SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the
ended ,
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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer |
| of incorporation or organization) | Identification No.) |
| | |
| (Address of principal executive offices) | (Zip code) |
(
(Registrant's telephone number, including area code)
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
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.
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).
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 ☐ |
| ☑ | 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
☐
The number of shares of Common Stock outstanding as of November 2, 2021 is .
TABLE OF CONTENTS
| PART 1 FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements (unaudited) | |
| CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2021 (unaudited) AND DECEMBER 31, 2020 | 3 | |
| CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 4 | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 5 | |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 5 | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020 (unaudited) | 7 | |
| NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS | 9 | |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 31 |
| Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 47 |
| Item 4. | CONTROLS AND PROCEDURES | 48 |
| PART II. OTHER INFORMATION | ||
| Item 1. | LEGAL PROCEEDINGS | 48 |
| Item 1A. | RISK FACTORS | 48 |
| Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 48 |
| Item 3. | DEFAULTS UPON SENIOR SECURITIES | 48 |
| Item 4. | MINE SAFETY DISCLOSURES | 48 |
| Item 5. | OTHER INFORMATION | 48 |
| Item 6. | EXHIBITS | 49 |
| SIGNATURES | 49 | |
| 2 |
PART I - FINANCIAL INFORMATION
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS (unaudited)
| (in thousands, except share data) | September 30, 2021 (unaudited) |
December 31, 2020 | ||||||
| ASSETS | ||||||||
| Cash and due from banks | $ | $ | ||||||
| Interest bearing demand deposits with other banks | ||||||||
| Total cash and cash equivalents | ||||||||
| Interest bearing Time Deposits with Financial Institutions | ||||||||
| Securities | ||||||||
| Available-for-sale at fair value | ||||||||
| CRA mutual fund at fair value | ||||||||
| Federal Home Loan Bank of Boston stock at cost | ||||||||
| Loans held-for-sale | ||||||||
| Loans receivable, net (allowance for loan losses: $13,168 and $13,754) | ||||||||
| Bank premises and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets (net of accumulated amortization: $5,405 and $5,207) | ||||||||
| Accrued interest receivable | ||||||||
| Cash surrender value of life insurance policies | ||||||||
| Deferred taxes | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES and SHAREHOLDERS' EQUITY | ||||||||
| Deposits | ||||||||
| Demand (non-interest bearing) | $ | $ | ||||||
| Demand (interest bearing) | ||||||||
| Money market | ||||||||
| Savings and other | ||||||||
| Certificates of deposit | ||||||||
| Total deposits | ||||||||
| Repurchase agreements | ||||||||
| Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt | ||||||||
| Note payable | ||||||||
| Finance lease obligations | ||||||||
| Accrued interest and other liabilities | ||||||||
| Total Liabilities | ||||||||
| Shareholders' Equity | ||||||||
| Common stock - $ per share par value | ||||||||
| Authorized: ; | ||||||||
| Issued: and | ||||||||
| Outstanding: and | ||||||||
| Unearned compensation - restricted stock awards | ( | ) | ( | ) | ||||
| Paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income, net | ||||||||
| Total Shareholders' Equity | ||||||||
| Total Liabilities and Shareholders' Equity | $ | $ |
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 | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest and dividend income | ||||||||||||||||
| Interest and fees on loans | $ | $ | $ | $ | ||||||||||||
| Interest on debt securities | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax exempt | ||||||||||||||||
| Other interest and dividends | ||||||||||||||||
| Total interest and dividend income | ||||||||||||||||
| Interest expense | ||||||||||||||||
| Deposits | ||||||||||||||||
| Repurchase agreements | ||||||||||||||||
| Finance lease | ||||||||||||||||
| Note payable | ||||||||||||||||
| Subordinated debt | ||||||||||||||||
| Federal Home Loan Bank of Boston advances | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest and dividend income | ||||||||||||||||
| Provision (release) for loan losses | ( | ) | ||||||||||||||
| Net interest and dividend income after provision (release) for loan losses | ||||||||||||||||
| Non-interest income | ||||||||||||||||
| Trust and wealth advisory | ||||||||||||||||
| Service charges and fees | ||||||||||||||||
| Mortgage banking activities, net | ||||||||||||||||
| (Losses) gains on CRA mutual fund | ( | ) | ( | ) | ||||||||||||
| Gains (losses) on securities, net | ( | ) | ||||||||||||||
| Bank-owned life insurance ("BOLI") income | ||||||||||||||||
| Gain on sale of assets | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | ||||||||||||||||
| Non-interest expense | ||||||||||||||||
| Salaries | ||||||||||||||||
| Employee benefits | ||||||||||||||||
| Premises and equipment | ||||||||||||||||
| Write-down of assets | ||||||||||||||||
| Data processing | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Collections, OREO, and loan related | ||||||||||||||||
| FDIC insurance | ||||||||||||||||
| Marketing and community support | ||||||||||||||||
| Amortization of intangibles | ||||||||||||||||
| Other | ||||||||||||||||
| Total non-interest expense | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||
| Basic earnings per common share | $ | $ | $ | $ | ||||||||||||
| Diluted earnings per common share | $ | $ | $ | $ | ||||||||||||
| Common dividends per share | $ | $ | $ | $ | ||||||||||||
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 | Nine months ended | |||||||||||||||
| Periods ended September 30, (in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Other comprehensive income | ||||||||||||||||
| Net unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ||||||||||||
| Reclassification of net realized (gains) losses in net income (1) | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized (losses) gains on securities available-for-sale | ( | ) | ( | ) | ||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Unrealized (losses) gains on securities available-for-sale, net of tax | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income (loss) and have affected certain lines in the consolidated statements of income as follows: The pre-tax amount is reflected as gains (losses) on securities, net, the tax effect is included in the income tax provision and the after tax amount is included in net income. The net tax effect for the three months ending September 30, 2021 and 2020 are $(1) thousand and $(7) thousand, respectively. The net tax effect for the nine months ending September 30, 2021 and 2020 were $1 thousand and ($45) thousand, respectively.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
Three
months ended September 30, | Common Stock | Paid-in | Retained | Unearned compensation- restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | awards | income | equity | ||||||||||||||||||||||
| Balances at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | |||||||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Issuance of restricted common stock | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Forfeiture of stock awards | ( | ) | - | ( | ) | - | - | - | ||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
| 5 |
Nine
months ended September 30, | Common Stock | Paid-in | Retained | Unearned compensation- restricted stock | Accumulated other comprehensive | Total shareholders' | ||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | awards | income (loss) | equity | ||||||||||||||||||||||
| Balances at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income for period | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive income, net of tax | - | - | - | - | - | |||||||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock options exercised | - | - | - | - | ||||||||||||||||||||||||
| Issuance of restricted common stock | - | ( | ) | - | - | |||||||||||||||||||||||
| Forfeiture of stock awards | ( | ) | - | ( | ) | - | - | - | ||||||||||||||||||||
| Issuance of director's restricted stock awards | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Net income for period | - | - | - | - | - | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per share) | - | - | - | ( | ) | - | - | ( | ) | |||||||||||||||||||
| Stock options exercised | - | - | - | |||||||||||||||||||||||||
| Issuance of restricted common stock | - | ( | ) | - | - | |||||||||||||||||||||||
| Issuance of director's restricted stock awards | - | - | ( | ) | - | - | ||||||||||||||||||||||
| Stock based compensation-restricted stock awards | - | - | - | - | ||||||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
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)
| Nine months ended September 30, (in thousands) | 2021 | 2020 | ||||||
| Operating Activities | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
| (Accretion), amortization and depreciation | ||||||||
| Securities | ||||||||
| Bank premises and equipment | ||||||||
| Core deposit intangible | ||||||||
| Modification fees on Federal Home Loan Bank of Boston advances | ||||||||
| Subordinated debt issuance costs | ||||||||
| Mortgage servicing rights | ||||||||
| Fair value adjustment on deposits | ( | ) | ||||||
| (Gains) and losses, including write-downs | ||||||||
| Sales and calls of securities available-for-sale, net | ( | ) | ||||||
| CRA Mutual Fund | ( | ) | ||||||
| Sales of loans, excluding capitalized servicing rights | ( | ) | ( | ) | ||||
| Loss on write-down of asset | ||||||||
| Gain on sale of premises and equipment | ( | ) | ||||||
| (Release) provision for loan losses | ( | ) | ||||||
| Proceeds from loans sold | ||||||||
| Loans originated for sale | ( | ) | ( | ) | ||||
| (Decrease) increase in deferred loan origination fees and costs, net | ( | ) | ||||||
| Mortgage servicing rights originated | ( | ) | ( | ) | ||||
| Decrease (increase) in interest receivable | ( | ) | ||||||
| Decrease (increase) in deferred tax benefit | ( | ) | ||||||
| (Increase) decrease in prepaid expenses | ( | ) | ||||||
| Increase in cash surrender value of life insurance policies | ( | ) | ( | ) | ||||
| Increase in income tax receivable | ( | ) | ||||||
| (Decrease) increase in income tax payable | ( | ) | ||||||
| (Increase) decrease in other assets | ( | ) | ||||||
| Decrease in accrued expenses | ( | ) | ( | ) | ||||
| (Decrease) increase in interest payable | ( | ) | ||||||
| Increase (decrease) in other liabilities | ( | ) | ||||||
| Stock based compensation-restricted stock awards | ||||||||
| Net cash provided by operating activities | ||||||||
| Investing Activities | ||||||||
| Net redemption of Federal Home Loan Bank of Boston stock | ||||||||
| Purchases of securities available-for-sale | ( | ) | ( | ) | ||||
| Proceeds from sales of securities available-for-sale | ||||||||
| Proceeds from calls of securities available-for-sale | ||||||||
| Proceeds from principal payments and maturities of securities available-for-sale | ||||||||
| Reinvestment of CRA Mutual Fund | ( | ) | ( | ) | ||||
| Loan originations and principal collections, net | ( | ) | ( | ) | ||||
| Recoveries of loans previously charged off | ||||||||
| Proceeds from sale/ disposal of premises and equipment | ||||||||
| Capital expenditures | ( | ) | ( | ) | ||||
| Purchase of life insurance policies | ( | ) | ||||||
| Proceeds from life insurance policy | ||||||||
| Net cash used by investing activities | $ | ( | ) | $ | ( | ) |
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)
| Nine months ended September 30, (in thousands) | 2021 | 2020 | ||||||
| Financing Activities | ||||||||
| Increase in deposit transaction accounts, net | $ | $ | ||||||
| (Decrease) increase in time deposits, net | ( | ) | ||||||
| Increase in securities sold under agreements to repurchase, net | ||||||||
| Federal Home Loan Bank of Boston long term advances | ||||||||
| Federal Home Loan Bank of Boston long-term maturities/payments | ( | ) | ||||||
| Federal Home Loan Bank of Boston short-term advances, net change | ( | ) | ||||||
| Principal payments on Amortizing Federal Home Loan Bank of Boston advance | ( | ) | ( | ) | ||||
| Issuance of Sub Debt, net of issuance costs | ||||||||
| Repayment of Sub Debt | ( | ) | ||||||
| Principal payments on note payable | ( | ) | ( | ) | ||||
| Decrease in finance lease obligation | ( | ) | ( | ) | ||||
| Stock options exercised | ||||||||
| Common stock dividends paid | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash and cash equivalents | ||||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Salisbury Bancorp, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Non cash investing and financing activities: | ||||||||
| Transfers from Fixed Assets to Other Assets | $ | $ |
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 September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2020 Annual Report on Form 10-K for the year ended December 31, 2020.
The allowance for loan losses is a significant accounting policy and is presented in the Notes to Consolidated Financial Statements and in Management's Discussion and Analysis, which provides information on how significant assets are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses to be the accounting area that requires the most subjective judgments, and as such could be most subject to revision as new information becomes available.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. Under current U.S. GAAP, companies generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. ASU 2016-13 also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. In April 2019, the FASB issued ASU 2019-04 which clarified the treatment of accrued interest when measuring credit losses. Entities may: (1) measure the allowance for credit losses on accrued interest receivable balances separately from other components of the amortized cost basis of associated financial assets; (2) make various accounting policy elections regarding the treatment of accrued interest receivable; or (3) elect a practical expedient to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. ASU 2019-04 also clarified that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account and should not exceed the aggregate of amounts previously written off and expected to be written off by the entity. In addition, for collateral dependent financial assets, the amendments clarify that an allowance for credit losses that is added to the amortized cost basis of the financial asset(s) should not exceed amounts previously written off. In November 2019, the FASB issued ASU 2019-10, which delayed the effective date of ASU 2016-13 to fiscal years beginning after December 15, 2022 for smaller reporting companies, although early adoption is permitted. Salisbury meets the definition of a smaller reporting company. In November 2019, the FASB issued ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" which clarified or addressed specific issues about certain aspects of the amendments in ASU 2016-13. The amendments in ASU 2019-11 clarified the following: (1) The allowance for credit losses (ACL) for purchased financial assets with credit deterioration should include expected recoveries of amounts previously written off and expected to be written off by the entity and should not exceed the aggregate of amounts of the amortized cost basis previously written off and expected to be written off by an entity. In addition, the amendments clarify that when a method other than a discounted cash flow method is used to estimate expected credit losses, expected recoveries should not include any amounts that result in an acceleration of the noncredit discount. An entity may include increases in expected cashflows after acquisition; (2) Transition relief will be provided by permitting entities an accounting policy election to adjust the effective interest rate on existing troubled debt restructurings using prepayment assumptions on the date of adoption of Topic 326 rather than the prepayment assumptions in effect immediately before the restructuring; (3) Disclosure relief will be extended for accrued interest receivable balances to additional relevant disclosures involving amortized cost basis; (4) An entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing the financial asset to apply the practical expedient. The amendments clarify that an entity applying the practical expedient should estimate expected credit losses for any difference between the amount of the amortized cost basis that is greater than the fair value of the collateral securing the financial asset (that is, the unsecured portion of the amortized cost basis). An entity may determine that the expectation of nonpayment for the amount of the amortized cost basis equal to the fair value of the collateral securing the financial asset is zero.
| 9 |
Upon adoption, Salisbury will apply the standards' provisions as a cumulative effect adjustment to retained earnings as of the first reporting period in which the guidance is effective. Salisbury anticipates that the adoption of ASU 2016-13 and related updates will impact the consolidated financial statements as it relates to the balance in the allowance for loan losses. Salisbury has engaged a third-party software vendor to model the allowance for loan losses in conformance with this ASU. Salisbury will continue to refine this model and assess the impact to its consolidated financial statements.
The Bank is working towards the completion of its ACL methodology. To estimate the ACL for loans and off-balance sheet credit exposures, such as unfunded loan commitments, the Bank will utilize a discounted cash flow model that contains additional assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include the impact of forecasted economic conditions. The estimate is expected to include a one-year reasonable and supportable forecast period and thereafter a one-year reversion period to the historical mean of its macroeconomic assumption. The estimate will also include qualitative factors that may not be reflected in quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.
Based on the credit quality of Salisbury's existing available for sale debt securities portfolio, which primarily consists of obligations of U.S. government agency and U.S. government-sponsored enterprise securities, including mortgage-backed securities, Salisbury does not expect the adoption of ASU 2016-13, as it relates to debt securities, to be significant. For available for sale debt securities with unrealized losses, credit losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities. As a result, improvements to estimated credit losses will be recognized immediately in earnings rather than as interest income over time.
The Bank is currently refining various ACL assumptions and running parallel calculations on a monthly basis. Salisbury expects to complete independent model validation and to finalize its documentation of ACL processes and controls by the first quarter of 2023.
In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for 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. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.
In October 2020, the FASB issued ASU 2020-08, "Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. Under current generally accepted accounting principles, entities amortize the premium on purchased callable debt securities to the earliest call date. If a callable debt security contains additional future call dates, entities should consider whether the amortized cost basis exceeded the amount repayable by the issuer at the next call date. If so, the excess or premium should be amortized to the next call date. This ASU clarifies that the next call date is the first date when a call option at a specified price becomes exercisable. Once that date has passed, the next call date is when the next call option at a specified price becomes exercisable, if applicable. If there is no remaining premium or if there are no further call dates, the entity shall reset the effective yield using the payment terms of the debt security. ASU 2020-08 is effective for interim and annual reporting periods beginning after December 15, 2020. On January 1, 2021, Salisbury adopted the new standard, which did not have a material impact on Salisbury's Consolidated Financial Statements.
In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." In response to the risk of cessation of the London Interbank Offered Rate (LIBOR) as a reference rate, this ASU clarifies the scope of Topic 848 so that derivatives affected by this transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. An entity may elect to apply the amendments in this ASU on a full retrospective basis as of any date from the beginning interim period that includes or is subsequent to March 12, 2020 or on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final Update, up to the date that the financial statements are available to be issued. Salisbury is currently evaluating the impact of the transition from LIBOR to a new reference rate.
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NOTE 2 - SECURITIES
The composition of securities is as follows:
| (in thousands) | Amortized cost basis | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| September 30, 2021 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| U.S. Treasury | $ | $ | $ | $ | ||||||||||||
| 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 | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| CRA mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
| (in thousands) | Amortized cost basis | Gross un-realized gains | Gross un-realized losses | Fair value | ||||||||||||
| December 31, 2020 | ||||||||||||||||
| Available-for-sale | ||||||||||||||||
| 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 | ||||||||||||||||
| Total securities available-for-sale | $ | $ | $ | $ | ||||||||||||
| CRA mutual fund | $ | |||||||||||||||
| Non-marketable securities | ||||||||||||||||
| Federal Home Loan Bank of Boston stock | $ | $ | $ | $ |
In third quarter
2021, $
| 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 | ||||||||||||||||||||||
| September 30, 2021 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Treasury | $ | $ | $ | - | $ | - | $ | $ | ||||||||||||||||
| U.S. Government Agency notes | ||||||||||||||||||||||||
| Municipal bonds | - | - | ||||||||||||||||||||||
| Mortgage- backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||||||||||
| Collateralized mortgage obligations | - | - | ||||||||||||||||||||||
| Corporate bonds | - | - | - | - | - | - | ||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
| December 31, 2020 (in thousands) | Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||||||||
| Available-for-sale | ||||||||||||||||||||||||
| U.S. Government Agency notes | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Municipal bonds | - | - | ||||||||||||||||||||||
| Mortgage- backed securities: | ||||||||||||||||||||||||
| U.S. Government agencies and U.S. Government - sponsored enterprises | ||||||||||||||||||||||||
| Total temporarily impaired securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The table below presents the amortized cost, fair value and tax equivalent yield of securities, by maturity. Debt securities issued by U.S. Government agencies (SBA securities), MBS, and CMOS are disclosed separately in the table below as these securities may prepay prior to the scheduled contractual maturity dates.
| September 30, 2021 (in thousands) | Maturity | Amortized cost | Fair value | Yield(1) | ||||||||||
| U.S. Treasury | After 5 year but within 10 years | $ | $ | % | ||||||||||
| U.S. Government Agency notes | After 5 year but within 10 years | |||||||||||||
| Total | ||||||||||||||
| Municipal bonds | After 5 year but within 10 years | |||||||||||||
| After 10 years | ||||||||||||||
| Total | ||||||||||||||
| Mortgage-backed securities, Collateralized mortgage obligations, | Securities not due at a single maturity date | 98,094 | 98,616 | 1.64 | ||||||||||
| Corporate bonds | After 5 years but within 10 years | |||||||||||||
| Securities available-for-sale | $ | $ | % | |||||||||||
(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 September 30, 2021.
U.S. Treasury notes: The contractual cash flows are guaranteed by the U.S. government. Four securities had unrealized losses at September 30, 2021, which approximated 0.91% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
| 12 |
U.S. Government Agency notes: The contractual cash flows are guaranteed by the U.S. government. Nineteen securities had unrealized losses at September 30, 2021, which approximated 0.45% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality since time of purchase. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
Municipal bonds: Salisbury performed a detailed analysis of the municipal bond portfolio. Sixteen securities had unrealized losses at September 30, 2021, which approximated 1.77% of their amortized cost. Management believes the unrealized loss position is attributable to interest rate and spread movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Management evaluated the impairment status of these debt securities, and concluded that the gross unrealized losses were temporary in nature. Therefore, management does not consider these investments to be other-than temporarily impaired at September 30, 2021.
U.S. Government agency and U.S. Government-sponsored enterprise securities and collateralized mortgage obligations: The contractual cash flows are guaranteed by U.S. government agencies and U.S. government-sponsored enterprises. Forty nine securities had unrealized losses at September 30, 2021, which approximated 1.51% of their amortized cost. Changes in fair values are a function of changes in investment spreads and interest rate movements and not changes in credit quality. Management expects to recover the entire amortized cost basis of these securities. Furthermore, Salisbury evaluates these securities for strategic fit and may reduce its position in these securities, although it is not more likely than not that Salisbury will be required to sell these securities before recovery of their cost basis, which may be maturity, and does not intend to sell these securities. Therefore, management does not consider these investments to be other-than-temporarily impaired at September 30, 2021.
The Federal Home Loan Bank of Boston (FHLBB) is a cooperative that provides services, including funding in the form of advances, to its member banking institutions. As a requirement of membership, the Bank must own a minimum amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. No market exists for shares of the FHLBB and therefore, they are carried at par value. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Bank currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Bank's FHLBB stock as of September 30, 2021. Deterioration of the FHLBB's capital levels may require the Bank to deem its restricted investment in FHLBB stock to be OTTI. If evidence of impairment exists in the future, the FHLBB stock would reflect fair value using either observable or unobservable inputs. The Bank will continue to monitor its investment in FHLBB stock.
| 13 |
NOTE 3 - LOANS
The composition of loans receivable and loans held-for-sale is as follows:
| (In thousands) | September 30, 2021 | December 31, 2020 | ||||||
| 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 ex PPP Loans | ||||||||
| PPP Loans | ||||||||
| Total Commercial and industrial | ||||||||
| Municipal | ||||||||
| Consumer | ||||||||
| Loans receivable, gross |