale, net		89,452		89,452		—		89,452		—
CRA mutual fund		912		912		912		—		—
Federal Home Loan Bank of Boston stock		3,353		3,353		3,353		—		—
Loans held-for-sale		5,313		5,392		—		—		5,392
Loans receivable, net		1,040,358		1,062,289		—		—		1,062,289
Accrued interest receivable		3,988		3,988		3,988		—		—
Cash surrender value of life insurance policies		20,846		20,846		20,846		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	325,531	$	325,531	$	—	$	325,531	$	—
Demand (interest-bearing)		188,487		188,487		—		188,487		—
Money market		251,242		251,242		—		251,242		—
Savings and other		170,537		170,537		—		170,537		—
Certificates of deposit		149,802		151,315		—		151,315		—
Deposits		1,085,599		1,087,112		—		1,087,112		—
Repurchase agreements		7,809		7,809		—		7,809		—
FHLBB advances		55,118		55,377		—		55,377		—
Subordinated debt		9,871		9,910		9,910		—		—
Note payable		228		231		—		231		—
Finance lease obligation		1,696		1,902		—		—		1,902
Accrued interest payable		187		187		187		—		—
December 31, 2019
Financial Assets
Cash and cash equivalents	$	26,885	$	26,885	$	26,885	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		91,801		91,801		—		91,801		—
CRA mutual fund		882		882		882		—		—
Federal Home Loan Bank of Boston stock		3,242		3,242		3,242		—		—
Loans held-for-sale		332		334		—		—		334
Loans receivable, net		927,413		933,287		—		—		933,287
Accrued interest receivable		3,415		3,415		3,415		—		—
Cash surrender value of life insurance policies		20,580		20,580		20,580		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	237,852	$	237,852	$	—	$	237,852	$	—
Demand (interest-bearing)		153,314		153,314		—		153,314		—
Money market		239,504		239,504		—		239,504		—
Savings and other		161,112		161,112		—		161,112		—
Certificates of deposit		127,724		128,629		—		128,629		—
Deposits		919,506		920,411		—		920,411		—
Repurchase agreements		8,530		8,530		—		8,530		—
FHLBB advances		50,887		51,028		—		51,028		—
Subordinated debt		9,859		10,113		10,113		—		—
Note payable		246		251		—		251		—
Finance lease liability		1,718		1,967		—		—		1,967
Accrued interest payable		78		78		78		—		—

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.

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SUBSEQUENT EVENTS

6 Months Ended

Jun. 30, 2020

Subsequent Events [Abstract]

SUBSEQUENT EVENTS

NOTE 11 – SUBSEQUENT EVENTS

In July 2020, Salisbury was notified of the death of a former employee who was covered under a Bank Owned Life Insurance policy (“BOLI”). Under the terms of the BOLI policy, the Bank will record a tax-free gain of $600 thousand in July 2020.

On July 29, 2020, the Compensation Committee of the Board of Directors approved grants of performance-based restricted stock units (“RSUs”) to named executive officers (“NEOs”) and other key employees under the Company’s 2017 Long Term Incentive Plan. The Compensation Committee granted a total of 7,250 RSUs, including 3,500 RSUs to NEOs. Richard J. Cantele, Jr., President and Chief Executive Officer received 1,500 target RSUs; John M. Davies, President of NY Region and Chief Lending Officer received 1,000 target RSUs; and Peter Albero, Executive Vice President and Chief Financial Officer received 1,000 target RSUs. The maximum number of shares deliverable upon vesting of RSUs assuming 150% of the TBV growth target is met or exceeded, will be 10,875.

On July 31, 2020 the Board of Directors declared a dividend of $0.29 per common share payable on August 28, 2020 to shareholders of record as of August 14, 2020.

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BASIS OF PRESENTATION (Policies)

6 Months Ended

Jun. 30, 2020

Accounting Policies [Abstract]

Other Regulatory Pronouncements

Other Regulatory Pronouncements

On March 12, 2020 the Securities and Exchange Commission finalized amendments to the definitions of “accelerated” and “large accelerated filer”. The amendments increase the threshold criteria for meeting these categories and are effective on April 27, 2020 and apply to annual reports due on or after such effective date. Prior to these changes, Salisbury was designated as a “smaller reporting company” and an “accelerated” filer as it had more than $75 million in public float but less than $700 million at the end of Salisbury's most recent second quarter. The rule changed the definition of “accelerated filer” and expands the category of “non-accelerated filer” to include entities with public float of less than $700 million and less than $100 million in annual revenues. Salisbury meets the new definition of non-accelerated filer while continuing to qualify as a “smaller reporting company”, and will no longer be considered an accelerated filer. The categorization of “accelerated” or “large accelerated filer” determines the requirement for a public company to obtain an auditor attestation of its internal control over financial reporting. Non-accelerated filers also have additional time to file quarterly and annual reports. All public companies are required to obtain and file annual financial statements audits as well as provide management's assertion on the effectiveness of internal controls over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. As the Bank has total assets exceeding $1.0 billion, it remains subject to the rules of the Federal Deposit Insurance Corporation, which requires an auditor attestation of internal controls over the Bank's regulatory financial reporting. As such, other than additional time provided to file quarterly and annual reports, this amendment to the definition of accelerated filer does not significantly change Salisbury's annual reporting and audit requirements and does not change the auditor's role in the financial statement audit.

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SECURITIES (Tables)

6 Months Ended

Jun. 30, 2020

Investments, Debt and Equity Securities [Abstract]

Composition of Securities

(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
June 30, 2020
Available-for-sale
U.S. Government Agency notes	$	4,186	$	176	$	1	$	4,361
Municipal bonds		24,701		1,207		12		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		30,881		1,179		35		32,025
Collateralized mortgage obligations:
U.S. Government agencies		20,349		699		—		21,048
Corporate bonds		6,000		147		25		6,122
Total securities available-for-sale	$	86,117	$	3,408	$	73	$	89,452
CRA mutual fund							$	912
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,353	$	—	$	—	$	3,353
(in thousands)		Amortized cost basis (1)		Gross un-realized gains		Gross un-realized losses		Fair value
December 31, 2019
Available-for-sale
U.S. Government Agency notes	$	4,520	$	125	$	1	$	4,644
Municipal bonds		26,562		704		73		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		28,961		420		24		29,357
Collateralized mortgage obligations:
U.S. Government agencies		25,041		468		10		25,499
Corporate bonds		5,000		108		—		5,108
Total securities available-for-sale	$	90,084	$	1,825	$	108	$	91,801
CRA mutual fund							$	882
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	3,242	$	—	$	—	$	3,242

Aggreggate fair value and gross unrealized loss of securities

	Less than 12 Months				12 Months or Longer				Total
June 30, 2020 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	102	$	1	$	102	$	1
Municipal bonds		2,074		12		—		—		2,074		12
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		4,160		34		105		1		4,265		35
Corporate bonds		725		25		—		—		725		25
Total temporarily impaired securities	$	6,959	$	71	$	207	$	2	$	7,166	$	73
	Less than 12 Months				12 Months or Longer				Total
December 31, 2019 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Government Agency notes	$	—	$	—	$	195	$	1	$	195	$	1
Municipal bonds		6,273		73		—		—		6,273		73
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		5,781		22		704		2		6,485		24
Collateralized mortgage obligations:
U.S. Government Agencies		1,438		10		—		—		1,438		10
Total temporarily impaired securities	$	13,492	$	105	$	899	$	3	$	14,391	$	108

Amortized cost, fair value and tax equivalent yield of securities

June 30, 2020 (in thousands)	Maturity	Amortized cost			Fair value	Yield(1)
U.S. Government Agency notes	After 5 year but within 10 years	$	2,496	$	2,557	3.48	%
	Total		2,496		2,557	3.48
Municipal bonds	After 5 year but within 10 years		1,720		1,881	3.16
	After 10 years		22,981		24,015	3.07
	Total		24,701		25,896	3.08
Mortgage-backed securities and Collateralized mortgage obligations	U.S. Government agencies		52,920		54,877	2.85
Corporate bonds	After 5 years but within 10 years		6,000		6,122	5.21
Securities available-for-sale		$	86,117	$	89,452	3.17	%

⁽¹⁾ Yield is based on amortized cost.

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LOANS (Tables)

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Composition of loans receivable and loans held-for-sale

(In thousands)		June 30, 2020			December 31, 2019
Residential 1-4 family	$	357,518		$	346,299
Residential 5+ multifamily		38,353			35,455
Construction of residential 1-4 family		11,041			11,889
Home equity lines of credit		30,286			33,798
Residential real estate		437,198			427,441
Commercial		309,935			289,795
Construction of commercial		13,699			8,466
Commercial real estate		323,634			298,261
Farm land		3,324			3,641
Vacant land		13,879			7,893
Real estate secured		778,035			737,236
Commercial and industrial (1)		247,440			169,411
Municipal		20,707			21,914
Consumer		7,886			6,385
Loans receivable, gross		1,054,068			934,946
Deferred loan origination (fees) and costs, net		(1,339	)		1,362
Loans receivable, gross	$	1,052,729		$	936,308
Allowance for loan losses		(12,371	)		(8,895	)
Loans receivable, net	$	1,040,358		$	927,413
Loans held-for-sale
Residential 1-4 family	$	5,313		$	332

⁽¹⁾ Commercial and industrial balance as of June 30, 2020 includes $98.9 million of Paycheck Protection Program loans.

Composition of loans receivable by risk rating grade

(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
June 30, 2020
Residential 1-4 family	$	350,494	$	3,357	$	3,667	$	—	$	—	$	357,518
Residential 5+ multifamily		36,539		96		1,718		—		—		38,353
Construction of residential 1-4 family		11,041		—		—		—		—		11,041
Home equity lines of credit		29,689		332		265		—		—		30,286
Residential real estate		427,763		3,785		5,650		—		—		437,198
Commercial		292,546		3,081		14,237		71		—		309,935
Construction of commercial		13,464		—		235		—		—		13,699
Commercial real estate		306,010		3,081		14,472		71		—		323,634
Farm land		1,637		—		1,687		—		—		3,324
Vacant land		13,785		55		39		—		—		13,879
Real estate secured		749,195		6,921		21,848		71		—		778,035
Commercial and industrial		245,768		581		731		360		—		247,440
Municipal		20,707		—		—		—		—		20,707
Consumer		7,851		3		32		—		—		7,886
Loans receivable, gross	$	1,023,521	$	7,505	$	22,611	$	431	$	—	$	1,054,068
(in thousands)	Pass		Special mention		Substandard		Doubtful		Loss		Total
December 31, 2019
Residential 1-4 family	$	337,302	$	4,278	$	4,719	$	—	$	—	$	346,299
Residential 5+ multifamily		33,619		99		1,737		—		—		35,455
Construction of residential 1-4 family		11,889		—		—		—		—		11,889
Home equity lines of credit		33,381		312		105		—		—		33,798
Residential real estate		416,191		4,689		6,561		—		—		427,441
Commercial		271,708		10,964		7,052		71		—		289,795
Construction of commercial		8,225		—		241		—		—		8,466
Commercial real estate		279,933		10,964		7,293		71		—		298,261
Farm land		1,934		—		1,707		—		—		3,641
Vacant land		7,834		59		—		—		—		7,893
Real estate secured		705,892		15,712		15,561		71		—		737,236
Commercial and industrial		167,458		443		1,510		—		—		169,411
Municipal		21,914		—		—		—		—		21,914
Consumer		6,344		3		38		—		—		6,385
Loans receivable, gross	$	901,608	$	16,158	$	17,109	$	71	$	—	$	934,946

Composition of loans receivable by delinquency status

			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
June 30, 2020
Residential 1-4 family	$	356,297	$	349	$	618	$	217	$	37	$	1,221	$	—	$	1,410
Residential 5+ multifamily		37,492		—		—		—		861		861		—		861
Construction of residential 1-4 family		11,041		—		—		—		—		—		—		—
Home equity lines of credit		29,825		62		159		73		167		461		—		265
Residential real estate		434,655		411		777		290		1,065		2,543		—		2,536
Commercial		308,473		954		—		437		71		1,462		—		1,281
Construction of commercial		13,699		—		—		—		—		—		—		—
Commercial real estate		322,172		954		—		437		71		1,462		—		1,281
Farm land		3,155		—		169		—		—		169		—		174
Vacant land		13,879		—		—		—		—		—		—		39
Real estate secured		773,861		1,365		946		727		1,136		4,174		—		4,030
Commercial and industrial		246,535		781		—		—		124		905		11		774
Municipal		20,707		—		—		—		—		—		—		—
Consumer		7,853		3		30		—		—		33		—		—
Loans receivable, gross	$	1,048,956	$	2,149	$	976	$	727	$	1,260	$	5,112	$	11	$	4,804

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

Troubled debt restructurings

	For the three months ending June 30, 2020						For the three months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		—		—		—		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		—		—		—		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		—	$	—	$	—		3	$	665	$	665

	For the six months ending June 30, 2020						For the six months ending June 30, 2019
(in thousands)	Quantity		Pre-modification balance		Post-modification balance		Quantity		Pre-modification balance		Post-modification balance
Residential real estate		—	$	—	$	—		2	$	623	$	623
Commercial real estate		1		133		133		—		—		—
Consumer		—		—		—		1		42		42
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665
Interest only payments to sell property		—	$	—	$	—		—	$	—	$	—
Rate reduction		—		—		—		3		665		665
Modification and Rate reduction		—		—		—		—		—		—
Workout refinance. Extension of new funds to pay outstanding taxes		1		133		133		—		—		—
Modification and term extension		—		—		—		—		—		—
Troubled debt restructurings		1	$	133	$	133		3	$	665	$	665

Changes in allowance for loan losses

	Three months ended June 30, 2020													Three months ended June 30, 2019
(in thousands)		Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance			Beginning balance		Provision (Benefit)			Charge-offs			Reco-veries		Ending balance
Residential 1-4 family		$	2,706	$	342		$	—		$	—	$	3,048		$	1,980	$	95		($	1	)	$	—	$	2,074
Residential 5+ multifamily			508		122			(41	)		—		589			466		29			—			—		495
Construction of residential 1-4 family			87		—			—			—		87			77		2			—			—		79
Home equity lines of credit			278		5			—			—		283			209		15			—			—		224
Residential real estate			3,579		469			(41	)		—		4,007			2,732		141			(1	)		—		2,872
Commercial			4,519		645			(4	)		—		5,160			3,803		(13	)		(14	)		1		3,777
Construction of commercial			126		79			—			—		205			143		(16	)		—			—		127
Commercial real estate			4,645		724			(4	)		—		5,365			3,946		(29	)		(14	)		1		3,904
Farm land			52		8			—			—		60			47		—			—			—		47
Vacant land			144		38			—			—		182			89		—			—			—		89
Real estate secured			8,420		1,239			(45	)		—		9,614			6,814		112			(15	)		1		6,912
Commercial and industrial			1,071		444			—			—		1,515			1,233		(67	)		(19	)		29		1,176
Municipal			53		(17	)		—			—		36			14		16			—			—		30
Consumer			102		(20	)		(13	)		5		74			51		40			(18	)		8		81
Unallocated			972		160			—			—		1,132			638		50			—			—		688
Totals		$	10,618	$	1,806		($	58	)	$	5	$	12,371		$	8,750	$	151		($	52	)	$	38	$	8,887

	Six months ended June 30, 2020												Six months ended June 30, 2019
(in thousands)	Beginning balance		Provision			Charge- offs			Reco- veries		Ending balance		Beginning balance		Acquisition Discount Transfer		Provision			Charge- offs			Reco- veries		Ending balance
Residential 1-4 family	$	2,393	$	647		$	—		$	8	$	3,048	$	2,149	$	10	($	85	)	$	(1	)	$	1	$	2,074
Residential 5+ multifamily		446		185			(42	)		—		589		413		—		82			—			—		495
Construction of residential 1-4 family		75		12			—			—		87		83		—		(4	)		—			—		79
Home equity lines of credit		197		86			—			—		283		219		1		4			—			—		224
Residential real estate		3,111		930			(42	)		8		4,007		2,864		11		(3	)		(1	)		1		2,872
Commercial		3,742		1,402			(3	)		19		5,160		3,048		488		262			(23	)		2		3,777
Construction of commercial		104		101			—			—		205		122		—		5			—			—		127
Commercial real estate		3,846		1,503			(3	)		19		5,365		3,170		488		267			(23	)		2		3,904
Farm land		47		13			—			—		60		33		—		14			—			—		47
Vacant land		71		111			—			—		182		100		—		(11	)		—			—		89
Real estate secured		7,075		2,557			(45	)		27		9,614		6,167		499		267			(24	)		3		6,912
Commercial and industrial		1,145		370			—			—		1,515		1,158		164		(127	)		(50	)		31		1,176
Municipal		46		(10	)		—			—		36		12		—		18			—			—		30
Consumer		60		32			(25	)		7		74		56		—		37			(24	)		12		81
Unallocated		569		563			—			—		1,132		438		—		250			—			—		688
Totals	$	8,895	$	3,512		($	70	)	$	34	$	12,371	$	7,831	$	663	$	445		($	98	)	$	46	$	8,887

Composition of loans receivable and allowance for loan losses

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
June 30, 2020
Residential 1-4 family	$	352,590	$	2,642	$	4,928	$	406	$	357,518	$	3,048
Residential 5+ multifamily		37,382		589		971		—		38,353		589
Construction of residential 1-4 family		11,041		87		—		—		11,041		87
Home equity lines of credit		30,021		263		265		20		30,286		283
Residential real estate		431,034		3,581		6,164		426		437,198		4,007
Commercial		305,393		4,836		4,542		324		309,935		5,160
Construction of commercial		13,699		205		—		—		13,699		205
Commercial real estate		319,092		5,041		4,542		324		323,634		5,365
Farm land		3,150		60		174		—		3,324		60
Vacant land		13,705		179		174		3		13,879		182
Real estate secured		766,981		8,861		11,054		753		778,035		9,614
Commercial and industrial		246,544		1,139		896		376		247,440		1,515
Municipal		20,707		36		—		—		20,707		36
Consumer		7,855		55		31		19		7,886		74
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

(in thousands)	Collectively evaluated 1				Individually evaluated 1				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans		Allowance
December 31, 2019
Residential 1-4 family	$	340,847	$	2,117	$	5,452	$	276	$	346,299	$	2,393
Residential 5+ multifamily		34,478		446		977		—		35,455		446
Construction of residential 1-4 family		11,889		75		—		—		11,889		75
Home equity lines of credit		33,693		197		105		—		33,798		197
Residential real estate		420,907		2,835		6,534		276		427,441		3,111
Commercial		285,462		3,333		4,333		409		289,795		3,742
Construction of commercial		8,466		104		—		—		8,466		104
Commercial real estate		293,928		3,437		4,333		409		298,261		3,846
Farm land		3,455		47		186		—		3,641		47
Vacant land		7,713		66		180		5		7,893		71
Real estate secured		726,003		6,385		11,233		690		737,236		7,075
Commercial and industrial		169,285		1,143		126		2		169,411		1,145
Municipal		21,914		46		—		—		21,914		46
Consumer		6,349		59		36		1		6,385		60
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

¹ For a further discussion of the allowance for loan losses, see “Provision and allowance for loan losses” in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Credit quality segments of loans receivable and allowance for loan losses

June 30, 2020 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	1,027,217	$	9,157	$	—	$	—	$	1,027,217	$	9,157
Potential problem loans 1		14,870		934		—		—		14,870		934
Impaired loans		—		—		11,981		1,148		11,981		1,148
Unallocated allowance		—		1,132		—		—		—		1,132
Totals	$	1,042,087	$	11,223	$	11,981	$	1,148	$	1,054,068	$	12,371

December 31, 2019 (in thousands)	Collectively evaluated				Individually evaluated				Total portfolio
		Loans		Allowance		Loans		Allowance		Loans	Allowance
Performing loans	$	913,648	$	7,251	$	—	$	—	$	913,648	$	7,251
Potential problem loans 1		9,903		382		—		—		9,903		382
Impaired loans		—		—		11,395		693		11,395		693
Unallocated allowance		—		569		—		—		—		569
Totals	$	923,551	$	8,202	$	11,395	$	693	$	934,946	$	8,895

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

Certain data with respect to loans individually evaluated for impairment

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2020
Residential	$	4,203	$	4,345	$	4,066	$	406	$	45	$	1,696	$	2,043	$	1,919	$	13
Home equity lines of credit		227		540		79		20		—		38		74		100		—
Residential real estate		4,430		4,885		4,145		426		45		1,734		2,117		2,019		13
Commercial		3,727		3,818		3,452		324		75		816		1,411		899		16
Construction of commercial		—		—		—		—		—		—		—		—		—
Farm land		—		—		—		—		—		174		325		181		—
Vacant land		39		41		40		3		—		134		151		137		5
Real estate secured		8,196		8,744		7,637		753		120		2,858		4,004		3,236		34
Commercial and industrial		896		901		241		376		7		—		151		64		—
Consumer		31		31		34		19		1		—		—		—		—
Totals	$	9,123	$	9,676	$	7,912	$	1,148	$	128	$	2,858	$	4,155	$	3,300	$	34

Note: The income recognized is for the six month period ended June 30, 2020.

	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance										Loan balance
		Recorded Investment		Note		Average		Specific allowance		Income recognized		Recorded Investment		Note		Average		Income recognized
June 30, 2019
Residential	$	4,629	$	4,985	$	3,032	$	172	$	66	$	1,991	$	2,659	$	3,299	$	13
Home equity lines of credit		43		43		45		1		1		483		575		442		—
Residential real estate		4,672		5,028		3,077		173		67		2,474		3,234		3,741		13
Commercial		2,565		2,571		2,239		186		51		1,236		2,519		2,287		27
Construction of commercial		—		—		143		—		—		—		3		72		—
Farm land		—		—		—		—		—		204		428		211		—
Vacant land		42		42		42		2		1		143		163		145		5
Real estate secured		7,279		7,641		5,501		361		119		4,057		6,347		6,456		45
Commercial and industrial		3		3		—		—		—		135		236		395		3
Consumer		41		41		6		35		—		—		—		6		—
Totals	$	7,323	$	7,685	$	5,507	$	396	$	119	$	4,192	$	6,583	$	6,857	$	48

Note: The income recognized is for the six month period ended June 30, 2019.

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LEASES (Tables)

6 Months Ended

Jun. 30, 2020

Notes to Financial Statements

Assets and liabilities as well as the costs of operating and financial leases

($ in thousands, except lease term and discount rate)	Classification		June 30, 2020		December 31, 2019
Assets
Operating	Other assets	$	1,258	$	1,360
Finance	Bank premises and equipment 1		1,453		1,503
Total Leased Assets		$	2,711	$	2,863
Liabilities
Operating	Other liabilities	$	1,258	$	1,360
Finance	Finance lease		1,696		1,718
Total lease liabilities		$	2,954	$	3,078
1 Net of accumulated depreciation of $344 thousand and $294 thousand, respectively.
Lease cost	Classification		Six months ended June 30, 2020		Three months ended June 30, 2020
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		51		25
Interest on finance leases	Interest expense		71		36
Total lease cost		$	245	$	122
Lease cost	Classification		Six months ended June 30, 2019		Three months ended June 30, 2019
Operating leases	Premises and equipment	$	123	$	61
Finance leases:
Amortization of leased assets	Premises and equipment		120		47
Interest on finance leases	Interest expense		92		46
Total lease cost		$	335	$	154
Weighted Average Remaining Lease Term			June 30, 2020		December 31, 2019
Operating leases			8.3 years		8.6 years
Financing leases			14.9 years		13.1 years
Weighted Average Discount Rate1
Operating leases			3.73%		3.70%
Financing leases			8.38%		6.20%
1 Salisbury uses the FHLB five-year Advance rate as the discount rate, as our leases do not provide an implicit rate.

Present value of the net minimum lease payments

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2020	$	128		$	93
2021		250			192
2022		198			195
2023		148			197
2024		129			200
Thereafter		654			1,980
Total future minimum lease payments		1,507			2,857
Less amount representing interest		(249	)		(1,161	)
Total present value of net future minimum lease payments	$	1,258		$	1,696

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MORTGAGE SERVICING RIGHTS (Tables)

6 Months Ended

Jun. 30, 2020

SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]

Balance of loans serviced for others and fair value of mortgage servicing rights

(in thousands)		June 30, 2020		December 31, 2019
Residential mortgage loans serviced for others	$	110,933	$	106,255
Fair value of mortgage servicing rights		613		813

Changes in mortgage servicing rights

		Three months ended						Six months ended
Periods ended June 30, (in thousands)		2020			2019			2020			2019
Mortgage Servicing Rights
Balance, beginning of period	$	255		$	221		$	238		$	228
Originated		110			1			143			5
Amortization (1)		(12	)		(13	)		(28	)		(24	)
Balance, end of period	$	353		$	209		$	353		$	209

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

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PLEDGED ASSETS (Tables)

6 Months Ended

Jun. 30, 2020

Guarantees [Abstract]

Securities and loans pledged to secure public and trust deposits, securities sold under agreements to repurchase, FHLBB advances and credit facilities available

(in thousands)		June 30, 2020		December 31, 2019
Securities available-for-sale (at fair value)	$	54,195	$	52,845
Loans receivable (at book value)		428,772		434,329
Total pledged assets	$	482,967	$	487,174

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EARNINGS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2020

Earnings Per Share [Abstract]

Computation of earnings per share

		Three months ended						Six months ended
Periods ended June 30, (in thousands, except per share data)		2020			2019			2020			2019
Net income	$	2,734		$	2,703		$	4,781		$	5,137
Less: Undistributed earnings allocated to participating securities		(43	)		(32	)		(77	)		(58	)
Net income allocated to common stock	$	2,691		$	2,671		$	4,704		$	5,079
Weighted-average common shares issued		2,834			2,813			2,831			2,810
Less: Unvested restricted stock awards		(38	)		(33	)		(38	)		(31	)
Weighted average common shares outstanding used to calculate basic earnings per common share		2,796			2,780			2,793			2,779
Add: Dilutive effect of stock options		7			20			8			16
Weighted-average common shares outstanding used to calculate diluted earnings per common share		2,803			2,800			2,801			2,795
Earnings per common share (basic)	$	0.96		$	0.96		$	1.68		$	1.83
Earnings per common share (diluted)	$	0.96		$	0.95		$	1.68		$	1.82

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SHAREHOLDERS' EQUITY (Tables)

6 Months Ended

Jun. 30, 2020

Equity [Abstract]

Actual regulatory capital position and minimum capital requirements

	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
June 30, 2020
Total Capital (to risk-weighted assets)	$	120,802		13.15	%	$	73,480		8.0	%	$	96,443		10.5	%	$	91,850		10.0	%
Tier 1 Capital (to risk-weighted assets)		109,309		11.90			55,110		6.0			78,073		8.5			73,480		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		109,309		11.90			41,333		4.5			64,295		7.0			59,703		6.5
Tier 1 Capital (to average assets)	$	109,309		8.95		$	48,856		4.0		$	48,856		4.0		$	61,071		5.0
December 31, 2019
Total Capital (to risk-weighted assets)	$	114,421		12.84	%	$	71,278		8.0	%	$	93,553		10.5	%	$	89,098		10.0	%
Tier 1 Capital (to risk-weighted assets)		105,430		11.83			53,459		6.0			75,733		8.5			71,278		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		105,430		11.83			40,094		4.5			62,368		7.0			57,914		6.5
Tier 1 Capital (to average assets)	$	105,430		9.60		$	43,944		4.0		$	43,944		4.0		$	54,930		5.0

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FAIR VALUE OF ASSETS AND LIABILITIES (Tables)

6 Months Ended

Jun. 30, 2020

Fair Value Disclosures [Abstract]

Assets measured at fair value

	Fair Value Measurements Using						Assets at
(in thousands)	Level 1		Level 2		Level 3		fair
							value
June 30, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,361	$	—	$	4,361
Municipal bonds		—		25,896		—		25,896
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		32,025		—		32,025
Collateralized mortgage obligations:
U.S. Government agencies		—		21,048		—		21,048
Corporate bonds		—		6,122		—		6,122
Securities available-for-sale	$	—	$	89,452	$	—	$	89,452
CRA mutual funds		912		—		—		912
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,282	$	1,282
Other real estate owned	$	—	$	—	$	—	$	—
December 31, 2019
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	4,644	$	—	$	4,644
Municipal bonds		—		27,193		—		27,193
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		29,357		—		29,357
Collateralized mortgage obligations:
U.S. Government agencies		—		25,499		—		25,499
Corporate bonds		—		5,108		—		5,108
Securities available-for-sale	$	—	$	91,801	$	—	$	91,801
CRA mutual funds		882		—		—		882
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	$	—	$	—	$	1,593	$	1,593
Other real estate owned	$	—	$	—	$	314	$	314

Carrying value and estimated fair values of financial instruments

(in thousands)	Carrying		Estimated		Fair value measurements using
	value		fair value		Level 1		Level 2		Level 3
June 30, 2020
Financial Assets
Cash and cash equivalents	$	84,495	$	84,495	$	84,495	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale, net		89,452		89,452		—		89,452		—
CRA mutual fund		912		912		912		—		—
Federal Home Loan Bank of Boston stock		3,353		3,353		3,353		—		—
Loans held-for-sale		5,313		5,392		—		—		5,392
Loans receivable, net		1,040,358		1,062,289		—		—		1,062,289
Accrued interest receivable		3,988		3,988		3,988		—		—
Cash surrender value of life insurance policies		20,846		20,846		20,846		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	325,531	$	325,531	$	—	$	325,531	$	—
Demand (interest-bearing)		188,487		188,487		—		188,487		—
Money market		251,242		251,242		—		251,242		—
Savings and other		170,537		170,537		—		170,537		—
Certificates of deposit		149,802		151,315		—		151,315		—
Deposits		1,085,599		1,087,112		—		1,087,112		—
Repurchase agreements		7,809		7,809		—		7,809		—
FHLBB advances		55,118		55,377		—		55,377		—
Subordinated debt		9,871		9,910		9,910		—		—
Note payable		228		231		—		231		—
Finance lease obligation		1,696		1,902		—		—		1,902
Accrued interest payable		187		187		187		—		—
December 31, 2019
Financial Assets
Cash and cash equivalents	$	26,885	$	26,885	$	26,885	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		91,801		91,801		—		91,801		—
CRA mutual fund		882		882		882		—		—
Federal Home Loan Bank of Boston stock		3,242		3,242		3,242		—		—
Loans held-for-sale		332		334		—		—		334
Loans receivable, net		927,413		933,287		—		—		933,287
Accrued interest receivable		3,415		3,415		3,415		—		—
Cash surrender value of life insurance policies		20,580		20,580		20,580		—		—
Financial Liabilities
Demand (non-interest-bearing)	$	237,852	$	237,852	$	—	$	237,852	$	—
Demand (interest-bearing)		153,314		153,314		—		153,314		—
Money market		239,504		239,504		—		239,504		—
Savings and other		161,112		161,112		—		161,112		—
Certificates of deposit		127,724		128,629		—		128,629		—
Deposits		919,506		920,411		—		920,411		—
Repurchase agreements		8,530		8,530		—		8,530		—
FHLBB advances		50,887		51,028		—		51,028		—
Subordinated debt		9,859		10,113		10,113		—		—
Note payable		246		251		—		251		—
Finance lease liability		1,718		1,967		—		—		1,967
Accrued interest payable		78		78		78		—		—

XML

SECURITIES - Composition of Securities (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Amortized cost basis (1)
Available-for-sale
U.S. Government Agency notes	$ 4,186	$ 4,520
Municipal bonds	24,701	26,562
Mortgage-backed securities, U.S. Government agencies and U.S. Government-sponsored enterprises	30,881	28,961
Collateralized mortgage obligations, U.S. Government Agencies	20,349	25,041
Corporate bonds	6,000	5,000
Total securities available-for-sale	86,117	90,084
Non-marketable securities
Federal Home Loan Bank of Boston stock	3,353	3,242
Gross unrealized gains
Available-for-sale
U.S. Government Agency notes	176	125
Municipal bonds	1,207	704
Mortgage-backed securities, U.S. Government agencies and U.S. Government-sponsored enterprises	1,179	420
Collateralized mortgage obligations, U.S. Government Agencies	699	468
Corporate bonds	147	108
Total securities available-for-sale	3,408	1,825
Non-marketable securities
Federal Home Loan Bank of Boston stock
Gross unrealized losses
Available-for-sale
U.S. Government Agency notes	1	1
Municipal bonds	12	73
Mortgage-backed securities, U.S. Government agencies and U.S. Government-sponsored enterprises	35	24
Collateralized mortgage obligations, U.S. Government Agencies		10
Corporate bonds	25
Total securities available-for-sale	73	108
Non-marketable securities
Federal Home Loan Bank of Boston stock
Fair value
Available-for-sale
U.S. Government Agency notes	4,361	4,644
Municipal bonds	25,896	27,193
Mortgage-backed securities, U.S. Government agencies and U.S. Government-sponsored enterprises	32,025	29,357
Collateralized mortgage obligations, U.S. Government Agencies	21,048	25,499
Corporate bonds	6,122	5,108
Total securities available-for-sale	89,452	91,801
CRA mutual funds	912	882
Non-marketable securities
Federal Home Loan Bank of Boston stock	$ 3,353	$ 3,242

XML

SECURITIES - Aggreggate fair value and gross unrealized loss of securities (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Less Than 12 Months, Fair value
Available-for-sale
U.S. Government Agency notes
Municipal bonds	2,074	6,273
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	4,160	5,781
Collateralized mortgage obligations: U.S. Government agencies		1,438
Corporate bonds	725
Total temporarily impaired securities	6,959	13,492
Less Than 12 Months, Unrealized losses
Available-for-sale
U.S. Government Agency notes
Municipal bonds	12	73
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	34	22
Collateralized mortgage obligations: U.S. Government agencies		10
Corporate bonds	25
Total temporarily impaired securities	71	105
12 Months or Longer, Fair value
Available-for-sale
U.S. Government Agency notes	102	195
Municipal bonds
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	105	704
Collateralized mortgage obligations: U.S. Government agencies
Corporate bonds
Total temporarily impaired securities	207	899
12 Months or Longer, Unrealized losses
Available-for-sale
U.S. Government Agency notes	1	1
Municipal bonds
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	1	2
Collateralized mortgage obligations: U.S. Government agencies
Corporate bonds
Total temporarily impaired securities	2	3
Total, Fair value
Available-for-sale
U.S. Government Agency notes	102	195
Municipal bonds	2,074	6,273
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	4,265	6,485
Collateralized mortgage obligations: U.S. Government agencies		1,438
Corporate bonds	725
Total temporarily impaired securities	7,166	14,391
Total, Unrealized losses
Available-for-sale
U.S. Government Agency notes	1	1
Municipal bonds	12	73
Mortgage-backed securities: U.S. Government agencies and U.S. Government- sponsored enterprises	35	24
Collateralized mortgage obligations: U.S. Government agencies		10
Corporate bonds	25
Total temporarily impaired securities	$ 73	$ 108

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SECURITIES - Amortized cost, fair value and tax equivalent yield of securities (Details) $ in Thousands	6 Months Ended
	Jun. 30, 2020 USD ($)
U.S. Government agency notes - After 5 years but within 10 years
Amortized cost	$ 2,496
Fair value	$ 2,557
Yield	3.48%
U.S. Government agency notes - Total
Amortized cost	$ 2,496
Fair value	$ 2,557
Yield	3.48%
Municipal bonds - After 5 year but within 10 years
Amortized cost	$ 1,720
Fair value	$ 1,881
Yield	3.16%
Municipal bonds - After 10 years
Amortized cost	$ 22,981
Fair value	$ 24,015
Yield	3.07%
Municipal bonds - Total
Amortized cost	$ 24,701
Fair value	$ 25,896
Yield	3.08%
Mortgage-backed securities and Collateralized mortgage obligations - U.S. Government agencies
Amortized cost	$ 52,920
Fair value	$ 54,877
Yield	2.85%
Corporate bonds - After 5 years but within 10 years
Amortized cost	$ 6,000
Fair value	$ 6,122
Yield	5.21%
Securities available-for-sale
Amortized cost	$ 86,117
Fair value	$ 89,452
Yield	3.17%

XML

SECURITIES (Details Narrative) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Investments, Debt and Equity Securities [Abstract]
Sales of securities available-for-sale	$ 10,600	$ 27,200	$ 10,598	$ 28,170
Pre-tax gain on sale of securities available-for-sale	181	281	182	272
Related tax expense on sale of securities available-for-sale	$ (38)	$ (59)	$ (38)	$ (57)

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LOANS - Composition of loans receivable and loans held-for-sale (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Loans receivable, net	$ 1,040,358	$ 927,413
Total
Residential 1-4 family	357,518	346,299
Residential 5+ multifamily	38,353	35,455
Construction of residential 1-4 family	11,041	11,889
Home equity lines of credit	30,286	33,798
Residential real estate	437,198	427,441
Commercial	309,935	289,795
Construction of commercial	13,699	8,466
Commercial real estate	323,634	298,261
Farm land	3,324	3,641
Vacant land	13,879	7,893
Real estate secured	778,035	737,236
Commercial and industrial	247,440	169,411
Municipal	20,707	21,914
Consumer	7,886	6,385
Loans receivable, gross	1,054,068	934,946
Deferred loan origination (fees) and costs, net	(1,339)	1,362
Loans receivable, gross	1,052,729	936,308
Allowance for loan losses	(12,371)	(8,895)
Loans receivable, net	1,040,358	927,413
Loans held-for-sale
Residential 1-4 family	$ 5,313	$ 332

XML

LOANS - Composition of loans receivable by risk rating grade (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Pass
Residential 1-4 family	$ 350,494	$ 337,302
Residential 5+ multifamily	36,539	33,619
Construction of residential 1-4 family	11,041	11,889
Home equity lines of credit	29,689	33,381
Residential real estate	427,763	416,191
Commercial	292,546	271,708
Construction of commercial	13,464	8,225
Commercial real estate	306,010	279,933
Farm land	1,637	1,934
Vacant land	13,785	7,834
Real estate secured	749,195	705,892
Commercial and industrial	245,768	167,458
Municipal	20,707	21,914
Consumer	7,851	6,344
Loans receivable, gross	1,023,521	901,608
Special mention
Residential 1-4 family	3,357	4,278
Residential 5+ multifamily	96	99
Construction of residential 1-4 family
Home equity lines of credit	332	312
Residential real estate	3,785	4,689
Commercial	3,081	10,964
Construction of commercial
Commercial real estate	3,081	10,964
Farm land
Vacant land	55	59
Real estate secured	6,921	15,712
Commercial and industrial	581	443
Municipal
Consumer	3	3
Loans receivable, gross	7,505	16,158
Substandard
Residential 1-4 family	3,667	4,719
Residential 5+ multifamily	1,718	1,737
Construction of residential 1-4 family
Home equity lines of credit	265	105
Residential real estate	5,650	6,561
Commercial	14,237	7,052
Construction of commercial	235	241
Commercial real estate	14,472	7,293
Farm land	1,687	1,707
Vacant land	39
Real estate secured	21,848	15,561
Commercial and industrial	731	1,510
Municipal
Consumer	32	38
Loans receivable, gross	22,611	17,109
Doubtful
Residential 1-4 family
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit
Residential real estate
Commercial	71	71
Construction of commercial
Commercial real estate	71	71
Farm land
Vacant land
Real estate secured	71	71
Commercial and industrial	360
Municipal
Consumer
Loans receivable, gross	431	71
Loss
Residential 1-4 family
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit
Residential real estate
Commercial
Construction of commercial
Commercial real estate
Farm land
Vacant land
Real estate secured
Commercial and industrial
Municipal
Consumer
Loans receivable, gross
Total
Residential 1-4 family	357,518	346,299
Residential 5+ multifamily	38,353	35,455
Construction of residential 1-4 family	11,041	11,889
Home equity lines of credit	30,286	33,798
Residential real estate	437,198	427,441
Commercial	309,935	289,795
Construction of commercial	13,699	8,466
Commercial real estate	323,634	298,261
Farm land	3,324	3,641
Vacant land	13,879	7,893
Real estate secured	778,035	737,236
Commercial and industrial	247,440	169,411
Municipal	20,707	21,914
Consumer	7,886	6,385
Loans receivable, gross	$ 1,054,068	$ 934,946

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LOANS - Composition of loans receivable by delinquency status (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Current
Residential 1-4 family	$ 349,628	$ 344,085
Residential 5+ multifamily	34,147	34,594
Construction of residential 1-4 family	12,214	11,889
Home equity lines of credit	31,300	33,522
Residential real estate	427,289	424,090
Commercial	307,973	289,103
Construction of commercial	10,922	8,466
Commercial real estate	318,895	297,569
Farm land	3,436	3,461
Vacant land	14,447	7,852
Real estate secured	764,067	732,972
Commercial and industrial	157,341	169,262
Municipal	20,964	21,914
Consumer	8,190	6,382
Loans receivable, gross	950,562	930,530
Past due 30-59 days
Residential 1-4 family	3,211	971
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit	337	152
Residential real estate	3,548	1,123
Commercial	2,114	336
Construction of commercial
Commercial real estate	2,114	336
Farm land	176	180
Vacant land
Real estate secured	5,838	1,639
Commercial and industrial	83	2
Municipal
Consumer	4
Loans receivable, gross	5,925	1,641
Past due 60-89 days
Residential 1-4 family	236	351
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit	89	46
Residential real estate	325	397
Commercial	278	141
Construction of commercial
Commercial real estate	278	141
Farm land
Vacant land		41
Real estate secured	603	579
Commercial and industrial	25	146
Municipal
Consumer	1	1
Loans receivable, gross	629	726
Past due 90-179 days
Residential 1-4 family	37	200
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit	103
Residential real estate	140	200
Commercial		71
Construction of commercial
Commercial real estate		71
Farm land
Vacant land	41
Real estate secured	181	271
Commercial and industrial	124	1
Municipal
Consumer		2
Loans receivable, gross	305	274
Past due 180 days and over
Residential 1-4 family		692
Residential 5+ multifamily	861	861
Construction of residential 1-4 family
Home equity lines of credit	78	78
Residential real estate	939	1,631
Commercial	71	144
Construction of commercial
Commercial real estate	71	144
Farm land
Vacant land
Real estate secured	1,010	1,775
Commercial and industrial
Municipal
Consumer
Loans receivable, gross	1,010	1,775
Past due 30 days and over
Residential 1-4 family	3,484	2,214
Residential 5+ multifamily	861	861
Construction of residential 1-4 family
Home equity lines of credit	607	276
Residential real estate	4,952	3,351
Commercial	2,463	692
Construction of commercial
Commercial real estate	2,463	692
Farm land	176	180
Vacant land	41	41
Real estate secured	7,632	4,264
Commercial and industrial	232	149
Municipal
Consumer	5	3
Loans receivable, gross	7,869	4,416
Past due Accruing 90 days and over
Residential 1-4 family
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines of credit
Residential real estate
Commercial
Construction of commercial
Commercial real estate
Farm land
Vacant land	41
Real estate secured	41
Commercial and industrial	27	1
Municipal
Consumer		2
Loans receivable, gross	68	3
Non-accrual
Residential 1-4 family	1,019	1,551
Residential 5+ multifamily	861	861
Construction of residential 1-4 family
Home equity lines of credit	207	105
Residential real estate	2,087	2,517
Commercial	755	914
Construction of commercial
Commercial real estate	755	914
Farm land	181	186
Vacant land
Real estate secured	3,023	3,617
Commercial and industrial	97
Municipal
Consumer
Loans receivable, gross	$ 3,120	$ 3,617

XML

LOANS - Troubled debt restructurings (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020 USD ($) Integer	Jun. 30, 2019 USD ($) Integer	Jun. 30, 2020 USD ($) Integer	Jun. 30, 2019 USD ($) Integer
Residential real estate
Quantity of troubled debt restructurings | Integer		2		2
Pre-modification balance		$ 623		$ 623
Post-modification balance		$ 623		$ 623
Commercial real estate
Quantity of troubled debt restructurings | Integer			1
Pre-modification balance			$ 133
Post-modification balance			$ 133
Consumer
Quantity of troubled debt restructurings | Integer	1	1		1
Pre-modification balance		$ 42		$ 42
Post-modification balance		$ 42		$ 42
Troubled debt restructurings
Quantity of troubled debt restructurings | Integer		3	1	3
Pre-modification balance		$ 665	$ 133	$ 665
Post-modification balance		$ 665	$ 133	$ 665
Interest only payments to sell property
Quantity of troubled debt restructurings | Integer
Pre-modification balance
Post-modification balance
Rate reduction
Quantity of troubled debt restructurings | Integer		3		3
Pre-modification balance		$ 665		$ 665
Post-modification balance		$ 665		$ 665
Modification and Rate reduction
Quantity of troubled debt restructurings | Integer
Pre-modification balance
Post-modification balance
Workout refinance. Extension of new funds to pay outstanding taxes
Quantity of troubled debt restructurings | Integer			1
Pre-modification balance			$ 133
Post-modification balance			$ 133
Modification and term extension
Quantity of troubled debt restructurings | Integer
Pre-modification balance
Post-modification balance

XML

LOANS - Changes in allowance for loan losses (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Residential 1-4 family
Beginning balance	$ 2,706	$ 1,980	$ 2,393	$ 2,149
Acquisition Discount Transfer				10
Provision	342	95	647	(85)
Charge-offs		(1)		(1)
Recoveries			8	1
Ending balance	3,048	2,074	3,048	2,074
Residential 5+ multifamily
Beginning balance	508	466	446	413
Acquisition Discount Transfer
Provision	122	29	185	82
Charge-offs	(41)		(42)
Recoveries
Ending balance	589	495	589	495
Construction of residential 1-4 family
Beginning balance	87	77	75	83
Acquisition Discount Transfer
Provision		2	12	(4)
Charge-offs
Recoveries
Ending balance	87	79	87	79
Home equity lines of credit
Beginning balance	278	209	197	219
Acquisition Discount Transfer				1
Provision	5	15	81	4
Charge-offs
Recoveries
Ending balance	283	224	283	224
Residential real estate
Beginning balance	3,579	2,732	3,111	2,864
Acquisition Discount Transfer				11
Provision	469	141	930	(3)
Charge-offs	(41)	(1)	(42)	(1)
Recoveries			8	1
Ending balance	4,007	2,872	4,007	2,872
Commercial
Beginning balance	4,519	3,803	3,742	3,048
Acquisition Discount Transfer				488
Provision	645	(13)	1,402	262
Charge-offs	(4)	(14)	(3)	(23)
Recoveries		1	19	2
Ending balance	5,160	3,777	5,160	3,777
Construction of commercial
Beginning balance	126	143	104	122
Acquisition Discount Transfer
Provision	79	(16)	101	5
Charge-offs
Recoveries
Ending balance	205	127	205	127
Commercial real estate
Beginning balance	4,645	3,946	3,846	3,170
Acquisition Discount Transfer				488
Provision	724	(29)	1,503	267
Charge-offs	(4)	(14)	(3)	(23)
Recoveries		1	19	2
Ending balance	5,365	3,904	5,365	3,904
Farm land
Beginning balance	52	47	47	33
Acquisition Discount Transfer
Provision	8		13	14
Charge-offs
Recoveries
Ending balance	60	47	60	47
Vacant land
Beginning balance	144	89	71	100
Acquisition Discount Transfer
Provision	38		111	(11)
Charge-offs
Recoveries
Ending balance	182	89	182	89
Real estate secured
Beginning balance	8,420	6,814	7,075	6,167
Acquisition Discount Transfer				499
Provision	1,239	112	2,557	267
Charge-offs	(45)	(15)	(45)	(24)
Recoveries		1	27	3
Ending balance	9,614	6,912	9,614	6,912
Commercial real estate
Beginning balance	1,071	1,233	1,145	1,158
Acquisition Discount Transfer				164
Provision	444	(67)	370	(127)
Charge-offs		(19)		(50)
Recoveries		29		31
Ending balance	1,515	1,176	1,515	1,176
Municipal
Beginning balance	53	14	46	12
Acquisition Discount Transfer
Provision	(17)	16	(10)	18
Charge-offs
Recoveries
Ending balance	36	30	36	30
Consumer
Beginning balance	102	51	60	56
Acquisition Discount Transfer
Provision	(20)	40	32	37
Charge-offs	(13)	(18)	(25)	(24)
Recoveries	5	8	7	12
Ending balance	74	81	74	81
Unallocated
Beginning balance	972	638	569	438
Acquisition Discount Transfer
Provision	160	50	563	250
Charge-offs
Recoveries
Ending balance	1,132	688	1,132	688
Total
Beginning balance	10,618	8,750	8,895	7,831
Acquisition Discount Transfer				663
Provision	1,806	151	3,512	445
Charge-offs	(58)	(52)	(70)	(98)
Recoveries	5	38	34	46
Ending balance	$ 12,371	$ 8,887	$ 12,371	$ 8,887

XML

LOANS - Composition of loans receivable and allowance for loan losses (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Totals	$ 1,040,358	$ 927,413
Collectively evaluated Loans
Residential 1-4 family	352,590	340,847
Residential 5+ multifamily	37,382	34,478
Construction of residential 1-4 family	11,041	11,889
Home equity lines credit	30,021	33,693
Residential real estate	431,034	420,907
Commercial	305,393	285,462
Construction of commercial	13,699	8,466
Commercial real estate	319,092	293,928
Farm land	3,150	3,455
Vacant land	13,705	7,713
Real estate secured	766,981	726,003
Commercial and industrial	246,544	169,285
Municipal	20,707	21,914
Consumer	7,855	6,349
Unallocated allowance
Totals	1,042,087	923,551
Collectively evaluated Allowance
Residential 1-4 family	2,642	2,117
Residential 5+ multifamily	589	446
Construction of residential 1-4 family	87	75
Home equity lines credit	263	197
Residential real estate	3,581	2,835
Commercial	4,836	3,333
Construction of commercial	205	104
Commercial real estate	5,041	3,437
Farm land	60	47
Vacant land	179	66
Real estate secured	8,861	6,385
Commercial and industrial	1,139	1,143
Municipal	36	46
Consumer	55	59
Unallocated allowance	1,132	569
Totals	11,223	8,202
Individually evaluated Loans
Residential 1-4 family	4,928	5,452
Residential 5+ multifamily	971	977
Construction of residential 1-4 family
Home equity lines credit	265	105
Residential real estate	6,164	6,534
Commercial	4,542	4,333
Construction of commercial
Commercial real estate	4,542	4,333
Farm land	174	186
Vacant land	174	180
Real estate secured	11,054	11,233
Commercial and industrial	896	126
Municipal
Consumer	31	36
Unallocated allowance
Totals	11,981	11,395
Individually evaluated Allowance
Residential 1-4 family	406	276
Residential 5+ multifamily
Construction of residential 1-4 family
Home equity lines credit	20
Residential real estate	426	276
Commercial	324	409
Construction of commercial
Commercial real estate	324	409
Farm land
Vacant land	3	5
Real estate secured	753	690
Commercial and industrial	376	2
Municipal
Consumer	19	1
Unallocated allowance
Totals	1,148	693
Total portfolio Loans
Residential 1-4 family	357,518	346,299
Residential 5+ multifamily	38,353	35,455
Construction of residential 1-4 family	11,041	11,889
Home equity lines credit	30,286	33,798
Residential real estate	437,198	427,441
Commercial	309,935	289,795
Construction of commercial	13,699	8,466
Commercial real estate	323,634	298,261
Farm land	3,324	3,641
Vacant land	13,879	7,893
Real estate secured	778,035	737,236
Commercial and industrial	247,440	169,411
Municipal	20,707	21,914
Consumer	7,886	6,385
Unallocated allowance
Totals	1,054,068	934,946
Total portfolio Allowance
Residential 1-4 family	3,048	2,393
Residential 5+ multifamily	589	446
Construction of residential 1-4 family	87	75
Home equity lines credit	283	197
Residential real estate	4,007	3,111
Commercial	5,160	3,742
Construction of commercial	205	104
Commercial real estate	5,365	3,846
Farm land	60	47
Vacant land	182	71
Real estate secured	9,614	7,075
Commercial and industrial	1,515	1,145
Municipal	36	46
Consumer	74	60
Unallocated allowance	1,132	569
Totals	$ 12,371	$ 8,895

XML

LOANS - Credit quality segments of loans receivable and allowance for loan losses (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Totals	$ 1,040,358	$ 927,413
Collectively evaluated Loans
Performing loans	1,027,217	913,648
Potential problem loans	14,870	9,903
Impaired loans
Unallocated allowance
Totals	1,042,087	923,551
Collectively evaluated Allowance
Performing loans	9,157	7,251
Potential problem loans	934	382
Impaired loans
Unallocated allowance	1,132	569
Totals	11,223	8,202
Individually evaluated Loans
Performing loans
Potential problem loans
Impaired loans	11,981	11,395
Unallocated allowance
Totals	11,981	11,395
Individually evaluated Allowance
Performing loans
Potential problem loans
Impaired loans	1,148	693
Unallocated allowance
Totals	1,148	693
Total portfolio Loans
Performing loans	1,027,217	913,648
Potential problem loans	14,870	9,903
Impaired loans	11,981	11,395
Unallocated allowance
Totals	1,054,068	934,946
Total portfolio Allowance
Performing loans	9,157	7,251
Potential problem loans	934	382
Impaired loans	1,148	693
Unallocated allowance	1,132	569
Totals	$ 12,371	$ 8,895

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LOANS - Certain data with respect to loans individually evaluated for impairment (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019	Jun. 30, 2019
Totals	$ 1,040,358	$ 927,413
Impaired loans with specific allowance - Loan balance - Book
Residential	4,203	4,111	$ 4,629
Home equity lines of credit	227		43
Residential real estate	4,430	4,111	4,672
Commercial	3,727	3,309	2,565
Construction of commercial
Farm land
Vacant land	39	41	42
Real estate secured	8,196	7,461	7,279
Commercial and industrial	896	93	3
Consumer	31	36	41
Totals	9,123	7,590	7,323
Impaired loans with specific allowance - Loan balance - Note
Residential	4,345	4,190	4,985
Home equity lines of credit	540		43
Residential real estate	4,885	4,190	5,028
Commercial	3,818	3,335	2,571
Construction of commercial
Farm land
Vacant land	41	41	42
Real estate secured	8,744	7,566	7,641
Commercial and industrial	901	97	3
Consumer	31	36	41
Totals	9,676	7,699	7,685
Impaired loans with specific allowance - Loan balance - Average
Residential	4,066	3,725	3,032
Home equity lines of credit	79	52	45
Residential real estate	4,145	3,777	3,077
Commercial	3,452	2,574	2,239
Construction of commercial		77	143
Farm land
Vacant land	40	42	42
Real estate secured	7,637	6,470	5,501
Commercial and industrial	241	16
Consumer	34	21	6
Totals	7,912	6,507	5,507
Impaired loans with specific allowance - Specific allowance
Residential	406	276	172
Home equity lines of credit	20		1
Residential real estate	426	276	173
Commercial	324	409	186
Construction of commercial
Farm land
Vacant land	3	5	2
Real estate secured	753	690	361
Commercial and industrial	376	2
Consumer	19	1	35
Totals	1,148	693	396
Impaired loans with specific allowance - Income recognized
Residential	45	162	66
Home equity lines of credit			1
Residential real estate	45	162	67
Commercial	75	90	51
Construction of commercial
Farm land
Vacant land		3	1
Real estate secured	120	255	119
Commercial and industrial	7	4
Consumer	1
Totals	128	259	119
Impaired loans with no specific allowance - Loan balance - Book
Residential	1,696	2,318	1,991
Home equity lines of credit	38	105	483
Residential real estate	1,734	2,423	2,474
Commercial	816	1,024	1,236
Construction of commercial
Farm land	174	186	204
Vacant land	134	139	143
Real estate secured	2,858	3,772	4,057
Commercial and industrial		33	135
Consumer
Totals	2,858	3,805	4,192
Impaired loans with no specific allowance - Loan balance - Note
Residential	2,043	3,081	2,659
Home equity lines of credit	74	450	575
Residential real estate	2,117	3,531	3,234
Commercial	1,411	1,733	2,519
Construction of commercial			3
Farm land	325	329	428
Vacant land	151	157	163
Real estate secured	4,004	5,750	6,347
Commercial and industrial	151	188	236
Consumer
Totals	4,155	5,938	6,583
Impaired loans with no specific allowance - Loan balance - Average
Residential	1,919	2,940	3,299
Home equity lines of credit	100	391	442
Residential real estate	2,019	3,331	3,741
Commercial	899	1,747	2,287
Construction of commercial		39	72
Farm land	181	203	211
Vacant land	137	143	145
Real estate secured	3,236	5,463	6,456
Commercial and industrial	64	265	395
Consumer		3	6
Totals	3,300	5,731	6,857
Impaired loans with no specific allowance - Income recognized
Residential	13	52	13
Home equity lines of credit
Residential real estate	13	52	13
Commercial	16	54	27
Construction of commercial
Farm land
Vacant land	5	10	5
Real estate secured	34	116	45
Commercial and industrial		4	3
Consumer
Totals	$ 34	$ 120	$ 48

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LOANS (Details Narrative) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Loans
Commercial loans for other banks serviced by Company under loan participation agreements	$ 61,900	$ 67,000

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LEASES - Assets and liabilities as well as the costs of operating and financial leases (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019	Dec. 31, 2019
Leases - Assets
Operating - Other assets	$ 1,258		$ 1,258		$ 1,360
Finance - Bank premises and equipment	1,453		1,453		1,503
Total Leased Assets	2,711		2,711		2,863
Leases - Liabilities
Operating - Other liabilities	1,258		1,258		1,360
Finance - Finance lease	1,696		1,696		1,718
Total lease liabilities	2,954		2,954		$ 3,078
Lease cost
Operating leases - Premises and equipment	61	$ 61	123	$ 123
Finance leases: Amortization of leased assets - Premises and equipment	25	47	51	120
Finance leases: Interest on finance leases - Interest expense	36	46	71	92
Total lease cost	$ 122	$ 154	$ 245	$ 335
Weighted Average Remaining Lease Term
Operating leases	8 years 3 months 18 days		8 years 3 months 18 days		8 years 7 months 6 days
Financing leases	14 years 10 months 24 days		14 years 10 months 24 days		13 years 1 month 6 days
Weighted Average Discount Rate
Operating leases	3.73%		3.73%		3.70%
Financing leases	8.38%		8.38%		6.20%

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LEASES - Present value of the net minimum lease payments (Details) $ in Thousands	Jun. 30, 2020 USD ($)
Operating Leases
2020	$ 128
2021	250
2022	198
2023	148
2024	129
Thereafter	654
Total future minimum lease payments	1,507
Less amount representing interest	(249)
Total present value of net future minimum lease payments	1,258
Finance Leases
2020	93
2021	192
2022	195
2023	197
2024	200
Thereafter	1,980
Total future minimum lease payments	2,857
Less amount representing interest	(1,161)
Total present value of net future minimum lease payments	$ 1,696

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MORTGAGE SERVICING RIGHTS - Balance of loans serviced for others and fair value of mortgage servicing rights (Details) - Balance of loans serviced for others and fair value of mortgage servicing rights - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2020	Dec. 31, 2019
Residential mortgage loans serviced for others	$ 110,933	$ 106,255
Fair value of mortgage servicing rights	$ 613	$ 813

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MORTGAGE SERVICING RIGHTS - Changes in mortgage servicing rights (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Mortgage Servicing Rights
Balance, beginning of period	$ 225	$ 221	$ 238	$ 228
Originated	110	1	143	5
Amortization	(12)	(13)	(28)	(24)
Balance, end of period	$ 353	$ 209	$ 353	$ 209

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PLEDGED ASSETS - Securities and loans pledged (Details) - Pledged Assets - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Securities available-for-sale (at fair value)	$ 54,195	$ 52,845
Loans receivable	428,772	434,329
Total pledged assets	$ 482,967	$ 487,174

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PLEDGED ASSETS (Details Narrative) $ in Thousands	Jun. 30, 2020 USD ($)
Guarantees [Abstract]
Securities pledged to secure public deposits	$ 45,680
Securities pledged to secure repurchase agreements	8,470
Securities pledged to secure FHLBB advances	$ 50

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EARNINGS PER SHARE - Computation of earnings per share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Earnings Per Share [Abstract]
Net income	$ 2,734	$ 2,703	$ 4,781	$ 5,137
Less: Undistributed earnings allocated to participating securities	(43)	(32)	(77)	(58)
Net income allocated to common stock	2,691	2,671	4,704	5,079
Weighted average common shares issued	2,834	2,813	2,831	2,810
Less: Unvested restricted stock awards	(38)	(33)	(38)	(31)
Weighted average common shares outstanding used to calculate basic earnings per common share	2,796	2,780	2,793	2,779
Add: Dilutive effect of stock options	7	20	8	16
Weighted average common shares outstanding used to calculate diluted earnings per common share	$ 2,803	$ 2,800	$ 2,801	$ 2,795
Earnings per common share (basic)	$ 0.96	$ 0.96	$ 1.68	$ 1.83
Earnings per common share (diluted)	$ 0.96	$ 0.95	$ 1.68	$ 1.82

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SHAREHOLDERS' EQUITY - Actual regulatory capital position and minimum capital requirements (Details) $ in Thousands	Jun. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)
Total Capital (to risk-weighted assets)
Actual - Amount	$ 120,802	$ 114,421
Actual - Ratio	.1315	.1284
Minimum Capital Required For Capital Adequacy - Amount	$ 73,480	$ 71,278
Minimum Capital Required For Capital Adequacy - Ratio	.08	.080
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Amount	$ 96,443	$ 93,553
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Ratio	10.50%	10.50%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Amount	$ 91,850	$ 89,098
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Ratio	.100	.100
Tier 1 Capital (to risk-weighted assets)
Actual - Amount	$ 109,309	$ 105,430
Actual - Ratio	.1190	.1183
Minimum Capital Required For Capital Adequacy - Amount	$ 55,110	$ 53,459
Minimum Capital Required For Capital Adequacy - Ratio	.060	.060
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Amount	$ 78,073	$ 75,733
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Ratio	8.50%	8.50%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Amount	$ 73,480	$ 71,278
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Ratio	0.080	0.080
Common Equity Tier 1 Capital (to risk-weighted assets)
Actual - Amount	$ 109,309	$ 105,430
Actual - Ratio	.1190	.1183
Minimum Capital Required For Capital Adequacy - Amount	$ 41,333	$ 40,094
Minimum Capital Required For Capital Adequacy - Ratio	4.50%	4.50%
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Amount	$ 64,295	$ 62,368
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Ratio	7.00%	7.00%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Amount	$ 59,703	$ 57,914
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Ratio	6.50%	6.50%
Tier 1 Capital (to average assets)
Actual - Amount	$ 109,309	$ 105,430
Actual - Ratio	.0895	.0960
Minimum Capital Required For Capital Adequacy - Amount	$ 48,856	$ 43,944
Minimum Capital Required For Capital Adequacy - Ratio	0.040	0.040
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Amount	$ 48,856	$ 43,944
Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer - Ratio	4.00%	4.00%
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Amount	$ 61,071	$ 54,930
Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions - Ratio	0.050	0.050

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SHAREHOLDERS' EQUITY (Details Narrative) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Equity [Abstract]
Risk-weighted assets	$ 918,500	$ 891,000

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BENEFITS (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2020	Jun. 30, 2019	Jun. 30, 2020	Jun. 30, 2019
Retirement Benefits [Abstract]
401(k) Plan contribution expense	$ 200	$ 192	$ 438	$ 431
Employee Stock Ownership Plan (ESOP)
ESOP expense	56	53	113	102
Other Retirement Plans
Restricted stock expense	135	115	271	215
Tax benefit from restricted stock expense	25	21	49	39
Expenses for Non-Qualified Deferred Compensation Plan	33	29	67	58
Restricted stock
Compensation expense	135	115	271	215
Unrecognized compensation cost relating to awards	$ 1,031	$ 1,075	$ 1,031	$ 1,075
Forfeitures of restricted stock, shares	(700)	(360)	(700)	(460)
Forfeitures of restricted stock, amount	$ (29)	$ (16)	$ (29)	$ (21)
Performance-based restricted stock units
Performance-based restricted stock units pursuant to 2017 Long-Term Incentive Plan, compensation expense	$ 24	$ 21	$ 47	$ 39
Options
Options exercised by former Riverside executive, issued in conjunction with Riverside Bank acquisition, shares			1,755
Options exercised by former Riverside executive, issued in conjunction with Riverside Bank acquisition, exercise price			$ 17.04
Options exercised by former Riverside employee, issued in conjunction with Riverside Bank acquisition, shares		2,025	1,350
Options exercised by former Riverside employee, issued in conjunction with Riverside Bank acquisition, exercise price		$ 17.04	$ 17.04

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FAIR VALUE OF ASSETS AND LIABILITIES - Assets measured at fair value (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Assets at fair value
Assets at fair value on a recurring basis
U.S. Government Agency notes	$ 4,361	$ 4,644
Municipal bonds	25,896	27,193
Mortgage backed securities: U.S. Government agencies and U.S. Government-sponsored enterprises	32,025	29,357
Collateralized mortgage obligations: U.S. Government agencies	21,048	25,499
Corporate bonds	6,122	5,108
Securities available-for-sale	89,452	91,801
CRA mutual funds	912	882
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	1,282	1,593
Other real estate owned		314
Fair Value Measurements Using - Level 1
Assets at fair value on a recurring basis
U.S. Government Agency notes
Municipal bonds
Mortgage backed securities: U.S. Government agencies and U.S. Government-sponsored enterprises
Collateralized mortgage obligations: U.S. Government agencies
Corporate bonds
Securities available-for-sale
CRA mutual funds	912	882
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans
Other real estate owned
Fair Value Measurements Using - Level 2
Assets at fair value on a recurring basis
U.S. Government Agency notes	4,361	4,644
Municipal bonds	25,896	27,193
Mortgage backed securities: U.S. Government agencies and U.S. Government-sponsored enterprises	32,025	29,357
Collateralized mortgage obligations: U.S. Government agencies	21,048	25,499
Corporate bonds	6,122	5,108
Securities available-for-sale	89,452	91,801
CRA mutual funds
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans
Other real estate owned
Fair Value Measurements Using - Level 3
Assets at fair value on a recurring basis
U.S. Government Agency notes
Municipal bonds
Mortgage backed securities: U.S. Government agencies and U.S. Government-sponsored enterprises
Collateralized mortgage obligations: U.S. Government agencies
Corporate bonds
Securities available-for-sale
CRA mutual funds
Assets at fair value on a non-recurring basis
Collateral dependent impaired loans	1,282	1,593
Other real estate owned		$ 314

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FAIR VALUE OF ASSETS AND LIABILITIES - Carrying value and estimated fair values of financial instruments (Details) - USD ($) $ in Thousands	Jun. 30, 2020	Dec. 31, 2019
Carrying value
Financial Assets
Cash and cash equivalents	$ 84,495	$ 26,885
Interest bearing time deposits with financial institutions	750	750
Securities available-for-sale, net	89,452	91,801
CRA mutual fund	912	882
Federal Home Loan Bank of Boston stock	3,353	3,242
Loans held-for-sale	5,313	332
Loans receivable, net	1,040,358	927,413
Accrued interest receivable	3,988	3,415
Cash surrender value of life insurance policies	20,846	20,580
Financial Liabilities
Demand (non-interest-bearing)	325,531	237,852
Demand (interest-bearing)	188,487	153,314
Money market	251,242	239,504
Savings and other	170,537	161,112
Certificates of deposit	149,802	127,724
Deposits	1,085,599	919,506
Repurchase agreements	7,809	8,530
FHLBB advances	55,118	50,887
Subordinated debt	9,871	9,859
Note payable	228	246
Finance lease liability	1,696	1,718
Accrued interest payable	187	78
Estimated fair value
Financial Assets
Cash and cash equivalents	84,495	26,885
Interest bearing time deposits with financial institutions	750	750
Securities available-for-sale, net	89,452	91,801
CRA mutual fund	912	882
Federal Home Loan Bank of Boston stock	3,353	3,242
Loans held-for-sale	5,392	334
Loans receivable, net	1,062,289	933,287
Accrued interest receivable	3,988	3,415
Cash surrender value of life insurance policies	20,846	20,580
Financial Liabilities
Demand (non-interest-bearing)	325,531	237,852
Demand (interest-bearing)	188,487	153,314
Money market	251,242	239,504
Savings and other	170,537	161,112
Certificates of deposit	151,315	128,629
Deposits	1,087,112	920,411
Repurchase agreements	7,809	8,530
FHLBB advances	55,377	51,028
Subordinated debt	9,910	10,113
Note payable	231	251
Finance lease liability	1,902	1,967
Accrued interest payable	187	78
Fair Value Measurements Using - Level 1
Financial Assets
Cash and cash equivalents	84,495	26,885
Interest bearing time deposits with financial institutions	750	750
Securities available-for-sale, net
CRA mutual fund	912	882
Federal Home Loan Bank of Boston stock	3,353	3,242
Loans held-for-sale
Loans receivable, net
Accrued interest receivable	3,988	3,415
Cash surrender value of life insurance policies	20,846	20,580
Financial Liabilities
Demand (non-interest-bearing)
Demand (interest-bearing)
Money market
Savings and other
Certificates of deposit
Deposits
Repurchase agreements
FHLBB advances
Subordinated debt	9,910	10,113
Note payable
Finance lease liability
Accrued interest payable	187	78
Fair Value Measurements Using - Level 2
Financial Assets
Cash and cash equivalents
Interest bearing time deposits with financial institutions
Securities available-for-sale, net	89,452	91,801
CRA mutual fund
Federal Home Loan Bank of Boston stock
Loans held-for-sale
Loans receivable, net
Accrued interest receivable
Cash surrender value of life insurance policies
Financial Liabilities
Demand (non-interest-bearing)	325,531	237,852
Demand (interest-bearing)	188,487	153,314
Money market	251,242	239,504
Savings and other	170,537	161,112
Certificates of deposit	151,315	128,629
Deposits	1,087,112	920,411
Repurchase agreements	7,809	8,530
FHLBB advances	55,377	51,028
Subordinated debt
Note payable	231	251
Finance lease liability
Accrued interest payable
Fair Value Measurements Using - Level 3
Financial Assets
Cash and cash equivalents
Interest bearing time deposits with financial institutions
Securities available-for-sale, net
CRA mutual fund
Federal Home Loan Bank of Boston stock
Loans held-for-sale	5,392	334
Loans receivable, net	1,062,289	933,287
Accrued interest receivable
Cash surrender value of life insurance policies
Financial Liabilities
Demand (non-interest-bearing)
Demand (interest-bearing)
Money market
Savings and other
Certificates of deposit
Deposits
Repurchase agreements
FHLBB advances
Subordinated debt
Note payable
Finance lease liability	1,902	1,967
Accrued interest payable

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SUBSEQUENT EVENTS (Details Narrative) $ / shares in Units, $ in Thousands	1 Months Ended
	Jul. 31, 2020 USD ($) $ / shares
Subsequent Events [Abstract]
Tax-free gain from BOLI policy | $	$ 600
Dividend declared | $ / shares	$ .29