Salisbury, a Connecticutcorporation, formed in 1998, is the bank holding company for the Bank, a Connecticut-chartered and FDICinsured commercial bank headquartered in Lakeville, Connecticut. Salisbury'sprincipal business consists of the business of the Bank. The Bank, formed in 1848, is engaged in customary banking activities, including general deposit taking and lending activities to both retail and commercial markets, and trust and wealth advisory services. The Bank conducts its banking business from fourteen full-service offices in the towns of: Canaan, Lakeville, Salisburyand Sharon, Connecticut; Great Barrington, South Egremontand Sheffield, Massachusetts; and, Fishkill, Newburgh, New Paltz, Poughkeepsie, Red Oaks Mill, Dover Plainsand Millerton, New York, and its trust and wealth advisory services from offices in Lakeville, Connecticut.
Critical accounting conventions and estimates
Salisbury'sconsolidated financial statements follow U.S.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'ssignificant 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'sreported 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. 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. Note 1 describes the methodology used to determine the allowance for loan losses. 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. Management, with the assistance of a third party, evaluates goodwill and identifiable intangible assets for impairment annually using valuation techniques that involve observations and adjustments as to comparable transactions, 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.
For both goodwill and base deposit intangible asset, the comparable transaction method was used to assess and conclude that there was no
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. 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, the intent and ability of
Salisburyto retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and the likelihood that Salisburywill be required to sell the security before recovery in fair value to meet liquidity needs. 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.
The following discussion and analysis of
RESULTS OF OPERATIONS
Comparison of completed years
COVID-19 has placed significant health and economic pressure on the communities the Bank serves, the
State of Connecticut, the United Statesand 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 practices social distancing by following the guidelines of the Center
for disease control and requires many of its employees to work from home or
from alternative locations. From
The Bank continues to operate drive-thru windows in twelve of its fourteen
branches as well as its electronic banking platform to continue to serve
Net interest and dividend income
Net interest and dividend income (presented on a tax-equivalent basis) increased
$4.1 million, or 11.9%, in 2020 over 2019. The net interest margin increased 1 basis point to 3.28% from 3.27%, due to a 57 basis point decrease in the average cost of interest-bearing liabilities partly offset by a 43 basis point decrease in the average yield on interest-earning assets. The net interest margin was affected by changes in the mix of interest-earning assets and funding liabilities, asset and liability growth, and the effects of changes in market interest rates on the pricing and re-pricing of assets and liabilities. The following table sets forth the components of Salisbury'snet interest income and yields on average interest-earning assets and interest-bearing funds. Income and yields on tax-exempt securities are presented on a fully taxable equivalent
basis. Years ended December 31, Average Balance Income / Expense Average Yield / Rate (dollars in thousands) 2020 2019 2018 2020 2019 2018 2020 2019 2018 Loans (a)(d)(f)
$ 1,019,999 $ 922,906 $ 871,557 $ 41,267 $ 40,176 $ 37,5044.02 % 4.35 % 4.30 % Securities (c)(d) 89,616 96,150 87,880 2,563 2,940 2,406 2.86 3.06 2.74 FHLBB stock 3,163 3,287 4,748 141 227 238 4.45 6.91 5.01 Short term funds (b) 65,935 36,109 41,348 154 675 695 0.23 1.87 1.68 Total earning assets 1,178,713 1,058,452 1,005,533 44,125 44,018 40,843 3.73 4.16 4.06 Other assets 63,434 58,204 53,630 Total assets $ 1,242,147 $ 1,116,656 $ 1,059,163
Interest-bearing demand deposits
$ 183,870 $ 155,463
$ 147,751441 602 460 0.24 0.39 0.31 Money market accounts 256,402 222,090 195,741 1,145 2,333 1,391 0.45 1.05 0.71 Savings and other 175,204 175,011 171,662 464 1,517 1,100 0.26 0.87 0.64 Certificates of deposit 144,489 159,862 134,057 1,840 2,872 1,706 1.27 1.80 1.27
Total interest-bearing deposits 759,965 712,426
649,211 3,890 7,324 4,657 0.51 1.03 0.72 Repurchase agreements 7,986 4,913 3,340 20 24 12 0.25 0.49 0.36 Finance lease 2,965 4,010 2,839 141 170 178 4.75 4.24 6.27 Note payable 226 262 296 14 16 18 6.08 6.11 6.08
Subordinated debt (net of issuance costs) 9,870 9,847
9,823 618 624 624 6.26 6.34 6.35 FHLBB advances 40,093 38,303 64,250 605 1,143 1,734 1.49 2.98 2.70
Total interest-bearing liabilities 821,105 769,761
729,759 5,288 9,301 7,223 0.64 1.21 0.99 Demand deposits 294,588 231,221 223,329 Other liabilities 6,956 6,699 6,266 Shareholders' equity 119,498 108,975 99,809
Total liabilities and equity
Net interest income (d)
$ 38,837 $ 34,717 $ 33,620Spread on interest-bearing funds
3.09 2.95 3.07 Net interest margin (e) 3.28 3.27 3.35
(a) Includes unrecorded loans.
(b) Includes interest bearing deposits in other banks and federal funds sold.
(c) Average securities balances are based on amortized cost.
(d) Includes tax-exempt income from
respectively for 2020, 2019 and 2018 on tax-exempt securities and loans for
whose income and returns are calculated on a tax-equivalent basis.
(e) Net interest income divided by average interest earning assets.
(f) Interest income for 2020, 2019 and 2018 reflects the net accretion related to
the fair value adjustments of loans acquired in the
Riverside Bankacquisition in the amount of $0 million, $0 millionand $0.8 million, respectively.
The following table shows the changes in net interest income (presented on a tax equivalent basis) due to volume and rate.
Years ended December 31, (in thousands) 2020 versus 2019 2019 versus 2018 Change in interest due to Volume Rate Net Volume Rate Net Loans
$ 4,272 $ (3,181 ) $ 1,091 $ 2,222 $ 450 $ 2,672Securities (193 ) (184 ) (377 ) 240 294 534 FHLBB stock (6 ) (80 ) (86 ) (87 ) 76 (11 ) Short term funds 314 (835 ) (521 ) (93 ) 73 (20 ) Interest-earning assets 4,387 (4,280 ) 107 2,282 893 3,175 Deposits 366 (3,800 ) (3,434 ) 552 2,114 2,666 Repurchase agreements 11 (15 ) (4 ) 7 5 12 Finance lease (46 ) 17 (29 ) 62 (70 ) (8 ) Note payable (2 ) - (2 ) (2 ) - (2 ) Subordinated Debt - (6 ) (6 ) 2 (2 ) - FHLBB advances 32 (570 ) (538 ) (737 ) 147 (590 )
Interest-bearing liabilities 361 (4,374 ) (4,013 ) (116 ) 2,194 2,078 Net change in net interest income
$ 4,026 $ 94 $ 4,120
Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets. 21 Interest and Dividend Income Tax equivalent interest and dividend income of
$44.1 millionin 2020 was essentially unchanged from 2019. Loan income increased $1.1 million, or 2.7%, to $41.3 millionin 2020. The increase was primarily due to a $97.1 million, or 10.5%, increase in average loans, which was partly offset by a 33 basis point decrease in average yield. Tax equivalent interest and dividend income from securities decreased $377 thousand, or 12.8%, to $2.6 millionin 2020, as a result of a $6.5 million, or 6.8%, decrease in average security balances, and a 20 basis point decrease in average yield. Interest from short term funds decreased $521 thousandin 2020 as a result of a 164 basis point decrease in average yield, partially offset by a $29.8 million, or 82.6%, increase in average short term balances.
Interest expense decreased
$4.0 million, or 75.9%, to $5.3 millionin 2020. Interest expense on interest bearing deposit accounts decreased $3.4 million, or 46.9%, to $3.9 millionin 2020, as a result of a $47.5 million, or 6.7%, increase in average interest-bearing deposits and a 52 basis point decrease in the average rate to 0.51%. Interest expense on money market accounts decreased $1.2 million, or 50.9%, due to a 60 basis point decline in the average rate partly offset by a $34.3 million, or 15.4% increase in average balance. Interest expense on savings and other accounts decreased $1.1 million, or 69.4%, due to a 61 basis point decline in the average rate. Interest expense on certificates of deposits decreased $1.0 million, or 35.9%,due to 53 basis point decline in the average rate and a $15.3 million, or 9.6% decrease in average balance. The decrease in the average certificate of deposit balance from 2019 reflected a $12.5 milliondecrease in average one-way buys executed through the Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a product offered by Promontory Interfinancial Networkthat enables participating financial institutions to buy or sell excess funds to other members to fund operations and to manage liquidity. Interest expense on FHLBB advances decreased $538 thousand, or 47.1%, due to a 149 basis point decrease in the average borrowing rate to 1.49%, partly offset by a $1.8 million, or 4.7%, increase in average advances. In December 2015, Salisburyissued $10 millionof subordinated debentures. The proceeds of such issuance, along with cash-on-hand, were used by Salisburyto fully redeem $16 millionof its outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U.S. Treasury'sSBLF program. Interest expense on the subordinated debt for 2020 and 2019 was $0.6 millionand $0.6 million, respectively.
Provision and allowance for loan losses
The provision for loan losses was
$5.0 millionfor 2020, compared with $1.0 millionfor 2019. Net loan charge-offs were $0.2 millionand $0.6 million, for the respective years. The higher provision for loan losses in 2020 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'sprovision 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'sprovision and allowance for loan losses.
The following table shows the changes in the allowance for loan losses and other statistical data:
December 31, (dollars in thousands) 2020 2019 2018 2017 2016 Balance, beginning of period $ 8,895 $ 7,831 $ 6,776 $ 6,127 $ 5,716Acquisition Discount Transfer - 663 - - - Provision for loan losses 5,038 955 1,728 1,020 1,835 Charge-offs Real estate mortgages (70 ) (461 ) (558 ) (733 ) (1,031 ) Commercial and industrial (362 ) (145 ) (108 ) (162 ) (452 ) Consumer (70 ) (36 ) (81 ) (76 ) (67 ) Charge-offs (502 ) (642 ) (747 ) (971 ) (1,550 ) Recoveries Real estate mortgages 306 5 18 286 32 Commercial and industrial 2 46 27 296 72 Consumer 15 37 29 18 22 Recoveries 323 88 74 600 126 Net charge-offs (179 ) (554 ) (673 ) (371 ) (1,424 ) Balance, end of period $ 13,754 $ 8,895$
Loans receivable, gross
$ 1,041,864 $ 934,946 $ 915,689 $ 807,190 $ 768,064Non-performing loans 5,648 3,620 6,514 6,635 8,792 Accruing loans past due 30-89 days 6,838 2,077 2,165 3,536 4,537 Ratio of allowance for loan losses: to loans receivable, gross 1.32 % 0.95 % 0.85 % 0.84 % 0.80 % to non-performing loans 243.50 245.72 120.21 102.13 69.69 Ratio of non-performing loans to loans receivable, gross 0.54 0.39 0.71 0.82 1.14 Ratio of accruing loans past due 30-89 days to loans receivable, gross 0.66 0.22 0.24 0.44 0.59 22 The reserve coverage at December 31, 2020, as measured by the ratio of allowance for loan losses to gross loans, was 1.32%, as compared with 0.95% at December 31, 2019. Excluding loans advanced under the SBA's Paycheck Protection Program, the ratio of the allowance to gross loans was 1.44% at December 31, 2020. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) increased $2.0 millionto $5.6 million, or 0.54% of gross loans receivable, at December 31, 2020, up from $3.6 millionor 0.39% of gross loans receivable at December 31, 2019. The increase in non-performing loans from the prior year end primarily reflected loans of $3.7 millionplaced on non-accrual status partly offset by loan sales of $0.7 million, loan payments of $0.5 millionand loans returned to accruing status of $0.5 million. Accruing loans past due 30-89 days increased from $2.1 million, or 0.22%, of gross loans receivable at December 31, 2019to $6.8 million, or 0.66%, of gross loans receivable at December 31, 2020. The increase included loans of $3.0 millionthat matured in fourth quarter 2020, most of which are expected to renew in first quarter 2021. See "Overview - Loan Credit Quality" below for further discussion and analysis.
Income other than interest
The following table details the main categories of non-interest income.
December 31, (dollars in thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Trust and wealth advisory $ 4,194 $ 3,995 $ 3,700 $ 1995.0 % $ 2958.0 % Service charges and fees 3,072 4,028 3,718 (956 ) (23.7 ) 310 8.3 Mortgage banking activities, net 1,621 423 397 1,198 283.2 26 6.5 Gains (Losses) on CRA mutual fund 19 25 (18 )
(6 ) (24.0 ) 43 (238.9 ) Gains on securities, net 196 263 318 (67 ) (25.5 ) (55 ) (17.3 ) Bank-owned life insurance ("BOLI") income 495 392 337 103 26.3 55 16.3
Gain on bank-owned life insurance 601 - 341 601 n/a (341 ) (100.0 ) Other 125 124 152 1 0.8 (28 ) (18.4 ) Total non-interest income
$ 10,323 $ 9,250 $ 8,945$
Non-interest income increased
$1.0 million, or 11.6%, in 2020 versus 2019. Trust and Wealth Advisory revenues increased $199 thousandmainly due to growth in asset-based fees. Service charges and fees decreased $956 thousandfrom 2019. During the twelve-month period ended December 31, 2020, Salisburywaived approximately $754 thousandin various deposit fees, including overdraft and ATM fees, to support customers affected by COVID-19. These fees were reinstituted in late November 2020. Mortgage banking activities, net increased $1.2 millionon higher sales volume. Mortgage loan sales totaled $59.8 millionin 2020 versus $6.4 millionin 2019. Loans serviced under the FHLBB Mortgage PartnershipFinance Program totaled $134.4 millionand $106.3 millionat December 31, 2020and 2019, respectively. In 2020, the Bank recorded a non-taxable gain of $601 thousandrelated to proceeds received from a BOLI policy due to the death of a covered former employee. Other income primarily includes rental property income.
The following table details the main categories of non-interest charges.
December 31, (dollars in thousands) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Salaries $ 11,828 $ 12,048 $ 12,003( $ 220) (1.8 %) $ 450.4 % Employee benefits 4,533 4,384 4,280 149 3.4 104 2.4 Premises and equipment 4,019 4,016 4,535
3 0.1 (519 ) (11.4 ) Data processing 2,211 2,201 2,119 10 0.5 82 3.9 Professional fees 2,741 2,213 2,236 528 23.9 (23 ) (1.0 ) OREO gains, losses and write-downs, net - 408 275 (408 ) (100.0 ) 133 48.4 Collections, OREO, and loan related 323 436 578 (113 ) (25.9 ) (142 ) (24.6 ) FDIC insurance 466 261 579 205 78.5 (318 ) (54.9 ) Marketing and community support 573 619 815 (46 ) (7.4 ) (196 ) (24.0 ) Amortization of intangibles 321 388 454
(67 ) (17.3 ) (66 ) (14.5 ) Other 2,023 1,938 1,961 85 4.4 (23 ) (1.2 ) Non-interest expense
$ 29,038 $ 28,912 $ 29,835 $ 1260.4 % ( $ 923) (3.1 %) Non-interest expenses increased $126 thousand, or 0.4%, in 2020 versus 2019. Salaries decreased $220 thousandas higher production and incentive accruals as well as higher overtime costs were more than offset by an increase in deferred compensation costs associated with originating loans, including PPP loans. Benefits increased $149 thousandcompared to the same period in 2019. The increase was primarily due to a one-time reduction of $328 thousandreceived in the fourth quarter 2019 due to the modification of key terms of agreements related to BOLI policies and higher accruals for performance based restricted stock units, partly offset by lower expenses for phantom stock appreciation units. See Note 16 for a further discussion of Salisbury'sLong-Term Incentive Compensation Plans. Premises and equipment increased $3 thousandmainly due to increased software expense partially offset by lower depreciation, building maintenance and utilities costs. Data processing increased $10 thousandmainly due to ATM fees and core data processing costs partially offset by lower Trust and Wealth data processing expense. The increase in professional fees of $528 thousandversus the twelve month period 2019 primarily reflected higher consulting and investment management expenses, partly offset by lower legal costs. Collections, OREO and loan related expense decreased $113 thousanddue to OREO losses in the twelve month period 2019. The increase in FDICinsurance expense primarily reflected non-recurring assessment credits of $240 thousandreceived in 2019. Marketing and community support costs decreased $46 thousandcompared to the same period in 2019 primarily due to lower marketing expenditures partially offset by increased contributions. Amortization of intangible assets decreased $67 thousanddue to the aging off of expenses related to previous acquisitions. Other expenses increased $85 thousandand primarily reflected accruals related to litigation matters occurring in the
normal course of business. 23 Income Taxes The effective income tax rates for 2020 and 2019 were 17.0% and 17.5%, respectively.
Salisbury'seffective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements. Salisburydid not incur Connecticutincome tax in 2020, 2019 or 2018, other than minimum state income tax, as a result of a Connecticutlaw that permits banks to shelter certain mortgage income from the Connecticutcorporation business tax through the use of a special purpose entity called a Passive Investment Companyor PIC. Salisburyavails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury'sincome tax provision reflects the full impact of the Connecticutlegislation. Salisburydoes not expect to pay other than minimum Connecticutstate income tax in the foreseeable future unless there is a change in Connecticuttax law.
Comparison of completed years
Net interest and dividend income
Net interest and dividend income represents the difference between interest and dividends earned on loans and securities and interest expense incurred on deposits and borrowings. The level of net interest income is a function of volume, rates and mix of both earning assets and interest-bearing liabilities. Net interest income can be affected by changes in interest rate levels, changes in the volume of assets and liabilities that are subject to re-pricing within different future time periods, and in the level of non-performing assets.
Interest and dividends
Tax equivalent interest and dividend income increased
$3.2 million, or 7.8%, to $44.0 millionin 2019. Loan income increased $2.7 million, or 7.1%, to $40.2 millionin 2019. The increase was primarily due to a $51.3 million, or 5.9%, increase in average loans, and a 5 basis point increase in average yield. Interest income for 2019 and 2018 reflects purchase accounting adjustments consisting of net accretion related to the fair value adjustments of loans acquired in the Riverside Bankacquisition in the amount of $0 millionand $0.8 million, respectively. Tax equivalent interest and dividend income from securities increased $0.5 million, or 22.2%, to $2.9 millionin 2019, as a result of a $8.3 million, or 9.4%, increase in average security balances, and a 32 basis point increase in average yield. Interest from short term funds decreased $20 thousandin 2019 as a result of a 19 basis point increase in average yield, partially offset by a $5.2 million, or 12.7%, decrease in average short term balances.
Interest expense increased
$2.1 million, or 28.8%, to $9.3 millionin 2019. Interest expense on interest bearing deposit accounts increased $2.7 million, or 57.2%, to $7.3 millionin 2019, as a result of a $63.2 million, or 9.7%, increase in average interest-bearing deposits and a 31 basis point increase in the average rate to 1.03%. The increase in the average certificate of deposit balance from 2018 reflected higher average brokered certificates of deposits balances of $20.3 millionand a $3.0 millionincrease in average one-way buys executed through the Certificate of Deposit Account Registry Service ("CDARS"). CDARS is a product offered by Promontory Interfinancial Networkthat enables participating financial institutions to buy or sell excess funds to other members to fund operations and to manage liquidity. Interest expense on FHLBB advances decreased $0.6 million, or 34.1%, due to a $25.9 million, or 40.4%, decrease in average advances, partially offset by a 28 basis point increase in the average borrowing rate to 2.98%. In December 2015, Salisburyissued $10 millionof subordinated debentures. The proceeds of such issuance, along with cash-on-hand, were used by Salisburyto fully redeem $16 millionof its outstanding Series B Preferred Stock, which was issued pursuant to the participation in the U.S. Treasury'sSBLF program. Interest expense on the subordinated debt for 2019 and 2018 was $0.6 millionand $0.6 million, respectively.
Provision and allowance for loan losses
The provision for loan losses was
$1.0 millionfor 2019, compared with $1.7 millionfor 2018. Net loan charge-offs were $0.6 millionand $0.7 million, for the respective years. The lower provision for loan losses in 2019 primarily reflected lower originations. In first quarter 2019, Salisburytransferred the remaining unearned credit-related discount on loans acquired in its 2014 acquisition of Riverside Bankto the allowance for loan loss reserves. As a result of this transfer, gross loans receivable and the allowance for loan losses increased by $0.7 million. The balance of net loans receivable did not change as a result of this transfer. The reserve coverage at December 31, 2019, as measured by the ratio of allowance for loan losses to gross loans, was 0.95%, as compared with 0.85% at December 31, 2018. Non-performing loans (non-accrual loans and accruing loans past-due 90 days or more) decreased $2.9 millionto $3.6 million, or 0.39% of gross loans receivable, at December 31, 2019, down from $6.5 millionor 0.71% of gross loans receivable at December 31, 2018. The decline in non-performing loans from the prior year end primarily reflected pay-offs of $1.6 million, upgrades to performing status of $0.9 millionand write-downs of $0.4 million. Accruing loans past due 30-89 days decreased $0.1 millionto $2.1 million, or 0.22% of gross loans receivable at December 31, 2019. See "Overview - Loan Credit Quality" below for further discussion and analysis.
Income other than interest
Non-interest income increased
$305 thousand, or 3.4%, in 2019 versus 2018. Trust and Wealth Advisory revenues increased $295 thousandprimarily due to increased market values and a higher volume of assets under management. Service charges and fees increased $310 thousandfrom 2018 on higher interchange and wire fees as well as higher loan prepayment penalties. Gains on sales of mortgage loans increased $27 thousandon higher sales volume. Mortgage loans sales totaled $6.4 millionin 2019 versus $4.6 millionin 2018. Loans serviced under the FHLBB Mortgage Partnership Finance Program totaled $106.3 millionand $111.4 millionat December 31, 2019and 2018, respectively. In 2018, the Bank recorded a non-taxable gain of $341 thousandrelated to proceeds received from a BOLI policy due to the death of a covered former employee. 24 Non-Interest Expense Non-interest expenses decreased $923 thousand, or 3.1%, in 2019 versus 2018. Salaries expense increased $45 thousanddue to higher base salaries, merit increases, and short-term incentive accruals partly offset by lower production accruals due to lower loan volume. Employee benefits expense for 2019 included a non-recurring reduction of $328 thousand, which reflected changes to the calculation of death benefits for bank-owned life insurance policies. This credit, as well as lower 401K and ESOP accruals, was more than offset by higher medical insurance costs and higher deferred compensation accruals. Premises and equipment expense decreased $519 thousandfrom 2018 as the prior year included a charge of $171 thousandto write-off the remainder of the lease and fixed assets related to the Bank's previously occupied Fishkill, New Yorkbranch location as well as a charge of $95 thousandto write-off the remaining term of a third-party software contract. Software maintenance costs and depreciation costs were also lower. Data processing expense increased $82 thousandmainly as a result of higher core data processing costs. The decrease of $23 thousandin professional fees reflected lower consulting and internal audit costs partly offset by higher external audit and regulatory exam costs, as well as higher investment management expenses. OREO losses and write-downs increased $133 thousandfrom 2018. Collections, OREO and appraisal expenses decreased $142 thousandprimarily due to lower appraisal fees, lower carrying costs and lower taxes. The $318 thousanddecrease in FDICinsurance reflected $240 thousandin non-recurring assessment credits received by the Bank in 2019. Marketing and community support decreased $196 thousanddue to costs incurred in the prior year for the Fishkill, New Yorkbranch relocation, the timing of contributions and lower overall marketing spend. Amortization of intangibles and all other operating expenses collectively decreased $89 thousandfrom 2018.
The effective income tax rates for 2019 and 2018 were 17.5% and 16.2%, respectively.
Salisbury'seffective tax rate was less than the 21% federal statutory rate due to tax-exempt income, primarily from municipal bonds, tax advantaged loans and bank-owned life insurance. Fluctuations in the effective tax rate generally result from changes in the mix of taxable and tax-exempt income. For further information on income taxes, see Note 13 of Notes to Consolidated Financial Statements. Salisburydid not incur Connecticutincome tax in 2019, 2018 or 2017, other than minimum state income tax, as a result of a Connecticutlaw that permits banks to shelter certain mortgage income from the Connecticutcorporation business tax through the use of a special purpose entity called a Passive Investment Companyor PIC. Salisburyavails itself of this benefit through its PIC, SBT Mortgage Service Corporation. Salisbury'sincome tax provision reflects the full impact of the Connecticutlegislation. Salisburydoes not expect to pay other than minimum Connecticutstate income tax in the foreseeable future unless there is a change in Connecticuttax law.
Salisbury'sassets increased by $181.2 millionto $1.294 billion, while net loans increased $100.3 millionat December 31, 2020. Asset and loan growth included approximately $85 millionof PPP loans. Salisburyalso experienced a significant build up in cash balances as a result of the funding of the PPP loans. The balance of cash and cash equivalents increased $66.3 millionto $93.2 millionat December 31, 2020. Salisburyhas employed excess cash to pay down borrowings and invest in additional available-for-sale securities. At December 31, 2020, Salisbury'stangible book value and book value per common share were $38.78and $43.88, respectively. At December 31, 2020, the Bank's Tier 1 leverage and total risk-based capital ratios were 8.90% and 13.57%, respectively. As of December 31, 2020, the Bank was categorized as "well capitalized."
Short-term securities and funds
During 2020, securities increased
$5.1 millionto $101.0 million, while short-term funds (cash and due from banks and interest-bearing deposits with other banks) increased $66.3 millionto $93.2 million. The carrying values of securities are as follows: December 31, (dollars in thousands) 2020 2019 2018 Available-for-Sale U.S. Government agency notes $ 7,851 $ 4,644 $ 7,670Municipal bonds 27,617 27,193 5,379 Mortgage-backed securities: U.S. Governmentagencies and U.S. Government- sponsored enterprises 36,573 29,357 57,446 Collateralized mortgage obligations: U.S. Government agencies 17,454 25,499 17,747 Corporate bonds 8,916 5,108 3,576 CRA mutual fund 917 882 836 Non-Marketable FHLBB stock 1,713 3,242 4,496 Total Securities $ 101,041 $ 95,925 $ 97,150
Salisburyevaluates 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, Salisburyconsiders 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, Salisburyrecognizes 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. Salisburyevaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisburywill 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 does not consider any of its securities to be OTTI at December 31, 2020. It is possible that future loss assumptions could change necessitating Salisburyto recognize future OTTI. Salisburyevaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisburywill be required to sell securities before recovery of their cost basis, which may be maturity.
Cumulative other comprehensive income as of
25 Loans During 2020, net loans receivable increased
$100.3 million, or 11%, to $1.027 billionat December 31, 2020. Salisbury'sretail lending department originates residential mortgage, home equity loans and lines of credit, and consumer loans for the portfolio. During 2020, Salisburyoriginated a record $147.6 millionof residential mortgage loans and $9.0 millionof home equity loans for the portfolio, compared with $53.4 millionand $7.5 million, respectively, in 2019. During 2020, total residential mortgage and home equity loans receivable declined by $1.7 millionto $425.7 millionat December 31, 2020, and represent 40.9% of gross loans receivable. During 2020, Salisbury'sresidential mortgage lending department also originated and sold $59.8 millionof residential mortgage loans, compared with $6.4 millionduring 2019. All such sold loans were sold through the FHLBB Mortgage Partnership Finance Program with servicing retained by Salisbury. Consumer loans, amounted to $7.9 millionat December 31, 2020, representing 0.7% of gross loans receivable. Salisbury'scommercial lending department specializes in lending to small and mid-size companies, businesses and municipalities. More specifically, we meet our clients' credit needs by providing short-term and long-term financing, construction loans, commercial mortgages, equipment, working capital, property improvement loans and municipal financing. The department also works with both the Small Business Administration("SBA") and United States Department of Agriculture("USDA") Government Guaranteed Lending Programs; however, such loans represent a very small percent of the commercial loan portfolio. Salisburyoriginated $221.8 millionof commercial loans during 2020 compared with $155.4 millionin 2019. Total commercial loans, which include commercial real estate, commercial and industrial and municipal loans, increased $101.6 millionto $591.2 millionat December 31, 2020, and represent 56.7% of gross loans receivable. Additionally, in 2020, Salisburyprocessed 932 loan applications for nearly $100 millionunder the SBA's PPP program. At December 31, 2020approximately $85 millionof these loans remained on Salisbury'sbalance sheet. These loans are categorized as "commercial and industrial" in the table below.
The main categories of loans receivable and loans held for sale are as follows:
December 31, (in thousands) 2020 2019 2018 2017 2016 Residential 1-4 family
$ 352,001 $ 346,299 $ 345,862 $ 317,639 $ 301,128Residential 5+ multifamily 37,058 35,455 36,510 18,108 13,625 Construction of residential 1-4 family 8,814 11,889 12,041 11,197 10,951 Home equity lines of credit 27,804 33,798 34,433 33,771 35,487 Residential real estate 425,677 427,441 428,846 380,715 361,191 Commercial 310,841 289,795 283,599 249,311 235,482 Construction of commercial 31,722 8,466 8,976 9,988 5,398 Commercial real estate 342,563 298,261 292,575 259,299 240,880 Farm land 3,198 3,641 4,185 4,274 3,914 Vacant land 14,079 7,893 8,322 7,883 6,600 Real estate secured 785,517 737,236 733,928 652,171 612,585 Commercial and industrial 227,148 169,411 162,905 132,731 141,473 Municipal 21,512 21,914 14,344 17,494 8,626 Consumer 7,687 6,385 4,512 4,794 5,380 Loans receivable, gross 1,041,864 934,946 915,689 807,190 768,064 Deferred loan origination fees and costs, net (372 ) 1,362 1,421 1,289 1,247 Allowance for loan losses (13,754 ) (8,895 ) (7,831 ) (6,776 ) (6,127 ) Loans receivable, net $ 1,027,738 $ 927,413 $ 909,279 $ 801,703 $ 763,184Loans Held-for-sale Residential 1-4 family $ 2,735 $ 332$ - $ 669$ -
The composition of loans receivable by distribution of scheduled maturities is as follows:
December 31, 2020 (in thousands) Within 1 year Within 2-5 years After 5 years Total Residential $ 3,690 $ 9,674
$ 384,509 $ 397,873Home equity lines of credit - 562 27,242 27,804 Commercial 11,567 18,935 280,339 310,841 Construction of commercial 389 3,968
27,365 31,722 Land 2,693 6,827 7,757 17,277 Real estate secured 18,339 39,966 727,212 785,517
Commercial and industrial 13,520 116,143
97,485 227,148 Municipal 13,714 2,510 5,288 21,512 Consumer 316 1,816 5,555 7,687
Loans receivable, gross
$ 45,889$ 160,435
$ 835,540 $ 1,041,86426
The composition of fixed, variable or revisable rate receivables is as follows:
December 31, 2020(in thousands) Variable or
adjustable Fixed interest rates interest rates Total Loans Residential $ 205,333 $ 192,540
$ 397,873Home equity lines of credit - 27,804 27,804 Commercial 71,127 239,714 310,841 Construction of commercial 15,892 15,830 31,722 Land 9,824 7,453 17,277 Real estate secured 302,176 483,341 785,517 Commercial and industrial 170,120 57,028 227,148 Municipal 19,916 1,596 21,512 Consumer 2,775 4,912 7,687 Loans receivable, gross $ 494,987 $ 546,877 $ 1,041,864Percentage of Total 47.5 % 52.5 % 100.0 % Loan Credit Quality Salisburyhas 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. Salisburypursues 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, Salisburywill 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"). Section 4013 of the CARES Act addresses modifications resulting from the pandemic and specified that virus related modifications on loans that were current as of December 31, 2019are not TDRs. The Bank has applied Section 4013 guidance and implemented a loan payment deferral program which allows residential, commercial and consumer borrowers, who have been adversely affected by the virus and whose loans were not more than 30 days past due at December 31, 2019, to defer loan payments for up to three months. Borrowers may apply to the Bank for additional deferments, which will be evaluated on a case-by-case basis. As of December 31, 2020, 15 commercial loans ( $29.8 millionloan balances) were granted payment deferrals. Approximately sixty percent of the deferred loan payments ( $17.9 millionloan balance) related to borrowers in the hospitality industry and another thirty percent ( $8.5 millionloan balance) related to borrowers in the entertainment & recreation industry. The loan balance for which payments were deferred represented approximately 3.1% of Salisbury'sgross loan balance at December 31, 2020, excluding loans granted under the SBA's Paycheck Protection Program. There were no outstanding deferrals related to residential and consumer loans as of December 31, 2020. The Bank will continue to accrue interest on such deferred payments, which will be added to a borrower's final payment. Salisburyevaluated each borrower's request for loan payment deferrals on a case-by case-basis. Salisburyalso reviewed the credit characteristics and internal risk rating assigned to each borrower that was granted a deferral. This review considered several factors, which included an assessment of COVID-19's impact on the operations of the business, other sources of liquidity available to a borrower for loan payments, the borrower's cooperation, the value of collateral and the number of payment deferrals granted to that borrower. Salisburyalso considered a borrower's ability to make partial payments, which represent a subset or combination of principal, interest and mortgage taxes. At December 31, 2020, six of the loans deferring payments were deferring principal only, eight loans were deferring principal and interest and one loan was deferring principal and mortgage taxes. 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. Salisburyprocessed 932 PPP loans for a principal balance of approximately $100 millionprimarily 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 Salisburyhave a two-year term. Management funded these short-term loans through a combination of deposits, short-term Federal Home Loan Bank("FHLB") advances, and brokered deposits. Salisburydid not participate in the Federal Reserve'sPaycheck Protection Program Liquidity Facility ("PPPLF"). As of December 31, 2020, Salisburyhad approximately $85 millionof PPP loans on its balance sheet. On December 27, 2020the Consolidated Appropriations Act, 2021 was signed into law. Certain provisions of the CARES Act were modified and extended by the Act. One of the features of the Act was the provision of $284 billionin additional funding for the PPP program, including a Second draw Paycheck Protection Program for qualifying businesses for which there was a quarterly revenue reduction of at least 25% compared to the same quarter in 2019. Salisburywill participate in the additional PPP program, which began in January 2021. Salisburyexpects the demand for second draws to be lower. The Bank will fund the loans through deposits, short-term FHLB advances or brokered certificate of deposits, as necessary.
Loans past due 30 days or more increased
$5.5 millionduring 2020 to $9.9 million, or 0.95% of gross loans receivable at December 31, 2020, compared with $4.4 million, or 0.47% of gross loans receivable at December 31, 2019. The increase included loans of $3.0 millionthat matured during fourth quarter 2020, most of which are expected to renew in first quarter 2021. 27
The components of loans past due 30 days or more are as follows:
(in thousands) 2020 2019 2018 Past due 30-59 days
$ 5,263 $ 1,351 $ 1,435Past due 60-89 days 1,575 726 730 Past due 90-179 days 1 3 795 Past due 180 days and over 11 - - Accruing loans 6,850 2,080 2,960 Past due 30-59 days 480 290 208 Past due 60-89 days 179 - 108 Past due 90-179 days 768 271 812 Past due 180 days and over 1,665 1,775 3,517 Non-accrual loans 3,092 2,336 4,645
Total loans past due 30 days or more
Credit quality segments
Impaired loans include all unrecognized loans and restructured distressed debts
loans, and represent loans for which it is probable that
able to collect all principal and interest amounts due in accordance with the
contractual clauses of loan agreements.
Unfunded loans, a subset of impaired loans, are loans for which the allowance
interest was dropped because, in the opinion of management,
recovery of principal or interest is unlikely.
Non-performing loans include unrecorded loans and past due loans
90 days and more which are well guaranteed, being collected and
where full recovery of principal and interest is reasonably assured.
Non-performing assets consist of non-performing loans and real estate acquired
in the settlement of loans.
Loans restructured for distressed debts are loans for which concessions such as
reduction in interest rates, other than normal market rate adjustments, or
deferral of payment of principal or interest, extension of due dates, or
reduction of the principal balance or accrued interest, have been granted due to a
the financial situation of the borrower. Loan restructuring is used when management
believes that granting a concession will increase the likelihood of the full
or partial recovery of principal and interest.
Potential problem loans consist of performing loans to which a
Substandard credit risk rating and is not classified as impaired.
Non-performing assets increased
$1.7 millionto $5.6 millionat December 31, 2020, or 0.44% of assets, from $3.9 millionor 0.35% of assets at December 31, 2019. The increase from the prior year end primarily reflected loans of $3.7 millionplaced on non-accrual status partly offset by loan sales of $0.7 million, loan payments of $0.5 millionand loans of $0.5 millionwhich returned to accruing status. The components of non-performing assets are as follows:
December 31, (in thousands) 2020 2019 2018 2017 2016 Residential 1-4 family
$ 1,508 $ 1,551 $ 2,092 $ 2,045 $ 1,920Residential 5+ multifamily 861 861 1,000 151 163 Home equity lines of credit 154 105 411 66 519 Commercial 2,544 914 1,640 3,622 4,901 Farm land 158 186 216 250 1,002 Vacant land 37 - - - - Real estate secured 5,262 3,617 5,359 6,134 8,505 Commercial and industrial 374 - 360 470 27 Consumer - - - - 4 Non-accrual loans 5,636 3,617 5,719 6,604 8,536
Accruing loans past due 90 days and over 12 3 795
31 256 Non-performing loans 5,648 3,620 6,514 6,635 8,792 Foreclosed assets - 314 1,810 719 3,773 Non-performing assets
$ 5,648 $ 3,934 $ 8,324 $ 7,354 $ 12,565
The interest income reductions associated with unrecorded loans are as follows:
57 40 36 Reduction in interest income
$ 240 $ 262 $ 29228
The past due status of non-performing loans is as follows:
$ 2,545 $ 1,281 $ 1,074Past due 30-59 days 480 290 208 Past due 60-89 days 179 - 108 Past due 90-179 days 769 274 1,607
180 days or more past due 1,675 1,775 3,517 Total past due receivables
December 31, 2020, 45.06% of non-performing loans were current with respect to loan payments, compared with 35.39% at December 31, 2019. Loans past due 180 days and over are substantially all mortgage loans in the process of foreclosure or litigation. Salisburyendeavors to work constructively to resolve its non-performing loan issues with 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.
Debt in difficulty Restructured loans
Troubled debt restructured loans decreased
$1.0 millionin 2020 to $7.8 million, or 0.75% of gross loans receivable, from $8.8 million, or 0.94% of gross loans receivable at December 31, 2019. The components of troubled debt restructured loans are as follows: December 31, (in thousands) 2020 2019 2018 Residential 1-4 family $ 2,798 $ 3,901 $ 2,824Residential 5+ multifamily 103 116 675 Home equity lines of credit - - 47 Personal 26 36 - Vacant land 130 180 190 Commercial 3,105 3,419 2,924 Real estate secured 6,162 7,652 6,660 Commercial and industrial 111 126 141 Accruing troubled debt restructured loans 6,273 7,778 6,801 Residential 1-4 family 378 152 289 Residential 5+ multifamily 861 861 1,000 Vacant land 37 - - Commercial 269 - - Real estate secured 1,545 1,013 1,289 Commercial and Industrial - - -
Restructured loans from unaccumulated distressed debts 1,545 1,013 1,289 Restructured loans from distressed debts
$ 7,818 $ 8,791 $ 8,090
The past due status of restructured loans for distressed debts is as follows:
December 31, (in thousands) 2020 2019 2018 Current
$ 5,737 $ 7,227 $ 6,340Past due 30-59 days 536 470 461 Past due 60-89 days - 81 - Accruing troubled debt restructured loans 6,273 7,778 6,801 Current 237 19 359 Past due 30-59 days - - 67 Past due 60-89 days - - - Past due 90-179 days 178 133 634 Past due 180 days and over 1,130 861 229
Restructured loans for unaccumulated distressed debts 1,545 1,013 1,289 Total restructured loans for distressed debts
December 31, 2020, 76.41% of troubled debt restructured loans were current with respect to loan payments, as compared with 82.43% at December 31, 2019. As of December 31, 2020, 2019 and 2018, there were specific reserves on troubled debt restructured loans amounting to $397 thousand, $582 thousand, and $252
thousand, respectively. 29 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
$8.3 millionduring 2020 to $18.2 million, or 1.75% of gross loans receivable at December 31, 2020, compared with $9.9 million, or 1.06% of gross loans receivable at December 31, 2019. The increase reflected the downgrade of two commercial loans of $9.5 million, partly offset by the payoff of a commercial & industrial line of credit of $0.8 millionand other activity of $0.4 million. The components of potential problem loans were as follows:
December 31, (in thousands) 2020 2019 2018 Residential 1-4 family
$ 1,620 $ 2,109 $ 1,300Residential 5+ multifamily 732 760 - Home equity lines of credit - - 29 Residential real estate 2,352 2,869 1,329 Commercial 13,703 3,886 5,567 Construction of commercial 229 241 141 Commercial real estate 13,932 4,127 5,708 Farm land 1,427 1,521 - Real estate secured 17,711 8,517 7,037 Commercial and industrial 486 1,384 605 Consumer 1 2 - Total potential problem loans $ 18,198 $ 9,903 $ 7,642
The past due status of potential problem loans was as follows:
December 31, (in thousands) 2020 2019 2018 Current
$ 17,598 $ 9,654 $ 6,543Past due 30-59 days 40 108 78 Past due 60-89 days 560 138 226 Past due 90-179 days - 3 795 Total potential problem loans $ 18,198 $ 9,903 $ 7,642
Deposits and loans
The distribution of average total deposits by account type was as follows: December 31, 2020 December 31, 2019 (in thousands) Weighted Average Weighted Average Balance Percent Average Balance Percent Average Demand deposits $ 294,603 27.94 % 0.00 %
$ 231,16924.50 % 0.00 %
Interest-bearing checking accounts 183,870 17.44 0.24 155,463 16.48 0.39 Regular savings accounts 175,204 16.61 0.26 175,011 18.55 0.87 Money market savings 256,402 24.31 0.45 222,090 23.54 1.05 Certificates of deposit 144,488 13.70
1.27 159,863 16.94 1.80 Total deposits
$ 1,054,567100.00 % 0.37 % $ 943,596100.00 % 0.78 %
The classification of certificates of deposit by interest rate was as follows:
At December 31, Interest rates 2020 2019 Less than 1.00%
$ 73,538 $ 34,2611.00% to 1.99% 25,589 46,502 2.00% to 2.99% 31,889 46,463 3.00% 498 498 Total $ 131,514 $ 127,72430 The distribution of certificates of deposit by interest rate and maturity was as follows: At December 31, 2020 Less Than or Equal to One More Than One More Than Two More Than Percent of Interest rates Year to Two Years to Three Years Three Years Total Total Less than 1.00% $ 65,116 $ 13,646 $ 1,170 $ 3,691 $ 83,62363.58 % 1.00% to 1.99% 9,878 15,632 2,585 5,368 33,463 25.44 % 2.00% to 2.99% 7,382 784 2,735 3,029 13,930 10.59 % 3.00% to 3.99% - 498 - - 498 0.38 % Total $ 82,376 $ 30,560 $ 6,490 $ 12,088 $ 131,514100.00 %
Expected maturities of certificates of deposit in denominations of
December 31, 2020 (in Within Within Within Over thousands) 3 months 3-6 months 6-12 months 1 year Total Certificates of deposit
$100,000and over $ 10,640 $ 24,591 $ 19,027 $ 30,837 $ 85,095FHLBB advances decreased $38.2 millionduring 2020 to $12.6 millionat December 31, 2020, compared with $50.9 millionat December 31, 2019. The net decrease primarily reflected net new amortizing borrowings of $10.0 millionoffset by $30.0 millionof maturities and $3.2 millionof amortization in 2020. In addition, in fourth quarter 2020 Salisbury utilized excess cash to prepay a $15 millionadvance that was scheduled to mature in July 2021. Salisburyincurred a penalty of approximately $60 thousandas a result of this prepayment. Salisburyalso 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 December 31, 2020, $20.0 millionof letters of credit were outstanding compared with $18.0 millionat December 31, 2019. Salisbury'sexcess borrowing capacity at the FHLB was $255.5 millioncompared with $233.7 millionat December 31, 2019. The increase in capacity reflected the pledging of additional residential and commercial loans as collateral.
The following table shows some information about short-term FHLBB advances:
December 31, (dollars in thousands) 2020 2019 Highest month-end balance during period
$ 15,000 $ 47,000Ending balance - 30,000 Average balance during period 5,956 5,670 Subordinated Debentures In December 2015, Salisburycompleted the issuance of $10.0 millionin aggregate principal amount of 6.00% Fixed to Floating Rate Subordinated Notes Due 2025 (the "Notes") in a private placement transaction to various accredited investors including $500 thousandto certain of Salisbury'srelated parties. The Notes have a maturity date of December 15, 2025and bear interest at an annual rate of 6.00% from and including the original issue date of the Notes to, but excluding, December 15, 2020or the earlier redemption date payable semi-annually in arrears on June 15and December 15of each year. Thereafter, from and including December 15, 2020to, but excluding, December 15, 2025, the terms of the note payable provide that the annual interest rate will be reset quarterly and equal to the three-month LIBOR, plus 430 basis points, as described in the Notes, payable quarterly, in arrears, on March 15, June 15, September 15and December 15of each year during the time that the Notes remain outstanding through December 15, 2025or earlier redemption date. Salisburyis monitoring the industry's transition from LIBOR as a market reference rate. The Notes are redeemable, without penalty, on or after December 15, 2020and, in certain limited circumstances, prior to that date. As more completely described in the Notes, the indebtedness evidenced by the Notes, including principal and interest, is unsecured and subordinate and junior in right of Salisbury'spayments to general and secured creditors and depositors of the Bank. The Notes also contain provisions with respect to redemption features and other matters pertaining to the Notes. The Notes have been structured to qualify as Tier 2 capital for regulatory capital purposes, subject to applicable limitations. As a result of the Notes being within five (5) years of their maturity date, Tier 2 capital at the parent company only will decrease in an amount equal to 20.0% of the outstanding Notes per year until the Notes mature in 2025 or are earlier redeemed. Subordinated debentures totaled $9.9 millionat December 31, 2020, which includes $117 thousandof remaining unamortized debt issuance costs. The debt issuance costs are being amortized to maturity. The effective interest rate of the subordinated debentures is 6.25%.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL CASH OBLIGATIONS
In the normal course of business,
The accompanying table summarizes
Salisbury'soff-balance sheet lending-related financial instruments and significant cash obligations, by remaining maturity, at December 31, 2020. Salisbury'slending-related financial instruments include commitments that have maturities over one year. Contractual purchases include commitments for future cash expenditures, primarily for services and contracts that reflect the minimum contractual obligation under legally enforceable contracts with contract terms that are both fixed and determinable. Excluded from the following table are a number of obligations to be settled in cash, primarily in under one year. These obligations are reflected in Salisbury'sConsolidated Balance Sheets and include deposits, FHLBB advances and repurchase agreements that settle within standard market timeframes. 31
1 year Within 3 years Within 5 years 5 years Total Residential $ - $ 5,177 $ -
$ 6,484 $ 11,661Home equity lines of credit 500 -
71 28,348 28,919 Commercial 3,057 305 520 6,221 10,103 Land 496 - - 70 566 Real estate secured 4,053 5,482 591 41,123 51,249 Commercial and industrial 33,173 761 1,356 59,564 94,854 Municipal - 1,554 - 250 1,804 Consumer 5 - - 2,072 2,077
Unadvanced portions of loans 37,231 7,797 1,947 103,009 149,984 Commitments to originate loans 49,753 -
- - 49,753 Standby letters of credit 4,647 110 - 1 4,758 Total
$ 91,631$ 7,907 $ 1,947 $ 103,010 $ 204,495LIQUIDITY Salisburymanages its liquidity position to ensure it has 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'sprimary source of liquidity is deposits and though its preferred funding strategy is to attract and retain low cost deposits, its ability to do so is affected by competitive interest rates and terms in its marketplace, and other financial market conditions. Other sources of funding include cash flows from loan and securities principal payments and maturities, funds provided by operations, and discretionary use of national market certificates of deposit and FHLBB advances. Liquidity can also be provided through sales of securities and loans. Salisburymanages 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'sfunding sources will meet anticipated funding needs. Operating activities for 2020 provided net cash of $13.8 million. Investing activities utilized net cash of $114.0 million, principally from purchases of securities of $37.4 million, net loan originations and principal collections of $107.4 million, a $3.5 millioninvestment in BOLI and capital expenditures of $4.4 million, offset by sales, calls, and maturities of securities of $32.5 million, BOLI proceeds of $4.0 millionand proceeds from the redemption of FHLB stock of $1.5 million. Financing activities provided net cash of $166.5 million, principally from a net deposit increase of $209.5 millionand advances from FHLBB for $16.0 million, partly offset by FHLB advances payments of $54.3 million, and common stock dividends of $3.3 million, and a decrease of $1.4 millionin securities sold under agreements to repurchase. Operating activities for 2019 provided net cash of $14.3 million. Investing activities utilized net cash of $23.4 million, principally from purchases of securities of $53.5 million, loan originations and principal collections, net of $19.2 million, a $5.8 millioninvestment in BOLI and capital expenditures of $2.0 million, offset by sales, calls, and maturities of securities of $55.4 million. Financing activities utilized net cash of $22.5 million, principally from the maturity of FHLBB advances of $37.0 million, a net deposit decrease of $7.2 million, and common stock dividends of $3.2 million, partly offset by FHLB advances of $20.5 millionand an increase of $4.4 millionin securities sold under agreements to repurchase. Operating activities for 2018 provided net cash of $13.3 million. Investing activities utilized net cash of $118.1 million, principally from loan originations and principal collections, net of $102.3 millionand purchases of securities of $41.6 million, offset by sales, calls, and maturities of securities of $27.8 million. Financing activities provided net cash of $114.8 million, principally from a net deposit increase of $103.0 million, FHLBB advances of $37.0 millionand an increase of $2.4 millionin securities sold under agreements to repurchase, partly offset by net principal payments on FHLB advances of $24.5 millionand common stock dividends of $3.1 million.
Shareholders' equity increased
$11.1 millionin 2020 to $124.7 millionat December 31, 2020. Contributing to the increase in shareholders' equity was net income of $11.9 million, a gain in other comprehensive income of $1.7 millionand restricted stock awards of $0.7 millionto certain of Salisbury'sdirectors and employees, partially offset by common stock dividends declared of $3.3 million.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. 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 at
December 31, 2020and 2019 under the regulatory capital rules then in effect: Minimum Capital Adequacy Minimum Ratios to be Requirement Well Capitalized Actual Bank Ratios 2020 2019 2020 2019 2020 2019 Total Capital (to risk-weighted assets) 8.00 % 8.00 % 10.00 %
10.00% 13.57% 12.84% Common Equity Tier 1 Capital 4.50 4.50 6.50 6.50
12.31 11.83 Tier 1 Capital (to risk-weighted assets) 6.00 6.00 8.00 8.00 12.31 11.83 Tier 1 Capital (to average assets) 4.00 4.00 5.00 5.00 8.90 1 9.60 1Excluding average PPP loan balances of
$62.0 million, the Bank's Tier 1 Capital (to average assets) ratio would have been approximately 9.35% at December 31, 2020. 32 A well-capitalized institution, which is the highest capital category for an institution as defined by the Prompt Corrective Action regulations issued by the FDICand 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 Salisburyand 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. The FRB's final rules implementing the Basel Committee on Banking Supervision'scapital 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, is also established above the regulatory minimum capital requirements. This capital conservation buffer began phasing in January 1, 2016at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until it reached its final level of 2.50% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. As of December 31, 2020, the Company and the Bank met each of their capital requirements and the most recent notification from the FDICcategorized 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 FDICpublished its final rule establishing a "Community Bank Leverage Ratio" ("CBLR") that simplifies capital requirements for certain community banking organizations with less than $10 billionin total consolidated assets (such as the Bank). Under the final rule, depository institutions and their holding companies that meet certain criteria (generally, those with limited amounts of off-balance sheet exposures, trading assets and liabilities, mortgage servicing assets, and temporary difference deferred tax assets) ("qualifying community banking organizations") may elect to report the components of its Tier 1 leverage ratio as a measure of capital adequacy. A qualifying community banking organization with a CBLR of greater than 9% that "elects to use the CBLR framework" will not be subject to other risk-based and leverage capital requirements and will be considered to have met the well-capitalized ratio requirements for purposes of the agencies' Prompt Corrective Action ("PCA") framework. Under the final rule, if a bank that has opted to use the CBLR framework subsequently fails to satisfy one or more of the qualifying criteria, but continues to report a leverage ratio of greater than 8 %, the bank may continue to use the framework and will be deemed "well capitalized" for a grace period of up to two quarters. A qualifying community banking organization will be required to comply with the generally applicable capital rule and file the relevant regulatory reports if the banking organization: (1) is unable to restore compliance with all qualifying criteria during the two-quarter grace period( including achieving compliance with the greater than 9% leverage ratio requirement); (2) reports a leverage ratio of 8% or less; or (3) ceases to satisfy the qualifying criteria due to consummation of a merger transaction. The final rule became effective on January 1, 2020. The Bank would qualify for the CBLR methodology and would also be considered to be well capitalized if it elected to utilize such methodology. The Bank is currently evaluating the benefits of transitioning to this simplified methodology for assessing capital adequacy. 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, 2022before 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.
January 2020, the Board of Directors of Salisbury Bankapproved a $0.01increase in the quarterly dividend. During 2020 and 2019, Salisburydeclared and paid four quarterly common stock dividends of $0.29and $0.28per common share each quarter, respectively, totaling $3.3 millionand $3.2 million, respectively. The Board of Directors of Salisburydeclared a common stock dividend of $0.29per common share payable on February 26, 2021to shareholders of record on February 12, 2021. Common stock dividends, when declared, will generally be paid the last business day of February, May, August and November, although Salisburyis not obligated to pay dividends on those dates or at any other time. Salisbury'sability 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 Connecticutlaw, 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, states that, as a general matter, the Board of Directors of a Bank Holding Company("BHC") should inform the Federal Reserveand 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 Reservereasonably 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. Salisburybelieves that the payment of common stock cash dividends is appropriate, provided that such payment considers Salisbury'scapital needs, asset quality, and overall financial condition and does not adversely affect the financial stability of Salisburyor the Bank. The continued payment of common stock cash dividends by Salisburywill be dependent on Salisbury'sfuture core earnings, financial condition and capital needs, regulatory restrictions, and other factors deemed relevant by the Board of Directors of Salisbury. 33
RECENTLY ISSUED ACCOUNTING STATEMENTS
See note 1 of the consolidated financial statements for details of recently published accounting statements and their expected impact on
consolidated financial statements.
IMPACT OF INFLATION AND PRICE DEVELOPMENTS
Salisbury'sconsolidated financial statements and related notes thereto presented elsewhere in this Form 10-K are prepared in conformity with U.S.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'sconsolidated 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 Salisburyto 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 the Company'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.
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