SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

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

For the quarterly period ended ~~March~~June 3130, 2023

☐

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

Commission file number 001-14854

SALISBURY BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(860) 435-9801

(Registrant's telephone number, including area code)

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

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

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

Yes ☑ No ☐

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

Yes ☑ No ☐

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The number of shares of Common Stock outstanding as of ~~May~~August 32, 2023 is 5,~~807~~806,119.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION	Page
Item 1. Financial Statements (unaudited)
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2023 (unaudited) and DECEMBER 31, 2022	3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2023 (unaudited) and DECEMBER 31, 2022	3
CONSOLIDATED STATEMENTS OF INCOME FOR THREE MONTHS ENDED MARCH 31, 2023 and 2022 (unaudited)	4
CONSOLIDATED STATEMENTS OF INCOME FOR THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited)	4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED MARCH 31, 2023 and 2022 (unaudited)	5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited)	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2023 and 2022 (unaudited)	5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited)	5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2023 and 2022 (unaudited)	6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2023 and 2022 (unaudited)	7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	89
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3739
Item 4. CONTROLS AND PROCEDURES	3940
PART II. OTHER INFORMATION	3940
Item 1. LEGAL PROCEEDINGS	3940
Item 1A. RISK FACTORS	3940
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3940
Item 3. DEFAULTS UPON SENIOR SECURITIES	3940
Item 4. MINE SAFETY DISCLOSURES	3940
Item 5. OTHER INFORMATION	3940
Item 6. EXHIBITS	4041
SIGNATURES	4142

PART I - FINANCIAL INFORMATION

Item 1.

FINANCIAL STATEMENTS

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)		~~March~~June 3130, 2023			December 31, 2022
ASSETS		(unaudited)
Cash and due from banks	$	67,~~231~~855		$	5,864
Interest bearing demand deposits with other banks		4346,~~613~~202			44,675
Total cash and cash equivalents		4954,~~844~~057			50,539
Securities
Available-for-sale, at fair value		~~187~~177,~~598~~477			187,410
Mutual funds at fair value		2,~~068~~020			1,933
Federal Home Loan Bank of Boston stock at cost		51,~~030~~488			1,285
Loans receivable, net (allowance for credit losses: $16,009 and $14,846)		1,234,632			1,213,671
Loans receivable, net (allowance for credit losses: $15,558 and $14,846)		1,237,511			1,213,671
Bank premises and equipment, net		21,~~597~~268			22,148
Goodwill		13,815			13,815
Intangible assets (net of accumulated amortization: $5,691 and $5,654)		188			227
Intangible assets (net of accumulated amortization: $5,727 and $5,654)		154			227
Accrued interest receivable		6,~~383~~546			6,797
Cash surrender value of life insurance policies		30,~~571~~248			30,379
Deferred taxes		8,~~234~~631			8,492
Other assets		5,~~374~~121			4,886
Total Assets	$	1,~~565~~558,~~334~~336		$	1,541,582
LIABILITIES and SHAREHOLDERS' EQUITY
Deposits
Demand (non-interest bearing)	$	~~370~~353,~~049~~794		$	395,994
Demand (interest bearing)		~~218~~219,~~902~~483			231,486
Money market		~~296~~361,~~974~~004			343,965
Savings and other		~~236~~218,~~755~~339			233,578
Certificates of deposit		~~170~~207,~~362~~330			153,370
Total deposits		1,~~293~~359,~~042~~950			1,358,393
Repurchase agreements		37,~~230~~492			7,228
Federal Home Loan Bank of Boston advances		~~100~~20,000			10,000
Subordinated debt		24,~~545~~559			24,531
Note payable		~~117~~106			128
Finance lease obligations		4,~~225~~189			4,262
Accrued interest and other liabilities		78,~~820~~975			8,685
Total Liabilities		1,~~432~~425,~~979~~271			1,413,227
Shareholders' Equity
Common stock - $0.10 per share par value
Authorized: 10,000,000;
Issued: 5,807,719 and 5,798,816
Issued: 5,807,119 and 5,798,816
Outstanding: 5,807,719 and 5,798,816		581			580
Outstanding: 5,807,119 and 5,798,816		581			580
Unearned compensation – restricted stock awards		(~~961~~779	)		(1,144	)
Paid-in capital		47,~~396~~443			47,466
Retained earnings		~~103~~105,~~371~~846			102,178
Accumulated other comprehensive loss, net		(1820,~~032~~026	)		(20,725	)
Total Shareholders' Equity		~~132~~133,~~355~~065			128,355
Total Liabilities and Shareholders' Equity	$	1,~~565~~558,~~334~~336		$	1,541,582

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

Three months ended March 31, (in thousands, except per share amounts)		2023			2022
		Three months ended						Six months ended
Interest and dividend income
Periods ended June 30, (in thousands, except per share amounts)		2023			2022			2023			2022
Interest and fees on loans	$	13,250		$	10,163
Interest and dividend income
Interest on debt securities
Interest and fees on loans	$	13,604		$	10,576		$	26,853		$	20,740
Taxable		1,068			724
Interest on debt securities
Tax exempt		212			174
Taxable		1,033			859			2,102			1,583
Other interest and dividends		393			57
Tax exempt		183			187			396			362
Total interest and dividend income		14,923			11,118
Other interest and dividends		561			107			954			164
Interest expense
Total interest and dividend income		15,381			11,729			30,305			22,849
Deposits		2,818			478
Interest expense
Repurchase agreements		16			3
Deposits		5,296			577			8,114			1,055
Finance lease		40			41
Repurchase agreements		25			4			41			6
Note payable		2			2
Finance lease		40			41			79			82
Subordinated Debt		233			233
Note payable		2			2			4			5
Federal Home Loan Bank of Boston advances		687			55
Subordinated debt		233			233			466			466
Total interest expense		3,796			812
Federal Home Loan Bank of Boston advances		444			—			1,131			55
Net interest and dividend income		11,127			10,306
Total interest expense		6,040			857			9,835			1,669
Provision for credit losses		1,016			363
Net interest and dividend income		9,341			10,872			20,470			21,180
Net interest and dividend income after provision for credit losses		10,111			9,943
(Release) provision for credit losses		(403	)		1,100			521			1,463
Non-interest income
Net interest and dividend income after (release) provision for loan losses		9,744			9,772			19,949			19,717
Trust and wealth advisory		1,153			1,241
Non-interest income
Service charges and fees		1,235			1,138
Trust and wealth advisory		1,330			1,293			2,483			2,533
Mortgage banking activities, net		59			355
Service charges and fees		1,251			1,723			2,485			2,861
Gains (losses) on mutual funds		20			(42	)
Mortgage banking activities, net		(151	)		77			(92	)		432
Gains on sales of available -for-sale securities, net		—			210
(Losses) gains on mutual fund		(14	)		(30	)		5			(72	)
BOLI income		192			162
(Losses) gains on securities, net		(15	)		(45	)		(15	)		165
Other		34			30
Bank-owned life insurance (“BOLI”) income		196			163			388			325
Total non-interest income		2,693			3,094
Gain on bank-owned life insurance		311			89			311			89
Non-interest expense
Other		26			27			60			57
Salaries		3,721			3,479
Total non-interest income		2,934			3,297			5,625			6,390
Employee benefits		1,468			1,277
Non-interest expense
Premises and equipment		1,105			1,104
Salaries		3,625			3,657			7,346			7,135
Loss on write-down and sale of assets		158			9
Employee benefits		1,232			1,288			2,700			2,565
Information processing and services		831			685
Premises and equipment		1,078			973			2,183			2,086
Professional fees		945			787
Loss on write-down and sale of assets		—			—			158			—
Collections, OREO, and loan related		72			117
Information processing and services		949			702			1,781			1,387
FDIC insurance		98			171
Professional fees		850			821			1,795			1,609
Marketing and community support		127			184
Collections, OREO, and loan related		29			116			100			232
Amortization of intangibles		39			54
FDIC insurance		248			122			346			293
Other		470			786
Marketing and community support		187			262			314			447
Total non-interest expense		9,034			8,653
Amortization of intangibles		34			50			73			104
Income before income taxes		3,770			4,384
Other		544			541			1,106			1,328
Income tax provision		752			816
Total non-interest expense		8,776			8,532			17,902			17,186
Net income	$	3,018		$	3,568
Income before income taxes		3,902			4,537			7,672			8,921
Net income available to common shareholders	$	2,968		$	3,508
Income tax provision		497			692			1,249			1,507
Basic earnings per common share 1	$	0.52		$	0.62
Net income	$	3,405		$	3,845		$	6,423		$	7,414
Diluted earnings per common share 1		0.52			0.62
Net income available to common shareholders	$	3,354		$	3,772		$	6,322		$	7,280
Common dividends per share 1		0.16			0.16
Basic earnings per common share	$	0.59		$	0.67		$	1.11		$	1.29
Diluted earnings per common share	$	0.59		$	0.66		$	1.10		$	1.28
Common dividends per share	$	0.16		$	0.16		$	0.32		$	0.32

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

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

Three months ended March 31, (in thousands)		2023			2022
		Three months ended						Six months ended
Net income	$	3,018		$	3,568
Periods ended June 30, (in thousands)		2023			2022			2023			2022
Other comprehensive income (loss)
Net income	$	3,405		$	3,845		$	6,423		$	7,414
Net unrealized income (loss) on securities available-for-sale		3,409			(11,549	)
Other comprehensive income (loss)
Reclassification of net realized loss in net income (1)		—			(210	)
Net unrealized (losses) gains on securities available-for-sale		(2,539	)		(7,788	)		870			(19,337	)
Unrealized income (loss) on securities available-for-sale		3,409			(11,759	)
Reclassification of net realized losses (income) in net income 1		15			45			15			(165	)
Income tax (expense) benefit		(716	)		2,470
Unrealized (losses) gains on securities available-for-sale		(2,524	)		(7,743	)		885			(19,502	)
Unrealized income (loss) on securities available-for-sale, net of tax		2,693			(9,289	)
Income tax benefit (expense)		530			1,626			(186	)		4,096
Comprehensive income (loss)	$	5,711		$	(5,721	)
Unrealized (losses) gains on securities available-for-sale, net of tax		(1,994	)		(6,117	)		699			(15,406	)
Comprehensive income (loss)	$	1,411		$	(2,272	)	$	7,122		$	(7,992	)

(1) Reclassification adjustments include realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive (loss) income and have affected certain lines in the consolidated statements of income as follows: ~~the~~The ~~pretax~~pre-tax amount is reflected as (losses) gains on ~~sales and calls on available-for-sale~~ securities, ~~net;~~ net, the tax effect is included in the income tax provision and the after-tax amount is included in net income. The ~~income~~net tax ~~expense~~effect for the ~~related~~three tomonths ~~reclassification~~ending ofJune ~~net~~30, ~~realized~~2023 ~~gains~~and ~~was~~2022 ~~approximately~~are $03 thousand and $449 thousand, respectively. The net tax effect for the ~~three~~six-~~months~~month ~~ended~~periods ending ~~March~~June 3130, 2023 and 2022 are $3 thousand and $(35) thousand, respectively.

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)

Three months ended March 31, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
Three months ended June 30, (dollars in thousands)	Common Stock					Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
	Shares 1			Amount		Capital			Earnings			awards			(loss) income			equity
Balances at December 31, 2021		5,723,394		$	286	$	46,374		$	89,995		$	(925	)	$	870		$	136,600
Net income		—			—		—			3,568			—			—			3,568
Other comprehensive loss, net of tax		—			—		—			—			—			(9,289	)		(9,289	)
Common stock dividends declared ($0.16 per share)		—			—		—			(915	)		—			—			(915	)
Issuance of restricted common stock		28,700			2		811			—			(813	)		—			—
Issuance of restricted stock units upon vesting		12,900			—		—			—			—			—			—
Net settlement impact for vesting of performance restricted stock units		(78	)		—		(183	)		—			—			—			(183	)
Stock based compensation-restricted stock awards		—			—		97			—			188			—			285
Balances at March 31, 2022		5,764,916		$	288	$	47,099		$	92,648		$	(1,550	)	$	(8,419	)	$	130,066
Balances at December 31, 2022		5,798,816		$	580	$	47,466		$	102,178		$	(1,144	)	$	(20,725	)	$	128,355
Net income		—			—		—			3,845			—			—			3,845
Cumulative effect of accounting changes (Note 1)		—			—		—			(898	)		—			—			(898	)
Other comprehensive loss, net of tax		—			—		—			—			—			(6,117	)		(6,117	)
Net income		—			—		—			3,018			—			—			3,018
Common stock dividends declared		—			—		—			(925	)		—			—			(925	)
Other comprehensive income, net of tax		—			—		—			—			—			2,693			2,693
Stock options exercised		11,070			1		94			—			—			—			95
Common stock dividends declared ($0.16 per share)		—			—		—			(927	)		—			—			(927	)
Issuance of director’s restricted stock awards		7,980			—		205			—			(205	)		—			—
Issuance of restricted stock units upon vesting		13,473			1		—			—			—			—			1
Transfer due to 2-for-1 forward stock split		—			289		(289	)		—			—			—			—
Net settlement impact of performance restricted stock units upon vesting		(4,570	)		—		(112	)		—			—			—			(112	)
Stock based compensation-restricted stock awards		—			—		96			—			243			—			339
Stock based compensation-restricted stock awards							42						183			—			225
Balances at June 30, 2022		5,783,966		$	578	$	47,205		$	95,568		$	(1,512	)	$	(14,536	)	$	127,303
Balances at March 31, 2023		5,807,719		$	581	$	47,396		$	103,371		$	(961	)	$	(18,032	)	$	132,355
Net income		—			—		—			3,405			—			—			3,405
Other comprehensive loss, net of tax		—			—		—			—			—			(1,994	)		(1,994	)
Common stock dividends declared		—			—		—			(930	)		—			—			(930	)
Forfeiture of restricted stock awards		(600	)		—		(15	)		—			15			—			—
Stock based compensation-restricted stock awards		—			—		62			—			167			—			229
Balances at June 30, 2023		5,807,119		$	581	$	47,443		$	105,846		$	(779	)	$	(20,026	)	$	133,065

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

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

Salisbury Bancorp, Inc. and Subsidiary

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

Three months ended March 31, (in thousands)		2023			2022
Six months ended June 30, (dollars in thousands)	Common Stock						Paid-in			Retained			Unearned compensation restricted stock			Accumulated other comprehensive			Total shareholders'
Operating Activities
	Shares 1			Amount			Capital			Earnings			awards			(loss) income			equity
Net income	$	3,018		$	3,568
Balances at December 31, 2021		5,723,394		$	286		$	46,374		$	89,995		$	(925	)	$	870		$	136,600
Adjustments to reconcile net income to net cash provided by operating activities:
Net income		—			—			—			7,414			—			—			7,414
(Accretion), amortization and depreciation:
Other comprehensive loss, net of tax		—			—			—			—			—			(15,406	)		(15,406	)
Securities		311			361
Common stock dividends declared		—			—			—			(1,841	)		—			—			(1,841	)
Bank premises and equipment		396			392
Issuance of restricted stock awards		28,700			2			811			—			(813	)		—			—
Core deposit intangible		39			53
Issuance of performance based stock awards		12,822			—			(183	)		—			—			—			(183	)
Modification fees on Federal Home Loan Bank of Boston advances		—			21
Stock options exercised		11,070			1			94			—			—			—			95
Subordinated debt issuance costs		14			14
Issuance of director’s restricted stock awards		7,980			—			205			—			(205	)		—			—
Mortgage servicing rights		26			39
Transfer due to 2-for-1 forward stock split		—			289			(289	)		—			—			—			—
(Gains) and losses, including write-downs
Stock based compensation-restricted stock awards		—			—			193			—			431			—			624
(Gain) loss on mutual funds		(20	)		42
Balances at June 30, 2022		5,783,966		$	578		$	47,205		$	95,568		$	(1,512	)	$	(14,536	)	$	127,303
Gain on sales of securities available-for-sale, net		—			(210	)
Balances at December 31, 2022		5,798,816		$	580		$	47,466		$	102,178		$	(1,144	)	$	(20,725	)	$	128,355
Gain on sales of loans, excluding capitalized servicing rights		—			(275	)
Cumulative effect of accounting changes (Note 1)		—			—			—			(898	)		—			—			(898	)
Sales/disposals of premises and equipment		158			9
Net income		—			—			—			6,423			—			—			6,423
Provision for credit losses		1,016			363
Other comprehensive income, net of tax		—			—			—			—			—			699			699
Proceeds from loans sold		—			8,852
Common stock dividends declared		—			—			—			(1,857	)		—			—			(1,857	)
Loans originated for sale		—			(6,963	)
Issuance of restricted stock units upon vesting		13,473			1			—			—			—			—			1
Decrease (increase) in deferred loan origination fees and costs, net		126			(476	)
Net settlement impact for vesting of performance restricted stock units		(4,570	)		—			(111	)		—			—			—			(111	)
Mortgage servicing rights originated		—			(55	)
Forfeiture of restricted stock units		(600	)		—			(15	)		—			15			—			—
Decrease in interest receivable		414			365
Stock based compensation-restricted stock awards		—			—			103			—			350			—			453
Deferred tax (benefit) expense		(172	)		467
Balances at June 30, 2023		5,807,119		$	581		$	47,443		$	105,846		$	(779	)	$	(20,026	)	$	133,065
Increase in prepaid expenses		(119	)		(111	)
Increase in cash surrender value of life insurance policies		(192	)		(162	)
(Increase) decrease in other assets		(395	)		403
Decrease in income tax receivable		—			79
Decrease in accrued expenses		(2,598	)		(1,537	)
Increase in income tax payable		702			—
Decrease in interest payable		(230	)		(12	)
Increase (decrease) in other liabilities		256			(53	)
Stock based compensation-restricted stock awards		225			285
Net cash provided by operating activities		2,975			5,459
Investing Activities
Net redemptions of Federal Home Loan Bank of Boston stock		(3,745	)		320
Purchases of securities available-for-sale		—			(145,297	)
Purchase/reinvestment of mutual funds		(115	)		(3	)
Proceeds from sales of securities available-for-sale		—			17,718
Proceeds from maturities/principal payments of securities available-for-sale		2,910			102,413
Loan originations and principal collections, net		(22,285	)		641
Recoveries of loans previously charged off		3			6
Capital expenditures		(3	)		(343	)
Net cash utilized by investing activities	$	(23,235	)	$	(24,545	)

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

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

Salisbury Bancorp, Inc. and Subsidiary

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

Three months ended March 31, (in thousands)		2023			2022
Six months ended June 30, (in thousands)		2023			2022
Financing Activities
Operating Activities
Decrease in deposit transaction accounts, net	$	(82,343	)	$	(54,923	)
Net income	$	6,423		$	7,414
Increase in time deposits, net		16,992			9,204
Adjustments to reconcile net income to net cash provided by operating activities
Decrease in securities sold under agreements to repurchase, net		(3,998	)		(3,269	)
Amortization(accretion) and depreciation
Repayments of Federal Home Loan Bank of Boston long term advances		—			(6,000	)
Securities		641			723
Federal Home Loan Bank of Boston short term advances(net)		90,000			—
Bank premises and equipment		774			801
Principal payments on amortizing FHLB Advances		—			(1,258	)
Core deposit intangible		73			104
Principal payments on note payable		(11	)		(11	)
Modification fees on Federal Home Loan Bank of Boston advances		—			21
Principal payments on finance lease obligations		(37	)		(33	)
Subordinated debt issuance costs		28			28
Net settlement of restricted stock units		(111	)		(183	)
Mortgage servicing rights		51			78
Common stock dividends paid		(927	)		(915	)
Loss (gain) on sales and calls of securities available-for-sale, net		15			(165	)
Net cash provided (utilized) by financing activities		19,565			(57,388	)
(Gain) loss on mutual funds		(5	)		72
Net decrease in cash and cash equivalents		(695	)		(76,474	)
Loss (gain) on sales of loans, excluding capitalized servicing rights		209			(292	)
Cash and cash equivalents, beginning of period		50,539			175,335
Loss on sale of disposed assets		158			3
Cash and cash equivalents, end of period	$	49,844		$	98,861
Provision for loan losses		521			1,463
Cash paid during period
Proceeds from loans sold		8,007			11,119
Interest		3,567			789
Loans originated for sale		—			(4,459	)
Income taxes		221			270
Decrease(increase) in deferred loan origination fees and costs, net		21			(733	)
Non cash investing and financing activities:
Increase in mortgage servicing rights originated		—			(72	)
Fixed Asset		65			289
Decrease in interest receivable		251			137
Finance lease liability		(65	)		(289	)
(Increase) decrease in deferred tax benefit		(324	)		224
Loans transferred to Loans Held for Sale		—			3,389
Decrease in prepaid expenses		236			202
Increase in cash surrender value of life insurance policies and gain on bank owned life insurance		(699	)		(414	)
Decrease in income tax receivable		—			37
Increase in other assets		(521	)		(52	)
Increase in income taxes payable		84			—
Decrease in accrued expenses		(1,594	)		(1,442	)
Increase (decrease) in interest payable		511			(5	)
Increase in other liabilities		1,288			19
Stock based compensation-restricted stock awards		453			624
Net cash provided by operating activities	$	16,601		$	15,435
Investing Activities
Net redemptions of Federal Home Loan Bank of Boston stock		(203	)		452
Purchases of securities available-for-sale		—			(52,175	)
Proceeds from sales of securities available-for-sale		3,969			22,012
Proceeds from maturities of securities available-for-sale		6,193			9,389
Reinvestment/purchase of mutual funds		(82	)		(843	)
Loan originations and principal collections, net		(33,501	)		(73,434	)
Recoveries of loans previously charged off		5			12
Proceeds from life insurance		830			89
Capital expenditures		(52	)		(601	)
Net cash utilized by investing activities	$	(22,841	)	$	(95,099	)

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

Salisbury Bancorp, Inc. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Six months ended June 30, (in thousands)		2023			2022
Financing Activities
Decrease in deposit transaction accounts, net	$	(52,403	)	$	(53,997	)
Increase in time deposits, net		53,960			34,343
Increase in securities sold under agreements to repurchase, net		264			5,144
Short-term Federal Home Loan Bank of Boston advances, net		10,000			(6,000	)
Principal payments on amortizing FHLB advances		—			(1,677	)
Principal payments on note payable		(22	)		(21	)
Decrease in finance lease obligation		(73	)		(67	)
Stock options exercised		—			95
Net settlement of restricted stock units		(111	)		(183	)
Common stock dividends paid		(1,857	)		(1,841	)
Net cash provided (utilized) by financing activities		9,758			(24,204	)
Net increase (decrease) in cash and cash equivalents		3,518			(103,868	)
Cash and cash equivalents, beginning of period		50,539			175,335
Cash and cash equivalents, end of period	$	54,057		$	71,467
Cash paid during period
Interest	$	9,296		$	1,625
Income taxes		1,203			1,310
Non-cash supplemental
Fixed Asset		65			289
Finance lease liability		(65	)		(289	)
Loans transferred to Loans Held for Sale		8,216			3,684

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

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 (loss), 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 credit losses and unrealized gains and losses related to available-for-sale securities.

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 ~~March~~June 3130, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in Salisbury's 2022 Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

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

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

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

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

InThe ~~December~~federal ~~2018,~~bank ~~the~~regulatory ~~OCC,~~agencies ~~the Board of Governors of the Federal Reserve System, and the FDIC~~ approved a final rule tomodifying ~~address~~their ~~changes~~regulatory ~~to credit~~capital ~~loss~~rules ~~accounting~~and ~~under~~providing ~~GAAP,~~an ~~including banking organizations’ implementation of CECL. The final rule provides banking organizations the~~ option to phase in over a ~~three~~period ~~year~~of ~~period~~three years the day -one ~~adverse~~regulatory capital effects onof ~~regulatory~~adopting ~~capital~~CECL. ~~that~~Salisbury ~~may~~has ~~result~~elected ~~from~~to ~~the~~phase ~~adoption~~in of the ~~new~~adjustment ~~accounting~~over a ~~standard~~three-year period.

Allowance for Credit Losses – Available-For-Sale Securities: For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Recent Accounting Pronouncements

In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848).” In 2020, the Board issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. At the time that Update 2020-04 was issued, the UK Financial Conduct Authority (FCA) had established its intent that it would no longer be necessary to persuade, or compel, banks to submit to LIBOR after December 31, 2021. As a result, the sunset provision was set for December 31, 2022—12 months after the expected cessation date of all currencies and tenors of LIBOR. In March 2021, the FCA announced that the intended cessation date of the overnight 1-, 3-, 6-, and 12-month tenors of USD LIBOR would be June 30, 2023, which is beyond the current sunset date of Topic 848. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, the amendments in this Update defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The amendments in this ASU were effective upon issuance.

NOTE 2 – ACQUISITIONS AND DISPOSITIONS

Pending Acquisition

On December 5, 2022, Salisbury and NBT Bancorp Inc. (“NBT”) announced that they entered into a definitive agreement under which Salisbury will merge with and into NBT, ~~with~~ with NBT as the surviving entity, in an all-stock transaction. Immediately thereafter, the Bank will merge with and into NBT Bank, with ~~NBT~~ NBT Bank as the surviving bank. Under the terms of the agreement, each share of Salisbury common stock will be converted into the right to to receive 0.745 shares of NBT common stock. ~~The~~Merger-related ~~merger~~expenses istotaling ~~expected~~$393 thousand and $778 thousand related to bethis ~~consummated~~transaction were recorded by Salisbury in ~~second~~the ~~quarter~~three ~~2023,~~and ~~subject~~six tomonth ~~regulatory~~periods ~~approval. Merger-related~~ended ~~expenses~~June ~~totaling~~30, ~~$385~~2023, ~~thousand~~respectively. ~~related~~The tomerger ~~this~~is ~~transaction~~expected ~~were~~to ~~recorded~~be inconsummated on ~~first~~August ~~quarter~~11, 2023.

NOTE 3 - SECURITIES

The composition of securities is as follows:

(in thousands)		Amortized cost basis		Gross un-realized gains		Gross un-realized losses		Fair value
March 31, 2023
June 30, 2023
Available-for-sale
U.S. Treasury	$	19,~~299~~315	$	—	$	12,~~820~~070	$	17,~~479~~245
U.S. Government Agency notes		2927,~~017~~999		585		2,~~231~~488		2625,~~844~~516
Municipal bonds		5551,~~099~~037		—		67,~~900~~375		4843,~~199~~662
Mortgage-backed securities:
U.S. Government agencies and U.S. Government- sponsored enterprises		67,804		19		7,273		60,550
U.S. Government agencies and U.S. Government - sponsored enterprises		65,811		18		7,760		58,069
Collateralized mortgage obligations:
U.S. Government agencies		24,~~954~~414		—		3,~~039~~589		2120,~~915~~825
Corporate bonds		14,250		—		12,~~639~~090		12,~~611~~160
Total securities available-for-sale	$	~~210~~202,~~423~~826	$	7723	$	2225,~~902~~372	$	~~187~~177,~~598~~477
Mutual funds							$	2,068
Mutual fund							$	2,020
Non-marketable securities
Federal Home Loan Bank of Boston stock	$	51,~~030~~488	$	—	$	—	$	51,~~030~~488

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

Salisbury did not sell any available-for-sale securities during the three-month periods ended March 31, 2023. Salisbury sold $17.7 million of available-for-sale securities during the three-month period ended March 31, 2022 realizing gains of $451 thousand and losses of $241 thousand resulting in a net gain of $210 thousand and a related tax expense of $44 thousand.

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

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

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

Salisbury sold $4.0 million of available-for-sale securities during the three and six-month period ended June 30, 2023 realizing gains of $3 thousand and losses of $18 thousand resulting in a net loss of $15 thousand and related tax benefit of $3 thousand. Salisbury sold $22.0 million of available-for-sale securities during the six-month period ended June 30, 2022 realizing gains of $458 thousand and losses of $293 thousand resulting in a net gain of $165 thousand and related tax expense of $35 thousand. Salisbury sold $4.0 million of available-for-sale securities during the three-month period ended June 30, 2022 realizing gains of $3 thousand and losses of $48 thousand resulting in a net loss of $45 thousand and related tax benefit of $9 thousand.

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


	Less than 12 Months				12 Months or Longer				Total
June 30, 2023 (in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Available-for-sale
U.S. Treasury	$	—	$	—	$	17,245	$	2,070	$	17,245	$	2,070
U.S. Government Agency notes		2,670		46		19,469		2,442		22,139		2,488
Municipal bonds		992		22		42,670		7,353		43,662		7,375
Mortgage- backed securities:
U.S. Government agencies and U.S. Government - sponsored enterprises		2,636		25		51,185		7,735		53,821		7,760
Collateralized mortgage obligations:
U.S. Government agencies		—		—		20,825		3,589		20,825		3,589
Corporate bonds		6,890		1,110		5,270		980		12,160		2,090
Total temporarily impaired securities	$	13,188	$	1,203	$	156,664	$	24,169	$	169,852	$	25,372


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

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

March 31, 2023 (in thousands)	Maturity	Amortized cost			Fair value	Yield(1)
June 30, 2023 (in thousands)	Maturity	Amortized cost			Fair value	Yield(1)
U.S. Treasury	~~After~~Within 1 year ~~but within 5 years~~	$	101,~~814~~976	$	101,~~005~~904	1.2953	%
	After 5 year but within 10 years		8,485		7,474	1.17
	After 1 year but within 5 years		8,854		8,003	1.24
	Total		19,299		17,479	1.24
	After 5 year but within 10 years		8,485		7,338	1.17
U.S. Government Agency notes	After 1 year but within 5 years		7,964		7,100	1.05
	Total		19,315		17,245	1.24
	After 5 year but within 10 years		7,960		6,863	1.42
U.S. Government Agency notes	After 1 year but within 5 years		8,951		7,864	1.25
	Total		15,924		13,963	1.23
	After 5 year but within 10 years		6,978		5,966	1.43
	Total		15,929		13,830	1.33
Municipal bonds	After 1 year but within 5 years		1,486		1,343	2.11
	After 5 year but within 10 years		1415,~~308~~331		12,~~054~~827	2.3125
	After 10 years but within 15 years		1514,~~458~~589		1312,~~580~~491	2.3339
	After 15 years		2319,~~847~~631		2117,~~222~~010	2.7342
	Total		5551,~~099~~037		4843,~~199~~662	2.4935
Mortgage-backed securities, U.S. Government Agency and Collateralized mortgage obligations	Securities not due at a single maturity date		105,851		95,346	2.95
Mortgage-backed securities and Collateralized mortgage obligations	Securities not due at a single maturity date		102,295		90,580	3.05
	Total		~~105~~102,~~851~~295		9590,~~346~~580	23.9505
Corporate bonds	After 5 years but within 10 years		14,250		12,~~611~~160	4.46
	After 10 years but within 15 years		—		—
	Total		14,250		12,160	4.46
	Total		14,250		12,611	4.46
Securities available-for-sale		$	202,826	$	177,477	2.82	%
Securities available-for-sale		$	210,423	$	187,598	2.79	%

⁽¹⁾Yield is based on amortized cost.

~~For~~During ~~the~~second ~~three~~quarter ~~months~~2023, ~~ended~~Salisbury ~~March~~realized ~~31,~~a ~~2023~~pre-tax ~~and~~loss ~~2022,~~of ~~the~~approximated ~~unrealized~~$15 ~~losses~~thousand on the ~~Company’s available-for-~~sale ~~debt~~of $4.0 million of securities. ~~have~~The ~~not~~sale ~~been~~was ~~recognized~~executed ~~into~~for ~~income~~strategic ~~because~~purposes ~~management~~and ~~does~~was not ~~intend~~driven toby ~~sell~~credit ~~and~~concerns itof isthe ~~not~~underlying ~~more-likely-than-not~~issuers itor ~~will~~the beneed ~~required~~by Salisbury to ~~sell~~generate ~~any~~liquidity. ofFor the ~~available-for-sale~~six ~~debt~~months ~~securities~~ended ~~before~~June ~~recovery~~30, of2023 ~~its~~and ~~amortized cost basis. Furthermore~~2022, the unrealized losses on the Company’s available-for-sale debt securities were due to changes in interest rates and other market conditions and were not reflective of credit events. The issuers continue to make ~~timely~~ timely principal and interest payments on the bonds. Agency-backed and government sponsored securities have a long 40 year history with no credit losses, including during times of severe stress such as the 2007-2008 financial crisis. The principal and interest payments on agency guaranteed debt is backed by the U.S. government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses.

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

At June 30, 2023 and December 31, 2022, total accrued interest receivable on available-for-sale debt securities, which has been excluded from the reported amortized cost basis on available-for-sale debt securities, was $0.55 million and $0.56 million, respectively, and was reported within accrued interest receivable on the consolidated balance sheets. An allowance was not carried on the accrued interest receivable at either date.

NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES

Salisbury segregates its loan portfolio into discrete loan pools for purposes of evaluating credit risk. Each loan pool possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of ~~March~~June 3130, 2023, the Company aggregated the individual loan pools as follows:

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

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

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

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

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

(In thousands)		~~March~~June 3130, 2023			December 31, 20221
Commercial & Industrial	$	~~232~~215,~~033~~372		$	239,997
Commercial real estate		~~515~~525,~~266~~364			491,659
Residential real estate		~~457~~468,~~506~~462			449,652
Consumer		4442,~~961~~891			46,208
Total Loans		1,~~249~~252,~~766~~089			1,227,516
Deferred loan origination costs, net		~~875~~980			1,001
Allowance for credit losses		(1615,~~009~~558	)		(14,846	)
Loans receivable, net	$	1,~~234~~237,~~632~~511		$	1,213,671

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

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

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

The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Bank. The allowance for credit losses on off-balance sheet exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.

12At June 30, 2023, the allowance for off-balance-sheet credit losses was $1.2 million compared with $0.2 million at December 31, 2022. This balance is included in “other liabilities” on Salisbury’s consolidated balance sheet. During second quarter 2023, the Bank recorded $10 thousand in credit loss benefit for off-balance-sheet items compared with $0.4 million for second quarter 2022. These balances are included in the “provision for credit losses” for 2023 and “other non-interest expense” in 2022 on Salisbury’s Consolidated Income Statement.

At March 31, 2023, the allowance for off-balance-sheet credit losses was $1.2 million compared with $0.2 million at December 31, 2022. This balance is included in “other liabilities” on Salisbury’s consolidated balance sheet. During first quarter 2023, the Bank recorded $92 thousand in credit loss expense for off-balance-sheet items compared with $0.2 million for first quarter 2022. These balances are included in the “provision for credit losses” for 2023 and “other non-interest expense” in 2022 on Salisbury’s Consolidated Income Statement.

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

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

At ~~March~~June 3130, 2023 and December 31, 2022, Salisbury serviced commercial loans for other banks under loan participation agreements totaling $6667.54 million and $64.1 million, respectively.

Concentrations of Credit Risk

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

Salisbury’s commercial loan portfolio is comprised of loans to diverse industries, several of which may experience operating challenges due to the COVID-19 virus pandemic (“virus”). Approximately 3233% of the Bank’s commercial loan portfolio are to entities who operate rental properties, which include commercial strip malls, smaller rental units as well as multi-unit dwellings. Approximately 10% of the Bank’s commercial loans are to entities in the hospitality industry, which includes hotels, bed & breakfast inns and restaurants. Approximately 9% of the Bank’s commercial loans are to educational institutions and approximately 4% of Salisbury’s commercial loans are to entertainment and recreation related businesses, which include camps and amusement parks. Salisbury’s commercial real estate exposure as a percentage of the Bank’s total risk-based capital, which represents Tier 1 plus Tier 2 capital, was approximately ~~209~~210% as of ~~March~~June 3130, 2023 and 198% at December 31, 2022 compared to the regulatory monitoring guideline of 300%. Salisbury’s commercial loan exposure is mitigated by a variety of factors including the personal liquidity of the borrower, real estate and/or non-real estate collateral, U.S. Department of Agriculture or Small Business Administration (“SBA”) guarantees, loan payment deferrals and economic stimulus loans from the U.S. government as a result of the virus, and other factors.

Credit Quality

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

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

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

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

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

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

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

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

(in thousands)	2023			2022			2021			2020		2019		Prior			Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
As of June 30, 2023
Commercial & industrial
Risk rating
Pass	$	12,115		$	41,250		$	40,502		$	29,466	$	15,974	$	38,085		$	30,691	$	—	$	208,083
Special mention		—			—			—			—		616		5,456			350		—		6,422
Substandard		—			300			—			—		10		—			557		—		867
Doubtful		—			—			—			—		—		—			—		—		—
Loss		—			—			—			—		—		—			—		—		—
Total commercial & industrial	$	12,115		$	41,550		$	40,502		$	29,466	$	16,600	$	43,541		$	31,598	$	—	$	215,372
Commercial real estate
Risk rating
Pass	$	46,897		$	150,311		$	103,226		$	66,452	$	25,628	$	121,807		$	—	$	—		514,321
Special mention		—			—			—			3,554		3,716		2,920			—		—		10,190
Substandard		—			—			—			—		—		853			—		—		853
Doubtful		—			—			—			—		—		—			—		—		—
Loss		—			—			—			—		—		—			—		—		—
Total commercial real estate	$	46,897		$	150,311		$	103,226		$	70,006	$	29,344	$	125,580		$	—	$	—	$	525,364
Residential real estate
Risk rating
Pass	$	30,996		$	104,583		$	114,161		$	63,316	$	26,509	$	123,627		$	170	$	—	$	463,362
Special mention		—			—			—			20		—		3,204			—		—		3,224
Substandard		—			—			662			—		—		1,214			—		—		1,876
Doubtful		—			—			—			—		—		—			—		—		—
Loss		—			—			—			—		—		—			—		—		—
Total residential real estate	$	30,996		$	104,583		$	114,823		$	63,336	$	26,509	$	128,045		$	170	$	—	$	468,462
Consumer
Risk rating
Pass	$	952		$	1,521		$	955		$	216	$	380	$	14,024		$	22,292	$	2,281	$	42,621
Special mention		—			—			—			—		—		1			96		43		140
Substandard		—			45			—			—		—		2			70		13		130
Doubtful		—			—			—			—		—		—			—		—		—
Loss		—			—			—			—		—		—			—		—		—
Total consumer	$	952		$	1,566		$	955		$	216	$	380	$	14,027		$	22,458	$	2,337	$	42,891
Total loans	$	90,960		$	298,010		$	259,506		$	163,024	$	72,833	$	311,193		$	54,226	$	2,337	$	1,252,089
Total Gross Charge-offs	$	(48	)	$	(13	)	$	(4	)	$	—	$	—	$	(20	)	$	—	$	—	$	(85	)
Total Recoveries		4			—			—			—		—		1			—		—		5
Total Net Charge-offs	$	(44	)	$	(13	)	$	(4	)	$	—	$	—	$	(19	)	$	—	$	—	$	(80	)

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

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

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

The following table presents the amortized cost basis of collateral-dependent non-accrual loans as of March 31, 2023. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.14

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

The following table presents the amortized cost basis of collateral-dependent non-accrual loans as of June 30, 2023. Commercial and industrial loans include loans to businesses, municipalities and independent schools. Commercial real estate includes construction, commercial, residential 5+ multi-family, farm and vacant land loans. Residential real estate includes residential 1-4 family and residential construction loans. Consumer includes HELOC, consumer, indirect auto loans and overdrafts.

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


		Collateral Type
(in thousands)		Real Estate		Business Assets		Total Collateral-Dependent Non-Accrual Loans
June 30, 2023
Commercial & industrial	$	—	$	—	$	—
Commercial real estate		85		—		85
Residential real estate		839		—		839
Consumer		83		14		97
Total	$	1,007	$	14	$	1,021

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

The following is a summary of loans by past due status at June 30, 2023:


			Past due
(in thousands)	Current		30-59 days		60-89 days		90 days or Greater Past Due		Total Past Due		Total Loans Outstanding		Loans Greater than 90 Days Past Due and Accruing
June 30, 2023
Commercial & industrial	$	215,070	$	—	$	2	$	300	$	302	$	215,372	$	300
Commercial real estate		524,923		356		—		85		441		525,364		—
Residential real estate		468,286		111		65		—		176		468,462		—
Consumer		42,604		204		48		35		287		42,891		—
Total	$	1,250,883	$	671	$	115	$	420	$	1,206	$	1,252,089	$	300

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

		March 31, 2023						December 31, 2022
		June 30, 2023						December 31, 2022
(in thousands)		Non-Accrual Loans with an Allowance		Non-Accrual Loans without an Allowance		Total Non-Accrual Loans		Total Non-Accrual Loans
Commercial & industrial	$	—	$	~~144~~—	$	~~144~~—	$	189
Commercial real estate		—		~~1,222~~85		~~1,222~~85		1,648
Residential real estate		—		~~858~~839		~~858~~839		820
Consumer		914		883		1797		5
Total	$	914	$	21,~~232~~007	$	21,~~241~~021	$	2,662


			Past due

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

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

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

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

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

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

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

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

Allowance for Credit Losses for Loans

The ACL on loans at ~~March~~June 3130, 2023, was $1615.06 million, an increase of $10.27 million, or 74.8%, since December 31, 2022. The increase ~~was~~reflected ~~driven by~~ the adoption of CECL, effective January 1, 2023, and the estimate of expected credit losses based on certain macro-economic factors, partially offset by the release of reserves associated with $8.2 million of shared national credit loans, which Salisbury sold in second quarter 2023. At ~~March~~June 3130, 2023, the ACL on loans estimate ~~used~~ used a reasonable and supportable forecast period of one year across all of its loan segments. At ~~March~~June 3130, 2023, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) Commercial & Industrial – National Gross Domestic Product (“GDP”) and National Unemployment; (ii) Commercial Real Estate - National GDP and National Unemployment; (iii) Residential Real Estate – National Housing Price Index and National Unemployment; (iv) Consumer - National Unemployment. National GDP and National Unemployment are sourced from the Federal Reserve Open Market Committee’s published forecast whereas the National Housing Price Index is sourced from the Federal National Mortgage Association’s published forecast. The Company's qualitative factors at ~~March~~June 3130, 2023, included consideration of the level of uncertainty surrounding the impact of macro-economic factors such as interest rates, inflation, supply chain disruption, geo-political events as well as other factors. At ~~March~~June 3130, 2023, the ACL estimate for loans used a reversion period of two years for each loan segment.

The ~~increase~~net decrease in the ACL ~~on loans at March 31, 2023 compared with March 31, 2022,~~ for the commercial & industrial ~~and commercial real estate~~ loan ~~segments~~segment was primarily driven by ~~changes in~~the ~~loan~~release ~~balances~~of asreserves ~~well~~associate aswith ~~changes~~the insale ~~current~~of ~~and~~shared ~~forecasted~~national ~~economic~~credit ~~conditions~~loans ~~between reporting periods. The increase in the ACL on~~noted ~~loans~~above inas ~~the~~well ~~residential~~as ~~real estate and consumer loan segments was primarily driven by~~ changes in ~~loan~~current ~~balances~~ and aforecasted ~~decline~~economic inconditions ~~the national housing price index~~ between reporting periods.

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

	Three Months Ended March 31, 2023
	Three months ended June 30, 2023
(in thousands)	Beginning balance		~~Impact~~(Release) ofprovision ~~Adopting~~for ~~ASC~~Credit ~~326~~Losses			~~Subtotal~~Charge-offs			~~Provision for Credit Losses~~Recoveries			~~Charge-offs~~Ending balance			~~Recoveries~~		~~Ending balance~~
Commercial & industrial	$	14,~~921~~279	$	~~2,447~~(427	)	$	~~4,368~~—		$	~~(89~~—	)	$	—3,852		$	—	$	~~4,279~~
Commercial real estate		85,~~425~~894		(~~3,236~~29	)		~~5,189~~—			~~705~~—			—5,865			—		~~5,894~~
Residential real estate		45,~~108~~226		~~831~~15			~~4,939~~—			~~287~~—			—5,241			—		~~5,226~~
Consumer		~~392~~610		~~229~~38			~~621~~(50	)		212			~~(35~~600	)		3		~~610~~
Total allowance for credit losses	$	14,846	$	271		$	15,117		$	924		$	(35	)	$	3	$	16,009
Totals	$	16,009	$	(403	)	$	(50	)	$	2		$	15,558

	Three months ended March 31, 2022
	Six Months Ended June 30, 2023
(in thousands)	Beginning balance		~~Provision~~Impact of Adopting ASC 326			~~Charge-offs~~Subtotal			~~Recoveries~~Provision for Credit Losses			~~Ending balance~~Charge-offs			Recoveries		Ending balance
Commercial & industrial	$	1,~~811~~921	$	~~(173~~2,447	)	$	~~(46~~4,368	)	$	1(516	)	$	~~1,593~~—		$	—	$	3,852
Commercial real estate		68,~~973~~425		~~261~~(3,236	)		~~(334~~5,189	)		—676			~~6,900~~—			—		5,865
Residential real estate		34,~~020~~108		~~252~~831			~~(16~~4,939	)		—301			~~3,253~~—			1		5,241
Consumer		~~277~~392		37229			~~(17~~621	)		560			~~302~~(85	)		4		600
Unallocated		881		(14	)		—			—			867
Total allowance for credit losses	$	14,846	$	271		$	15,117		$	521		$	(85	)	$	5	$	15,558
Totals	$	12,962	$	363		$	(416	)	$	6		$	12,915

Charge-offs for first quarter 2022 included a write-down of $374 thousand to reduce the carrying value on $3.8 million of non-performing and under-performing loans, which Salisbury sold during the quarter, to the initial bid prices. The proceeds from the sale of these loans subsequently increased by approximately $239 thousand due to higher final bids. This increase was recorded in mortgage banking activities, net in Salisbury’s consolidated statement of income.16

The Bank’s allowance for credit losses on unfunded commitments is recognized as a liability (in other liabilities on consolidated balance sheet), with adjustments to the reserve recognized in the provision for credit losses in the consolidated income statement. The Bank’s activity in the allowance for credit losses on unfunded commitments for the three months ended March 31, 2023 and 2022 was as follows:


	Three months ended June 30, 2022
(in thousands)	Beginning balance		Provision		Charge-offs			Recoveries		Ending balance
Commercial & industrial	$	1,593	$	367	$	—		$	—	$	1,960
Commercial real estate		6,900		35		(39	)		1		6,897
Residential real estate		3,253		598		(239	)		—		3,612
Consumer		302		66		(39	)		4		333
Unallocated		867		34		—			—		901
Totals	$	12,915	$	1,100	$	(317	)	$	5	$	13,703

	Three months ended March 31, 2023
	Six months ended June 30, 2022
Balance at the beginning of period December 31, 2022	$	178
(in thousands)	Beginning balance		Provision		Charge-offs			Recoveries		Ending balance
Impact of adopting ASC 326		913
Commercial & industrial	$	1,811	$	194	$	(46	)	$	1	$	1,960
Subtotal		1,091
Commercial real estate		6,973		296		(373	)		1		6,897
Provision for credit losses		92
Residential real estate		3,020		851		(259	)		—		3,612
Balance at the end of period March 31, 2023	$	1,183
Consumer		277		102		(56	)		10		333
Unallocated		881		20		—			—		901
Totals	$	12,962	$	1,463	$	(734	)	$	12	$	13,703

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

The Bank’s allowance for credit losses on unfunded commitments is recognized as a liability (in other liabilities on consolidated balance sheet), with adjustments to the reserve recognized in the provision for credit losses in the consolidated income statement. The Bank’s activity in the allowance for credit losses on unfunded commitments for the three and six month periods ended June 30, 2023 and 2022 was as follows:

	Six months ended June 30, 2023		Three months ended June 30, 2023
Balance at the beginning of period	$	178	$	1,183
Impact of adopting ASC 326		913		—
Subtotal		1,091		1,083
Provision (release) for credit losses		82		(10	)
Balance at the end of period June 30, 2023	$	1,173	$	1,173

	Six months ended June 30, 2022		Three months ended June 30, 2022
Balance at the beginning of period	$	146	$	183
Other expense – unfunded commitments		41		4
Balance at the end of period June 30, 2022	$	187	$	187

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

(in thousands)

Collectively evaluated

Individually evaluated

Total portfolio

Loans

Allowance

Loans

Allowance

Loans

Allowance

March 31, 2023

June 30, 2023

Commercial & industrial

~~231~~215,~~889~~372

43,~~279~~852

~~144~~—

—

~~232~~215,~~033~~372

43,~~279~~852

Commercial real estate

~~514~~525,~~044~~279

5,~~894~~865

~~1,222~~85

—

~~515~~525,~~266~~364

5,~~894~~865

Residential real estate

~~456~~467,~~648~~623

5,~~226~~241

~~858~~839

—

~~457~~468,~~506~~462

5,~~226~~241

Consumer

4442,~~953~~808

~~610~~600

883

—

4442,~~961~~891

~~610~~600

Totals

1,~~247~~251,~~534~~082

1615,~~009~~558

21,~~232~~007

—

1,~~249~~252,~~766~~089

1615,~~009~~558



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

Certain data with respect to loans individually evaluated for impairment is presented in the tables below. The loan categories for previously reported periods have been updated to conform to the current presentation.17

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

Certain data with respect to loans individually evaluated for impairment is presented as follows as of and for the six months ended June 30, 2023. The loan categories for previously reported periods have been updated to conform to the current presentation.

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


	Loans with no specific allowance
	Loan balance						Income
	Book		Note		Average		Recognized
June 30, 2023
Commercial & industrial	$	—	$	—	$	115	$	1
Commercial real estate		85		85		867		44
Residential real estate		839		859		1,083		1
Consumer		83		84		54		1
Totals	$	1,007	$	1,028	$	2,119	$	47

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

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the six months ended June 30, 2022:



	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
June 30, 2022
Commercial & industrial	$	73	$	73	$	115	$	3	$	2	$	63	$	60	$	62	$	1
Commercial real estate		584		584		633		23		15		2,488		3,059		2,999		24
Residential real estate		2,100		2,106		568		141		24		1,853		1,938		2,531		26
Consumer		—		—		—		—		—		—		—		15		—
Totals	$	2,757	$	2,763	$	1,316	$	167	$	41	$	4,404	$	5,057	$	5,607	$	51

Certain data with respect to loans individually evaluated for impairment is as follows as of and for the twelve months ended December 31, 2022:



	Impaired loans with specific allowance										Impaired loans with no specific allowance
(in thousands)	Loan balance							Specific		Income	Loan balance							Income
		Book		Note		Average		allowance		recognized		Book		Note		Average		recognized
December 31, 2022
Commercial & industrial	$	—	$	—	$	64	$	—	$	—	$	189	$	195	$	88	$	13
Commercial real estate		559		559		604		22		30		2,470		2,705		2,717		51
Residential real estate		—		—		306		—		—		2,109		2,169		2,192		55
Consumer		—		—		—		—		—		5		5		9		—
Totals	$	559	$	559	$	974	$	22	$	30	$	4,773	$	5,074	$	5,006	$	119

NOTE 5 – LEASES

The Bank leases facilities and equipment with various expiration dates. The facilities leases have varying renewal options, generally require fixed annual rent, and provide that real estate taxes, insurance, and maintenance expenses are to be paid by Salisbury. On April 30, 2023, Salisbury closed its Red Oaks Mill, New York, branch and terminated the lease, which would have expired on July 31, 2023. The following table provides the assets and liabilities as of ~~March~~June 3130, 2023 and December 31, 2022, as well as the costs of operating and financial leases, which are included in the Bank’s consolidated income statement for the ~~three~~six months ended ~~March~~June 3130, 2023 and 2022.

($ in thousands, except lease term and discount rate)	Classification		March 31, 2023		December 31, 2022
(in thousands, except lease term and discount rate)	Classification		June 30, 2023		December 31, 2022
Assets
Operating	Other assets	$	1,~~183~~125	$	1,175
Finance	Bank premises and equipment 1		3,~~800~~745		3,856
Total leased assets		$	4,983	$	5,031
Total Leased Assets		$	4,870	$	5,031
Liabilities
Operating	Other liabilities	$	1,~~183~~125	$	1,175
Finance	Finance lease		4,~~225~~189		4,262
Total lease liabilities		$	5,~~408~~314	$	5,437
1 Net of accumulated depreciation of $832 thousand and $720 thousand, respectively.

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

Lease cost	Classification		Six Months Ended June 30, 2023		Three Months Ended June 30, 2023
Operating leases	Premises and equipment	$	163	$	86
Finance leases:
Amortization of leased assets	Premises and equipment		112		56
Interest on finance leases	Interest expense		79		39
Total lease cost		$	354	$	181

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

Weighted Average Remaining Lease Term		March 31, 2023			December 31, 2022
Lease cost	Classification			Six Months Ended June 30, 2022			Three Months Ended June 30, 2022
Operating leases	Premises and equipment	~~5.6 years~~	$	147	~~5.9 years~~	$	73
Financing leases		21.5 years			21.5 years
Finance leases:
Weighted Average Discount Rate 1
Amortization of leased assets	Premises and equipment			112			77
Operating leases		3.74	%		3.63	%
Interest on finance leases	Interest expense			82			41
Financing leases		3.76	%		3.74	%
Total lease cost			$	341		$	191
1 Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate.

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

Weighted Average Remaining Lease Term	June 30, 2023		December 31, 2022
Operating leases	5.3 years		5.9 years
Financing leases	21.3 years		21.5 years
Weighted Average Discount Rate ¹
Operating leases	3.7	%	3.63	%
Financing leases	3.7	%	3.74	%
¹ Salisbury uses the applicable FHLBB Advance rate as the discount rate, as its leases do not provide an implicit rate.

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

The following is a schedule by years of the present value of the net minimum lease payments as of June 30, 2023.

Future minimum lease payments (in thousands)		Operating Leases			Finance Leases
2023	$	125		$	152
2024		270			314
2025		218			323
2026		213			334
2027		188			344
Thereafter		244			4,624
Total future minimum lease payments		1,258			6,091
Less amount representing interest		(133	)		(1,902	)
Total present value of net future minimum lease payments	$	1,125		$	4,189

NOTE 6 - MORTGAGE SERVICING RIGHTS

(in thousands)		~~March~~June 3130, 2023		December 31, 2022
Residential mortgage loans serviced for others	$	~~130~~127,~~275~~766	$	133,100
Fair value of mortgage servicing rights		1,~~309~~344		1,376

Changes in mortgage servicing rights are as follows:

Three months ended March 31, (in thousands)		2023			2022
		Three months ended						Six months ended
Mortgage Servicing Rights
Periods ended June 30, (in thousands)		2023			2022			2023			2022
Balance, beginning of period	$	630		$	700
Mortgage Servicing Rights
Originated		—			55
Balance, beginning of period	$	604		$	716		$	630		$	700
Amortization (1)		(26	)		(39	)
Originated		—			17			—			72
Balance, end of period	$	604		$	716
Amortization (1)		(25	)		(39	)		(51	)		(78	)
Valuation Allowance
Balance, end of period	$	579		$	694		$	579		$	694
Balance, beginning of period		—			—
Valuation Allowance
Decrease in impairment reserve (1)		—			—
Balance, beginning of period		—			—			—			—
Balance, end of period		—			—
Decrease in impairment reserve (1)		—			—			—			—
Mortgage servicing rights, net	$	604		$	716
Balance, end of period		—			—			—			—
Mortgage servicing rights, net	$	579		$	694		$	579		$	694

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

NOTE 7 - PLEDGED ASSETS

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

(in thousands)		~~March~~June 3130, 2023		December 31, 2022
Securities available-for-sale (at fair value)	$	80100,~~456~~349	$	74,303
Loans receivable (at book value)		~~381~~373,~~740~~245		380,787
Total pledged assets	$	~~462~~473,~~196~~594	$	455,090

At ~~March~~June 3130, 2023, securities were pledged as follows: $7792.384 million to secure public deposits and $37.250 million to secure repurchase agreements. ~~In addition to securities~~Additionally, loans receivable were pledged to secure FHLBB advances and credit facilities.

NOTE 8 – EARNINGS PER SHARE

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

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

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

Three months ended March 31, (in thousands, except per share data)		2023			2022
		Three months ended						Six months ended
Net income	$	3,018		$	3,568
Periods ended June 30, (in thousands, except per share data)		2023			2022			2023			2022
Less: Undistributed earnings allocated to participating securities		(50	)		(60	)
Net income	$	3,405		$	3,845		$	6,423		$	7,414
Net income allocated to common stock	$	2,968		$	3,508
Less: Undistributed earnings allocated to participating securities		(51	)		(73	)		(101	)		(134	)
Weighted-average common shares issued		5,799			5,734
Net income allocated to common stock	$	3,354		$	3,772		$	6,322		$	7,280
Less: Unvested restricted stock awards		(97	)		(98	)
Weighted-average common shares issued		5,807			5,776			5,803			5,755
Weighted average common shares outstanding used to calculate basic earnings per common share		5,702			5,636
Less: Unvested restricted stock awards		(86	)		(110	)		(91	)		(104	)
Add: Dilutive effect of stock options and restricted stock units		12			58
Weighted average common shares outstanding used to calculate basic earnings per common share		5,721			5,666			5,711			5,651
Weighted-average common shares outstanding used to calculate diluted earnings per common share		5,714			5,694
Add: Dilutive effect of stock options and restricted stock units		12			33			12			48
Earnings per common share (basic)	$	0.52		$	0.62
Weighted-average common shares outstanding used to calculate diluted earnings per common share		5,733			5,699			5,723			5,699
Earnings per common share (diluted)	$	0.52		$	0.62
Earnings per common share (basic)	$	0.59		$	0.67		$	1.11		$	1.29
Earnings per common share (diluted)	$	0.59		$	0.66		$	1.10		$	1.28

NOTE 9 – SHAREHOLDERS’ EQUITY

Capital Requirements

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

The Bank isbecame subject to capital regulations ~~adopted~~ adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implemented the Basel III regulatory capital ~~reforms~~ reforms and the changes required by the Dodd-Frank Act. The required minimum regulatory capital ratios to which the Bank is subject, and the minimum ratios required for the Bank to be categorized as “well capitalized” under the prompt corrective action framework are noted in the table below. In addition, the regulations established a capital conservation buffer of 2.5% effective January 1, 2019. ~~Failure~~ Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At ~~March~~June 3130, 2023, the Bank exceeded the minimum requirement for the capital conservation buffer. As of ~~March~~June 3130, 2023, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed that categorization.

In March 2022, Salisbury announced that its Board of Directors renewed a share repurchase program, which provides for the repurchase of Salisbury’s common stock in amounts up to an aggregate of five percent (5%) of the outstanding shares of Salisbury’s common stock from time to time over the next twelve months. Salisbury did not repurchase any shares pursuant to such program.20

The Bank’s risk-weighted assets at ~~March~~June 3130, 2023 and December 31, 2022 were $1,~~280~~277.9 million and $1,256.6 million, respectively. Actual regulatory capital position and minimum capital ~~requirements~~ requirements as defined "To Be Well Capitalized Under Prompt Corrective Action Provisions" and "For Capital Adequacy Purposes" for the Bank are as follows:

	Actual					Minimum Capital Required For Capital Adequacy					Minimum Capital Required For Capital Adequacy Plus Required Capital Conservation Buffer					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2023
June 30, 2023
Total Capital (to risk-weighted assets)	$	~~171~~174,~~829~~607		13.4166	%	$	102,~~472~~236		8.0	%	$	134,~~495~~185		10.5	%	$	~~128~~127,~~090~~795		10.0	%
Tier 1 Capital (to risk-weighted assets)		~~155~~158,~~812~~632		12.1641			76,~~854~~677		6.0			108,~~877~~626		8.5			102,~~472~~236		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		~~155~~158,~~812~~632		12.1641			57,~~641~~508		4.5			89,~~663~~456		7.0			83,~~259~~067		6.5
Tier 1 Capital (to average assets)	$	~~155~~158,~~812~~632		910.9815		$	62,~~444~~487		4.0		$	62,~~444~~487		4.0		$	78,~~055~~108		5.0
December 31, 2022
Total Capital (to risk-weighted assets)	$	168,786		13.43	%	$	100,525		8.0	%	$	131,939		10.5	%	$	125,656		10.0	%
Tier 1 Capital (to risk-weighted assets)		153,762		12.24			75,394		6.0			106,808		8.5			100,525		8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		153,762		12.24			56,545		4.5			87,959		7.0			81,677		6.5
Tier 1 Capital (to average assets)	$	153,762		9.99		$	61,540		4.0		$	61,540		4.0		$	76,925		5.0

December 31, 2022
Total Capital (to risk-weighted assets)	$	168,786	13.43	%	$	100,525	8.0	%	$	131,939	10.5	%	$	125,656	10.0	%
Tier 1 Capital (to risk-weighted assets)		153,762	12.24			75,394	6.0			106,808	8.5			100,525	8.0
Common Equity Tier 1 Capital (to risk-weighted assets)		153,762	12.24			56,545	4.5			87,959	7.0			81,677	6.5
Tier 1 Capital (to average assets)	$	153,762	9.99		$	61,540	4.0		$	61,540	4.0		$	76,925	5.0

Restrictions on Cash Dividends to Common Shareholders

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

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

NOTE 10 – BENEFITS

~~Salisbury offers a~~ 401(k) Plan to eligible employees. Under the 401(k) Plan, eligible participants may contribute a percentage of their pay subject to IRS limitations. Salisbury may make discretionary contributions to the Plan. The Plan includes a safe harbor contribution of 3% for all qualifying employees. The Bank’s safe harbor contribution percentage is reviewed annually and, under provisions of the 401(k) Plan, is subject to change in the future. An additional discretionary match may also be made for all employees that meet the 401(k) Plan’s qualifying requirements for such a match. This discretionary matching percentage, if any, is also subject to review under the provisions of the 401(k) Plan. Both the safe harbor and additional discretionary match, if any, vest immediately. Salisbury’s 401(k) Plan expense was $328 thousand and $294 thousand, respectively, for the three-month periods ended March 31, 2023 and 2022.

Salisbury offers a 401(k) Plan to eligible employees. Under the 401(k) Plan, eligible participants may contribute a percentage of their pay subject to IRS limitations. Salisbury may make discretionary contributions to the Plan. The Plan includes a safe harbor contribution of 3% for all qualifying employees. The Bank’s safe harbor contribution percentage is reviewed annually and, under provisions of the 401(k) Plan, is subject to change in the future. An additional discretionary match may also be made for all employees that meet the 401(k) Plan’s qualifying requirements for such a match. This discretionary matching percentage, if any, is also subject to review under the provisions of the 401(k) Plan. Both the safe harbor and additional discretionary match, if any, vest immediately. Salisbury’s 401(k) Plan expense was $285 thousand and $257 thousand, respectively, for the three-month periods ended June 30, 2023 and 2022, and $613 thousand and $551 thousand, respectively, for the six-month periods ended June 30, 2023 and 2022.

ESOP

Salisbury offers an ESOP to eligible employees. Under the Plan, Salisbury may make discretionary contributions to the Plan. Discretionary ~~contributions~~ contributions vest in full upon six years and reflect the following schedule of qualified service: 20% after the second year, 20% per year thereafter, vesting at 100% after six full years of service. Salisbury’s ESOP expense was $9866 thousand and $3549 thousand, respectively, for the three-month periods ended ~~March~~June 3130, 2023 and 2022, and $164 thousand and $84 thousand, respectively, for the six-month periods ended June 30, 2023 and 2022. On December 21, 2022, the Board of Directors of the Company adopted resolutions to terminate the Plan effective on the date immediately preceding the closing date of the pending merger with NBT (see Note 2). Upon termination, ~~the~~ the employees participating in the Plan will become fully vested in the Company’s contributions to the Plan.

Other Retirement Plans

Split-Dollar Life Insurance

Salisbury adopted ASC 715-60, “Compensation - Retirement Benefits - Defined Benefit Plans - Other Postretirement" and recognized a liability for Salisbury’s future postretirement benefit obligations under endorsement split-dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $~~694~~670 thousand and $702 thousand at ~~March~~June 3130, 2023, and December 31, 2022, respectively. The Bank realized a credit of $824 thousand for the three months ended ~~March~~June 3130, 2023 and recorded no expense for the three months ended June 30, 2022. The Bank realized a credit of $32 thousand and $8 thousand for the six months ended June 30, 2023 ended June 30, 2022, respectively.

Supplemental Retirement Agreement

The Bank assumed a Supplemental Retirement Plan Agreement with a former Chief Executive Officer of Riverside Bank that provides for supplemental post retirement payments for a fifteen-year period ending in 2025 as described in the agreement. The related liability was $~~199~~186 thousand and $~~212~~238 thousand at ~~March~~June 3130, 2023 and ~~December 31,~~ 2022, respectively. The related expenses were immaterial for all periods presented.

Non-Qualified Deferred Compensation Plan

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

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

The amended and restated Plan allows participant deferrals and provides greater flexibility in participant elections and investment options. The amended and restated Plan also provides additional distribution options, including distributions in the event of an unforeseeable emergency and on the occurrence of a specified date before separation from service, and allows a participant to elect for each year’s contributions the manner in which such distributions will be paid. Installment distributions can be made in monthly, quarterly or annual installments. Payment of benefits under the Plan, other than benefits payable as a result of base salary deferrals, are conditioned on the participant’s covenant to comply with non-compete, non-solicitation and non-disclosure provisions for a period of one year following the participant’s separation from service. The Bank has established a grantor trust to hold the assets of the Plan. Until distributed, the assets of the Plan are not legally owned by the participants. In first quarter 2023, the Bank awarded one (1) Executive with a discretionary contribution of $100 thousand to the plan. In first quarter 2022, the Bank awarded seven (7) Executives with discretionary contributions to the plan. Salisbury’s expense for this plan was $~~145~~11 thousand and $47 thousand, respectively, for the three-month periods ended June 30, 2023 and 2022, and $156 thousand and $94 thousand, respectively, for the six-month periods ended ~~March~~June 3130, 2023 and 2022. The increase in expense for the six-month period ended June 30, 2023 compared with the same period in 2022 primarily reflected Salisbury’s discretionary contribution of $100 thousand to one executive in first quarter 2023 consistent with the Plan.

Management Agreements

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

NOTE 11 – LONG TERM INCENTIVE PLANS

Restricted stock

~~Salisbury~~Restricted ~~did~~stock ~~not~~expense ~~grant~~was ~~restricted~~$167 ~~stock~~thousand ~~awards~~and $243 inthousand, ~~first~~respectively; ~~quarter~~for ~~2023.~~the ~~Expense~~three-month inperiods ~~first~~ended ~~quarter~~June 30, 2023 and 2022, ~~related~~and to$350 ~~employee~~thousand and ~~directors’~~$431 ~~stock-based~~thousand, ~~compensation~~respectively, ~~totaled~~for ~~$183~~the ~~thousand~~six-month ~~and~~periods ~~$188~~ended ~~thousand~~June 30, ~~respectively~~2023 and 2022. ~~Unrecognized~~The ~~compensation~~second ~~cost~~quarter ~~relating~~of to2022 included an expense of $17 thousand for the accelerated vesting of restricted stock awards aspreviously ofgranted ~~March~~to 31certain Directors, ~~2023~~who ~~and~~retired ~~2022~~from ~~totaled~~Salisbury’s Board of Directors during the quarter. The tax benefit from restricted stock expense was $~~961~~30 thousand and $~~1.6~~44 ~~million~~thousand, respectively., ~~There~~for ~~were~~the nothree-month ~~forfeitures~~periods ended inJune 30, 2023 and 2022, and $63 thousand and $78 thousand, respectively; for the ~~first~~six-month ~~quarter~~periods ofended June 30, 2023 orand 2022.

Unrecognized compensation cost relating to the awards as of June 30, 2023 and 2022 totaled $0.8 million and $1.5 million, respectively. There were forfeitures of $15 thousand and $0 in the second quarter of June 30, 2023 and 2022, respectively. Year to date forfeitures were $15 thousand and $0 for 2023 and 2022, respectively.

Performance-based restricted stock units

On July 29, 2020, the Compensation Committee granted an additional 14,500 units under the RSU plan. The performance goal for this tranche is based on the relative increase in the Bank’s tangible book value compared with a pre-determined group of peer banks over the performance period for threshold performance. Vesting will range from 50% of target for achieving threshold performance, to 100% of target for achieving tangible book value growth of at least 50% but less than 55% of the peer group, to 150% of target for achieving in excess of target payout performance and, if the performance goal is achieved. These awards vested in first quarter 2023 at 94% of target for achieving below target payout performance.

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

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

No performance-based restricted stock units were awarded in 2023 and prior to 2019. The fair value of the awards granted under the RSU plan at the grant date was $394 thousand ~~and $354 thousand, respectively,~~ for those grants awarded in 2022 ~~and 2021~~. Compensation expense of $4262 thousand and $9796 thousand was recorded with respect to ~~all~~these RSUs ~~granted~~for tothe ~~date~~three months ended June 2023 and 2022, and $103 thousand and $193 thousand for the ~~three~~six months ended ~~March~~June 3130, 2023 and 2022, respectively. The shares noted above are contingently issuable only upon attainment of the minimum performance goal.

Short Term Incentive Plan (STIP)

Salisbury offers a short-term discretionary compensation plan to eligible employees on an annual basis. Under this incentive plan, Salisbury may reward employees with cash compensation if certain pre-determined Bank and individual performance goals have been achieved. The STIP expense, which is included in compensation expenses, totaled $~~315~~258 thousand and $~~267~~271 thousand for the three months ended ~~March~~June 3130, 2023 and 2022, and year to date expenses of $574 thousand and $538 thousand for 2023 and 2022, respectively.

~~NOTE 12 – FAIR VALUE OF ASSETS AND LIABILITIES~~Options

Salisbury issued stock options in conjunction with its acquisition of Riverside Bank in 2014. In second quarter 2022, a former Riverside employee exercised 4,050 stock options and a former Riverside Bank executive exercised 7,020 stock options at $8.52 per share. All unexercised stock options issued in conjunction with the acquisition of Riverside Bank expired in January 2023.

NOTE 12 - CONTINGENT LIABILITIES

Contingent Liabilities

In July 2022, Salisbury management discovered that the Bank’s trust department terminated a trust account in May 2020 and distributed approximately $1.0 million that should have been retained in continuance of the trust account. In March 2023, Salisbury filed an amended complaint against the beneficiaries to recover the distributed proceeds and to reinstate the trust account. Management believes that Salisbury’s exposure could possibly range from approximately $0.0 million to $0.4 million depending upon the amount the beneficiaries contribute toward the reinstatement of the trust and potential insurance coverage.

NOTE 13 – FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

•

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

•

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

•

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

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

•

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

•

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

•

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

Assets measured at fair value are as follows:

Fair Value Measurements Using

Assets at

(in thousands)

Level 1

Level 2

Level 3

fair

value

March 31, 2023

June 30, 2023

Assets at fair value on a recurring basis

U.S. Treasury

—

17,~~479~~245

—

17,~~479~~245

U.S. Government Agency notes

—

2625,~~844~~516

—

2625,~~844~~516

Municipal bonds

—

4843,~~199~~662

—

4843,~~199~~662

Mortgage-backed securities:

U.S. Government agencies and U.S. Government-sponsored enterprises

—

6058,~~550~~069

—

6058,~~550~~069

Collateralized mortgage obligations:

U.S. Government agencies

—

2120,~~915~~825

—

2120,~~915~~825

Corporate bonds

~~834~~803

11,~~777~~357

—

12,~~611~~160

Securities available-for-sale

~~834~~803

~~186~~176,~~764~~674

—

~~187~~177,~~598~~477

Mutual funds

2,~~068~~020

—

2,~~068~~020


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

At March 31, 2023 and December 31, 2022, Salisbury did not have any assets measured at fair value on a non-recurring basis.

At June 30, 2023 and December 31, 2022, Salisbury did not have any assets measured at fair value on a non-recurring basis.

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

(in thousands)

Carrying

Estimated

Fair value measurements using

value

fair value

Level 1

Level 2

Level 3

March 31, 2023

June 30, 2023

Financial Assets

Cash and cash equivalents

4954,~~844~~057

—

Securities available-for-sale, net

~~187~~177,~~598~~477

~~834~~803

~~186~~176,~~764~~674

—

Mutual funds

2,~~068~~020

—

Federal Home Loan Bank of Boston stock

51,~~030~~488

—

51,~~030~~488

—

Loans held-for-sale

—

Loans receivable, net

1,~~234~~237,~~632~~511

1,~~193~~180,~~272~~881

—

1,~~193~~180,~~272~~881

Accrued interest receivable

6,~~383~~546

—

6,~~383~~546

—

Cash surrender value of life insurance policies

30,~~571~~248

—

30,~~571~~248

—

Financial Liabilities

Demand (non-interest-bearing)

~~370~~353,~~049~~794

—

~~370~~353,~~049~~794

—

Demand (interest-bearing)

~~218~~219,~~902~~483

—

~~218~~219,~~902~~483

—

Money market

~~296~~361,~~974~~004

—

~~296~~361,~~974~~004

—

Savings and other

~~236~~218,~~755~~339

—

~~236~~218,~~755~~339

—

Certificates of deposit

~~170~~207,~~362~~330

~~170~~206,~~806~~311

—

~~170~~206,~~806~~311

—

Deposits

1,~~293~~359,~~042~~950

1,~~293~~358,~~486~~931

—

1,~~293~~358,~~486~~931

—

Repurchase agreements

37,~~230~~492

—

37,~~230~~492

—

FHLBB advances

~~100~~20,000

9920,~~999~~000

—

9920,~~999~~000

—

Subordinated debt

24,~~545~~559

2120,~~022~~257

—

2120,~~022~~257

—

Note payable

~~117~~106

~~114~~103

—

~~114~~103

—

Finance lease obligation

4,~~225~~189

3,~~449~~357

—

3,~~449~~357

Accrued interest payable

~~425~~721

—

~~425~~721

—


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

~~NOTE~~The 13carrying –amounts ~~SUBSEQUENT~~of ~~EVENTS~~financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in accrued interest and other liabilities.

OnNOTE ~~April~~14 ~~12,~~– ~~2023,~~SUBSEQUENT ~~Salisbury shareholders approved the merger with NBT. The merger is expected to close in second quarter 2023 subject to regulatory approval.~~EVENTS

OnIn July ~~April 26~~2023, ~~2023~~the Office of the ~~Board~~Comptroller of ~~Directors~~the ~~declared~~Currency and the Connecticut State Banking Department both approved the merger of Salisbury awith ~~quarterly~~and ~~dividend~~into NBT, and NBT received an application waiver from the Federal Reserve Bank of $0New York.16 ~~per~~The ~~common~~merger ~~share~~is ~~payable~~expected to be consummated after the close of business on ~~May~~August 2611, 2023, subject to ~~shareholders~~the satisfaction of ~~record~~customary asclosing conditions. A weekend systems conversion will follow with locations of ~~May~~Salisbury 12Bank opening as NBT Bank offices beginning on August 14, 2023.

After second quarter 2023, Salisbury sold $57.3 million of securities in its AFS portfolio for a pre-tax loss of approximately $9.6 million in preparation for its pending merger with NBT Bancorp, which is scheduled to close on August 11, 2023. Salisbury intends to use the sales proceeds to primarily pay down and reduce borrowings prior to the merger. This loss did not result in a material change to Salisbury’s shareholders’ equity because these securities were recorded at fair value on the Bank’s consolidated balance sheet at June 30, 2023. The loss reduced Salisbury’s total capital ratio of 13.66% and tier one common equity ratio of 12.41% at June 30, 2023 by approximately 26 basis points and 29 basis points, respectively. After adjusting for these losses, Salisbury remained well-capitalized according to regulatory guidelines.

Certain legal claims related to the pending merger with NBT were settled by Salisbury in the amount of $220,000 subsequent to June 30, 2023. Salisbury considered this amount to be immaterial to the results presented for the three and six month periods ended June 30, 2023.

Item 2.

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

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

BUSINESS

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

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

Critical Accounting Policies and Estimates

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

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

Allowance for Credit Losses on Loans (“ACL”)

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

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

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

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

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

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

The significant key assumptions used with the ACL calculation at ~~March~~June 3130, 2023 using the CECL methodology, included:

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

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

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

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

As of ~~March~~June 3130, 2023, the recorded ACL was $1615.06 million and represented management’s best estimate. However, management may adjust its assumptions to account for differences between expected and actual losses from period to period. A future change of management’s assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL is reviewed periodically within a calendar quarter to assess trends in key CECL assumptions and asset quality, and consider their impact on the Company's financial condition. A discussion of the factors driving changes in the amount of the allowance for credit losses is included in the “Provision and Allowance for Credit Losses” section of Management’s Discussion and Analysis.

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

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

As of ~~March~~June 3130, 2023, the recorded ACL on off-balance sheet credit exposures of $1.2 million is recorded within accrued interest and other liabilities on Salisbury’s consolidated balance sheet. Increases (decreases) to the allowance are presented within provision (credit) for credit losses on the consolidated statements of income. The allowance at ~~March~~June 3130, 2023, represented management’s best estimate, however, management may adjust various assumptions to account for differences between expected and actual losses from period to period. A future change to certain assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on off-balance sheet credit exposures is reviewed on a quarterly basis by the Company's Loan Committee, and subsequently ratified by the Company’s Board of Directors.

As of ~~March~~June 3130, 2023, the Company had not identified indications of credit risk and did not carry any allowance for credit losses on its AFS portfolio, nor did it record any permanent impairments during ~~first~~three ~~quarter~~and six month periods ended June 30, 2023.

FINANCIAL CONDITION

Securities and Short -Term Funds

As of ~~March~~June 3130, 2023, the market value of Salisbury’s available-for-sale (AFS) investment portfolio was $~~187~~177.65 million or 1211.04% of total assets. compared with $187.4 million, or 12.2% of total assets at December 31, 2022. Cash and cash equivalents (non-time interest-bearing deposits with other banks, money market funds and federal funds sold) of $4954.81 million at ~~March~~June 3130, 2023 ~~decreased~~increased $03.75 million, or 17.40% from December 31, 2022.

~~The decline in market interest rates in first quarter 2023 resulted in inception~~Inception-to-date after-tax unrealized losses in Salisbury’s AFS portfolio of were $1820.0 million at ~~March~~June 3130, 2023 compared with an after-tax unrealized losses of $20.7 million at December 31, 2022. These unrealized losses and gains are recorded in accumulated other comprehensive loss, net on Salisbury’s consolidated balance sheet. Salisbury evaluates securities for impairment when the fair value of a security is less than its amortized cost basis at the balance sheet date. As part of this process, Salisbury considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, Salisbury recognizes an impairment charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For securities that meet neither of these conditions, an analysis is performed to determine if any of these securities are at risk for impairment. Salisbury evaluates securities for strategic fit and may reduce its position in securities, although it is not more likely than not that Salisbury will be required to sell securities before recovery of their cost basis, which may be maturity. Management does not consider any of its securities to be impaired at ~~March~~June 3130, 2023.

Loans

~~Net~~Gross loans ~~receivable~~ ofreceivable increased $24.6 million, or 2.3%, to $1.~~235~~25 billion at ~~March~~June 3130, 2023, ~~increased~~compared ~~from~~with $1.~~214~~21 billion at December 31, 2022. AtPPP loan ~~March~~balances ~~31,~~declined ~~2023~~from ~~and~~$0.3 million at December 31, 2022, ~~Salisbury had~~to ~~approximately~~ $0.2 million at June 30, 2023 due to the forgiveness of ~~PPP~~such loans onby the ~~its~~SBA. ~~balance~~During ~~sheet.~~the ~~The~~six ~~increase~~month inperiod ~~net~~ended ~~loan~~June ~~receivable~~30, ~~balances~~2023, ~~primarily~~Salisbury ~~reflected~~originated ~~growth in~~$53.2 ~~residential~~million ~~mortgage,~~of commercial ~~real~~loans, ~~estate~~$29.8 million of residential loans and ~~commercial~~$1.7 ~~construction~~million ~~balances,~~of ~~partially~~consumer ~~offset~~loans. byThis ~~lower~~growth ~~commercial~~was &mostly ~~industrial~~offset by amortization, ~~consumer~~ loan payments and ~~municipal~~net ~~loan~~refinancing ~~balances~~activity of $51.9 million. In addition, Salisbury ~~did~~sold ~~not~~three ~~sell~~shared ~~any~~national ~~residential~~credit commercial loans, towhich ~~FHLB~~aggregated ~~Boston~~$8.2 inmillion, ~~first~~during the quarter. The ~~2023~~allowance orfor ~~fourth~~credit ~~quarter 2022.~~losses ~~The~~increased ~~ratio~~by of$0.7 ~~gross~~million ~~loans~~from toDecember ~~deposits~~2022 ~~for~~primarily ~~first~~due ~~quarter~~to ~~2023~~the ~~was~~adoption ~~96.7%~~of ~~compared~~CECL ~~with~~and ~~90.4%~~net ~~for~~loan ~~fourth~~growth during ~~quarter~~the ~~2022~~period.

Asset Quality

During the first ~~three~~six months of 2023, overall asset quality remained strong. Non-performing assets decreased $01.4 million to $21.23 million, or 0.1408% of assets at ~~March~~June 3130, 2023, from $2.7 million, or 0.17% of assets at December 31, 2022. Salisbury has cooperative relationships with the vast majority of its non-performing loan customers. Substantially all non-performing loans are collateralized with real estate and the repayment of such loans is largely dependent on the return of such loans to performing status or the liquidation of the underlying real estate collateral. Salisbury pursues the resolution of all non-performing loans through collections, restructures, voluntary liquidation of collateral by the borrower and, where necessary, legal action. When attempts to work with a customer to return a loan to performing status, including restructuring the loan, are unsuccessful, Salisbury will initiate appropriate legal action seeking to acquire property by deed in lieu of foreclosure or through foreclosure, or to liquidate business assets.

Past Due Loans

Loans past due 30 days or more ~~increased~~decreased ~~during~~$0.3 ~~first~~million ~~quarter~~for the six months ended June 30, 2023 to $21.42 million, or 0.1910% of gross loans receivable ~~at March 31, 2023 compared~~ compared with $1.5 million, or 0.12% of gross loans receivable at December 31, 2022.

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

(in thousands)		~~March~~June 3130, 2023		December 31, 2022
Past due 30-59 days	$	~~2,156~~671	$	1,195
Past due 60-89 days		7819		115
Past due 90-179 days		—300		—
Past due 180 days and over		—		—
Accruing loans		~~2,234~~990		1,310
Past due 30-59 days		—		68
Past due 60-89 days		4896		—
Past due 90-179 days		1627		90
Past due 180 days and over		~~100~~93		15
Non-accrual loans		~~164~~216		173
Total loans past due 30 days or greater	$	21,~~398~~206	$	1,483

Credit Risk Ratings

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

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

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

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

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

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

Deposits and Borrowings

Total deposits of $1.336 billion at ~~March~~June 3130, 2023 ~~decreased~~increased $651.46 million, or 40.81%, from December 31, 2022 and increased $243.64 million, or 03.23%, from ~~March~~ 31June 30, 2022. Salisbury accumulates deposits from a diverse customer base. At ~~March~~June 3130, 2023, the composition of Salisbury’s deposit balances was as follows: retail: 4542%; commercial: 39%; municipalities: 8%; brokered funds: 46%; Wealth Advisory: 35%; and educational institutions: 1%. At ~~March~~June 3130, 2023, the balance of Salisbury’s deposits that were not insured by the FDIC and not collateralized by marketable securities owned by Salisbury was approximately $~~344~~340 million, or 2725%, of total deposits.

At March 31, 2023, Salisbury had outstanding brokered deposits balances of $53.2 million compared with balances of $45.0 million at December 31, 2022. Salisbury did not have any outstanding brokered deposit balances at March 31, 2022. Brokered deposits are included in the certificates of deposit balances on Salisbury’s consolidated balance sheet. Management utilized brokered deposits in first quarter 2023 to fund loan growth and as a source of liquidity. Excluding brokered funds, Salisbury’s deposits declined $73.5 million, or 5.6%, from fourth quarter 2022 and declined $50.6 million, or 3.9%, from first quarter 2022. Average total deposits were $1.3 billion for first quarter 2023, fourth quarter 2022 and first quarter 2022. Average total deposits for first quarter 2023 included average brokered deposits of $47.9 million compared with $25.8 million for fourth quarter 2022 and $7.5 million for first quarter 2022. 28

~~Salisbury has~~At ~~access~~June to30, 2023, ~~various~~Salisbury ~~sources~~had ofoutstanding ~~liquidity,~~brokered ~~including~~deposits ~~the~~balances ~~FHLBB~~of ~~and~~$80.1 ~~the~~million ~~Federal~~compared ~~Reserve~~with ~~Bank.~~balances ~~Salisbury~~of ~~had~~ $~~100~~45.0 million ~~of outstanding advances from FHLBB~~ at ~~March~~December 31, ~~2023~~2022 and ~~compared~~balances ~~with~~of $1035.0 million at ~~December~~June 3130, 2022. ~~and~~Brokered ~~$0.4~~deposits ~~million~~are atincluded ~~March~~in ~~31,~~the ~~2022,~~certificates ~~respectively.~~ of deposit balances on Salisbury’s consolidated ~~excess~~balance ~~borrowing~~sheet. ~~capacity~~Management atutilized ~~FHLBB~~brokered ~~was~~deposits ~~approximately~~to ~~$145~~fund ~~million~~loan atgrowth ~~March~~and ~~31,~~as ~~2023~~a source of liquidity. ~~Additionally~~Excluding brokered funds, atSalisbury’s ~~March~~deposits 31increased $40.0 million, ~~2023~~or 3.2%, ~~Salisbury~~ ~~had~~from ~~approximately~~first quarter 2023. Average total deposits were $~~100~~1.4 ~~million~~billion for ofsecond ~~eligible~~quarter ~~collateral~~2023 ~~that~~and ~~could~~first bequarter ~~posted~~2023 tocompared ~~the~~with ~~Federal~~$1.3 ~~Reserve~~billion tofor ~~secure~~second ~~funds~~quarter ~~under~~2022. ~~the~~Average total deposits for second quarter ~~Bank~~2023 ~~Term~~included ~~Funding~~average ~~Program~~brokered deposits of $75.0 ~~Salisbury~~million ~~has~~compared ~~not~~with ~~borrowed~~$47.9 ~~funds~~million ~~under~~for ~~this~~first ~~program~~quarter 2023 and $18.0 million for second quarter 2022.

Salisbury has anaccess ~~Irrevocable~~to ~~Letter~~various sources of ~~Credit~~liquidity, ~~Reimbursement~~including ~~Agreement with~~ the FHLBB, ~~whereby~~and ~~upon~~ the ~~Bank’s~~Federal ~~request~~Reserve anBank. ~~irrevocable~~Salisbury ~~letter of~~had ~~credit~~$20.0 ismillion ~~issued~~of tooutstanding advances ~~secure~~from ~~municipal~~FHLBB ~~and~~at ~~certain~~June ~~other~~30, ~~transactional~~2023 ~~deposit~~compared ~~accounts~~with $10.0 ~~These~~million ~~letters~~at ofDecember ~~credit~~31, ~~are~~2022 ~~secured~~and ~~primarily by~~$100.0 ~~residential~~million ~~mortgage~~at ~~loans.~~March ~~The~~31, ~~amount~~2023, ofrespectively. Salisbury’s ~~funds~~excess ~~available~~borrowing ~~from~~capacity ~~the~~at FHLBB towas ~~the~~approximately ~~Bank~~$218 ismillion ~~reduced~~at byJune ~~any~~30, ~~letters~~2023. ofAdditionally, ~~credit~~at ~~outstanding. At~~June ~~March 31~~30, 2023, Salisbury had approximately $~~20.0~~76 million of ~~letters~~eligible ofcollateral ~~credit~~that ~~were~~could ~~outstanding~~be ~~compared~~posted ~~with~~to ~~$20.0~~the ~~million~~Federal atReserve ~~December~~to ~~31,~~secure ~~2022~~funds under the Bank Term Funding Program. Salisbury has not borrowed funds under this program.

29The distribution of average total deposits by account type is as follows:

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

	June 30, 2023								December 31, 2022
(in thousands)	Average Balance		Percent			Weighted-Average Interest Rate			Average Balance		Percent			Weighted-Average Interest Rate
Demand deposits	$	370,057		27.82	%		0.00	%	$	395,848		30.01	%		0.00	%
Interest-bearing checking accounts		219,722		16.52			0.25			231,970		17.59			0.18
Regular savings accounts		230,085		17.30			0.99			240,695		18.25			0.26
Money market savings		331,348		24.91			2.47			318,302		24.13			0.49
Certificates of deposit (CD’s)		178,954		13.45			2.99			132,192		10.02			0.84
Total deposits	$	1,330,166		100.00	%		1.23	%	$	1,319,007		100.00	%		0.28	%

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

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

Interest rates		~~March~~June 3130, 2023		December 31, 2022
Less than 1.00%	$	4842,~~809~~275	$	104,261
1.00% to 1.99%		106,~~437~~439		11,739
2.00% to 2.99%		1817,~~734~~379		19,907
3.00% to 3.99%		29,~~781~~749		17,463
4.00% to 4.99%		62111,~~601~~488		—
Total	$	~~170~~207,~~362~~330	$	153,370

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

	At March 31, 2023
	At June 30, 2023
Interest rates	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
Less than 1.00%	$	3226,~~823~~710	$	78,~~998~~354	$	43,~~329~~237	$	3,~~659~~974	$	4842,~~809~~275		2820.6539	%
1.00% to 1.99%		63,~~041~~314		43,~~301~~030		95		—		106,~~437~~439		63.1211	%
2.00% to 2.99%		14,~~501~~671		12,~~735~~708		~~2,498~~—		—		1817,~~734~~379		118.038	%
3.00% to 3.99%		29,~~781~~749		—		—		—		29,~~781~~749		1714.4835	%
4.00% to 4.99%		56105,~~928~~763		5,~~673~~725		—		—		62111,~~601~~488		3653.7577	%
Total	$	~~140~~180,~~074~~207	$	19,~~707~~817	$	63,~~922~~332	$	3,~~659~~974	$	~~170~~207,~~362~~330		100.00	%

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

March 31, 2023 (in thousands)

Within 3 months

3-6 months

6-12 months

Over 1 year

Total

June 30, 2023 (in thousands)

Within 3 months

3-6 months

6-12 months

Over 1 year

Total

Certificates of deposit $100,000 and over

629,~~218~~404

970,~~819~~896

3663,~~930~~576

1513,~~960~~608

~~124~~157,~~926~~484

Salisbury had outstanding FHLBB advances of $20.0 million and $10.0 million at June 30, 2023 and December 31, 2022, respectively. Salisbury has an Irrevocable Letter of Credit Reimbursement Agreement with the FHLBB, whereby upon the Bank’s request, an irrevocable letter of credit is issued to secure municipal and certain other transactional deposit accounts. These letters of credit are secured primarily by residential mortgage loans. The amount of funds available from the FHLBB to the Bank is reduced by any letters of credit outstanding. At June 30, 2022, $20.0 million of letters of credit were outstanding.

Liquidity

Salisbury manages its liquidity position to ensure that there is sufficient funding availability at all times to meet both anticipated and unanticipated deposit withdrawals, loan originations and advances, securities purchases and other operating cash outflows. Salisbury's primary sources of liquidity are principal payments and maturities of securities and loans, short-term borrowings through repurchase agreements and FHLBB advances, net deposit growth and funds provided by operations. Liquidity can also be provided through sales of loans and available-for-sale securities. During ~~first~~second quarter 2023, Salisbury increased its utilization of brokered deposits by $526.39 million and ~~increased~~reduced its borrowings from FHLBB by $9080.0 million ~~to fund loan growth and to provide liquidity~~. At ~~March~~June 3130, 2023, Salisbury’s outstanding borrowings and excess borrowing capacity at FHLBB were $~~100~~ 20 million and $~~145~~218 million, respectively. Salisbury maintains access to multiple sources of liquidity, including wholesale funding. An increase in funding costs could have an adverse impact on Salisbury’s net interest margin. If an extended economic shutdown causes depositors to withdraw their funds, Salisbury could become more dependent on more expensive sources of funding.

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

Operating activities for the three-month period ended March 31, 2023 provided net cash of $3.0 million. Investing activities utilized net cash of $23.2 million due to the net loan originations of $22.3 million, net purchases of FHLB stock of $3.7 million and other activity of $0.2 million, partly offset by $3.0 million from the maturities/principal paydowns of available-for-sale (AFS) securities. Financing activities provided net cash of $19.6 million primarily due to the increase of short-term FHLB borrowings of $90 million, increase in time deposits $17.0 million partly off-set by the decrease of savings deposits of $82.4 million, a decrease of $4.0 million in securities sold under agreements to repurchase and $1.0 million in dividends paid. 29

AtOperating ~~March~~activities for 31the six-month period ended June 30, 2023, ~~Salisbury~~provided ~~had~~net ~~outstanding~~cash ~~commitments~~of to$16.6 ~~fund~~million. ~~new~~Investing ~~loan~~activities ~~originations~~utilized net cash of $4222.68 million principally from $33.5 million of net loan originations and ~~unused~~principal ~~lines~~collections, and $0.2 for redemptions of ~~credit~~FHLB stock, partly offset by proceeds of $~~253~~6.02 million~~. Salisbury~~ ~~believes~~from ~~that~~calls ~~these~~and ~~commitments~~maturities ~~can~~of beavailable-for-sale ~~met~~securities, inproceeds of $4.0 million from the ~~normal~~sale ~~course~~of available-for-sale-securities and $ 0.8 million from proceeds of ~~business~~life insurance. ~~Salisbury~~Financing ~~believes~~activities ~~that~~provided ~~its~~net ~~liquidity~~cash ~~sources~~of ~~will continue~~$9.8 million principally due to ~~provide~~an ~~funding~~increase in ~~sufficient~~time todeposits ~~support~~of ~~operating~~$54.0 ~~activities~~million, ~~loan~~net ~~originations~~FHLB short term advances of $10.0 million and ~~commitments~~a $0.2 million increase in repurchase agreements partially offset by a decrease in deposit transaction accounts of $52.4 million, and ~~deposit~~the ~~withdrawals~~payment of common stock dividends of $1.9 million.

At June 30, 2023, Salisbury had outstanding commitments to fund new loan originations of $60.3 million and unused lines of credit of $254.8 million. Salisbury believes that these commitments can be met in the normal course of business. Salisbury believes that its liquidity sources will continue to provide funding sufficient to support operating activities, loan originations and commitments, and deposit withdrawals.

RESULTS OF OPERATIONS

For the three -month periods ended ~~March~~June 3130, 2023 and 2022

OVERVIEW

Net income allocated to common shareholders was $3.04 million, or $0.5259 per basic earnings per common share, for the ~~first~~second quarter ended ~~March~~June 3130, 2023 (~~first~~second quarter 2023), compared ~~with~~ with $43.18 million, or $0.7167 ~~basic earnings~~ per basic common share, for the ~~fourth~~second quarter ended ~~December~~June 3130, 2022 (~~fourth~~second quarter 2022), and $3.5 0 million, or $0.6252 ~~basic earnings~~ per basic common share, for the first quarter ended March 31, ~~2022~~2023 (first quarter ~~2022~~2023). The decrease from fourth quarter 2022 primarily reflected lower net interest income of $0.9 million, a higher provision for credit losses of $0.4 million and higher non-interest expenses of $0.2 million. The decrease from first quarter 2022 primarily reflected a higher provision for credit losses of $0.6 million, lower non-interest income of $0.4 million and higher non-interest expense of $0.5 million, partially offset by higher net interest income of $0.8 million. First quarter 2023 included cost of $385 thousand related to the pending merger with NBT.

Net Interest Income

Tax equivalent net interest income for ~~first~~the second quarter 2023 ~~increased~~decreased $~~834~~1.6 ~~thousand~~million, or 814.0%, versus ~~first~~second quarter 2022. Average ~~total~~ earning assets ~~for the~~increased ~~first~~$106.9 million, or 7.7%, versus second quarter ~~2023~~2022. Average total interest bearing liabilities increased $82111.52 million, or 511.8%, versus ~~first~~second quarter 2022. Average loan ~~total~~balances ~~interest bearing deposits~~ for ~~the~~second ~~first~~ quarter 2023 ~~increased~~included an average PPP loan balance of $190.42 million, ornet ~~2.1%~~of deferred fees, ~~versus~~compared ~~first~~with $8.8 million in second quarter 2022. The tax equivalent net interest margin for the ~~first~~ second quarter 2023 was 2.9950% compared with 23.9515% for the ~~first~~ second quarter 2022. ~~Excluding~~The ~~PPP~~decrease ~~loans,~~in ~~the tax equivalent~~ net interest margin ~~for the~~in ~~first~~second quarter 2023 ~~was~~primarily 2reflected an increase in average total interest bearing deposits of $79.994 million or 8.8%, ~~compared~~an increase in FHLBB advances of $36.7 million with 2an average borrowing cost of 4.8678%, ~~for~~and ~~first~~a ~~quarter~~reduction ~~2022~~in short term fund balances of $6.8 million, or 12.5%, earning an average yield of 4.18%, partially offset by a $129.7 million, or 11.6%, increase in average loan balances earning an average yield of 4.38%.

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

Three months ended March 31,	Average Balance				Income / Expense				Average Yield / Rate
Three months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2023		2022		2023		2022		2023		2022
Loans (a)(d)	$	1,~~236~~241,~~778~~813	$	1,~~079~~112,~~610~~120	$	13,~~367~~709	$	10,~~277~~693		4.2938	%	3.7981	%
Securities (c)(d)		~~214~~207,~~246~~885		~~208~~225,~~140~~458		1,~~353~~279		~~962~~1,117		2.5346		1.8598
FHLBB stock		32,~~436~~771		1,~~434~~221		1964		710		29.2921		23.0520
Short term funds (b)		4047,~~689~~733		~~123~~54,~~454~~553		~~375~~498		5098		34.7218		0.1673
Total interest-earning assets		1,~~495~~500,~~149~~202		1,~~412~~393,~~638~~352		15,~~114~~550		11,~~296~~918		4.0212		3.1940
Other assets		5553,~~022~~758		7461,~~795~~790
Total assets	$	1,~~550~~553,~~171~~960	$	1,~~487~~455,~~433~~142
Interest-bearing demand deposits	$	~~223~~215,~~742~~746	$	~~232~~229,~~464~~625		~~119~~158		99108		0.2229		0.1719
Money market accounts		~~320~~342,~~015~~555		~~321~~299,~~198~~870		12,~~270~~786		~~126~~156		13.6126		0.1621
Savings and other		~~232~~228,~~162~~031		~~233~~236,~~092~~728		~~402~~727		6497		01.7028		0.1116
Certificates of deposit		~~161~~196,~~300~~416		~~131~~137,~~059~~034		1,~~027~~625		~~189~~216		23.5832		0.5963
Total interest-bearing deposits		~~937~~982,~~219~~748		~~917~~903,~~813~~257		25,~~818~~296		~~478~~577		12.2216		0.2126
Repurchase agreements		35,~~961~~101		710,~~146~~216		1625		34		1.6598		0.1415
Finance lease		5,~~397~~354		5,~~097~~283		40		41		2.96		3.2309
Note payable		~~121~~110		~~163~~153		2		2		6.1719		6.1213
Subordinated debt (net of issuance costs)		24,536		24,480		233		233		3.80		3.81
Subordinated Debt (net of issuance costs)		24,551		24,494		233		233		3.80		3.80
FHLBB advances		5736,~~056~~758		~~2,974~~—		~~687~~444		55—		4.8278		~~7.46~~—
Total interest-bearing liabilities		1,~~028~~054,~~290~~622		~~957~~943,~~673~~403		36,~~796~~040		~~812~~857		12.4929		0.3436
Demand deposits		~~382~~357,~~601~~690		~~386~~376,~~884~~694
Other liabilities		8,~~427~~268		76,~~036~~258
Shareholders’ equity		~~130~~133,~~853~~380		~~135~~128,~~840~~787
Total liabilities & shareholders’ equity	$	1,~~550~~553,~~171~~960	$	1,~~487~~455,~~433~~142
Net interest income (d)					$	119,~~318~~510	$	1011,~~484~~061
Spread on interest-bearing funds										21.5485		23.8403
Net interest margin (e)										2.9950		23.9515

(a) Includes non-~~accural~~accrual loans. ~~(b) Includes interest-bearing deposits in other banks and federal funds sold.~~

(b)

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

(c)

Average balances of securities are based on cost.

(d) Includes tax exempt income benefit of $~~190~~169,000 and $~~178~~187,000, respectively, for 2023 and 2022 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2023 and 2022.

(e)

Net interest income divided by average interest-earning assets.

3130

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

Three months ended March 31, (in thousands)	2023 versus 2022
Three months ended June 30, (in thousands)	2023 versus 2022
Change in interest due to		Volume			Rate			Net
Loans	$	1,~~633~~351		$	1,~~457~~665		$	3,~~090~~016
Securities		34(99	)		~~357~~261			~~391~~162
FHLBB stock		1124			130			1254
Short term funds		(~~405~~42	)		~~730~~442			~~325~~400
Interest-earning assets		1,~~273~~234			2,~~545~~398			3,~~818~~632
Deposits		(7250	)		24,~~347~~469			24,~~340~~719
Repurchase agreements		(814	)		2135			1321
Finance lease		21			(32	)		(1	)
Subordinated debt and notes payable		1			(1	)		—
Note payable		—			—			—
FHLBB advances		830			(198	)		632
Subordinated Debt		—			—			—
Interest-bearing liabilities		818			2,166			2,984
FHLBB advances		224			220			444
Net change in net interest income	$	455		$	379		$	834
Interest-bearing liabilities		460			4,722			5,183
Net change in net interest income	$	774		$	(2,324	)	$	(1,551	)

Interest Income

Tax equivalent interest income increased $3.86 million, or 3330.85%, to $15.16 million for ~~first~~second quarter 2023 as compared with ~~first~~$11.9 million in second quarter 2022. Loan income ~~compared~~ ~~with~~as ~~first~~compared to second quarter 2022 increased $3.10 million, or 3028.02%, primarily due to a 50$129.7 ~~basis~~million, ~~point~~or 11.7%, increase in ~~the~~ average loan ~~yield~~ balances and a ~~$157.2~~57 basis ~~million,~~point ~~or 14.6%,~~ increase in the average ~~loans~~loan yield. Tax equivalent securities income increased $~~391~~162 thousand, or 4014.65%, for ~~first quarter~~second quarter 2023 as compared with ~~first~~second quarter 2022, primarily due to a ~~$6.1~~48 ~~million,~~basis orpoint ~~2.9%,~~ increase in average ~~balances~~yield, ~~and~~partly aoffset 68by ~~basis~~a ~~point~~$17.6 million, ~~increase~~or 7.8%, decrease in average ~~yield~~balance. Income on short-term funds as compared ~~with~~to ~~first~~second quarter 2022 increased $~~325~~400 thousand, or ~~650~~408.01%, primarily due to a ~~356~~345 basis point increase in the average short-term funds ~~yields~~yield, ~~partially~~partly offset by ana $826.78 million, or 6712.05%, decrease in the average ~~balances~~ balance.

Interest Expense

Interest expense increased $35.02 million, or ~~367~~604.57%, to $36.80 million for ~~first~~second quarter 2023 as compared with ~~first~~$0.9 million in second quarter 2022. Interest on deposit accounts increased $24.3 7 million, or ~~489~~817.59%, asfrom asecond ~~result of a 101 basis point increase in average deposit rates and a $19.4 million, or 2.1%, increase in the average balances compared with first~~ quarter 2022. Interest expense on FHLBB ~~borrowings~~advances increased $~~632~~444 thousand, orfrom ~~1,149.1%, compared~~zero ~~with first quarter 2022 due to an average balance increase of $54.1 million, or 1,818.5%, partially offset by a 264 basis point decrease~~ in the ~~average~~second ~~borrowings rate. Interest expense on FHLBB borrowings for first~~ quarter ~~2022 included a non-recurring expense~~ of ~~approximately $30 thousand to pay off a $6.0 million advance due in December~~ 2022.

Provision and Allowance for Credit Losses

During ~~first~~second quarter 2023, the allowance for credit losses on loans ~~increased~~decreased by ~~the provision for credit losses on loans of~~ $0.95 million compared with aan ~~provision~~increase ~~expense~~ of $01.52 million for ~~fourth~~first quarter ~~2022~~2023 and aan ~~provision~~increase ~~expense~~ of $0.48 million for ~~first~~second quarter 2022. The ~~provision~~decline ~~expense~~in ~~for~~second ~~first~~ quarter 2023 primarily reflected ~~loan~~a ~~growth~~release of reserves associated with the sale of $8.2 million of shared national credit loans during the quarter asand ~~well~~an asimprovement ~~changes~~ in the forecast of certain macro-economic factors, which underpin the Bank’s CECL model. ~~Net~~This ~~loan~~benefit ~~charge-offs~~was ~~were~~partially ~~$32~~offset ~~thousand~~by ~~for~~an ~~the~~increase ~~first~~in ~~quarter~~reserves ~~2023, $13 thousand~~ for ~~fourth~~loans ~~quarter~~originated ~~2022~~during ~~and $410 thousand for~~ the ~~first~~ quarter ~~2022~~. Net ~~Charge~~loan charge-offs ~~for~~were ~~first quarter 2022 included a write-down of~~ $~~374~~47 thousand tofor ~~reduce~~second ~~the carrying value on $3.8 million of non-performing and under-performing residential and commercial loans, which Salisbury sold during the~~ quarter, ~~to the initial bid prices. Upon the adoption of ASU 326~~2023, ~~Salisbury increased its ACL for off-balance sheet credit exposures by~~ $~~0.9~~32 ~~million. In~~thousand first quarter 2023, ~~Salisbury~~and ~~increased~~$312 ~~the~~thousand ~~ACL~~ for ~~this~~second ~~exposure~~quarter ~~by $92 thousand~~2022.

(in thousands)	~~March~~June 3130, 2023			~~March~~June 3130, 2022
At or For the Three Months Ended	(CECL)			(Incurred Loss)
ACL on loans, beginning of period	$	1416,~~846~~009		$	12,~~962~~915
Impact of CECL adoption		271			—
Provision for credit losses		(403	)		1,100
Provision for credit losses		924			363
Charge-offs:
Commercial & industrial		—			~~(46~~—	)
Commercial real estate		—			(~~334~~39	)
Residential real estate		—			(19239	)
Consumer		(3550	)		(1739	)
Total loan charge-offs		(3550	)		(~~416~~317	)
Recoveries:
Commercial & industrial		—			1—
Commercial real estate		—			—1
Residential real estate		—			—
Consumer		32			54
Total loan recoveries		32			65
Net charge-offs	$	(3248	)	$	(~~410~~312	)
ACL on loans, end of the period	$	1615,~~009~~558		$	1213,~~915~~703
ACL on unfunded commitments, beginning of period	$	1,183		$	~~146~~183
Impact of CECL adoption		~~913~~—			—
Provision for credit losses		92(10	)		374
ACL on unfunded commitments, end of period	$	1,~~183~~173		$	~~183~~187
Components of ACL:
ACL on loans	$	1615,~~009~~558		$	1213,~~915~~703
ACL on unfunded commitments		1,~~183~~173			~~183~~187
ACL, end of period	$	1716,~~192~~731		$	13,~~098~~890
Net charge-offs to average loans
Provision for credit losses on loans to average loans		~~0.07~~n/a	%		0.03	%
ACL on loans to total loans		1.2824	%		1.2019	%

32As a result of these factors, reserve coverage, as measured by the ratio of the allowance for credit losses to gross loans, excluding PPP loans, was 1.24% for the second quarter 2023, versus 1.28% for the first quarter 2023 and 1.20% for the second quarter 2022. Similarly, reserve coverage, as measured by the ratio of the allowance for credit losses to non-performing loans was 1,178% for first quarter of 2023, versus 714% for first quarter of 2022 and 324% for second quarter of 2022.

As a result of these factors, reserve coverage, as measured by the ratio of the allowance for credit losses to gross loans, excluding PPP loans, was 1.28% for the first quarter 2023, versus 1.21% for the fourth quarter 2022 and 1.20% for the first quarter 2022. Similarly, reserve coverage, as measured by the ratio of the allowance for credit losses to non-performing loans was 714% for first quarter of 2023, versus 558% for fourth quarter of 2022 and 467% for first quarter of 2022.31

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

Three months ended March 31,	2023		2022
Three months ended June 30,	2023		2022
Net charge-offs (recoveries) to average loans receivable, gross	0.00	%	0.0403	%
Non-performing loans to loans receivable, gross	0.1811		0.2637
Accruing loans past due 30-89 days to loans receivable, gross	0.1811		0.2209
Allowance for credit losses to loans receivable, gross	1.2824		1.2019
Allowance for credit losses to non-performing loans	~~714~~1,177.3577		~~467~~324.2703
Non-performing assets to total assets	0.1408		0.1928

Non-performing loans (non-accrual loans plus accruing loans past-due 90 days or more) were $21.43 million, or 0.1811% of gross loans receivable at ~~March 31,~~June 30, 2023 as compared to $2.7 million, or 0.22% at December 31, 2022 and $24.82 million, or 0.2637%, at ~~March~~June 3130, 2022. Accruing loans past ~~due~~ due 30-89 days were $20.27 million, or 0.1806% of gross loans receivable at ~~March~~June 3130, 2023 compared with $1.3 million, or 0.11% of gross loans receivable at December 31, 2022 and $21.30 million, or 0.2209% of gross loans receivable, at ~~March~~June 3130, 2022. See “Financial Condition – Asset Quality” above for further discussion and analysis.

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

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

At ~~March~~June 3130, 2023, the reasonable and supportable forecast used to estimate the ACL on loans used the following loss drivers by loan segment: (i) Commercial & Industrial – National Gross Domestic Product (“GDP”) and National Unemployment; (ii) Commercial Real Estate - National GDP and National Unemployment; (iii) Residential Real Estate – National Housing Price Index and National Unemployment; (iv) Consumer - National Unemployment. National GDP and National Unemployment are sourced from the Federal Reserve Open Market Committee’s published forecast whereas the National Housing Price Index is sourced from the Federal National Mortgage Association’s published forecast. The Company's qualitative factors at ~~March~~June 3130, 2023, included consideration of the level of uncertainty surrounding the impact of macro-economic factors such as interest rates, inflation, supply chain disruption, geo-political events as well as other factors. At ~~March~~June 3130, 2023, the ACL estimate for loans used a reversion period of two years for each loan segment.

Also included within scope of CECL standard are off-balance sheet loan commitments, which includes the unfunded portion of committed lines of credit and commitments “in-process” reflect loans not in Salisbury’s gross loans receivable balance as of the balance sheet date but rather negotiated loan/line of credit terms and rates that the Bank has offered to customers and is committed to honoring. In reference to “in-process” credits, the Bank defines an unfunded commitment as a credit that has been offered to and accepted by a borrower, which has not closed and by which the obligation is not unconditionally cancellable. The Bank estimates expected credit losses over the contractual period in which the Bank is exposed to credit risk through a contractual obligation to extend credit, unless that obligation in unconditionally cancellable by the Bank. The allowance for credit losses on losses on off-balance sheet exposures includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments to be funded over its estimated life.

Determining the adequacy of the allowance and reserves at any given period is difficult, particularly during deteriorating or uncertain economic periods, and management must make estimates using assumptions and information that are often subjective and changing rapidly. The review of credit exposure related to loans is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. Should the economic climate deteriorate, borrowers could experience difficulty and the level of non-performing loans, charge-offs ~~and~~ and delinquencies could rise, requiring increased provisions and reserves. In management's judgment, Salisbury remains adequately reserved both against total loans and non-performing loans at ~~March~~June 3130, 2023.

Non-Interest Income

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

Three months ended March 31, (dollars in thousands)		2023			2022			2023 vs. 2022
Three months ended June 30, (dollars in thousands)		2023			2022			2023 vs. 2022
Trust and wealth advisory	$	1,~~153~~330		$	1,~~241~~293		($	8837	)	(72.19	%)
Service charges and fees		1,~~235~~251			1,~~138~~723			97(472	)	8(27.54	)
Mortgage banking activities, net		59(151	)		~~355~~77			(~~296~~228	)	~~(83.4~~n/a	)
Gains (losses) on mutual funds		20			(42	)		62		147.6
(Losses) gains on mutual fund		(14	)		(30	)		16		(53.3	)
Gains on securities, net		—			210			(210	)	(100.0	)
(Losses) gains on securities, net		(15	)		(45	)		30		(66.7	)
Bank-owned life insurance (“BOLI”) income		~~192~~196			~~162~~163			3033		1820.52
Other		34			30			4		13.3
Gain on bank-owned life insurance		311			89			222		249.4
Total non-interest income	$	2,693		$	3,094		($	401	)	(13.0	%)
Other		26			27			(1	)	(3.7	)
Total non-interest income	$	2,934		$	3,297		$	(363	)	11.0	%

Non-interest income decreased $~~401~~363 thousand, or 13 11.0% in ~~first~~the second quarter of 2023 versus ~~first~~second quarter of 2022. Trust and wealth advisory revenues ~~decreased~~ increased $8837 thousand versus ~~first~~ second quarter 2022 primarily due to ~~lower~~higher asset management fees. Assets under administration were $1.30 4 billion at ~~March~~ 31June 30, 2023 compared with $1.293 billion at ~~December~~March 31, ~~2022~~2023 and $1.03 billion at ~~March~~June 3130, 2022. Discretionary assets under administration of $~~588~~638.41 million inat ~~first~~June ~~quarter~~30, 2023 increased from $~~561~~588.14 million inat ~~fourth~~March ~~quarter~~31, ~~2022~~2023 and ~~decreased from~~ $~~625~~546.35 million inat ~~first quarter~~June 30, 2022. ~~The variance from the comparative quarters primarily reflected changes in market valuations.~~ Non-discretionary assets under administration of $~~712~~711.7 million indecreased ~~first quarter 2023 declined~~ from $~~728~~712.97 million inat ~~fourth~~first quarter ~~2022~~2023 and ~~increased from~~ $~~423~~714.97 million in ~~first~~second quarter 2022. The variance from the comparative periods primarily reflected changes in the valuation of certain partnership assets for an existing client relationship. The ~~trust and~~ wealth advisory business records only a nominal annual fee on this relationship.

Service charges and fees increased $97 thousand versus first quarter 2022 and primarily reflected higher deposit fees and interchange fees. First quarter 2023 income from mortgage sales and servicing decreased $296 thousand due to a lower volume of sales of residential mortgage loans to the FHLB Boston. Salisbury did not sell any residential loans to FHLBB during first quarter 2023 compared with sales of $5.5 million in first quarter 2022. Mortgage banking activities, net for first quarter 2022 also included a pre-tax gain of $239 thousand on the sale of $3.8 million of non-performing and under-performing commercial and residential loans.32

~~The~~Service ~~first~~charges and fees decreased $472 thousand versus second quarter 2022 primarily due to non-recurring loan prepayment fees of $425 thousand during second quarter 2022 as well as lower lending fees, partially offset by higher deposit and other fees. Second quarter 2023 ~~included~~income ~~net~~from mortgage ~~gains~~sales ofand servicing decreased $2019 thousand ondue ~~investments~~to inlower ~~mutual~~sales ~~funds~~volume. Salisbury did not sell any residential loans to FHLBB during second quarter 2023 compared with ~~net~~sales ~~losses~~ of $422.0 ~~thousand~~million infor ~~first~~second quarter 2022. ~~Non-interest~~ ~~income~~Mortgage banking activities, net for ~~first~~second quarter 2023 ~~2022~~also included a pre-tax ~~gain~~loss of $209 thousand on the sale of ~~available-~~$8.2 million of shared national credit commercial loans. BOLI income for~~-sale~~ ~~(“AFS”)~~second ~~securities~~quarter 2023 included a non-taxable gain of $~~210~~311 thousand. ~~Salisbury~~related ~~did~~to ~~not~~proceeds ~~sell~~receivable ~~any~~due ~~AFS~~to ~~securities~~the indeath ~~first~~of a ~~quarter~~former ~~2023~~covered employee.

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

Non-Interest Expense

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

Three months ended March 31, (dollars in thousands)		2023		2022		2023 vs. 2022
Three months ended June 30, (dollars in thousands)		2023		2022		2023 vs. 2022
Salaries	$	3,~~721~~625	$	3,~~479~~657	$	~~242~~(32	)	7.(0.9	%)
Employee benefits		1,~~468~~232		1,~~277~~288		~~191~~(56	)	15(4.03	)
Premises and equipment		1,~~105~~078		~~1,104~~973		1105		010.18
Loss on write-down and sale of assets		158		9		149		1655.6
Information processing and services		949		702		247		35.2
Information processing and services		831		685		146		21.3
Professional fees		850		821		29		3.5
Professional fees		945		787		158		20.1
Collections, OREO, and loan related		29		116		(87	)	(75.0	)
Collections, OREO, and loan related		72		117		(45	)	(38.5	)
FDIC insurance		248		122		126		103.3
FDIC insurance		98		171		(73	)	(42.7	)
Marketing and community support		187		262		(75	)	(28.6	)
Marketing and community support		127		184		(57	)	(31.0	)
Amortization of intangibles		34		50		(16	)	(32.0	)
Amortization of core deposit intangibles		39		54		(15	)	(27.8	)
Other		544		541		3		0.6
Other		470		786		(316	)	(40.2	)
Total non-interest expense		8,776	$	8,532	$	244		2.9	%
Non-interest expense	$	9,034	$	8,653	$	381		4.4	%

Non-interest expense for ~~first~~second quarter 2023 increased $~~381~~244 thousand versus ~~first~~second quarter 2022. ~~Non-interest~~Total compensation expense ~~for~~decreased ~~first quarter 2023 included costs of approximately~~ $~~385~~88 thousand versus ~~associated with~~ the ~~pending~~second ~~NBT~~quarter ~~merger~~2022. ~~Non-interest~~The ~~expense~~decrease ~~for~~from ~~first quarter 2023 also included a non-recurring charge of $158 thousand to write off fixed assets in~~ the ~~Red~~comparative ~~Oaks Mill, New York branch, which will be closed on April 30, 2023. Salaries expense increased $242 thousand versus first~~ quarter ~~2022. The increase~~ primarily reflected ~~higher~~lower ~~base~~production ~~salary expense~~ and ~~higher~~ incentive accruals as well as lower benefits expense, partially offset by higher deferred compensation ~~expense~~costs. ~~Employee~~Premises ~~benefits~~and equipment expense increased $~~191~~ 105 thousand versus ~~first~~ second quarter 2022 primarily due to higher ~~medical~~building ~~insurance costs~~ and ~~ESOP~~software ~~and~~maintenance ~~401k~~ expense. Information processing and services expense increased $~~146~~247 thousand versus ~~first~~second quarter 2022 primarily due to higher ~~core~~ATM network processing ~~costs~~fees, ~~and~~core ~~ATM~~data processing and ~~debit~~merger-related ~~card processing fees~~expenses. Professional fees increased $~~158~~29 thousand versus ~~first~~second quarter 2022 primarily asdue ato ~~result~~higher oflegal ~~increased~~expenses, external audit and ~~legal~~investment management fees., ~~Loan~~partially ~~and~~offset ~~OREO~~by ~~related expenses~~lower ~~decreased~~consulting ~~$45~~and ~~thousand~~internal audit ~~versus~~fees. ~~first~~Collections, ~~quarter~~OREO ~~2022,~~and ~~mainly~~loan ~~due~~related toexpense ~~lower~~decreased ~~appraisal~~$87 ~~expenses~~thousand ~~and~~primarily ~~mortgage~~on ~~recording~~lower ~~taxes~~appraisal expense. Marketing and community support expense decreased $5775 thousand versus ~~first~~second quarter 2022. ~~The~~due ~~decrease~~to inthe ~~other~~timing ~~expenses~~ of ~~$316 thousand primarily reflected two isolated instances of debit card or check cashing fraud-related losses aggregating $251 thousand in first quarter 2022~~events.

34Non-interest expense for second quarter 2023 included costs of $393 thousand associated with the pending NBT merger compared with $385 thousand in first quarter 2023.

Income Taxes

The effective income tax rates for ~~first~~second quarter 2023 and ~~first~~second quarter 2022 were 1912.957% and 1815.603%, respectively. ~~The~~Generally, ~~higher~~fluctuations ~~tax rate~~ in the ~~first~~effective ~~quarter~~tax ~~2023~~rate ~~primarily~~result ~~reflected~~from achanges ~~lower~~in the mix of taxable and tax-exempt income. ~~from~~The ~~municipal~~tax ~~bonds,~~provision ~~tax~~for ~~advantaged~~second ~~loans~~quarter ~~and~~2023 ~~bank-owned~~included ~~life~~a ~~insurance~~non-recurring oncredit aof ~~comparatively~~$163 ~~lower~~thousand ~~level~~to ofadjust ~~pre~~the Bank’s tax liability at quarter-end. The lower tax ~~income~~rate in second quarter 2023 also reflected the non-taxable BOLI proceeds receivable noted above.

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

For the six-month periods ended June 30, 2023 and 2022

Overview

Net income allocated to common shareholders was $6.3 million, or $1.11 basic earnings per common share, for the six-month period ended June 30, 2023 (six-month period 2023), compared with $7.3 million, or $1.29 basic earnings per common share, for the six-month period ended June 30, 2022 (six month period 2022). The reduction in net income allocated to common shareholders for the six-month period in 2023 primarily reflected a decline in net interest and dividend income and non-interest income, which were partly offset by a lower provision for credit losses and higher non-interest expense. The six-month period ended June 30, 2023 included costs of approximately $778 thousand associated with the pending merger with NBT Bancorp and a non-taxable gain of $311 thousand related to proceeds receivable from a bank-owned life insurance policy (“BOLI”) due to the death of a former covered employee.

Net Interest Income

Tax equivalent net interest income for the six-month period 2023 of $20.8 million decreased $0.7 million, or 3.33%, versus the six-month period 2022. Average earning assets of $1.5 billion at June 30, 2023 increased $94.7 million, or 6.8%, versus the six-month period 2022. Average total interest bearing deposits of $1.0 million increased $91.0 million, or 9.6%, versus the six-month period 2022. The net interest margin of 2.75% decreased 30 basis points compared with the six-month period 2022.

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

Six months ended June 30,	Average Balance				Income / Expense				Average Yield / Rate
(dollars in thousands)		2023		2022		2023		2022		2023		2022
Loans (a)(d)	$	1,239,309	$	1,095,955	$	27,075	$	20,971		4.34	%	3.80	%
Securities (c)(d)		211,048		216,847		2,632		2,079		2.49		1.92
FHLBB stock		3,101		1,327		83		17		5.40		2.58
Short term funds (b)		44,231		88,813		872		146		3.97		0.33
Total earning assets		1,497,689		1,402,942		30,662		23,213		4.07		3.29
Other assets		54,386		68,256
Total assets	$	1,552,075	$	1,471,198
Interest-bearing demand deposits	$	219,722	$	231,037		277		207		0.25		0.18
Money market accounts		331,348		310,475		4,056		283		2.47		0.18
Savings and other		230,085		234,920		1,129		160		0.99		0.14
Certificates of deposit		178,954		134,063		2,652		405		2.99		0.61
Total interest-bearing deposits		960,109		910,495		8,114		1,055		1.70		0.23
Repurchase agreements		4,533		8,689		41		6		1.84		0.15
Finance lease		5,376		5,190		79		82		2.96		3.16
Note payable		115		158		4		5		6.19		6.13
Subordinated Debt (net of issuance costs)		24,545		24,488		466		466		3.80		3.81
FHLBB advances		46,851		1,479		1,131		55		4.80		7.46
Total interest-bearing liabilities		1,041,529		950,499		9,835		1,669		1.90		0.35
Demand deposits		370,057		381,731
Other liabilities		8,366		6,675
Shareholders’ equity		132,123		132,293
Total liabilities & shareholders’ equity	$	1,552,075	$	1,471,198
Net interest income (d)					$	20,827	$	21,544
Spread on interest-bearing funds										2.20		2.94
Net interest margin (e)										2.75		3.05

(a)

Includes non-accrual loans.

(b)

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

(c)

Average balances of securities are based on cost.

(d)

Includes tax exempt income benefit of $357,000 and $364,000, respectively for 2023 and 2022 on tax-exempt securities and loans whose income and yields are calculated on a tax-equivalent basis. The income benefit reflected the U.S. federal statutory tax rate of 21.0% for 2023 and 2022.

(e)

Net interest income divided by average interest-earning assets.

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

Six months ended June 30, (in thousands)

2023 versus 2022

Change in interest due to

Volume

Rate

Filing Compare · SALISBURY BANCORP, INC.